UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q




xQUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended September 30, 2009





OR





oTRANSITION 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
              incorporationor
      organization)
            
            51-05021250
              (I.R.S.
      Employer
              IdentificationNo.)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)





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes oNo o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes oNo x




There
were 53,256,874 shares outstanding of registrant’s common stock, par value
$0.001 per share, as of November 12, 2009.













CHINA
ARCHITECTURAL ENGINEERING, INC.


FORM
10-Q QUARTERLY REPORT





TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATION
            
            1ITEM
      1.
            
            FINANCIAL
      STATEMENTS
            
            1Unaudited
      Consolidated Balance Sheet as of September 30, 2009 and December 31,
      2008
            
            2Unaudited
      Interim Consolidated Statements of Income for the three and nine months
      ended September 30, 2009 and 2008
            
            4Unaudited
      Interim Consolidated Statements of Cash Flows for the nine months ended
      September 30, 2009 and 2008
            
            5Unaudited
      Consolidated Statements of Stockholders’ Equity from January 1, 2009 to
      September 30, 2009
            
            6Notes
      to the Unaudited Interim Consolidated Financial Statements
            
            7ITEM
      2.
            
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION
            
            22ITEM
      3.
            
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
            
            30ITEM
      4.
            
            CONTROLS
      AND PROCEDURES
            
            31PART
      II - OTHER INFORMATION
            
            33ITEM
      1.
            
            LEGAL
      PROCEEDINGS
            
            33ITEM
      1A.
            
            RISK
      FACTORS
            
            33ITEM
      2.
            
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            
            35ITEM
      3.
            
            DEFAULTS
      UPON SENIOR SECURITIES
            
            35ITEM
      4.
            
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            
            36ITEM
      5.
            
            OTHER
      INFORMATION
            
            36ITEM
      6.
            
            EXHIBITS
            
            36SIGNATURES
            
            
            
            37











PART
I - FINANCIAL INFORMATION








ITEM
1. FINANCIAL STATEMENTS





The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The accompanying unaudited financial statements reflect all adjustments that, in
the opinion of management, are considered necessary for a fair presentation of
the financial position, results of operations, and cash flows for the
periods presented. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period. The accompanying unaudited financial statements should be
read in conjunction with the audited financial statements of China Architectural
Engineering, Inc. as contained in its Annual Report for the fiscal year ended
December 31, 2008 on Form 10-K, as filed with the Securities and Exchange
Commission on March 31, 2009.




1




CHINA
      ARCHITECTURAL ENGINEERING, INC.CONSOLIDATED
      BALANCE SHEETSAS
      OF SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31,
    2008


(STATED
      IN US DOLLARS)




September
      30,
                2009
              
              
              December
      31,
                2008(unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              6,517,969
              
              
              $
              9,516,202Restricted
      cash
              
              
              2,930
              
              
              
              7,451,388Contract
      receivables, net
              
              
              84,268,586
              
              
              
              71,811,627Costs
      and earnings in excess of billings
              
              
              24,393,864
              
              
              
              15,988,920Job
      disbursements advances
              
              
              2,674,922
              
              
              
              2,252,241Other
      receivables
              
              
              17,314,096
              
              
              
              18,614,928Inventories
              
              
              291,633
              
              
              
              308,842Deferred
      income taxes, current
              
              
              113,106
              
              
              
              3,264Other
      current assets
              
              
              767,040
              
              
              
              1,659,307Total
      current assets
              
              
              136,344,146
              
              
              
              127,606,719Non-current
      assetsPlant
      and equipment, net
              
              
              2,961,900
              
              
              
              5,852,110Intangible
      assets
              
              
              75,664
              
              
              
              50,720Goodwill
              
              
              7,995,896
              
              
              
              7,995,896Other
      non-current asset
              
              
              -
              
              
              
              32,137TOTAL
      ASSETS
              
              $
              147,377,606
              
              
              $
              141,537,582LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      bank loans
              
              $
              9,533,975
              
              
              $
              -Notes
      payable
              
              
              -
              
              
              
              10,193,088Accounts
      payable
              
              
              27,667,418
              
              
              
              35,510,827Billings over
      costs and estimated earnings
              
              
              16,115,529
              
              
              
              5,358,527Amount
      due to shareholder
              
              
              4,635,428
              
              
              
              924,687Other
      payables
              
              
              10,062,000
              
              
              
              7,364,816Income
      tax payable
              
              
              2,939,329
              
              
              
              2,318,743Business
      and other taxes payable
              
              
              1,918,736
              
              
              
              3,304,522Other
      Accrual
              
              
              4,606,225
              
              
              
              1,794,879Total
      current liabilities
              
              
              77,478,640
              
              
              
              66,770,089




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




2





CHINA
      ARCHITECTURAL ENGINEERING, INC.CONSOLIDATED
      BALANCE SHEETS (Continued)AS
      OF SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008(STATED
      IN US DOLLARS)




September
      30,
                    2009
                  
                  
                  December
      31,
                    2008(unaudited)Non-current
      liabilitiesLong
      term bank loans
                  
                  $
                  128,599
                  
                  
                  $
                  328,285Convertible
      bond payable, net
                  
                  
                  23,645,242
                  
                  
                  
                  24,907,170TOTAL
      LIABILITIES
                  
                  $
                  101,252,481
                  
                  
                  $
                  92,005,544STOCKHOLDERS’
      EQUITYPreferred
      stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and
      outstanding at September 30, 2009 and December 31, 2008; Common stock,
      $0.001 par value, 100,000,000 shares authorized, 53,256,874 shares issued
      and outstanding at September 30, 2009 and December 31,
2008
                  
                  $
                  53,257
                  
                  
                  $
                  53,257Additional
      paid in capital
                  
                  
                  26,500,138
                  
                  
                  
                  23,043,792Statutory
      reserves
                  
                  
                  3,230,098
                  
                  
                  
                  3,040,595Accumulated
      other comprehensive income
                  
                  
                  3,282,496
                  
                  
                  
                  5,443,432Retained
      earnings
                  
                  
                  13,089,426
                  
                  
                  
                  17,940,421Total
      Company shareholders’ equity
                  
                  
                  46,155,415
                  
                  
                  
                  49,521,497Noncontrolling
      interests
                  
                  
                  (30,290
                  )
                  
                  
                  10,541Total
      shareholders’ equity
                  
                  
                  46,125,125
                  
                  
                  
                  49,532,038TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
                  $
                  147,377,606
                  
                  
                  $
                  141,537,582




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




3





CHINA
      ARCHITECTURAL ENGINEERING, INC.UNAUDITED
      CONSOLIDATED STATEMENTS OF INCOMEFOR
      THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND
      2008(STATED
      IN US DOLLARS)




Three
      Months Ended
                
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                
                September
      30,2009
                
                
                
                2008
                
                
                
                2009
                
                
                
                2008Contract
      revenues earned
                
                $
                25,558,074
                
                
                $
                55,978,184
                
                
                $
                92,500,112
                
                
                $
                122,707,679Cost
      of contract revenues earned
                
                
                (25,082,910
                )
                
                
                (38,595,231
                )
                
                
                (73,892,287
                )
                
                
                (83,537,317
                )Gross
      profit
                
                $
                475,164
                
                
                $
                17,382,953
                
                
                $
                18,607,825
                
                
                $
                39,170,362Selling,
      general and administrative expenses
                
                
                (5,548,946
                )
                
                
                (6,273,059
                )
                
                
                (17,619,775
                )
                
                
                (13,877,990
                )Income/(Loss)
      from operations
                
                $
                (5,073,782
                )
                
                $
                11,109,894
                
                
                $
                988,050
                
                
                $
                25,292,372Interest
      income
                
                
                4,835
                
                
                
                3,622
                
                
                
                54,800
                
                
                
                45,827Interest
      expense
                
                
                (1,741,368
                )
                
                
                (1,356,085
                )
                
                
                (4,524,936
                )
                
                
                (2,888,111
                )Other
      income
                
                
                335,104
                
                
                
                177,114
                
                
                
                495,560
                
                
                
                342,075Income/(Loss)
      before taxation on Continuing Operations
                
                $
                (6,475,211
                )
                
                $
                9,934,545
                
                
                $
                (2,986,526
                )
                
                $
                22,792,163Income
      tax
                
                
                (114,113
                )
                
                
                (30,945
                )
                
                
                (114,113
                )
                
                
                (147,925
                )Discontinued
      Operation Loss, net of tax
                
                
                (1,829,971
                )
                
                
                -
                
                
                
                (1,829,971
                )
                
                
                -Net
      Earnings/(Loss)
                
                
                (8,419,295
                )
                
                
                9,903,600
                
                
                
                (4,930,610
                )
                
                
                22,644,238Net
      Loss attributable to non-controlling interest
                
                
                38,009
                
                
                
                5,924
                
                
                
                36,604
                
                
                
                16,787Net
      earnings/(loss) attributable to the Company
                
                $
                (8,381,286
                )
                
                $
                9,909,524
                
                
                $
                (4,894,006
                )
                
                $
                22,661,025Earnings/(Loss)
      per share:Basic
                
                $
                (0.16
                )
                
                $
                0.19
                
                
                $
                (0.09
                )
                
                $
                0.44Diluted
                
                $
                (0.16
                )
                
                $
                0.18
                
                
                $
                (0.09
                )
                
                $
                0.42Weighted
      average shares outstanding:Basic
                
                
                53,256,874
                
                
                
                51,891,657
                
                
                
                53,256,874
                
                
                
                51,829,156Diluted
                
                
                53,256,874
                
                
                
                55,653,537
                
                
                
                53,256,874
                
                
                
                55,554,987





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




4





CHINA
      ARCHITECTURAL ENGINEERING, INC.UNAUDITED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND
2008(STATED
      IN US DOLLARS)




Nine
      Months Ended
              September
      30,2009
            
            
            2008Cash
      flows from operating activitiesNet/(Loss)
      income
            
            $
            (4,894,006
            )
            
            $
            22,661,025Noncontrolling
      interest
            
            
            (40,831
            )
            
            
            (16,787
            )Depreciation
      expense
            
            
            710,901
            
            
            
            589,961Amortization
      expense on intangible assets
            
            
            78,461
            
            
            
            -Amortization
      expense on convertible bond
            
            
            2,194,418
            
            
            
            682,261Loss
      on disposal of fixed assets
            
            
            1,998,634
            
            
            
            -Deferred
      income taxes
            
            
            (109,842
            )
            
            
            -Increase/(decrease)
      in inventories
            
            
            17,209
            
            
            
            (989,879
            )Increase
      in receivables
            
            
            (12,456,959
            )
            
            
            (54,359,406
            )(Increase)/decrease
      in other assets
            
            
            (6,339,445
            )
            
            
            100,246Increase
      in payables
            
            
            7,656,923
            
            
            
            15,987,691Net
      cash used in operating activities
            
            $
            (11,184,537
            )
            
            $
            (15,344,888
            )Cash
      flows from investing activitiesPurchases
      of assets
            
            $
            (161,420
            )
            
            $
            (2,577,397
            )Purchases
      of short term investment
            
            
            -
            
            
            
            -Purchase
      of intangible assets
            
            
            (103,405
            )
            
            
            -Proceeds
      from disposal of fixed assets
            
            
            342,095
            
            
            
            -Decrease
      / (increase) in restricted cash
            
            
            7,448,458
            
            
            
            (10,464,272
            )Net
      cash provided by/(used in) investing activities
            
            $
            7,525,728
            
            
            $
            (13,041,669
            )Cash
      flows from financing activitiesProceeds
      from short-term loans
            
            $
            9,533,975
            
            
            $
            6,359,035Proceeds
      from long-term loans
            
            
            -
            
            
            
            1,404,840Repayment
      of Notes Payable
            
            
            (10,193,088
            )
            
            
            -Repayment
      of long-term loans
            
            
            (199,686
            )
            
            
            (124,519
            )Proceeds
      from shareholders
            
            
            3,710,741
            
            
            
            100,555Issuance
      of convertible bond and warrants
            
            
            -
            
            
            
            19,500,000Net
      cash provided by financing activities
            
            $
            2,851,942
            
            
            $
            27,239,911Net
      decrease in cash and cash equivalents
            
            $
            (806,867
            )
            
            $
            (1,146,646
            )Effect
      of foreign currency translation on cash and cash
    equivalents
            
            
            (2,191,366
            )
            
            
            3,644,437Cash
      and cash equivalents - beginning of period
            
            
            9,516,202
            
            
            
            4,040,168Cash
      and cash equivalents - end of period
            
            $
            6,517,969
            
            
            $
            6,537,961Other
      supplementary information:Cash
      paid during the period for:Interest
      paid
            
