**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**




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


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**For
      the quarterly period ended September 30, 2007**





**OR**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





**Commission
      File Number**


**001-33709**


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**


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





**Delaware**
              *(State
                or other jurisdiction of incorporation*
              *or
                organization)*
            
            **51-0502125**
              *(I.R.S.
                Employer Identification*
              *No.)***105
                Baishi Road, Jiuzhou West Avenue,**
              **Zhuhai,
                People’s Republic of China**
              *(Address
                of principal executive offices)*
            
            **519070**
              *(Zip
                Code)*





**0086-756-8538908**


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





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 x No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.





Large
      accelerated filer o Accelerated filer o Non-accelerated filer x







Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes o No x




There
      were 51,079,638 shares outstanding of registrant’s common stock, par value
      $0.001 per share, as of November 1, 2007.







**CHINA
      ARCHITECTURAL ENGINEERING, INC.**


**FORM
      10-Q QUARTERLY REPORT**





**TABLE
      OF CONTENTS**





**Page**PART
                I - FINANCIAL INFORMATIONITEM
                1.
            FINANCIAL
                STATEMENTSConsolidated
                Balance Sheet as of September 30, 2007 (unaudited) and December 31,
                2006
            2Consolidated
                Statements of Income of Registrant for the three and nine month periods
                ending September 30, 2007 and 2006 (unaudited)
            4Consolidated
                Statements of Stockholders’ Equity for periods ending September 30, 2007
                (unaudited)
            5Consolidated
                Statements of Cash Flows for the three and nine month periods ending
                September 30, 2007 and 2006 (unaudited)
            6Notes
                to the Consolidated Financial Statements (unaudited)
            7ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATION
            27ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
            35ITEM
                4.
            CONTROLS
                AND PROCEDURES
            36PART
                II - OTHER INFORMATIONITEM
                1.
            LEGAL
                PROCEEDINGS
            36ITEM
                1A.
            RISK
                FACTORS
            36ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            36ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            37ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            37ITEM
                5.
            OTHER
                INFORMATION
            37ITEM
                6.
            EXHIBITS
            37SIGNATURES
            
            38










**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. on pages F-25 to F-44 of the registration statement on Form
      S-1/A (File No. 333-138603) as filed as filed with the Securities and Exchange
      Commission on September 21, 2007.





1





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                BALANCE SHEETS****AS
                AT SEPTEMBER 30, 2007 AND DECEMBER 31, 2006****(Stated
                in US Dollars)**
            
            Notes
            
            September
                30, 2007
            
            December
                31, 2006(unaudited)**ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            4,067,878
            
            $
            2,115,966Restricted
                cash
            
            
            
            
            
            2,619,453
            
            
            2,743,142Contract
                receivables, net
            
            
            3
            
            
            13,761,391
            
            
            7,573,913Costs
                and earnings in excess of billings
            
            
            
            
            
            37,828,540
            
            
            22,487,792Job
                disbursements advances
            
            
            
            
            
            305,548
            
            
            5,236,327Tender
                and other site deposits
            
            
            
            
            
            3,677,630
            
            
            3,427,490Other
                receivables
            
            
            
            
            
            305,926
            
            
            213,257Inventories
            
            
            5
            
            
            151,259
            
            
            23,108Total
                current assets
            
            
            
            
            
            62,717,625
            
            
            43,820,995Plant
                and equipment, net
            
            
            6
            
            
            1,245,446
            
            
            474,498Security
                deposit
            
            
            
            
            
            4,028,535
            
            
            565,795**TOTAL
                ASSETS**
            
            
            
            
            $
            67,991,606
            
            $
            44,861,288**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilitiesShort-term
                bank loan
            
            
            8
            
            $
            35,285
            
            $
            -Accounts
                payable
            
            
            
            
            
            13,540,063
            
            
            15,202,029Amount
                due to shareholder
            
            
            4
            
            
            -
            
            
            1,735Other
                payables
            
            
            
            
            
            3,824,902
            
            
            1,091,382Income
                tax payable
            
            
            
            
            
            2,733,618
            
            
            1,263,491Business
                and other taxes payable
            
            
            
            
            
            3,171,993
            
            
            2,058,327Customers’
                deposits
            
            
            
            
            
            551,987
            
            
            1,272,312Accruals
            
            
            
            
            
            174,341
            
            
            894,329Total
                current liabilities
            
            
            7
            
            
            24,032,189
            
            
            21,783,605Long
                term liabilities bank loan
            
            
            7
            
            
            2,757,979
            
            
            2,564,979Convertible
                bond payable, net
            
            
            8
            
            
            4,220,900
            
            
            -**TOTAL
                LIABILITIES**
            
            
            
            
            $
            31,011,068
            
            $
            24,348,584




See
        notes
        to consolidated financial statements and accountant's report.