            $
            -
            
            
            $
            643,880Income
      tax paid
            
            $
            143,306
            
            
            $
            203,682




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




5


CHINA
      ARCHITECTURAL ENGINEERING, INC.UNAUDITED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITYFOR
      THE PERIOD FROM JANUARY 1, 2009 TO SEPTEMBER 30, 2009(STATED IN US
      DOLLARS)




Total
              Number
      of
                shares
            
            
            Common
                stock
            
            
            Additional
                paid
      in
                capital
            
            
            Statutory
      reserves
            
            
            Accumulated
      other comprehensive income
            
            
            Retained
      earnings
            
            
            Noncontrolling
      interests
            
            
            TotalBalance,
      January 1, 2009
            
            
            53,256,874
            
            
            $
            53,257
            
            
            $
            23,043,792
            
            
            $
            3,040,595
            
            
            $
            5,443,432
            
            
            $
            17,940,421
            
            
            $
            10,541
            
            
            $
            49,532,038Net
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,894,006
            )
            
            
            
            
            
            
            (4,894,006
            )Appropriations
      of retained earnings
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            219,933
            
            
            
            
            
            
            
            (219,933
            )Additional
      paid-in capital from warrants and beneficial conversion
            
            
            
            
            
            
            
            
            
            
            3,456,346
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,456,346Prior
      Period Consolidation Elimination Adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            262,944
            
            
            
            
            
            
            
            262,944Foreign
      currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (30,430
            )
            
            
            (2,160,936
            )
            
            
            
            
            
            
            
            
            
            
            (2,191,366
            )Non-controlling
      interests
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (40,831
            )
            
            
            (40,831
            )Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,406,913
            )Balance,
      September 30, 2009
            
            
            53,256,874
            
            
            $
            53,257
            
            
            $
            26,500,138
            
            
            $
            3,230,098
            
            
            $
            3,282,496
            
            
            $
            13,089,426
            
            
            $
            (30,290
            )
            
            $
            46,125,125





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




6




CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
 (Stated
in US Dollars)




1. ORGANIZATION
AND PRINCIPAL ACTIVITIES





China
Architectural Engineering, Inc. (the “Company”) formerly SRKP 1, Inc., was
incorporated in the State of Delaware, United States on March 16, 2004. The
Company’s common stock was initially listed for trading on the American Stock
Exchange on September 28, 2007.  The Company transferred its listing
to The NASDAQ Stock Market LLC on June 10, 2008.




The
Company through its subsidiaries conducts its principal activity as building
envelope systems contractors, specializing in the design, engineering,
fabrication and installation of curtain wall systems, roofing systems, steel
construction systems and eco-energy saving building conservation systems,
throughout China, Australia, Southeast Asia, the Middle East, and the United
States.




The
Company's work is performed under cost-plus-fee contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. These contracts are undertaken by the Company or its wholly owned
subsidiaries. The length of the Company's contracts varies but is typically
about one to two years.




2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





(a) Method
of accounting





The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The consolidated financial
statements and notes are representations of management.  Accounting
policies adopted by the Company conform to generally accepted accounting
principles in the United States of America and have been consistently applied in
the presentation of consolidated financial statements, which are compiled on the
accrual basis of accounting.





(b) Consolidation





The
consolidated financial statements include the accounts of the Company and its 14
subsidiaries. Significant inter-company transactions have been eliminated in
consolidation. The consolidated financial statements include 100% of the assets
and liabilities of these majority-owned subsidiaries, and the ownership
interests of minority investors are recorded as noncontrolling
interests.





The
Company owned the subsidiaries through its reverse-merger on October 17, 2006
and through direct investments or acquisitions after October 17,
2006.  As of September 30, 2009, detailed identities of the
consolidating subsidiaries are as follows:





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




7




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




(c) Use
of estimates





The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made; however, actual results could differ materially
from those estimates.





(d) Plant
and equipment





Plant and
equipment are carried at cost less accumulated
depreciation.  Depreciation is provided over their estimated useful
lives, using the straight-line method. Estimated useful lives of the plant and
equipment are as follows:




Building
              20
      yearsMachinery
      and equipment
              5
      - 10 yearsFurniture
      and office equipment
              5
      yearsMotor
      vehicle
              5
      years




The cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.





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





The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry
changes.  Determination of recoverability of assets to be held and
used is by comparing the carrying amount of an asset to future net undiscounted
cash flows to be generated by the assets.





If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.




During
the reporting periods, there was no impairment loss.




(f) Goodwill
and Intangible Assets




In
accordance with ASC 350, “Goodwill and Other Intangible
Assets”, the Company does not amortize goodwill or intangible assets with
indefinite lives.





For
goodwill and indefinite-lived intangible assets, impairment tests are performed
annually and more frequently whenever events or changes in circumstances
indicate goodwill carrying values exceed estimated reporting unit fair values.
Upon indication that the carrying values of such assets may not be recoverable,
the Company recognizes an impairment loss as a charge against current
operations. During the reporting periods, there was no impairment
loss.





(g) Inventories





Inventories
are raw materials, which are stated at the lower of weighted average cost or
market value.




8




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




(h) Contracts
receivable




Contracts
receivable from performing construction of industrial and commercial buildings
are based on contracted prices.  The Company provides an allowance for
doubtful accounts, which is based upon a review of outstanding receivables,
historical collection information, and existing economic
conditions.





(i) Cash
and cash equivalents





The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.





(j) Restricted
cash





Restricted
cash represents time deposit accounts to secure notes payable and bank
loans.





(k) Earnings
per share





The
Company computes earnings per share (“EPS’) in accordance with ASC260, “Earnings per Share”. ASC260
requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect on
a per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.





The
calculation of diluted weighted average common shares outstanding for the
periods ended September 30, 2009 and 2008 is based on the estimate fair value of
the Company’s common stock during such periods applied to warrants and options
using the treasury stock method to determine if they are dilutive. The
Convertible Bond is included on an “as converted” basis when these shares are
dilutive.





Components
of basic and diluted earnings per share were as follows:




Three
      Months Ended
                September
      30,
              
              
              
              Nine
      Months Ended
                  September
      30,2009
              
              
              
              2008
              
              
              
              2009
              
              
              
              2008Net
      Income/(Loss)
              
              $
              (8,381,286
              )
              
              $
              9,909,524
              
              
              $
              (4,894,006
              )
              
              $
              22,661,025Add:
      Interest expenses less income taxes
              
              
              -
              
              
              
              282,876
              
              
              
              -
              
              
              
              770,564Adjusted
      income
              
              
              (8,381,286
              )
              
              
              10,192,400
              
              
              
              (4,894,006
              )
              
              
              23,431,589Basic
      Weighted Average Shares Outstanding
              
              
              53,256,874
              
              
              
              51,891,657
              
              
              
              53,256,874
              
              
              
              51,829,156Dilutive
      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
              
              
              
              -
              
              
              
              868,688Diluted
      Weighted Average Outstanding Shares:
              
              
              53,256,874
              
              
              
              55,653,537
              
              
              
              53,256,874
              
              
              
              55,554,987Earnings/(Loss)
      Per Share-
      Basic
              
              $
              (0.16
              )
              
              $
              0.19
              
              
              $
              (0.09
              )
              
              $
              0.44-
      Diluted
              
              $
              (0.16
              )
              
              $
              0.18
              
              
              $
              (0.09
              )
              
              $
              0.42




9




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




(l) Revenue
and cost recognition





Revenues
from fixed-price and modified fixed-price construction contracts are recognized
on the percentage-of-completion method, measured by the percentage of costs
incurred to date to estimated total cost for each contract.





Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs.





Selling,
general, and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Profit incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to claims is included in
revenues when realization is probable and the amount can be reliably
estimated.





Total
estimated gross profit on a contract, being the difference between total
estimated contract revenue and total estimated contract cost, is determined
before the amount earned on the contract for a period can be
determined.





The
measurement of the extent of progress toward completion is used to determine the
amount of gross profit earned to date and that the earned revenue to date is the
sum of the total cost incurred on the contract and the amount of gross profit
earned.





Earned
revenue, cost of earned revenue, and gross profit are determined as follows:
-





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.





Change
orders are common for the changes in specifications or
design.  Contract revenue and costs are adjusted to reflect change
orders approved by the customer and the contractor regarding both scope and
price.  Recognition of amounts of additional contract revenue relating
to claims is appropriate only if it is probable that the claim will result in
additional contract revenue and if the amount can be reliably
estimated.





(m) Income
taxes





The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are
available.  The Company has implemented ASC 740-270, Accounting for Income
Taxes.





Income
tax liabilities computed according to the United States, People’s Republic of
China (PRC), Hong Kong SAR, Macau SAR and Australia tax laws are provided for
the tax effects of transactions reported in the financial statements and
consists of taxes currently due plus deferred taxes related primarily to
differences between the basis of fixed assets and intangible assets for
financial and tax reporting.  The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will be
either taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred taxes also are recognized for operating losses that
are available to offset future income taxes.  A valuation allowance is
created to evaluate deferred tax assets if it is more likely than not that these
items will either expire before the Company is able to realize that tax benefit,
or that future realization is uncertain.




10




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




In
respect of the Company’s subsidiaries domiciled and operated in different tax
jurisdictions, the taxation of these entities can be summarized as
follows:





·
              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 18% in
      2008 and 20% in 2009. In accordance to China’s Enterprise Income Tax Law
      (“EIT Law”) effective from January 1, 2008, the tax rate for these two
      subsidiaries will be gradually increased 25% in 2012. The Company
      anticipates that as a result of the 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 a 20% 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 20% in
2009.





·
            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, 2008, 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.





(n) Advertising





The
Company expensed all advertising costs as incurred. Advertising expenses
included in selling expenses were $nil and $nil for the three-month period,
$11,032 and $362,076 for the nine-month period ended September 30, 2009 and
2008, respectively.





(o) Research and
development





All
research and development costs are expensed as incurred. Research and
development costs included in general and administrative expenses were $nil and
$9,319 for the three-month period, $2,926 and $698,814 for the nine-month period
ended September 30, 2009 and 2008, respectively.





(p) Retirement
benefits





Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.




11




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




(q) Foreign
currency translation





The
accompanying consolidated financial statements are presented in United States
Dollars (US$). The Company’s functional currency is the US$, while certain
domestic subsidiaries’ use the Renminbi (RMB) and Hong Kong and overseas
subsidiaries use local currencies as their functional
currency.   The consolidated financial statements are translated
into US$ from RMB, Hong Kong Dollars (HKD), United Arab Emirate Dirham (AED) and
other local currencies at September 30, 2009 exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.





September
      30,
              2009
            
            
            December
      31,
              2008
            
            
            September
      30,
              2008Period
      end RMB : US$ exchange rate
            
            
            6.8263
            
            
            
            6.8225
            
            
            
            6.8551Average
      quarterly RMB : US$ exchange rate
            
            
            6.8309
            
            
            
            6.9564
            
            
            
            6.8529





September
      30,
              2009
            
            
            December
      31,
              2008
            
            
            September
      30,
              2008Period
      end HKD : US$ exchange rate
            
            
            7.7501
            
            
            
            7.7499
            
            
            
            7.7701Average
      quarterly HKD : US$ exchange rate
            
            
            7.7505
            
            
            
            7.7859
            
            
            
            7.8001




September
      30,
              2009
            
            
            December
      31,
              2008
            
            
            September
      30,
              2008Period
      end AED : US$ exchange rate
            
            
            3.6700
            
            
            
            3.6731
            
            
            
            3.6750Average
      quarterly AED : US$ exchange rate
            
            
            3.6700
            
            
            
            3.6736
            
            
            
            3.6743





The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions.  No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.





(r) Statutory
reserves





Statutory
reserves for foreign investment enterprises are referring to the amount
appropriated from the net income in accordance with laws or regulations, which
can be used to recover losses and increase capital, as approved, and are to be
used to expand production or operations.





(s) Comprehensive
income





Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.  Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other consolidated financial statements.  The Company’s current
components of other comprehensive income are the foreign currency translation
adjustment.





(t) Recent
accounting pronouncements





In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. SFAS 165 is effective for interim or
annual financial periods ending after June 15, 2009.





In June
2009, FASB issued FASB Statement No. 166, Accounting for Transfers for
Financial Assets and FASB Statement No. 167, a revision to FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities.  Statement 166 is a revision to FASB Statement No.
140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, and
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures.




12




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




Statement
167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities, and changes how a reporting entity determines when an entity
that is insufficiently capitalized or is not controlled through voting (or
similar rights) should be consolidated. The determination of whether a reporting
entity is required to consolidate another entity is based on, among other
things, the other entity’s purpose and design and the reporting entity’s ability
to direct the activities of the other entity that most significantly impact the
other entity’s economic performance.