2




Notes
            
            September
                30, 2007
            
            December
                31, 2006(unaudited)**STOCKHOLDERS’
                EQUITY**Preferred
                stock, $0.001 par value, 10,000,000 sharesauthorized,
                0 shares issued and outstanding atSeptember
                30, 2007 and December 31, 2006
            
            
            
            -
            
            -Common
                stock, $0.001 par value, 100,000,000 sharesauthorized,
                50,000,000 shares issued and outstandingat
                September 30, 2007 and December 31, 2006
            
            
            8
            
            $
            50,000
            
            $
            50,000Additional
                paid in capital
            
            
            8
            
            
            13,790,282
            
            
            7,074,701Statutory
                reserves
            
            
            
            
            
            1,567,539
            
            
            1,437,223Accumulated
                other comprehensive income
            
            
            
            
            
            1,115,715
            
            
            469,964Retained
                earnings
            
            
            
            
            
            20,457,002
            
            
            11,480,81636,980,538
            
            
            20,512,704**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            
            
            
            $
            67,991,606
            
            $
            44,861,288





See
      notes
      to consolidated financial statements and accountant’s report.




3




**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****FOR
                THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
                2006****(Stated
                in US Dollars) (Unaudited)**Three
                months ended
            
            Nine
                months endedSeptember
                30,
            
            September
                30,Note
            
            2007
            
            2006
            
            2007
            
            2006Contract
                revenues earned
            
            
            11
            
            $
            27,077,867
            
            $
            14,224,819
            
            $
            60,961,604
            
            $
            41,367,812Cost
                of contract revenues earned
            
            
            
            
            
            (20,532,767
            )
            
            (11,122,018
            )
            
            (44,026,537
            )
            
            (30,311,481
            )Gross
                profit
            
            
            
            
            
            6,545,100
            
            
            3,102,801
            
            
            16,935,067
            
            
            11,056,331Selling
                expenses
            
            
            
            
            
            (128,803
            )
            
            (87,327
            )
            
            (508,774
            )
            
            (239,280
            )Administrative
                and general expenses
            
            
            
            
            
            (1,746,481
            )
            
            (1,183,806
            )
            
            (3,930,581
            )
            
            (3,243,683
            )Income
                from operations
            
            
            
            
            
            4,669,816
            
            
            1,831,668
            
            
            12,495,712
            
            
            7,573,368Interest
                expenses
            
            
            
            
            
            (764,747
            )
            
            (11,607
            )
            
            (1,341,206
            )
            
            (7,016
            )Interest
                income
            
            
            
            
            
            10,971
            
            
            -
            
            
            14,608
            
            
            -Income
                before taxation
            
            
            
            
            
            3,916,040
            
            
            1,820,061
            
            
            11,169,114
            
            
            7,566,352Income
                tax
            
            
            12
            
            
            (784,744
            )
            
            (292,870
            )
            
            (2,049,422
            )
            
            (1,149,573
            )Equity
                loss and minority interests
            
            
            
            
            
            1,087
            
            
            -
            
            
            (13,190
            )Net
                income
            
            
            
            
            $
            3,132,383
            
            $
            1,527,191
            
            $
            9,106,502
            
            $
            6,416,779Basic
                net income per common share
            
            
            
            
            $
            0.06
            
            $
            0.04
            
            $
            0.18
            
            $
            0.15Diluted
                net income per common share
            
            
            
            
            $
            0.06
            
            $
            0.04
            
            $
            0.18
            
            $
            0.15Basic
                weighted average common shares outstanding
            
            
            
            
            
            50,000,000
            
            
            43,304,125
            
            
            50,000,000
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            
            
            
            50,925,991
            
            
            43,304,125
            
            
            50,632,657
            
            
            43,304,125





See
      notes
      to consolidated financial statements and accountant’s report.


4





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS' EQUITY****FOR
                THE YEAR ENDED DECEMBER 31, 2006 AND NINE MONTHS ENDED SEPTEMBER
                30,
                2007****(Stated
                in US Dollars)**




AccumulatedTotal
            
            
            
            Additional
            
            
            
            othernumber
                of
            
            Common
            
            paid
                in
            
            Statutory
            
            comprehensive
            
            Retainedshares
            
            Stock
            
            capital
            
            reserves
            
            income
            
            earnings
            
            TotalBalance,
                January 1, 2006
            
            
            43,304,125
            
            $
            43,304
            
            $
            -
            
            $
            1,403,699
            
            $
            (51,957
            )
            $
            6,903,786
            
            $
            8,298,832Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,149,768
            
            
            6,149,768Dividend
                paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,576,796
            )
            
            (1,576,796
            )Issuance
                of Common Stock (Note 9)
            
            
            6,695,875
            
            
            6,696
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,696Additional
                paid in capital from issuance of common stock in cash, to third party
                for
                services, and from conversion of original capital from Full Art (Note
                9)
            
            
            
            
            
            
            
            
            7,068,979
            
            
            
            
            
            
            
            
            
            
            
            7,068,979Adjustment
                of Additional Paid in Capital to Retained Earnings in connection
                with
                Share Exchange
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,582
            
            
            37,582Increase
                to Additional Paid in Capital from Reverse Acquisition Transaction
                reflecting Cash held by SRKP 1, Inc.
            