On July
1, 2009, FASB issued FASB Statement No. 168, The “FASB Accounting Standards
Codification” and the Hierarchy of Generally Accepted Accounting
Principles.  The ASC has become the source of authoritative US
GAAP recognized by the FASB to be applied by nongovernmental entities and
provides that all such guidance carries an equal level of authority. The ASC is
not intended to change or alter existing GAAP. The ASC is effective for interim
and annual periods ending after September 15, 2009.




3. CONTRACT
RECEIVABLES





September
      30,
              2009
            
            
            December
      31,
              2008Contract
      receivables
            
            $
            89,817,178
            
            
            $
            77,027,328Less: Allowance for
      doubtful accounts
            
            
            (5,548,592
            )
            
            
            (5,215,701
            )Net
            
            $
            84,268,586
            
            
            $
            71,811,627





Allowance for Doubtful
      Accounts
            
            September
      30,
              2009
            
            
            December
      31,
              2008Beginning
      balance
            
            $
            5,215,701
            
            
            $
            215,701Add:
      Allowance created
            
            
            332,891
            
            
            
            5,000,000Ending
      balance
            
            $
            5,548,592
            
            
            $
            5,215,701





4. INVENTORIES





September
      30,
              2009
            
            
            December
      31,
              2008Raw
      materials at sites
            
            $
            291,633
            
            
            $
            308,842




13




CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




5. PLANT
AND EQUIPMENT





Plant and
equipment consist of the following as of:





September
      30,
              2009
            
            
            December
      31,
              2008At
      costMotor
      vehicle
            
            $
            1,468,048
            
            
            $
            1,568,165Machinery
      and equipment
            
            
            2,383,997
            
            
            
            3,221,028Furniture,
      software and officeequipment
            
            
            2,253,973
            
            
            
            2,443,382Building
            
            
            -
            
            
            
            311,596Leasehold
      improvement
            
            
            447,974
            
            
            
            2,198,367$
            6,553,992
            
            
            $
            9,742,538Less:
      Accumulated depreciationMotor
      vehicle
            
            $
            852,550
            
            
            $
            774,977Machinery
      and equipment
            
            
            1,389148
            
            
            
            1,975,014Furniture,
      software and officeequipment
            
            
            1,129,231
            
            
            
            908,591Building
            
            
            -
            
            
            
            24,538Leasehold
      improvement
            
            
            221,163
            
            
            
            207,308$
            3,592,092
            
            
            $
            3,890,428$
            2,961,900
            
            
            $
            5,852,110





Depreciation
expenses included in the selling and administrative expenses were $246,484 and
$191,720 for the three-month periods, $710,901 and $524,705 for the nine-month
periods ended September 30, 2009 and 2008, respectively.





6. INTANGIBLE
ASSETS




September
      30,
              2009
            
            
            December
      31,
              2008At
      costIntangible
      Assets
            
            $
            202,972
            
            
            $
            99,567Less:
      Accumulated amortization
            
            
            127,308
            
            
            
            48,847$
            75,664
            
            
            $
            50,720




14


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)
  7. LOANS





A. SHORT-TERM
BANK LOANS





September
      30,
              2009
            
            
            December
      31,
              2008ABN
      Amro Bank N.V. Bank Overdraft in Current Account at interest rate at 6.5%
      per annum
            
            
            4,915,733
            
            
            
            -ABN
      Amro Bank N.V. Bank Temporary Loan for the drawing of performance and
      advance payment bonds at interest rate at Bank's Cost of Fund +
      6%
            
            
            4,541,082
            
            
            
            -Automobile
      capital lease obligation (hire purchase),amount due within one year, last
      installment due November 9, 2012
            
            
            77,160
            
            
            
            -$
            9,533,975
            
            
            $
            -




B. LONG-TERM
BANK LOANS




September
      30,
              2009
            
            
            December
      31,
              2008Bank
      of East Asia (China) Ltd., Apartment Mortgage, amount due after one year,
      at 5.184% per annum, subject to variation every 6 months, last installment
      due January 4, 2012, full outstanding amount repaid in May
      2009
            
            $
            -
            
            
            $
            141,811Automobile
      capital lease obligation (hire purchase),amount due after one year, last
      installment due November 9, 2012
            
            
            128,599
            
            
            
            186,474$
            128,599
            
            
            $
            328,285




Zhuhai
King Glass Engineering Co., Limited borrowed from Bank of East Asia with a
condominium as collateral. This facility is subject to a current interest rate
of 5.184% and interest rate adjusts every 6 months. The borrowing was fully
repaid in May 2009.





Full Art
International Limited borrowed a hire purchase (car) loan from DBS
Bank.





15


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)


8. CONVERTIBLE
BONDS AND BOND WARRANTS





(a) $10,000,000
Variable Rate Convertible Bonds due in 2012




On April
12, 2007, the Company completed a financing transaction with ABN AMRO Bank N.V.
(the “Subscriber”) issuing (i) $10,000,000 Variable Rate Convertible Bonds due
in 2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of
800,000 shares of the Company’s common stock, subject to adjustments for stock
splits or reorganizations as set forth in the warrant, that expire in 2010 (the
“Warrants”).




On
September 29, 2008, the Subscriber converted $2,000,000 into 571,428 shares at
the conversion price of $3.50 per share. As of March 31, 2009, the face value of
the bonds outstanding was $8,000,000.




Effective
from April 12, 2009, the conversion price has been reset to $2.45, which is 70%
of $3.50 as the average closing price of the Company’s shares for the period of
20 consecutive trading days immediately prior to April 12, 2009 was $0.94. The
reset of the conversion price resulted in additional $3.4 million of bonds
discount and will be amortized over the remaining outstanding periods of the
bonds.




On
November 8, 2008, the Subscriber exercised all the 800,000 warrants into 800,000
shares at the exercise price of $0.01 per share.





(b) $20,000,000
12% Convertible Bonds due in 2011




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





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





The
Convertible Bonds Payable, net consists of the following:




September
      30,
              2009
            
            
            December
      31,
              2008Convertible
      Bonds Payable
            
            $
            28,000,000
            
            
            $
            28,000,000Less:
      Interest discount – Warrants
            
            
            (3,159,903
            )
            
            
            (3,159,903
            )Less:
      Interest discount – Beneficial conversion feature
            
            
            (1,737,143
            )
            
            
            (1,737,143
            )Less:
      Bond discount
            
            
            (740,000
            )
            
            
            (740,000
            )Accretion
      of interest discount
            
            
            1,282,288
            
            
            
            2,544,216Net
            
            $
            23,645,242
            
            
            $
            24,907,170





As more
fully discussed in Note 12(d), below, the Company entered into a waiver
agreement with the Subscribers pursuant to which the Subscribers waived, among
other things, interest payments due under the $10,000,000 Variable Rate
Convertible Bonds due in 2012 and $20,000,000 12% Convertible Bonds due in 2011
until November 6, 2009.





16


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)


9. CONTRACT
REVENUES EARNED





The
contract revenues earned for the three-month and nine-month periods ended
September 30, 2009 and 2008 consist of the following:





Three
      Months Ended
                September
      30,
            
            
            Nine
      Months Ended
                September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Billed
            
            $
            16,670,961
            
            
            $
            24,675,970
            
            
            $
            60,073,588
            
            
            $
            71,930,700Unbilled
            
            
            8,887,113
            
            
            
            31,302,214
            
            
            
            32,426,524
            
            
            
            50,776,979$
            25,558,074
            
            
            $
            55,978,184
            
            
            $
            92,500,112
            
            
            $
            122,707,679




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





10. INCOME
TAXES





The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the relevant applicable corporation income
tax rate to income before tax for the periods ended September 30, 2009 and
2008:





Three
      Months Ended
              September
      30,
            
            
            Nine
      Months Ended
              September
      30,2009
            
            
            2008
            
            
            2009
            
            
            2008Taxes
      at the applicable income tax rates
            
            $
            114,113
            
            
            $
            19,629
            
            
            $
            114,113
            
            
            $
            1,273,344Miscellaneous
      non taxable income and non-deductible expenses
            
            
            -
            
            
            
            11,316
            
            
            
            -
            
            
            
            (1,125,419
            )Current
      income tax expense
            
            $
            114,113
            
            
            $
            30,945
            
            
            $
            114,113
            
            
            $
            147,925





17


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)


11. DISCONTINUED
OPERATION LOSS




In
September 2009, the Company’s Shenzhen office was downsized and moved out from
the leasehold multi-floor office building to a smaller leased place at minimal
operations. The move was a result from the Company’s recent restructure and
reorganization to turn back to the domestic market in China instead of
overseas market due to the recent change in international economic environments.
The set up of the Shenzhen office was originally for the support of the overseas
operations which the Company decided to be discontinued.  As a result,
the current improvement works to the leasehold multi-floor office building were
stopped and being written off in the period under this report as discontinued
operation loss of $1,829,971.





12. COMMITMENTS
AND CONTINGENCIES





(a)
Operating lease commitments





The
Company leases certain administrative and production facilities from third
parties.  Accordingly, for the nine-month periods ended September 30,
2009 and 2008, the Company incurred rental expenses of $2,402,943 and $1,254,919
respectively.





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





For
      the 12 months ending September 30,2010
            
            
            1,058,5592011
            
            
            835,4902012
            
            
            808,9612013
      or after
            
            
            694,421$
            3,397,431





(b) Pending
Litigation





Techwell
Litigation




Pursuant
to a Stock Purchase Agreement dated November 7, 2007, the previous shareholders
of Techwell Engineering Limited (“Techwell”), Mr. Ng, Chi Sum and Miss Yam, Mei
Ling Maria agreed to sell 100% of the shares in Techwell to the Company for
approximately $11.7 million in cash and shares of common stock of the Company.
Subsequent to the said acquisition, Mr. Ng and Miss Yam were employed by
Techwell.




On
January 14, 2009, the board of directors of Techwell passed a board resolution,
to dismiss both Mr. Ng and Miss Yam with immediate effect and remove Mr. Ng from
the board of Techwell (the “Resolution”).   On January 16, 2009,
Mr. Ng and Miss Yam filed a lawsuit in the High Court of Hong Kong against the
Company and its subsidiary, Full Art International Limited.  The
lawsuit alleges that, inter
alia, (i) the Company misrepresented to them the financial status of the
Company and operations during the course the acquisition of Techwell was being
negotiated; (ii) the Company failed to perform its obligations under a
settlement agreement alleged to be agreed by the Company in January 2009;
and (iii) the dismissal of Mr. Ng was unlawful and invalid.  The
lawsuit filed by Mr. Ng and Miss Yam requests the court for specific performance
of the settlement agreement that was allegedly entered into, which would require
the return of the Techwell company to Mr. Ng and Miss Yam, and in the absence of
such grant of relief, Mr. Ng and Miss Yam request unspecified damages lieu of
return of the Techwell company.





On
January 23, 2009 an ex-parte injunction order was granted to Mr. Ng, restraining
the Company from implementing the Resolution, which was eventually dismissed
with immediate effect on February 25, 2009 after a court session in the High
Court of Hong Kong. Mr. Ng was also ordered to bear the costs of the various
court proceedings in connection with the said injunction order. On March 27,
2009, Mr. Ng and Miss Yam filed a summons in the High Court of Hong Kong seeking
a court order for leave to join the Company’s principal shareholder, KGE Group
Limited, as a defendant of the said lawsuit, which was granted on April 9,
2009.  As a result, KGE Group Limited became one of the defendants of
the lawsuit. On May 12, 2009, the Company filed a Defense and Counterclaim at
the High Court of Hong Kong in response to a Statement of Claim served by Mr. Ng
and Miss Yam on the Company on April 7, 2009.




18


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




The
Company, Mr. Ng, and Miss Yam are in discussions and negotiations to settle the
all disputes between the parties.  However, there is no guarantee that
the parties will reach an agreement to settle the dispute, in which case the
Company intends to vigorously defend against the lawsuit.  There can
be no assurance that the lawsuit will be resolved in the Company’s
favor.  Even if the Company successfully defends the lawsuit, the
Company may incur substantial costs defending or settling the lawsuit, in
addition to a possible diversion of the time and attention of the Company’s
management from its business.  If the Company is unsuccessful in
defending the lawsuit, its may be required to pay a significant amount of
damages and/or it may potentially lose ownership of Techwell, which will have a
material adverse effect on the Company’s business, financial condition or
results of operations.





Dubai
Metro Rail Project Dispute





On
September 9, 2009, the Red Line, or first phase, of the Dubai Metro was
officially opened. The Company, through its subsidiary Techwell, had been
working towards completion of its external envelopes for stations along the Red
Line of the Dubai Metro System.  According to the Company’s original
construction blueprint, the majority of its construction work was completed at
the end of June 2009, and final construction milestones were scheduled for
completion in the third quarter of 2009.  With less than 5% of its
contract remaining to be completed, Techwell was removed by the master
contractor of the project, which also called for and received payment of $2.1
million in performance bonds and $7.3 million in advance payment bonds that were
issued on Techwell's behalf for the project. The calling of the advance payment
bonds was based on the master contractor's belief that it had paid in excess of
the construction work performed.  The Company and certain of its
subsidiaries are guarantor of the bonds that were paid by the banks, and the
Company is liable under the guarantee agreements for such amounts paid by the
banks.  The Company does not believe that the master contractor had
a proper basis for calling the bonds and intend to vigorously defend all of
its legal rights and remedies related to the dispute.  The Company has
engaged a construction claims consultant to facilitate resolution of the
dispute.  The Company and its construction claims consultant, based on
a review of the facts, documents, and materials available, believes that it has
a reasonable opportunity to collect the amounts due to Techwell from the master
contractor, less appropriate credits as its final amount due for work performed
through September 2009.  The Company, with the assistance of its
claims consultant, will continue to evaluate the dispute and probability of
success on this dispute going forward and make the appropriate adjustments;
however, no assurance can be given that the dispute will be resolved in the
Company’s and Techwell’s favor.





(c)
Nine Dragons Framework Agreement and Letter of Intent for Land
Transfer





In June
2009, the Company entered into a Framework Agreement of Investment on Marine
Park and Holiday Resorts Project (the “Framework Agreement”) with Shanghai Nine
Dragon Co. Ltd (“Nine Dragon”) to undertake the projects at the Nine Dragon
Holiday Resort that has been under development in the Yangtze River Delta in
China.  Pursuant to the terms of the Framework Agreement, the projects
include, but are not limited to, the construction of a marine park, botanical
garden, and other buildings.  According to the Framework Agreement,
various portions of the overall project are scheduled to commence in the second
half of 2009, and projected completion dates for various portions of the project
range from 2011 to 2013.  The Company and Nine Dragons agree to sign
separate terms and conditions for each sub-project, including investment, the
size of the construction, and the operation procedures.  Further to
the Framework Agreement, in August 2009, the Company signed a Letter of Intent
of Land Transfer ("LOI") to purchase land from Zhejiang Nine Dragon Co., a
subsidiary of Nine Dragon.  The property that is subject to the LOI is
a planned construction area of approximately 1.6 million square feet, and,
according to the LOI, the purchase price will be equal to approximately US$34
per square foot, for a total purchase price of approximately US$55
million.  Pursuant to the terms of the LOI, the parties will sign a
definitive agreement and the transaction is intended to close within six months
after signing the definitive contract. According to the LOI, the purchased land
is expected to be constructed into a mixed-used complex, which will include a
residential complex.  Pursuant to the LOI, it is expected for
construction to occur in 2010 and completion to occur in 2011. The Company has
not entered into any definitive agreement, and it continues to examine and
negotiate the transaction with Zhejiang Nine Dragon.




19


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)




(d) Proposed
Sale of Securities





Securities
Purchase Agreement





On August
6, 2009, the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with KGE Group, Limited (“KGE Group”) and certain investors pursuant
to which the Company agreed to sell an aggregate of 17,000,000 shares (the
“Shares”) of its common stock to the investors for $1.65 per share for aggregate
gross proceeds of approximately $28 million.





Pursuant
to the Purchase Agreement, the Company intends to sell and issue the Shares to
the investors on or around September 30, 2009, provided that approval from the
stockholders of the Company is obtained prior to the sale and issuance of the
Shares.   Under the Purchase Agreement, the Company is required
to seek, and use its best efforts to obtain stockholders approval of the sale
and issuance of the Shares.  The Company intends to seek stockholder
approval for the sale and issuance of the Shares at a special meeting of
stockholders.  If stockholder approval is not obtained for the sale
and issuance of the Shares, the Shares will not be sold to the
investors.  Pursuant to the Purchase Agreement, after the sale of the
Shares to the investors, the Company must maintain a substantial majority of the
proceeds from the offering as a cash reserve to fund the Shanghai Nine Dragons
Project until such project has reached at least 80% of completion as determined
by the Company and Nine Dragon (Shanghai) Co. Ltd.





According
to the Purchase Agreement, if as reported in the Company's financial statements
at the end of any fiscal quarter, the Company’s net assets (excluding normal
depreciation) do not at least equal the value of the Company’s net assets
(excluding normal depreciation) on June 30, 2009, less $2,500,000 (the "Net
Assets Threshold"), KGE Group agreed to pay to the Company an amount equal to
the difference between the Net Assets Threshold and the net assets (excluding
normal depreciation) as reported for the period in question (the "Net Assets
Loss") in cash within six months after the end of the period in which the Net
Assets Loss occurred.  The provision expires on the earlier of (i)
three years from the date of the Purchase Agreement or (ii) the investors no
longer holder at least 50% of the Shares sold pursuant to the Purchase Agreement
at the end of any fiscal quarter of the Company.





Waiver
of Conversion Price Adjustment on Convertible Bonds





On August
6, 2009, the Company and the holders of the Company’s outstanding Variable Rate
Convertible Bonds due 2012 (the “2007 Bonds”), 12% Convertible Bonds due 2011
(the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”) and
warrants to purchase 300,000 shares of common stock of the Company expiring 2013
(the “2008 Warrants”) entered into an Amendment and Waiver Agreement (the
“Waiver”).  Pursuant to Waiver, the bondholders and warrantholder
agreed to waive their right to a reduction in the conversion price of the Bonds
and exercise price of the 2008 Warrants due to the Company’s proposed sale of
the shares pursuant to the Purchase Agreement at a price per share less than the
current conversion prices of the Bonds and exercise price of the 2008
Warrants.  The holders of the 2008 Bonds also agreed that no default
shall occur under Condition 12(A)(xiv) of the trust deed governing the 2008
Bonds relating to the requirement that KGE Group own at least 45% of the
Company’s common stock.





Pursuant
to the Waiver, the Company agreed to use a portion of the net proceeds of the
sale of the Shares to the investors to pay (i) the interest payments of the
Bonds that are outstanding and due for payment in accordance with the terms of
the trust deeds governing the Bonds, and (ii) all amounts owed to ABN AMRO Bank
(China) Co. Ltd., Shenzhen Branch or any other ABN AMRO Bank N.V. affiliate in
connection with the Bank Overdraft Facility and any outstanding interest on the
facility as the date of payment (collectively, the “Agreed Bondholders
Payments”).  Such payments must be made no later than the earlier of
(i) seven business days after the sale of the Shares and (ii) three months from
the date of the Waiver.  Remaining net proceeds shall be used to fund
the operations of the Company. Until the Agreed Bondholders Payments of are made
by the Company after the sale of the Shares, the Company agreed that it will not
use proceeds from the proposed sale of shares to repay or prepay any debt prior
to its currently scheduled due date without consent of the
bondholders.




20


CHINA
ARCHITECTURAL ENGINEERING, INC.
 NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE- AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(continued)
 (Stated
in US Dollars)


13. RELATED
PARTIES TRANSACTIONS





The
current account balances with the largest shareholder at September 30 2009 and
at December 31, 2008 were payables of $4,635,428 and $924,687, respectively.
Pursuant to the terms of the loans, the loans are interest-free, fee-free and
have no fixed repayment schedule.





During
the nine months period ended September 30, 2009, the Company purchased
construction materials amounting to $13.4 million from Guangdong Canbo
Electrical Co., Ltd. (Canbo), a subsidiary of the Company’s major shareholder,
KGE Group Limited. Canbo is a preferred supplier of the Company as it is able to
procure materials at favorable price levels due to its purchased quantities.
More important, application of certain of the Company’s patented technology is
preferably routed through Canbo to prevent undesired distribution of this
technology. The Company at times provides advance payment to Canbo in order to
obtain a more favorable pricing. As of September 30, 2009, the Company’s advance
to Canbo was $0.5 million.




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





14. SUBSEQUENT
EVENTS





On
October 5, 2009, the shareholders of the Company voted to approve the sale and
issuance of 17 million shares of common stock at $1.65 per share in accordance
with the terms of a securities purchase agreement dated August 6, 2009 entered
into by and between the Company and investors.  Pursuant to the
securities purchase agreement, the transaction was to close by September 30,
2009, but only if shareholder approval was obtained by such
time.  After receipt of shareholder approval, the Company and the
investors have sought to close the sales transaction, however, certain new and
modified terms and conditions have been requested by the investors, including a
change in the use of proceeds as set forth in the securities purchase
agreement.  There is no guarantee that the sales transaction of any or
all of the 17 million shares of common stock will be completed.  As
such, the Company may be required to seek funding through other means, such as
public or private financing or through collaborative arrangements with strategic
partners.  The Company cannot be certain that additional capital will
be available on favorable terms, if at all, and any available additional
financing may not be adequate to meet its goals.





21


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, 2008.
 
 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,
reduction or reversal of the Company's recorded revenue or profits due to
"percentage of completion" method of accounting and expenses; our ability to
being able to close the transactions contemplated by the Securities Purchase
Agreement; resolving the dispute with the master contractor on the Dubai Metro
Rail Project; our ability to obtain an extension or other modification for the
Waiver agreement with the bondholders; adverse capital and credit market
conditions; and interest, costs, and other restrictions associated with our
convertible bonds; increasing provisions for bad debt related to our accounts
receivable; fluctuation and unpredictability of costs related to our products
and services; 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 2008 annual report and
June 30, 2009 quarter report occur.  Consequently, all of the
forward-looking statements made in this report are qualified by these cautionary
statements and there can be no assurance of the actual results or
developments.
 
 Overview
 
 We
specialize in high-end curtain wall systems (including glass, stone and metal
curtain walls), roofing systems, steel construction systems, eco-friendly energy
saving buildings and conservation systems and related products, for public works
and commercial real estate projects. We provide timely, high quality, reliable,
fully integrated and cost-effective service solutions to our clients using
specialized technical expertise in the design, engineering, fabrication,
installation and construction of structural exterior cladding systems. We have
completed over one hundred projects throughout China, Hong Kong, Macau,
Australia and Southeast Asia, including the National Grand Theater in Beijing,
the Meridian Gate Exhibition Hall of the Palace Museum in Beijing’s Forbidden
City (winner of the 2005 UNESCO Jury Commendation for Innovation of Asia Pacific
Heritage Award), the Beijing Botanical Garden Conservatory (winner of the Zhan
Tian You award in 2003), the Shenzhen Airport Terminal Building, the Shanghai
South Railway Station and the Vietnam National Conference Center.  We
compete on the strength of our reputation, relationships with government and
commercial clients, and our ability to give expression to the vision of leading
architects.  By focusing on innovation while outsourcing commoditized
manufacturing work, we are able to add artistic and technological value to
projects at cost-effective price points.  In 2008, we became a member
of U.S. Green Building Council (USGBC) and we further focused on expanding our
international operations.
 
 Most
sectors in the global economy have been suffering through a financial slow down
and recession, particularly the construction industry. During 2009, we have
experienced a decrease in the project turnover and an increase in costs and
delays in customer payments. As a result, our results of operations have
suffered.
 
 In the
past, the number and size of our international projects had been increasing, but
during 2009 our management has moved to refocus our resources to projects in the
mainland China.  During the second quarter of 2009, we decided to
terminate our work on the project in Singapore and stop the guarantee related to
the project. Our management reviewed and created updated forecasts for the
project and concluded that there will be major differences between the design
concept as originally contemplated and the final site structures. As a result,
we decided to terminate our work on the project since we did not receive
approval for our improvement proposal, and resources related to the project were
moved to projects in China.
  22
  Dubai Metro Rail Project
 
 On
September 9, 2009, the Red Line, or first phase, of the Dubai Metro was
officially opened. We, through our subsidiary Techwell Engineering Limited, had
been working towards completion of our external envelopes for stations along the
Red Line of the Dubai Metro System.  According to our original
construction blueprint, the majority of our construction work was completed at
the end of June 2009, and final construction milestones were scheduled for
completion in the third quarter of 2009.  With less than 5% of our
contract remaining to be completed, Techwell was removed by the master
contractor of the project, who also called for and received payment of $2.1
million in performance bonds and $7.3 million in advance payment bonds that were
issued on Techwell's behalf for the project. The calling of the advance payment
bonds was based on the master contractor's belief that it had paid in excess of
the construction work performed.  We and certain of our subsidiaries
are guarantor of the bonds that were paid by the banks, and we are liable under
the guarantee agreements for such amounts paid by the banks.  We do
not believe that the master contractor had a proper basis for calling the bonds
and intend to vigorously defend all of our legal rights and remedies related to
this dispute.  We have engaged a construction claims consultant to
facilitate resolution of this dispute.  We and our construction claims
consultant, based on a review of the facts, documents, and materials available,
believes that we have a reasonable opportunity to collect the amounts due to
Techwell from the master contractor, less appropriate credits as our final
amount due for work performed through September 2009.  We,
with the assistance of our claims consultant, will continue to evaluate the
dispute and probability of success on this dispute going forward and make the
appropriate adjustments; however, no assurance can be given that the dispute
will be resolved in our and Techwell’s favor.
 