            
            
            
            
            
            
            
            5,722
            
            
            
            
            
            
            
            
            
            
            
            5,722Adjustment
                of Additional Paid in Capital to Retained Earnings in connection
                with
                Share Exchange
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,582
            
            
            37,582Appropriations
                to statutory revenue reserves
            
            
            
            
            
            
            
            
            
            
            
            33,524
            
            
            
            
            
            (33,524
            )
            
            -Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            521,921
            
            
            
            
            
            521,921-Balance,
                December 31, 2006
            
            
            50,000,000
            
            $
            50,000
            
            $
            7,074,701
            
            $
            1,437,223
            
            $
            469,964
            
            $
            11,480,816
            
            $
            20,512,704Balance,
                January 1, 2007
            
            
            50,000,000
            
            $
            50,000
            
            $
            7,074,701
            
            $
            1,437,223
            
            $
            469,964
            
            $
            11,480,816
            
            $
            20,512,704Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9,106,502
            
            
            9,106,502Additional
                paid in capital - stock warrants & conversion feature (Note
                8)
            
            
            
            
            
            
            
            
            6,715,581
            
            
            
            
            
            
            
            
            
            
            
            6,715,581Appropriations
                to statutory revenue reserves
            
            
            
            
            
            
            
            
            
            
            
            130,316
            
            
            
            
            
            (130,316
            )
            
            -Foreign
                currency translation Adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            645,751
            
            
            
            
            
            645,751Balance,
                September 30, 2007 (unaudited)
            
            
            50,000,000
            
            $
            50,000
            
            $
            13,790,282
            
            $
            1,567,539
            
            $
            1,115,715
            
            $
            20,457,002
            
            $
            36,980,538





See
      notes
      to consolidated financial statements and accountant’s report.





5


**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
                2006****(Stated
                in US Dollars) (Unaudited)**




Three
                months ended
            
            Nine
                months endedSeptember
                30,
            
            September
                30,2007
            
            2006
            
            2007
            
            2006Cash
                flows from operating activitiesNet
                income
            
            $
            3,132,383
            
            
            1,527,191
            
            $
            9,106,502
            
            
            6,416,779Depreciation
            
            
            121,274
            
            
            85,501
            
            
            220,624
            
            
            256,503Amortization
                on bond discount
            
            
            756,516
            
            
            -
            
            
            479,965
            
            
            -Minority
                interests
            
            
            1,087
            
            
            -
            
            
            13,190
            
            
            -(Increase)/decrease
                in inventories
            
            
            (127,795
            )
            
            (760,822
            )
            
            (128,151
            )
            
            (768,767
            )Increase
                in receivables
            
            
            (6,077,457
            )
            
            3,463,582
            
            
            (16,940,256
            )
            
            (13,700,151
            )Increase/(decrease)
                in payables
            
            
            3,689,474
            
            
            (1,059,796
            )
            
            2,215,034
            
            
            7,717,155Net
                cash used in operating activities
            
            
            1,495,482
            
            
            3,255,656
            
            
            (5,033,092
            )
            
            (78,481
            )Cash
                flows from investing activitiesDecrease/(increase)
                in restricted cash
            
            
            (77,868
            )
            
            348,733
            
            
            (6,627
            )
            
            348,733Decrease
                (Increase) in security deposit
            
            
            (3,543,186
            )
            
            565,795
            
            
            (3,462,740
            )
            
            -Purchases
                of plant and equipment
            
            
            (234,996
            )
            
            (107,174
            )
            
            (550,324
            )
            
            (107,174
            )Net
                cash provided by (used in) investing activities
            
            
            (3,856,050
            )
            
            807,354
            
            
            (4,019,691
            )
            
            241,559Cash
                flows from financing activitiesRepayment
                of long-term loan
            
            
            (11,762
            )
            
            (247,914
            )
            
            (35,285
            )
            
            (743,742
            )Proceeds
                from long-term loan
            
            
            16,478
            
            
            16,478
            
            
            193,000
            
            
            -Dividend
                paid
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,653,753
            )Amount
                due to shareholder
            
            
            -
            
            
            (3,359,325
            )
            
            (1,735
            )
            
            -Issuance
                of convertible bond and warrants
            
            
            -
            
            
            -
            
            
            10,456,516
            
            
            4,352,395Net
                cash provided by (used in) financing activities
            
            
            4,716
            
            
            (3,590,761
            )
            
            10,612,496
            
            
            954,900Net
                (decrease)/increase in cash and cash equivalents
            
            
            (2,355,852
            )
            
            472,249
            
            
            1,559,713
            
            
            1,117,978Effect
                  of foreign currency translation on cashand
                  cash equivalents
            
            
            414,960
            
            
            361,214
            
            
            392,199
            
            
            160,308Cash
                and cash equivalents - beginning of period
            
            
            6,008,770
            
            
            956,640
            
            
            2,115,966
            
            
            511,817Cash
                and cash equivalents - end of period
            
            $
            4,067,878
            
            
            1,790,103
            
            $
            4,067,878
            
            
            1,790,103Other
                supplementary informationInterest
                paid
            
            $
            764,747
            
            
            11,607
            
            $
            861,241
            
            
            32,483Income
                tax paid
            
            $
            784,744
            
            
            292,870
            
            $
            2,049,422
            
            
            1,149,573




See
      notes
      to consolidated financial statements and accountant’s report.