 Nine Dragon Project
 
 We
entered into a Framework Agreement of Investment on Marine Park and Holiday
Resorts Project (the “Framework Agreement”) with Shanghai Nine Dragon Co. Ltd
(“Nine Dragon”) to undertake the projects at the Nine Dragon Holiday Resort that
has been under development in the Yangtze River Delta in China. Pursuant to the
terms of the Framework Agreement, the projects include, but are not limited to,
the construction of a marine park, botanical garden, and other buildings.
According to the Framework Agreement, various portions of the overall project
are scheduled to commence in the second half of 2009, and projected completion
dates for various portions of the project range from 2011 to 2013. We agreed to
sign an agreement with Nine Dragons that contained separate terms and conditions
for each sub-project, including investment, the size of the construction, and
the operation procedures. As of the date of this quarterly report, no separate
agreements have been entered into for sub-projects, and we have not commenced
any constructions projects for the Nine Dragon project.  Since the
signing of the Framework Agreement, we have continued in negotiations with Nine
Dragon regarding the nature, terms, and conditions of the projects intended for
us to conduct under the agreement.
 
 Further
to the Framework Agreement, in August 2009, we signed a Letter of Intent of Land
Transfer ("LOI") to purchase land from Zhejiang Nine Dragon Co., a subsidiary of
Nine Dragon. The property that is subject to the LOI is a planned construction
area of approximately 1.6 million square feet, and, according to the LOI, the
purchase price will be equal to approximately US$34 per square foot, for a total
purchase price of approximately US$55 million. Pursuant to the terms of the LOI,
the parties will sign a definitive agreement and the transaction is intended to
close within six months after signing the definitive contract. According to the
LOI, the purchased land is expected to be constructed into a mixed-used complex,
which will include a residential complex. Pursuant to the LOI, it is expected
for construction to occur in 2010 and completion to occur in 2011.  As
of the date of this quarterly report, we have not entered into any definitive
agreement, and we continue to examine and negotiate the transaction with
Zhejiang Nine Dragon.
 
 Securities Purchase Agreement and
Bondholders Waiver
 
 On August
6, 2009, we entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with KGE Group, Limited (“KGE Group”) and certain investors pursuant
to which we agreed to sell an aggregate of 17,000,000 shares (the “Shares”) of
our common stock to the investors for $1.65 per share for aggregate gross
proceeds of approximately $28 million. Under the terms of the Purchase
Agreement, which was to close on September 30, 2009, we would be required to
maintain a substantial majority of the proceeds from the offering as a cash
reserve to fund the Shanghai Nine Dragons Project until such project has reached
at least 80% of completion as determined by us and Nine Dragon (Shanghai) Co.
Ltd.  In addition, under the Purchase Agreement, if as reported in our
financial statements at the end of any fiscal quarter, our net assets (excluding
normal depreciation) do not at least equal the value of our net assets
(excluding normal depreciation) on June 30, 2009, less $2,500,000 (the "Net
Assets Threshold"), KGE Group agreed to pay to us an amount equal to the
difference between the Net Assets Threshold and the net assets (excluding normal
depreciation) as reported for the period in question (the "Net Assets Loss") in
cash within six months after the end of the period in which the Net Assets Loss
occurred. The provision expires on the earlier of (i) three years from the date
of the Purchase Agreement or (ii) the investors no longer holder at least 50% of
the Shares sold pursuant to the Purchase Agreement at the end of any fiscal
quarter of our company.
  23
  On
October 5, 2009, our shareholders voted to approve the sale and issuance of 17
million shares.  Pursuant to the securities purchase agreement, the
transaction was to close by September 30, 2009, but only if shareholder approval
was obtained by such time.  After receipt of shareholder approval, we
and the investors have sought to close the sales transaction, however, certain
new and modified terms and conditions have been requested by the investors,
including a change in the use of proceeds as set forth in the securities
purchase agreement.  There is no guarantee that the sales transaction
of any or all of the 17 million shares of common stock will be
completed.  As such, we may be required to seek funding through other
means, such as public or private financing or through collaborative arrangements
with strategic partners.  We cannot be certain that additional capital
will be available on favorable terms, if at all, and any available additional
financing may not be adequate to meet our goals.
 
 This
quarterly report is not an offer of securities for sale. Any securities sold in
the private placement have not been registered under the Securities Act of 1933,
as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.
 
 On August
6, 2009, and in connection with the Purchase Agreement, we and the holders of
our outstanding Bonds and warrants to purchase 300,000 shares of our common
stock expiring 2013 (the “2008 Warrants”) entered into an Amendment and Waiver
Agreement (the “Waiver”). Pursuant to Waiver, the bondholders and warrantholder
agreed to waive their right to a reduction in the conversion price of the Bonds
and exercise price of the 2008 Warrants due to our proposed sale of the shares
pursuant to the Purchase Agreement at a price per share less than the current
conversion prices of the Bonds and exercise price of the 2008 Warrants. The
holders of the 2008 Bonds also agreed that no default shall occur under
Condition 12(A)(xiv) of the trust deed governing the 2008 Bonds relating to the
requirement that KGE Group own at least 45% of our issued and outstanding common
stock. Pursuant to the Waiver, we agreed to use a portion of the net proceeds of
the sale of the Shares to the investors to pay (i) the interest payments of the
Bonds that are outstanding and due for payment in accordance with the terms of
the trust deeds governing the Bonds, and (ii) all amounts owed to ABN
AMRO Bank (China) Co. Ltd., Shenzhen Branch or any other ABN AMRO Bank N.V.
affiliate in connection with the Bank Overdraft Facility and any outstanding
interest on the facility as the date of payment (collectively, the “Agreed
Bondholders Payments”). Such payments must be made no later than the earlier of
(i) seven business days after the sale of the Shares and (ii) three months from
the date of the Waiver.  Remaining net proceeds shall be used to fund
our operations. Until the Agreed Bondholders Payments of are made by us after
the sale of the Shares, we agreed that we will not use proceeds from the
proposed sale of shares to repay or prepay any debt prior to our currently
scheduled due date without consent of the bondholders.
 
 The three
months provided to us to make the Agreed Bondholders Payments expired on
November 6, 2009, and as of the date of this quarterly report, we had not closed
the proposed sale of securities under the Purchase Agreement and we had not made
the Agreed Bondholders Payments.  We are continuing to seek to close
the sale of the securities under the Purchase Agreement but there is no
guarantee that we will be able to do so, as the investors are seeking a
modification to the terms of the agreement.  We are currently in
discussions with the Bondholders regarding an extension the Waiver or an
alternative solution amicable to all parties. If we are required to redeem all
or a portion of the bonds, and we do not have sufficient cash to make the
repurchase, we may be required to obtain third party financing to do so, and
there can be no assurances that we will be able to secure financing in a timely
manner and on favorable terms, which would have a material adverse effect on our
financial performance, results of operations and stock price.
 
 In
September 2009, our Shenzhen office was downsized and moved out from the
leasehold multi-floor office building to a smaller leased place at minimal
operations. The move was a result from our recent restructure and reorganization
to turn back to the domestic market in China instead of overseas market due
to the recent change in international economic environments. The set up of the
Shenzhen office was originally for the support of the overseas operations which
now we decided to be discontinued.  As a result, the current improvement
works to the leasehold multi-floor office building were stopped and being
written off in the period under this report as discontinued operation loss of
$1.8 million.
  24
  Results
of Operations
  The
following table sets forth statements of operations for the three and nine
months ended September 30, 2009 and 2008 in U.S. dollars
(unaudited):
  Three Months Ended
                  September 30,
                
                
                Nine Months Ended
                  September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008(in thousands, except for share
      and per share amounts)Contract
      revenues earned
                
                $
                25,558
                
                
                $
                55,978
                
                
                $
                92,500
                
                
                $
                122,708Cost
      of contract revenues earned
                
                
                (25,083
                )
                
                
                (38,595
                )
                
                
                (73,892
                )
                
                
                (83,538
                )Gross
      profit
                
                $
                475
                
                
                $
                17,383
                
                
                $
                18,608
                
                
                $
                39,170Selling,
      general and administrative expenses
                
                
                (5,549
                )
                
                
                (6,273
                )
                
                
                (17,620
                )
                
                
                (13,878
                )Income/(Loss)
      from operations
                
                $
                (5,074
                )
                
                $
                11,110
                
                
                $
                988
                
                
                $
                25,292Interest
      income
                
                
                5
                
                
                
                4
                
                
                
                55
                
                
                
                46Interest
      expenses
                
                
                (1,741
                )
                
                
                (1,356
                )
                
                
                (4,525
                )
                
                
                (2,888
                )Other
      income
                
                
                335
                
                
                
                177
                
                
                
                495
                
                
                
                342Income/(Loss)
      before taxes on Continuing Operations
                
                $
                (6,475
                )
                
                $
                9,935
                
                
                $
                (2,987
                )
                
                $
                22,792Income
      tax
                
                
                (114
                )
                
                
                (31
                )
                
                
                (114
                )
                
                
                (148
                )Discontinued
      Operation Loss, net of tax
                
                
                (1,830
                )
                
                
                -
                
                
                
                (1,830
                )
                
                
                -Net
      Earnings/(Loss)
                
                
                (8,419
                )
                
                
                9,904
                
                
                
                (4,931
                )
                
                
                22,644Net
      Loss attributable to noncontrolling interest
                
                
                38
                
                
                
                6
                
                
                
                37
                
                
                
                17Net
      earnings/(loss) attributable to the Company
                
                $
                (8,381
                )
                
                $
                9,910
                
                
                $
                (4,894
                )
                
                $
                22,661Earnings/(Loss)
      per share:Basic
                
                $
                (0.16
                )
                
                $
                0.19
                
                
                $
                (0.09
                )
                
                $
                0.44Diluted
                
                $
                (0.16
                )
                
                $
                0.18
                
                
                $
                (0.09
                )
                
                $
                0.42Weighted
      average shares outstanding:Basic
                
                
                53,256,874
                
                
                
                51,891,657
                
                
                
                53,256,874
                
                
                
                51,829,156Diluted
                
                
                53,256,874
                
                
                
                55,653,537
                
                
                
                53,256,874,
                
                
                
                55,554,987
  25
  Three
Months Ended September 30, 2009 and 2008
 
 Contract
revenues earned for the three months ended September 30, 2009 were $25.6
million, a decrease of $30.4 million, or 54%, from the contract revenues earned
of $56.0 million for the comparable period in 2008. The primary reasons for the
decrease in contract revenues earned were due to major international projects
entering the completion phase from which project revenue was declining, such as
the Metro Red Line Project in Dubai, in addition to an adjustment to estimated
gross revenue of the Metro Red Line Project in Dubai that resulted in a decrease
in recognized revenue on the project during the third quarter of
2009.  The adjustment related to a dispute that arose during the third
quarter with the master contractor on the project.  In the absence of
the start up of new major projects in the third quarter of 2009, the revenue
earned decreased accordingly.
 
 Cost of
contract revenues earned for the three months ended September 30, 2009 was $25.1
million, a decrease of $13.5 million, or 35%, from $38.6 million for the
comparable period in 2008. Cost of contract revenues earned consists of the raw
materials, labor and other operating costs related to manufacturing. The
decrease in costs of contract revenues earned was primarily due to a decrease in
revenue in 2009.
 
 Gross
profit for the three months ended September 30, 2009 was $0.5 million,
a decrease of $16.9 million, or 97%, from $17.4 million for the comparable
period of 2008. Our gross margin for the three months ended September 30, 2009
was 2% as compared with 31% for the three months ended September 30, 2008. The
decrease in gross margin was primarily the result of higher raw material, labor
and administrative costs in Dubai as well as our domestic market of China, in
addition to the increase in costs and overhead for the project in Doha, which
resulted in a decrease in the profit margin for the project.  The
decrease in gross profit for the Doha project was caused by the delay of the
work completion that resulted from technical and environmental factors that led
to our claims for work period extension.  Because the outcome of the
claims cannot be ascertained, we recognized the full loss of the Doha
project in the third quarter of 2009 in accordance with relevant accounting
standards.   Furthermore, gross profit decreased during the third
quarter of 2009 due to an adjustment of revenue earned for projects in Dubai due
to the decrease in estimated gross revenue, as related to the dispute with the
master contractor on the project.
 
 Selling,
general and administrative expenses were $5.5 million for the three months ended
September 30, 2009, a decrease of approximately $0.8 million, or 13%, from
approximately $6.3 million for the comparable period in 2008. The decrease was
primary due to the decrease in contract revenues.  Among the selling,
general and administrative expenses, payroll and social securities was the
single largest expenditure of the group, which accounted for approximately 50%
of the expenses. Other major expenses included office administrative expenses
and rental expenses.
 