6




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**1.**
                **ORGANIZATION
                    AND****PRINCIPAL
                    ACTIVITIES**





China
      Architectural Engineering, Inc. (CAEI or the “Company”) formerly SKRP 1 Inc.,
      was incorporated in the State of Delaware, United State on March 16, 2004.
      The
      Company’s common stock was listed for trading on the American Stock Exchange on
      September 28, 2007.





On
      October 17, 2006, the Company underwent a reverse-merger with Full Art
      International Ltd. (a Hong Kong company) and its four wholly-owned subsidiaries
      as detailed in 2. *(b)*  *Consolidation* below,
      involving an exchange of shares whereby the Company issued an aggregate of
      43,304,125 shares of common stock in exchange for all of the issued and
      outstanding shares of Full Art. CAEI was the accounting acquiree. For financial
      reporting purposes, this transaction is classified as a recapitalization of
      China Architectural Engineering, Inc. and the historical financial statements
      of
      Full Art.





The
      Company through its subsidiaries conducts its principal activity as glass wall
      contractors, specifically specializing in the design, manufacturing,
      installation and maintenance of structural glass and other light structure
      building systems, throughout China, 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
      subsidiary. 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
      Group
      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 Group
      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 China Architectural
      Engineering, Inc. (the Company) and its six subsidiaries constituting the group.
      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 minority interests.




7




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**





The
      Company owned the six subsidiaries since its reverse-merger on October 17,
      2006.
      As of September 30, 2007, detailed identities of the consolidating subsidiaries
      are as follows:





**Name
                of Company**
            
            **Place
                of Incorporation**
            
            **Attributable
                Equity interest %**Full
                Art International Ltd
            
            Hong
                Kong
            
            100Zhuhai
                King Glass Engineering Co., Ltd
            
            PRC
            
            100Zhuhai
                King General Glass Engineering Technology Co., Ltd
            
            PRC
            
            100King
                General Engineering (HK) Ltd
            
            Hong
                Kong
            
            100KGE
                Building System Ltd
            
            Hong
                Kong
            
            100KGE
                Australia Pty Ltd
            
            Australia
            
            55Zhuhai
                City, Xiangzhou District Career Training School
            
            PRC
            
            72





For
      retrospective financial reporting purposes, the constituents of the group are
      the same as of September 30, 2006.





*(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)*
            *Economic
                and political risks*





The
      Group’s operations are mainly conducted in the PRC, although there are also
      operations in the Middle East and the United States. Accordingly, the Group’s
      business, financial condition and results of operations in the PRC may be
      influenced by the political, economic and legal environment in the PRC, and
      by
      the general state of the PRC economy.




The
      Group’s major operations in the PRC are subject to special considerations and
      significant risks not typically associated with companies in North America
      and
      the Middle East. These include risks associated with, among others, the
      political, economic and legal environment and foreign currency exchange. The
      Group’s results may be adversely affected by changes in the political and social
      conditions in the PRC, and by changes in governmental policies with respect
      to
      laws and regulations, anti-inflationary measures, currency conversion,
      remittances abroad, and rates and methods of taxation, among other
      things.


8


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**





*(e)*
              *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:


Motor
                  vehicle
              5
                  yearsMachinery
                  and equipment
              5
                  -
                  10 yearsFurniture
                  and office equipment
              5
                  yearsBuilding
              20
                  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.





*(f)*
              *Land
                  use rights*





Land
      use
      rights are stated at cost less accumulated amortisation. Amortisation is
      provided over the respective useful lives, using the straight-line
      method.





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





The
      long-lived assets held and used by the Group 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.





*(h)*
              *Inventories*





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





*(i)*
              *Contracts
                  receivable*





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


9


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**





*(j)*
              *Advances
                  to suppliers*





Advances
      to suppliers represent the cash paid in advance for purchasing raw
      materials.





*(k)*
              *Cash
                  and cash equivalents*





The
      Group
      considers all highly liquid investments purchased with original maturities
      of
      three months or less to be cash equivalents. The Group maintains bank accounts
      only in the PRC and Hong Kong. The Group does not maintain any bank accounts
      in
      the United States of America.





*(l)*
              *Restricted
                  cash*





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





*(m)*
              *Earnings
                  per share*





The
      Company computes earnings per share (“EPS’) in accordance with Statement of
      Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
      and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
      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. Approximately
      2,857,143 dilutive shares on an “as converted” basis for the Convertible Bond
      were excluded from the calculation of diluted EPS for the three and nine months
      ended September 30, 2007 since their effect would have been anti-dilutive.





The
      calculation of diluted weighted average common shares outstanding for the three
      months ended September 30, 2007 and 2006 and for the nine months ended September
      30, 2007 and 2006 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.





The
      following tables are a reconciliation of the weighted average shares used in
      the
      computation of basic and diluted earnings per share for the periods presented
      (amounts in thousands, except per share data):


10


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING POLICIES
                  (CONT’D)**





**Three Months Ended September
                30,****2007**
            
            **2006****Weighted**
            
            
            
            
            
            **Weighted****Average**
            
            
            
            
            
            **Average****Income**
            
            **Shares**
            
            **Per-Share**
            
            **Income**
            
            **Shares**
            
            **Per-Share**Earnings
                per share - basicNet
                income
            
            $
            3,132,383
            
            
            50,000,000
            
            $
            0.06
            
            $
            1,527,191
            
            
            43,304,125
            
            $
            0.04Effect
                of dilutive securitiesConvertible
                Bond
            
            
            
            
            
            -
            
            
            
            
            
            
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            925,991
            
            
            
            
            
            -
            
            
            -
            
            
            -Earnings
                per share - diluted
            
            $
            3,132,383
            
            
            50,925,991
            
            $
            0.06
            
            $
            1,527,191
            
            
            43,304,125
            
            $
            0.04




**Nine Months Ended September
                30,****2007**
            
            **2006****Weighted**
            
            
            
            
            
            **Weighted****Average**
            
            
            
            
            
            **Average****Income**
            
            **Shares**
            
            **Per-Share**
            
            **Income**
            
            **Shares**
            
            **Per-Share**Earnings
                per share - basicNet
                income
            
            $
            9,106,502
            
            
            50,000,000
            
            $
            0.18
            
            $
            6,416,779
            
            
            43,304,125
            
            $
            0.15Effect
                of dilutive securitiesConvertible
                Bond
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            632,657
            
            
            
            
            
            -
            
            
            -
            
            
            -Earnings
                per share - diluted
            
            $
            9,106,502
            
            
            50,632,657
            
            $
            0.18
            
            $
            6,416,779
            
            
            43,304,125
            
            $
            0.15




11


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (CONT’D)**





*(n)*
            *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 time
      cost
      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.


12


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (CONT’D)**





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 while claims
      are
      uncommon. 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.





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





Income
      tax liabilities computed according to the United States, People’s Republic of
      China (PRC) and Hong Kong SAR 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 either be 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.





In
      respect of the Company’s subsidiaries domiciled and operated in China and Hong
      Kong, the taxation of these entities can be summarized as follows:





·
            Zhuhai
                King Glass Engineering Co., Ltd and Zhuhai King General Glass Engineering
                Technology Co., Ltd are located in the city of Zhuhai PRC, and are
                subject
                to the corporation income tax rate of 33%. However, in accordance
                with the
                relevant tax laws and regulations of PRC, the Zhuhai local corporation
                income tax rate is 15%. Zhuhai KGE is presently dormant, and from
                the time
                that it has its first profitable tax year, it is exempt from corporate
                income tax for its first two years and is then entitled to a 50%
                tax
                reduction for the succeeding three years. Zhuhai KGE has enjoyed
                this tax
                incentive in the previous years.





·
            Full
                Art International Limited, King General Engineering (HK) Ltd, and
                KGE
                Building System Ltd are subject to Hong Kong profits tax rate of
                17.5%.
                Currently, Full Art has around US$370,000 tax losses carried forward.
                KGE
                Building System has around US$33,000 tax losses carried forward.
                And for
                KGE (HK), it does not have any material tax
                losses.


13


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (CONT’D)**




The
      Company is subject to United States Tax according to Internal Revenue Code
      Sections 951 and 957. Corporate income tax is imposed on graduated rates in
      the
      range of:




Taxable
                Income*Rate*
            *Over*
            *But
                not over*
            *Of
                Amount Over*15%
            0
            50,000
            025%
            50,000
            75,000
            50,00034%
            75,000
            100,000
            75,00039%
            100,000
            335,000
            100,00034%
            335,000
            10,000,000
            335,00035%
            10,000,000
            15,000,000
            10,000,00038%
            15,000,000
            18,333,333
            15,000,00035%
            18,333,333
            -
            0




The
      Company, after a reverse-merger on October 17, 2006, revived to be an active
      business enterprise because of the operations of its subsidiaries in China
      and
      Hong Kong. Based on the consolidated net income for the three months ended
      September 30, 2007, the Company shall be taxed at the 34% tax rate. The Group’s
      net income for the three months ended March 31, 2006, being prior to become
      a
      U.S. Company before the reverse-merger on October 17, 2006, is not subject
      to
      U.S. tax. Please refer to Note 12 for provision of United States and PRC Income
      Taxes.





*(p)*
              *Advertising*





The
      Group
      expensed all advertising costs as incurred. Advertising expenses included in
      selling expenses were $97,462 and $61,590 for the periods ended September 30,
      2007 and 2006, respectively.





*(q)*
              *Research
                  and development*





All
      research and development costs are expensed as incurred. Research and
      development costs included in general and administrative expenses were $274,484
      and $215,720 for the three months ended September 30, 2007 and 2006,
      respectively.





*(r)*
              *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. The contributions were $64,780 and $26,291 for the three months ended
      September 30, 2007 and 2006, respectively.


14


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (CONT’D)**





*(s)*
              *Foreign
                  currency translation*





The
      accompanying consolidated financial statements are presented in United States
      dollars. The functional currencies of the Group companies are the Hong Kong
      Dollar (HKD) and Renminbi (RMB). The consolidated financial statements are
      translated into United States dollars from HKD and RMB at year-end 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, 2007**
            
            **September
                30, 2006**Period
                end HKD : US$ exchange rate
            7.7760
            
            7.7907Average
                yearly HKD : US$ exchange rate
            7.8080
            
            7.7773




**September
                30, 2007**
            
            **September
                30, 2006**Period
                end RMB : US$ exchange rate
            7.5176
            
            7.9168Average
                yearly RMB : US$ exchange rate
            7.5691
            
            7.9771




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.