 Interest
expenses were $1.7 million for the three months ended September 30, 2009, an
increase of $0.3 million, from approximately $1.4 million for the comparable
period in 2008.  The increase was mainly due to the use of short term
bank loan in financing of purchases of materials and company
operations.
 
 Income
tax expense was $114,000 for the three months ended September 30, 2009 at an
effective tax rate approximately of -1.8%, compared with approximately $31,000
in taxes for the same period of 2008 at an effective tax rate of 0.3%. The tax
was mainly charged for the company’s operations in mainland China.
 
 Net loss
for the three months ended September 30, 2009 was $8.4 million, a decrease in
earnings of $18.3 million, or 185%, from a net income of $9.9 million for the
comparable period in 2008. As indicated above, the decrease was due to
decrease in revenue earned, higher raw material, labor and administrative costs,
full provision of loss for the project in Doha, written off of construction
works for the previous leasehold office building in Shenzhen PRC as the
discontinued operation in the amount of $1.8 million, and the revenue adjustment
for projects in Dubai.
 
 Nine
months Ended September 30, 2009 and 2008
 
 Contract
revenues earned for the nine months ended September 30, 2009 were $92.5 million,
a decrease of $30.2 million, or 25%, from the contract revenues earned of $122.7
million for the comparable period in 2008. The decrease was mainly from the
significant decrease in contract revenues for the three months ended September
30, 2009, as compared to the prior year period.  Such decrease was due
to the completion of a majority of the work for the international projects
commenced in 2008, such as the Metro Red Line Project in Dubai that made
considerable revenues earned in 2008.  Moreover, the decrease in
contracts revenues for the nine months ended September 30, 2009 was due to major
international projects entering the completion phase from which project revenue
was declining, such as the Metro Red Line Project in Dubai, in addition to an
adjustment to estimated gross revenue of the Metro Red Line Project in Dubai
that resulted in a decrease in recognized revenue on the project during the
first nine months of 2009.  The adjustment related to a dispute that
arose during the third quarter of 2009 with the master contractor on the
project.  In the absence of the start up of new major projects in the
first nine months of 2009, the revenue earned decreased
accordingly.
  26
  Cost of
contract revenues earned for the nine months ended September 30, 2009 was $73.9
million, a decrease of $9.6 million, or 11%, from $83.5 million for the
comparable period in 2008. The decrease in costs of contract revenues earned was
primarily due to decrease in revenue in 2009.
 
 Gross
profit for the nine months ended September 30, 2009 was $18.6 million, a
decrease of $20.6 million, or 53%, from $39.2 million for the comparable period
of 2008. Our gross margin for the nine months ended September 30, 2009 was 20%
as compared with 32% for the nine months ended September 30, 2008. The decrease
in gross margin was primarily the result of higher raw material, labor and
administrative costs in Dubai as well as our domestic market of China, in
addition to the increase in costs and overhead for the project in Doha, which
resulted in a decrease in the profit margin for the project.  The
decrease in gross profit for the Doha project was caused by the delay of the
work completion that resulted from technical and environmental factors that led
to our claims for work period extension. Because the outcome of the claims
cannot be ascertained, we recognized the full loss of the Doha project in
the third quarter of 2009 in accordance with relevant accounting
standards.   Furthermore, gross profit decreased during the first
nine months of 2009 due to an adjustment of revenue earned for projects in Dubai
due to the decrease in estimated gross revenue, as related to the dispute with
the master contractor on the project.
 
 Selling,
general and administrative expenses were $17.6 million for the nine months ended
September 30, 2009, an increase of approximately $3.7 million, or 27%, from
$13.9 million for the comparable period in 2008. The increase was due to our
operational expansion, including the growth in staff, office rental and other
costs associated with the expansion of our overseas operations since
2008.  Among the selling, general and administrative expenses, payroll
and social securities was the single largest expenditure of the group, which
accounted for approximately 50% of the expenses. Other major expenses included
office administrative expenses and rental expenses.
 
 Interest
expenses were $4.5 million for the nine months ended September 30, 2009, an
increase of $1.6 million, from $2.9 million for the comparable period in
2008.  The increase was mainly due to the issuance of $20 million
convertible bonds in April 2008.
 
 Income
tax expense was $114,000 for the nine months ended September 30, 2009 at an
effective tax rate approximately of -3.8%, compared with approximately $147,000
in taxes for the same period of 2008 at an effective tax rate of 0.6%. The tax
was mainly charged for the company’s operations in mainland China.
 
 Net loss
for the nine months ended September 30, 2009 was $ 4.9 million, a decrease
of earnings of $27.6 million, or 122%, from $22.7 million for the comparable
period in 2008. As indicated above, the decrease was due to decrease in
revenue earned, higher raw material, labor and administrative costs, full
provision of loss for the project in Doha, written off of construction works for
the previous leasehold office building in Shenzhen PRC as the discontinued
operation in the amount of $1.8 million, and the revenue adjustment for projects
in Dubai.
 
 Liquidity
and Capital Resources
 
 At
September 30, 2009, we had cash and cash equivalents of $6.5
million.
 
 Prior to
October 17, 2006, we financed our business operations through short-term bank
loans, cash provided by operations, and credit provided by suppliers. On October
17, 2006, concurrently with the close of our Share Exchange, we received net
proceeds of $3.1 million in a private placement transaction, and in October
2007, we received approximately $2.0 million from an initial public
offering.
 
 We have
also financed our operations through the issuance of convertible
bonds.  On April 12, 2007, we completed a financing transaction
pursuant to which we issued the 2007 Bonds in the principal amount of $10
million. In September 2008, $2 million worth of bonds were converted into shares
of common stock pursuant to which we issued 571,428 shares of common
stock.  Effective from April 12, 2009, the conversion price was reset
from $3.50 to $2.45 per share per the terms of the bonds based on the average
trading price of our common stock.
 
 On April
15, 2008, we completed a financing transaction pursuant to which we issued the
2008 Bonds in the principal amount of $20.0 million. The 2008 Bonds bear cash
interest at the rate of 12% per annum. According to the terms of the Bonds,
interest was payable semi-annually in arrears on April 15 and October 15 of each
year commencing October 15, 2008. For the interest payment that was due on April
15, 2009, the bondholders agreed, subject to certain conditions being met, that
we may defer an interest payment of $1.2 million of the 2008 bonds. As indicated
above, we and the holders of our outstanding Bonds and the 2008 Warrants entered
into an Amendment and Waiver Agreement (the “Waiver”) pursuant to which the
bondholders and warrant holder agreed to waive their right to a reduction in the
conversion price of the Bonds and exercise price of the 2008 Warrants due to our
proposed sale of the shares pursuant to the Purchase Agreement at a price per
share less than the current conversion prices of the Bonds and exercise price of
the 2008 Warrants. Pursuant to the Waiver, we agreed to use a portion of the net
proceeds of the sale of the Shares to the investors to pay (i) the interest
payments of the Bonds that are outstanding and due for payment in accordance
with the terms of the trust deeds governing the Bonds, and (ii) all amounts owed
to ABN AMRO Bank (China) Co. Ltd., Shenzhen Branch or any other ABN AMRO Bank
N.V. affiliate in connection with the Bank Overdraft Facility and any
outstanding interest on the facility as the date of payment (collectively, the
“Agreed Bondholders Payments”). Such payments must be made no later than the
earlier of (i) seven business days after the sale of the Shares and (ii) three
months from the date of the Waiver. Remaining net proceeds shall be used to fund
our operations. Until the Agreed Bondholders Payments of are made by us after
the sale of the Shares, we agreed that we will not use proceeds from the
proposed sale of shares to repay or prepay any debt prior to our currently
scheduled due date without consent of the bondholders.
  27
 
 The three
months provided to us to make the Agreed Bondholders Payments expired on
November 6, 2009, and as of the date of this quarterly report, we had not closed
the proposed sale of securities under the Purchase Agreement and we had not made
the Agreed Bondholders Payments.  We are continuing to seek to close
the sale of the securities under the Purchase Agreement but there is no
guarantee that we will be able to do so, as the investors are seeking a
modification to the terms of the agreement.  We are currently in
discussions with the Bondholders regarding an extension the Waiver or an
alternative solution amiable to all parties. If we are required to redeem all or
a portion of the bonds, and we do not have sufficient cash to make the
repurchase, we may be required to obtain third party financing to do so, and
there can be no assurances that we will be able to secure financing in a timely
manner and on favorable terms, which would have a material adverse effect on our
financial performance, results of operations and stock price.
 
 Full Art
International Limited incurred an automobile capital lease obligation due
November 09, 2012 that had an outstanding amount of $205,759 as of September 30,
2009.
 
 On
February 19, 2008, we and Techwell Engineering Limited were granted a bond
facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was
$10,000,000, at a tenor of up to one year with 2% flat interest rate on the
issued amount of bonds such as bank guarantees, performance bonds, advanced
payment bonds and standby letters of credit. ABN AMRO required guarantees as
follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King
Glass Engineering Co. Limited and (ii) share charge over the shares of us for a
minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May
2, 2008, the facility was increased to $12,000,000 with additional cash
collateral of $2,000,000, which is also the total amount of cash collateral for
the facility.  All cash collateral was then fully used to off-set a
portion of the calling of the bonds for projects in Dubai by the beneficiary in
September 2009. This facility is fully utilized.
 
 On March
28, 2008, we, Full Art and Techwell Engineering Limited were granted a bonding
facility by the Hong Kong Branch of HSBC. The facility amount was $10,000,000,
at a tenor of up to one year with 1% flat interest rate on the issued amount of
bonds such as bank guarantees, performance bonds, advanced payment bonds
and standby letters of credit. HSBC required guarantees as follows: (i) an
unlimited guarantee among China Architectural Engineering, Inc., Full Art
International Limited and Techwell Engineering Limited; and (ii) an “all monies”
securities deposits with 15% margin.  On August 18, 2008, the facility was
increased to $20,000,000 with additional cash collateral of $1,500,000 that
increased the total amount of cash collateral to $3,000,000. In September 2009,
$2,818,440 of the cash collateral was used to off-set of the calling of the
bonds for projects in Dubai by the beneficiary. As of September 30, 2009, we
have utilized $1.8 million of the facility.
 
 On July
19, 2008, Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”), our
wholly-owned subsidiary was granted a Bank Accepted Draft facility by the
Shenzhen Branch of ABN AMRO Bank N.V. The facility amount is RMB70,000,000
(US$10,218,978).  On September 30, 2009, the facility was amended to
allow Open Account Financing – Accounts Receivable against invoices from
acceptable buyers up to RMB21,000,000 and Open Account Financing and Overdraft
in Current Account up to RMB16,800,000.  ABN AMRO requires irrevocable
and unconditional guarantee from us and cash collateral of 20% of bank’s
acceptance bill issued and Open Account Financing.  As of
September 30, 2009, Zhuhai KGE utilized RMB nil (US$ nil) of Bank Accepted Draft
and RMB 33.6 million (US$4.9 million) of Overdraft in Current
Account.
 
 In
September 2009, the beneficiary of a performance bond and advance payment bonds
for the projects in Dubai demanded the drawing of approximately $9.4 million in
total from the two issuing banks, ABN AMRO Bank NV and HSBC. The calling of the
bonds was based on the beneficiary’s belief that it had paid in excess of the
construction work performed. We do not believe that the beneficiary had the
proper basis for calling the bonds and intend to vigorously defend all of their
rights and remedies related to the dispute. On September 30, 2009, after an
offset against collateral accounts that we held with the banks, there was
approximately $4.5 million in a shortfall amount due to ABN AMRO Bank NV by us
that was not paid off.  Such amount is currently outstanding as the
temporary loan from the bank at the interest rate at the bank’s cost of funds
plus 6%.
 
 We also
lease certain administrative and production facilities from third parties.
Accordingly, for the nine months ended September 30, 2009 and 2008, we incurred
rental expenses of $2.4 million and $1.3 million, respectively.
  28
  Working
capital management, including prompt and diligent billing and collection, is an
important factor in our results of operations and liquidity. When we are awarded
construction project, we work according to the percentage-of-completion method
which matches the revenue streams with the relevant cost of construction based
on the percentage-of-completion of project as determined based on certain
criteria, such as, among other things, actual cost of raw material used compared
to the total budgeted cost of raw material and work certified by customers.
There is no guarantee that the cash inflow from these contracts is being
accounted for in parallel with the cash outflow being incurred in the
performance of such contract. In addition, a construction project is usually
deemed to be completed once we prepare a final project account, the account is
agreed upon by our customers, and all amounts related to the contract must be
settled according to the account within three months to a year from the
customer’s agreement on the final project account. As there may be
different time intervals to reach a consensus on the amount as being accounted
for in the projects before the project finalization account is being mutually
agreed by each other. We experience an average accounts settlement period
ranging from three months to as high as one year from the time we provide
services to the time we receive payment from our customers. In contrast, we
typically need to place certain deposit with our suppliers on a portion
of the purchase price in advance and for some suppliers we must maintain a
deposit for future orders. We attempt to maintain a credit policy of receiving
certain amounts of deposit from customers before we begin a new
project.
  We
experienced revenue of $92.5 million for the nine months ended September 30,
2009 compared to revenue of $122.7 million for the same period in 2008.
Construction contract related receivables, including contract receivables and
costs and earnings in excess of billings as of September 30, 2009 were $108.7
million, an increase of $21.0 million over construction related receivables
of $87.7 million as of December 31, 2008. The increase in such receivables
reflected the slow down of payment by the customers.
 