*(t)*
              *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.





*(u)*
              *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 Group’s current components of other comprehensive
      income are the foreign currency translation adjustment.


15


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (CONT’D)**





*(v)*
              *Recent
                  accounting
                  pronouncements*




In
      September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements. SFAS 157 applies under other accounting pronouncements that
      require or permit fair value measurements, where fair value is the relevant
      measurement attribute. The standard does not require any new fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      year beginning after November 15, 2007, and interim periods within those fiscal
      years.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities - Including an Amendment of SFAS
      115”
(SFAS No. 159), which allows for the option to measure financial instruments
      and
      certain other items at fair value. Unrealized gains and losses on items for
      which the fair value option has been elected are reported in earnings. The
      objective of SFAS 159 is to provide opportunities to mitigate volatility in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply hedge accounting provisions. SFAS 159 also establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between companies that choose different measurement attributes for similar
      types
      of assets and liabilities. This statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007. The Company is
      currently evaluating the impact of SFAS No. 159 on our consolidated financial
      statements.




The
      Company does not anticipate that the adoption of the above standards will have
      a
      material impact on these consolidated financial statements.




16




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**3.**
            **CONTRACT
                RECEIVABLES**





**Three
                months ended September 30, 2007**
            
            **Year
                ended December 31, 2006**Contract
                receivables
            
            $
            13,971,253
            
            $
            7,991,561*Less**:*Allowance for doubtful accounts
            
            
            (209,862
            )
            
            (417,648
            )Net
            
            $
            13,761,391
            
            $
            7,573,913





**Three
                months ended September 30, 2007**
            
            **Year
                ended December 31, 2006**Allowance
                for doubtful accounts at January 1, 2007 and 2006
            
            $
            383,311
            
            $
            403,595*Less**:*Reduction in allowance for doubtful accounts
            
            
            (182,236
            )
            
            -Foreign
                exchange adjustments
            
            
            8,787
            
            
            14,053Balances
            
            $
            209,862
            
            $
            417,648





**4.**
            **ADVANCES
                FROM/TO DIRECTOR/EMPLOYEE**





All
      the
      advances from/to with director/employee are unsecured, interest free, and have
      no fixed repayment terms. Advances from/to employee are related to business
      traveling and material purchasing.





**5.**
            **INVENTORIES**





**September
                30, 2007**
            
            **December
                31, 2006**Raw
                materials
            
            $
            151,259
            
            $
            23,108




17


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**6.**
            **PLANT
                AND EQUIPMENT**




Plant
      and
      equipment consist of the following as of: -





**September
                30, 2007**
            
            **December
                31, 2006****At
                cost**Motor
                vehicle
            
            $
            606,210
            
            $
            453,917Machinery
                and equipment
            
            
            1,710,328
            
            
            1,417,256Furniture,
                software and officeequipment
            
            
            916,046
            
            
            669,480Building
            
            
            282,785
            
            
            -$
            3,515,369
            
            $
            2,540,653*Less**:
                Accumulated depreciation*Motor
                vehicle
            
            $
            422,252
            
            $
            401,862Machinery
                and equipment
            
            
            1,344,229
            
            
            1,190,795Furniture,
                software and officeequipment
            
            
            497,079
            
            
            473,498Building
            
            
            6,363
            
            
            -$
            2,269,922
            
            $
            2,066,155$
            1,245,446
            
            $
            474,498




Depreciation
      expenses included in the selling and administrative expenses for the three-month
      periods ended 2007, 2006 were $121,274 and $73,834, respectively.





18


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**




**7.**
                **LONG-TERM
                    BANK LOANS**




**September
                30, 2007**
            
            **December
                31, 2006**Line
                of credit from Bank of East Asia Ltd. atan
                interest rate at 5.508% subject to variationevery
                6 months
              (September
                30, 2007 RMB 19,692,000;
              December
                31, 2006: RMB 20,000,000)Due
                October 25, 2011
            
            $
            2,619,453
            
            $
            2,564,979Secured
                loan from Bank of East Asia Ltd witha
                condominium as collateral;Interest
                rate at 5.832% (RMB 1,480,000)Due
                November 4, 2011 (refer to Note 7(a)below)
            
            $
            173,811
            
            $
            -Less:
                current portion
            
            
            (35,285
            )
            
            -$
            138,526
            
            $
            -$
            2,757,979
            
            $
            2,564,979




The
      Company obtained a line of credit facility as reflected above up to a maximum
      of
      RMB 20,000,000, which does not need to renew until October 25,
      2011.





Interest
      expenses were $8,231 and $32,483 for the periods ended 2007 and 2006,
      respectively.





**7(a).
      NOTES PAYABLE**





**2007**Notes
                to Bank of East Asia Ltd. at September 30,2008
            
            $
            35,2852009
            
            
            37,3992010
            
            
            39,6392011
            
            
            42,0142012
            
            
            19,474Please
                refer to Note (7) above
            
            $
            173,811


19




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





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 our common stock, subject to adjustments for stock splits
      or
      reorganizations as set forth in the warrant, that expire in 2010 (the
“Warrants”).





The
      Bonds
      were subscribed at a price equal to 97% of their principal amount, which is
      the
      issue price of 100% less a 3% commission to the Subscriber. The Bonds were
      issued pursuant to, and are subject to the terms and conditions of, a trust
      deed
      dated April 12, 2007, as amended, between us and The Bank of New York, London
      Branch (the “Trust Deed”). The Bonds are also subject to a paying and conversion
      agency agreement dated April 12, 2007 between us, The Bank of New York, and
      The
      Bank of New York, London Branch. The terms and conditions of the Bonds, as
      set
      forth in the Trust Deed include, among other thing, the following
      terms:





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





·
              *Conversion.*Each Bond is convertible at the option of the holder at any time
                  after
                  April 12, 2008 up to March 28, 2012, into shares of our common
                  stock at an
                  initial conversion price equal to the price per share at which
                  shares are
                  sold in our initial public offering of common stock on the American
                  Stock
                  Exchange (“AMEX”) with minimum gross proceeds of $2,000,000. If no initial
                  public offering occurs prior to conversion, the conversion price
                  per share
                  will be $2.00, subject to adjustment in accordance with the terms
                  and
                  conditions of the Bonds. Based on the initial public offering completed
                  on
                  October 3, 2007 the initial conversion is now set at $3.50 per
                  share
                  resulting initial conversion shares of 2,857,143. The conversion
                  price is
                  subject to adjustment in certain events, including our issuance
                  of
                  additional shares of common stock or rights to purchase common
                  stock at a
                  per share or per share exercise or conversion price, respectively,
                  at less
                  than the applicable per share conversion price of the Bonds. If
                  for the
                  period of 20 consecutive trading days immediately prior to April
                  12, 2009
                  or February 18, 2012, the conversion price for the Bonds is higher
                  than
                  the average closing price for the shares, then the conversion price
                  will
                  be reset to such average closing price; provided that, the conversion
                  price will not be reset lower than 70% of the then existing conversion
                  price. In addition, the Trust Deed provides that the conversion
                  price of
                  the Bonds cannot be adjusted to lower than $0.25 per share of common
                  stock
                  (as adjusted for stock splits, stock dividends, spin-offs, rights
                  offerings, recapitalizations and similar
                  events).





·
              *Mandatory
                  Redemptions.*If
                  on or before April 12, 2008, either (i) our common stock (including
                  the
                  shares of common stock issuable upon conversion of the Bonds and
                  exercise
                  of the Warrants) are not listed on AMEX or (ii) the Bonds, Warrants,
                  and
                  shares underlying the Bonds and Warrants are not registered with
                  the
                  Securities and Exchange Commission (the “SEC”), then holders of the Bonds
                  can require us to redeem the Bonds at 106.09% of the principal
                  amount. In
                  addition, at any time after April 12, 2010, holders of the Bonds
                  can
                  require us to redeem the Bonds at 126.51% of the principal amount.
                  The
                  Company is required to redeem any outstanding Bonds at 150.87%
                  of its
                  principal amount on April 4,
                  2012.




20


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**8.**
            **CONVERTIBLE
                BONDS AND BOND WARRANTS
                (CONT’D)**





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





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





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





As
      addressed in an earlier paragraph under Mandatory Redemptions, the Company
      will
      redeem each bond at 150.87% of its principal amount on April 4, 2012 (the
      maturity date). On the basis of this commitment, the Company has determined
      the
      total redemption premium to be $5,087,100, which is an addition to the original
      face value of the Bonds of $10,000,000. This redemption premium is to be
      amortized to interest expense over the term of the Bonds by the interest method.
      Interest expense on the accretion of redemption premium for the period from
      July
      1, 2007 to September 30, 2007 amounted to $153,333 and $313,240 for the nine
      months ended September 30, 2007 as disclosed in the following schedule of
      Convertible Bonds Payable.




21


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**8.**
            **CONVERTIBLE
                BONDS AND BOND WARRANTS****(CONT’D)**





Because
      of the fact that the $10,000,000 Variable Rate Convertible Bonds contain three
      separate securities and yet merged into one package, the Company identified
      the
      constituents and established the individual value as required by US generally
      accepted accounting principles as follows:





(1)
            Bond
                Discount
            $    
                300,000(2)
            Warrants
            3,207,790(3)
            Beneficial
                Conversion Feature
            3,507,791





The
      above
      items (1), (2), and (3) 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, 2007
            
            December
                31, 2006Convertible
                Bonds Payable
            
            $
            10,000,000
            
            $
            -Less:
                Interest discount - Warrants
            
            
            (3,207,790
            )Less:
                Interest discount - Beneficial conversion feature
            
            
            (3,507,791
            )Less:
                Bond discount
            
            
            (300,000
            )Accretion
                of interest discount - Warrant
            
            
            304,740Accretion
                of interest discount - Beneficial conversion feature
            
            
            333,242Amortization
                of bond discount to interest expense
            
            
            28,5016%
                Interest Payable
            
            
            284,999Accretion
                of redemption premium
            
            
            284,999Net
            
            $
            4,220,900
            
            $
            -




22


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**9.**
              **COMMON
                  STOCK AND ADDITIONAL PAID IN
                  CAPITAL**





As
      a
      result of the reverse-merger on October 17, 2006 involving an exchange of shares
      between China Architectural Engineering, Inc. and its subsidiaries led by Full
      Art International Limited as well as issuance of shares to entities involved
      in
      the deal as fully described in the Company’s Form S-1/A (to Form SB-2) filed
      with SEC, total capitalization of the Company by common stock and related
      additional paid-in capital at September 30, 2007 and December 31, 2006 are
      depicted in the following table: -





*Name
                of Shareholder*
            
            *Number
                of Shares*
            
            *Common
                Stock Capital*
            
            *Additional
                Paid-in Capital*
            
            *%
                of Equity Holdings*KGE
                Group Ltd.
            