 We
provide for bad debts principally based upon the aging of accounts receivable,
in addition to collectability of specific customer accounts, our history of bad
debts, and the general condition of the industry. We are currently involved in
six lawsuits in which we are suing other parties for overdue payments. The total
amount involved is approximately $3.2 million. Additional provision for
doubtful accounts in the nine months ended September 30, 2009 was $0.3
million.  As of September 30, 2009, our provision for doubtful
accounts was $5.5 million, which was 5.1% of our construction contract
related receivables of $103 million. We believed our current reserve for
doubtful accounts is commensurate to cover the associated credit risk in the
portfolio of our construction contract related receivables.  Due to
the difficulty in assessing future trends, we could be required to further
increase our provisions for doubtful accounts.  As our accounts
receivable age and become uncollectible our cash flow and results of operations
are negatively impacted.
 
 As
indicated above, we entered into the Framework Agreement in June 2009 with Nine
Dragon to undertake the projects at the Nine Dragon Holiday Resort that has been
under development in the Yangtze River Delta in China. We also entered into the
LOI in August 2009 to purchase land from Zhejiang Nine Dragon Co., a subsidiary
of Nine Dragon, for an approximate purchase price equal to $55 million. The Nine
Dragon Project will require significant capital resources and it will require us
to properly manage the project to avoid a material adverse effect on our
operating results, cash flows and liquidity. We originally anticipated to use
proceeds from the sale of 17 million shares of common stock to fund the project,
but the sales transaction has not closed, and there is no guarantee that such
sale will occur.  As of the date of this quarterly report, we have not
entered into any definitive agreement, and we continue to examine and negotiate
the transaction with Zhejiang Nine Dragon.
 
 We intend
to expend a significant amount of capital to purchase materials and serve as
deposits for performance bonds for new projects that we have obtained.
Additional capital for this objective may be required that is in excess of our
liquidity, requiring us to raise additional capital through an equity offering
or secured or unsecured debt financing. The availability of additional capital
resources will depend on prevailing market conditions, interest rates, and our
existing financial position and results of operations.
 
 Net cash
used in operating activities for the nine months ended September 30, 2009 was
approximately $11.2 million, as compared to $15.3 million in the same period in
2008. The change is primarily due to our improvement in cash collection in
2009.
 
 Net cash
provided by investing activities was approximately $7.5 million for the nine
months ended September 30, 2009 compared to approximately $13.0 million used in
investing activities for the nine months ended September 30, 2008. The change
was mainly a result of decrease in our restricted cash.  The decrease
in the restricted cash was due to the off-setting of such restricted cash as a
result of the calling of bonds for projects in Dubai by the
beneficiary.
 
 Net cash
provided by financing activities was $2.9 million for the nine months ended
September 30, 2009 compared to $27.2 million provided by the nine months ended
September 30, 2008. The decrease was primarily due to convertible bond of
$19.5 million issued in 2008 and repayment of notes payable in
2009.
  29
  Contractual
Obligations
 
 The
following table describes our contractual commitments and obligations as of
September 30, 2009:
 
 Payments
      due by periodTotal
              
              
              Less than
                1
      year
              
              
              1-3 years
              
              
              3-5 years
              
              
              Morethan
                5yearsOperating
      Lease Obligations
              
              $
              3,397,431
              
              
              $
              1,058,559
              
              
              $
              1,644,451
              
              
              $
              694,421
              
              
              $
              -Contingent
      Liabilities (1)
              
              $
              5,331,411
              
              
              $
              5,331,411
              
              
              $
              -
              
              
              $
              -
              
              
              $
              —Long-term
      debt (2)
              
              $
              23,645,242
              
              
              $
              -
              
              
              $
              23,645,242-
              
              
              $
              -
              
              
              $
              —
  
 (1)
              Includes
      the $3,500,000 standby guarantee expiring May 2, 2010 issued by ABN AMRO
      Bank N.V. and $1,831,411 performance bond expiring December 31, 2009
      issued by HSBC.
  (2)
              Includes
      the $8 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 stock after September 28, 2008, accordingly we
      may re-classify upon conversion. Also includes the $20 million convertible
      bond which is required to be redeemed at 116.61% at maturity at April 15,
      2011, which may be converted into our common stocks after October 15,
      2008, accordingly we may re-classify upon
  conversion.
 
 Off-Balance
Sheet Arrangements
 
 None.
 
 Critical
Accounting Policies and Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues, expenses and allocated charges during the reporting period. Actual
results could differ from those estimates.
 
 We
describe our significant accounting policies in Note 2, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K as of and for the year ended December 31,
2008. We discuss our critical accounting policies and estimates in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K as of and for the year ended December 31,
2008.  Other than as indicated in this quarterly report, there have
been no material revisions to the critical accounting policies as filed in our
Annual Report for the fiscal year ended December 31, 2008 on Form 10-K as filed
with the SEC on March 31, 2009.
 
 Recent
Accounting Pronouncements
 
 See
Note2(t) of the
accompanying unaudited interim consolidated financial statements included in
this Form 10-Q for a discussion of recent accounting
pronouncements.
 
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 There
have been no material changes in market risk from the information provided in
Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in
our Annual Report for the fiscal year ended December 31, 2008 on Form 10-K as
filed with the SEC on March 31, 2009.
 
 30
  ITEM
4.  CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.
 
 As of the
end of the period covered by this Quarterly Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Acting Chief Financial Officer, of our disclosure controls and procedures
(as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation,
our Chief Executive Officer and Acting Chief Financial Officer concluded that
the Company’s disclosure controls and procedures identified certain material
weaknesses, as described below, that caused our controls and procedures to be
ineffective.  Notwithstanding the existence of the material weaknesses
described below, management has concluded that the interim consolidated
financial statements in this Form 10-Q fairly present, in all material respects,
our financial position, results of operations and cash flows for the periods and
dates presented.
 
 These
material weaknesses primarily related to one of our material operating
subsidiaries, Techwell Engineering Limited. (“Techwell”).  On November
6, 2007, we acquired Techwell and its wholly owned subsidiaries, Techwell
Building Systems (Shenzhen) Ltd. in China and Techwell International Ltd. in
Macau.  At the time, Techwell was a privately-held company and its
financial systems were not designed to facilitate the external financial
reporting required of a publicly held company under the Sarbanes-Oxley Act of
2002.  In addition, Techwell’s accounting records were historically
maintained using accounting principles generally accepted in the People's
Republic of China, its personnel was not fully familiar with accounting
principles generally accepted in the United States of America.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected in a timely basis.  We identified the
following material weaknesses:
 
 1.
              Techwell
      lacked the technical expertise and processes to ensure compliance with our
      policies and did not maintain adequate controls with respect to (a) timely
      updating engineering budget and analysis, (b) coordination and
      communication between Corporate Accounting and Engineering Staffs, and (c)
      timely review and analysis of corporate journals recorded in the
      consolidation process.
  2.
              Techwell
      did not maintain a sufficient complement of personnel with an appropriate
      knowledge and skill to comply with our specific engineering financial
      accounting and reporting requirements and low materiality
      thresholds.  This was evidenced by a number of documents missing
      or not matching with the records and contributed to the adjustment of
      financial results.  As evidenced by the significant number and
      magnitude of out-of-period adjustments identified from Techwell during the
      period-end closing process, management has concluded that the controls
      over the period-end financial reporting process were not operating
      effectively. Specifically, controls were not effective to ensure that
      significant accounting estimates and other adjustments were appropriately
      reviewed, analyzed, and monitored on a timely
  basis.
  3.
              Techwell
      did not comply with our authorization policy. This was evidenced by a
      number of expenses incurred without appropriate authorization. This
      material weakness resulted in an unauthorized and significant increase of
      expenses, which significantly impacted our operating
    results.
  31
  Remediation
of Material Weaknesses
 
 We are in
the process of developing and implementing remediation plans to address our
material weaknesses.  One key change for us going forward will be the
design and implementation of internal controls over the accounting and oversight
of all subsidiaries, including enhanced accounting systems, processes, policies
and procedures.  We have taken the following actions to address the
material weaknesses and improve our internal controls over financial
reporting:
  1.
              On
      January 14, 2009, the board of directors of Techwell passed a board
      resolution to replace management of Techwell.  We have appointed
      a new general manager to Techwell, as well as three experienced project
      managers to the Dubai Metro
project.
  2.
              Management
      has initiated a Sarbanes-Oxley Act of 2002 Section 404 Compliance
      Assistance Project, which is intended to meet all requirements required by
      SEC in our company and all of our subsidiaries. We
      engaged a consulting firm to assist in the set-up of project and our staff
      thereafter continued with its
  implementation.
  3.
              We
      have established a dedicated and qualified internal control and audit team
      to implement the policies and procedures to the standard of a US public
      company.
  4.
              We
      reorganized and restructured Techwell’s Corporate Accounting by (a)
      modifying the reporting structure and establishing clear roles,
      responsibilities, and accountability, (b) hiring skilled technical
      accounting personnel to address our accounting and financial reporting
      requirements, and (c) assessing the technical accounting capabilities in
      the operating units to ensure the right complement of knowledge, skills,
      and training.
  5.
              We
      reorganized and restructured the budgeting process by (a) centralizing the
      procurement function to our company to ensure budgets and analyses of
      Techwell are timely prepared and properly reviewed; (b) implementing new
      policies and procedures to ensure that appropriate communication and
      collaboration protocols among our Engineering, Procurement and Corporate
      Accounting departments; and (c) hiring the necessary technical procurement
      personnel to support complex procurement
      activities.    We have hired two experienced technical
      procurement managers and expect to increase the headcount in the purchase
      department in the future if
necessary.
  6.
              We
      strengthened the period-end closing procedures of our operating
      subsidiaries by (a) requiring all significant estimate transactions to be
      reviewed by Corporate Accounting, (b) ensuring that account
      reconciliations and analyses for significant financial statement accounts
      are reviewed for completeness and accuracy by qualified accounting
      personnel, (c) implementing a process that ensures the timely review and
      approval of complex accounting estimates by qualified accounting personnel
      and subject matter experts, where appropriate, and (d) developing better
      monitoring controls at Corporate Accounting and the operating
      units.
 
 7.
              In
      September 2009, we hired a new Vice President of Finance who was later
      appointed as our Acting Chief Financial Officer in November
      2009.  We believe that the addition of this person will assist
      the strengthening of the controls and procedures of our
      company.
 
 We
believe that we are taking the steps necessary for remediation of the material
weaknesses identified above, and we will continue to monitor the effectiveness
of these steps and to make any changes that our management deems
appropriate.
 
 Changes
in internal control over financial reporting
  Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 of
the Exchange Act, we believe that there were changes in our internal control
over financial reporting that occurred during the third quarter of 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, and such changes are described above
under “Remediation of Material Weaknesses.”
  32
  PART
II-OTHER INFORMATION
 
 ITEM1. LEGAL PROCEEDINGS
 
 See
Note12(b) of the
accompanying unaudited interim consolidated financial statements included in
this Form 10-Q for a discussion of our current legal proceedings,
 
 ITEM
1A. RISK FACTORS
 
 Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in our public filings before deciding whether to purchase our common
stock. Except as set forth below, there have been no material revisions to the
“Risk Factors” as filed in our Annual Report on Form 10-K as of and for the
year ended December 31, 2008.
 
 We
were unable to meet the terms and condition of the Waiver agreement that we
entered into with the holders of our outstanding Bonds and the 2008 Warrants,
and if we are unable to negotiate an extension or other modification to the
Waiver, the bondholders may declare a default under the bonds, require us to pay
the bonds, which would have a material adverse effect on our results of
operations and financial position.
  On August
6, 2009, we and the holders of our outstanding Bonds and warrants to purchase
300,000 shares of our common stock expiring 2013 (the “2008 Warrants”) entered
into an Amendment and Waiver Agreement (the “Waiver”).  Pursuant to
Waiver, the bondholders and warrantholder agreed to waive their right to a
reduction in the conversion price of the Bonds and exercise price of the 2008
Warrants due to our proposed sale of the shares pursuant to the Purchase
Agreement at a price per share less than the current conversion prices of the
Bonds and exercise price of the 2008 Warrants.
  Pursuant
to the Waiver, we agreed to use a portion of the net proceeds of the sale of the
Shares to the investors to pay:
 
 ·
              the
      interest payments of the Bonds that are outstanding and due for payment in
      accordance with the terms of the trust deeds governing the Bonds,
      and
 
 ·
              all
      amounts owed to ABN AMRO Bank (China) Co. Ltd., Shenzhen Branch or any
      other ABN AMRO Bank N.V. affiliate in connection with the Bank Overdraft
      Facility and any outstanding interest on the facility as the date of
      payment (collectively, the “Agreed Bondholders
  Payments”).
 
 Such
payments must be made no later than the earlier of (i) seven business days after
the sale of the Shares and (ii) three months from the date of the Waiver. We
also agreed that until the Agreed Bondholders Payments of are made by us after
the sale of the Shares, we agreed that we will not use proceeds from the
proposed sale of shares to repay or prepay any debt prior to our currently
scheduled due date without consent of the bondholders.
 
 The three
months provided to us to make the Agreed Bondholders Payments expired on
November 6, 2009, and as of the date of this quarterly report, we had not closed
the proposed sale of securities under the Purchase Agreement and we had not made
the Agreed Bondholders Payments.  We are continuing to seek to close
the sale of the securities under the Purchase Agreement but there is no
guarantee that we will be able to do so, as the investors are seeking a
modification to the terms of the agreement.  We are currently in
discussions with the Bondholders regarding an extension the Waiver or an
alternative solution amiable to all parties. If we are required to redeem all or
a portion of the bonds, and we do not have sufficient cash to make the
repurchase, we may be required to obtain third party financing to do so, and
there can be no assurances that we will be able to secure financing in a timely
manner and on favorable terms, which would have a material adverse effect on our
financial performance, results of operations and stock price.  Any of
the foregoing would have a material adverse effect on our results of operation,
financial position, cash flows and liquidity.
 
 Our
dispute with the master contractor on the Dubai Metro Rail Project may result in
costly and time-consuming litigation that could require significant time and
attention of management and a reversal of recognized revenue in accordance with
the “percentage of completion” method of accounting, either of which may have a
material adverse effect on our financial position and results of
operations.
 
 Techwell,
our wholly owned subsidiary, was removed by the master contractor of the Dubai
Metro Rail Project, and such master contractor also called for and received
payment of $2.1 million in performance bonds and $7.3 million in advance payment
bonds that were issued on Techwell's behalf for the project. The calling of the
advance payment bonds was based on the master contractor's belief that it had
paid in excess of the construction work performed.  We and certain of
our subsidiaries are guarantor of the bonds that were paid by the banks, and we
are liable under the guarantee agreements for such amounts paid by the
banks.  Although we do not believe that the master contractor had a
proper basis for calling the bonds, there can be no assurance can be given that
the dispute will be resolved in our favor.  We had generated
approximately $92.8 million in total revenue since construction began in 2008,
and depending on the evolving status of the dispute, we may be required to
reverse revenue that we have recognized in previously periods under the
“percentage of completion” accounting method, which would have a material
adverse effect on our results of operations.
  33
 
 The
discontinuation of international construction projects and shifting to projects
located in mainland China has resulted in a loss of $1.8 million, and it may
materially reduce our contracts revenue and net income if we are not able to
secure sufficient projects in China.
 
 As a
result of our recent restructure and reorganization to turn back to local
instead of oversea market due to the recent change in international economic
environments, our Shenzhen office was down sized and moved out from the
leasehold multi-floor office building to a smaller leased place at minimal
operations in September 2009. The set up of the Shenzhen office was originally
for the support of the overseas operations which we have decided to discontinue.
As a result, the current improvement works to the leasehold multi-floor office
building were stopped and was written off in the third quarter of 2009, a loss
of $1.8 million.  In addition, a substantial percentage of our revenue
has been derived from international projects in the past few years, and with the
loss of such sources of revenue going forward, our results of operations will
suffer if we are unable to secure a sufficient amount of projects in mainland
China to offset the void in revenue that we have received from international
projects in the past, which could negatively affect our stock
price.
 
 Our
failure to properly manage the Nine Dragon Project may result in additional
costs or claims, which could have a material adverse effect on our operating
results, cash flows and liquidity.
  If and
when we are able to enter into definitive project agreements for the Nine Dragon
Project, which we expect will be material to our operations, we will be required
to take on numerous large-scale and complex projects. The quality of our
performance on the Nine Dragon Project will depend in large part upon our
ability to manage our relationship with Nine Dragon and the project itself and
to timely deploy appropriate resources. Our results of operations, cash flows
and liquidity could be adversely affected if we miscalculate the resources or
time needed to complete the Nine Dragon Project, or the resources or time needed
to meet any milestones.  Further, any defects or errors, or failures
to meet in the project could result in large damage claims against us, and,
because of the substantial cost of, and potentially long lead-time necessary to
acquire certain of the materials, damage claims may be large and thereby have a
material adverse effect on our results of operations.
 
 In
connection with the Nine Dragons Resort Project, if and when we enter into
definitive project agreements, we intend to enter into the real estate
development industry, in which we have no significant experience.
 
 We have
no significant real estate development experience. We have historically been
engaged only in design and construction of curtain wall systems, roofing
systems, steel construction systems, eco-energy saving building conservation
systems and related products, for public works and commercial real estate
projects. Therefore, we do not have any specific real estate development history
from which you can draw conclusions about our ability to execute the Nine
Dragons Resort Project or plan to enter the real estate development industry
generally. Any failure to successfully purchase, develop, and sell a real estate
property could have a material adverse effect on our results of
operations.   In addition, our proposed entry into the
development industry will place increased demands on our operational, managerial
and administrative resources. These increased demands could cause us to operate
our business less effectively, which, in turn, could cause deterioration in the
financial performance of our overall business.
 
 We
may not have adequate funding resources to finance land acquisitions or property
developments, or to service our financing obligations.
 
 We intend
to enter the real estate property development business, which T is capital
intensive. In connection with the Nine Dragons Resort Project, we entered into a
letter of intent pursuant to which we intend to pay approximately $55 million to
purchase a real estate property for development.  Generally, we intend
to finance our property developments through a combination of securities
issuances, borrowings from banks, internal funding, in addition to other
methods.  We have already experienced difficulties in closing the sale
17 million shares of common stock in a transaction, and there is no guarantee
that we will have sufficient cash flow available for land acquisitions or
property developments or that we will be able to raise the requisite amount of
capital on terms acceptable to us or at all to fund land acquisitions or
property developments.
 
 We
expect to face significant property development risks before we realize any
benefits from a development.
 
 We intend
to enter the real estate property development business, which typically requires
substantial capital outlays during the construction periods, and it may take
months or years before positive cash flows, if any, can be generated by
development properties. The time and costs required to complete a property
development may increase substantially due to many factors beyond our control,
including the shortage, or increased cost of material, equipment, technical
skills and labor, adverse weather conditions, natural disasters, labor disputes,
disputes with contractors, accidents, changes in government priorities and
policies, changes in market conditions, delays in obtaining the requisite
licenses, permits and approvals from the relevant authorities and other
unforeseeable problems and circumstances. Any of these factors, singly or in
aggregate, may lead to a delay in, or the failure of, the completion of a
property development and result in costs substantially exceeding those
originally budgeted. Failure to complete a property development according to its
original plan, if at all, may have an adverse effect on our reputation and could
give rise to potential liabilities. As a result, our returns on investments, if
any, might not be timely recognized or might be lower than originally
expected.
  34
 
 Our
business and results of operations may be adversely affected if we fail to
obtain, or there are material delays in obtaining, the requisite governmental
approvals for a property development.
 
 We intend
to enter the real estate industry in the PRC, which is heavily regulated by the
PRC government. Developers must comply with a variety of legal and regulatory
requirements, as well as the policies and procedures established by local
authorities to implement such laws and regulations. To undertake and complete a
property development, a real estate developer must obtain permits, licenses,
certificates and other approvals from the relevant administrative authorities at
various stages of the property development, including land use rights documents,
planning permits, construction permits, and certificates or confirmations of
completion and acceptance. Each approval is dependent on the satisfaction of a
set of conditions.
 
 We do not
have experience in this process and we may experience delays in obtaining such
governmental approvals in respect of property developments that would have a
material adverse effect on our business or results of operations, and we cannot
assure you that we will not encounter significant problems in satisfying the
conditions to the approvals, or that we will be able to adapt ourselves to the
laws, regulations or policies that may come into effect from time to time with
respect to the real estate industry in general or the particular processes
related to the granting of the approvals. There may also be delays on the part
of the administrative bodies in reviewing our applications and granting
approvals. If we fail to obtain, or experience material delays in obtaining, the
requisite governmental approvals, the schedule of development and sale of our
developments could be substantially disrupted, resulting in a material adverse
effect on our business, financial condition and results of
operations.
 
 Our
sales of developed properties, if any, will be affected if mortgage financing
becomes more costly or otherwise less attractive.
 
 We intend
to enter the real estate property development business, and we expect that most
purchasers of properties will rely on mortgages to fund their purchases.
Increases in interest rates may significantly increase the cost of mortgage
financing, thus reducing the attractiveness of mortgages as a source of
financing for property purchases and adversely impacting the affordability of
properties. In addition, the PRC government and commercial banks may also
increase the downpayment requirements, impose other conditions or otherwise
change the regulatory framework in a manner that would make mortgage financing
unavailable or unattractive to potential property purchasers.  If the
availability or attractiveness of mortgage financing is further reduced or
limited, many of our prospective customers may not be able to purchase
properties that we may have out for sale. As a result, our business, financial
condition and results of operations could be materially and adversely
affected.
 
 Potential
liability for environmental problems could result in substantial
costs.
 
 In our
possible entrance into the real estate development industry, we will become
subject to a variety of laws and regulations concerning the protection of health
and the environment. The particular environmental laws and regulations that
apply to any given development site vary greatly according to the site’s
location and environmental condition, the present and former uses of the site
and the nature of the adjoining properties. Environmental laws and conditions
may result in delays, may cause us to incur substantial compliance and other
costs and can prohibit or severely restrict project development activity in
environmentally-sensitive regions or areas, which could have a material adverse
effect of our results of operations.
 
 ITEM 2.UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF
PROCEEDS
 
 Not
applicable.
 
 ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
 
 Not
applicable.
 
 35
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
 
 On
October 5, 2009, we held a special meeting of stockholders called to approve the
sale and issuance of 17,000,000 shares of common stock pursuant to the
Securities Purchase Agreement dated August 6, 2009.  Of the 53,256,874
shares eligible to vote, 27,027,752 votes were returned, which is more than 50%
of the issued and outstanding common stock, constituting a quorum. The votes
returned do not include the 5,000,000 shares held by Nine Dragon (Hong Kong) Co.
Ltd. that abstained from the vote as the underlying shares were related to the
sale of the 17,000,000 shares.  The results of voting on the proposal
was approved with 26,634,564 shares voted for, 372,851 voted against and 20,337
abstained from voting, thereby, approving the sale and issuance of the
17,000,000 under the terms of the Securities Purchase Agreement.
 
 After
receipt of shareholder approval at the special meeting, we and the investors
have sought to close the sales transaction, however, certain new and modified
terms and conditions have been requested by the investors, including a change in
the use of proceeds as set forth in the securities purchase
agreement.  There is no guarantee that the sales transaction of any or
all of the 17,000,000 shares of common stock will be completed.  As
such, we may be required to seek funding through other means, such as public or
private financing or through collaborative arrangements with strategic
partners.  We cannot be certain that additional capital will be
available on favorable terms, if at all, and any available additional financing
may not be adequate to meet our goals.
  ITEM 5.OTHER INFORMATION
 
 Not
applicable.
 
 ITEM
6. EXHIBITS
 
 31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of Acting Chief Financial Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Certification
      of Chief Executive Officer and Acting Chief Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of
2002.*
  
 *
              This
      exhibit shall not be deemed “filed” for purposes of Section 18 of the
      Securities Exchange Act of 1934 or otherwise subject to the liabilities of
      that section, nor shall it be deemed incorporated by reference in any
      filing under the Securities Act of 1933 or the Securities Exchange Act of
      1934, whether made before or after the date hereof and irrespective of any
      general incorporation language in any filings.
  36
  SIGNATURES
 
 In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  CHINA
      ARCHITECTURAL ENGINEERING, INC.
                  (Registrant)November
      16, 2009
                By:
                /s/
      Luo Ken YiLuo
      Ken YiChief
      Executive Officer and
                  Chairman
      of the Board
  37