            
            43,304,125
            
            
            43,304
            
            
            -
            
            
            86.61
            %Investor
                Relations Firm
            
            
            100,000
            
            
            100
            
            
            159,900
            
            
            0.20
            %First
                Alliance Financial Group
            
            
            2,000,000
            
            
            2,000
            
            
            3,198,000
            
            
            4.00
            %Former
                CAEI shareholders
            
            
            2,275,000
            
            
            2,275
            
            
            -
            
            
            4.55
            %Various
                private investors
            
            
            2,320,875
            
            
            2,321
            
            
            3,711,079
            
            
            4.64
            %Increase
                to Additional Paid-in Capital from Reverse Acquisition Transaction
                reflecting Cash held by SRKP 1, Inc.
            
            
            
            
            
            
            
            
            5,722Stock
                Warrants
            
            
            
            
            
            
            
            
            3,207,790Beneficiary
                Conversion Feature
            
            
            
            
            
            
            
            
            3,507,79150,000,000
            
            
            50,000
            
            $
            13,790,282
            
            
            100.00
            %





**10.**
              **SHARE
                  WARRANT**





Upon
      the
      closing of the share exchange on October 17, 2006, the Company issued 100,000
      shares of common stock and a five-year warrant to purchase 232,088 shares of
      common stock at a per share exercise price of $1.60 for an investor relations
      services firm (the “IR Securities”).





As
      of
      September 30, 2007, the 232,088 shares have not been exercised.


23




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**11.**
              **CONTRACT
                  REVENUES EARNED**





The
      contract revenues earned for the three-month periods ended September 30, 2007
      and 2006 consist of the following:





**2007**
            
            **2006**Billed
            
            $
            18,852,741
            
            $
            4,788,485Unbilled
            
            
            8,225,126
            
            
            9,436,334$
            27,077,867
            
            $
            14,224,819





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 Group 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 Group 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 Group before the final billing is
      issued; however this does not affect the Group’s recognition of revenue and
      respective cost according to the terms of the contract with the consistent
      application of the percentage-of-completion method.





**12.**
              **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 three months ended September 30, 2007
      and
      2006: -





**2007**
            
            **2006**Income
                before tax
            
            $
            3,916,040
            
            $
            3,947,098Tax
                at the domestic income tax rate
            
            $
            1,292,293
            
            $
            1,302,542Effect
                of government grants
            
            
            (507,549
            )
            
            (751,919
            )Current
                income tax expense
            
            $
            784,744
            
            $
            550,623




24


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**




**13.**
              **COMMITMENTS**





The
      Company leases certain administrative and production facilities from third
      parties. Accordingly, for the three months ended September 30, 2007 and 2006,
      the Group incurred rental expenses of $182,507 and $75,604
      respectively.





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





For
                the years ended September 30,2008
            
            $
            276,1952009
            
            
            113,7302010
            
            
            89,5532011
            
            
            7,867$
            487,345




**14.**
              **RELATED
                  PARTIES TRANSACTIONS**





The
      following material transactions with related parties during the periods were
      in
      the opinion of the directors, carried out in the ordinary course of business
      and
      on normal commercial terms:





The
      advances from the shareholder at September 30, 2007 and December 31, 2006 were
      $0.00 and $1,735, respectively.


25


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**15.**
              **SUBSEQUENT
                  EVENTS**





On
      October 3, 2007, the Company issued 847,550 shares of common stock at $3.50
      per
      share upon the closing of an initial public offering. The Company’s sale of
      common stock, which was sold indirectly by the Company to the public at a price
      of $3.50 per share, resulted in net proceeds of approximately $2.2 million.
      These proceeds were net of underwriting discounts and commissions, fees for
      legal and auditing services, and other offering costs. Upon the closing of
      the
      initial public offering, the Company sold to the underwriter warrants to
      purchase up to 73,700 shares of its common stock. The warrants are exercisable
      at a per share price of $4.20 and will expire if unexercised after five years
      from the date of issuance.





In
      October 2007, a holder of warrants to purchase 232,088 shares of our common
      stock at a per share exercise price of $1.60 exercised the warrants. As a result
      of the exercise, we received gross exercise proceeds of $371,341 and issued
      232,088 shares of common stock to the holder.





On
      November 6, 2007, the Company, through Full Art, acquired all of the issued
      and
      outstanding shares (the “Techwell Shares”) in the capital of Techwell
      Engineering Limited (which has two subsidiaries), a limited liability company
      incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
      (the “Agreement”) dated November 6, 2007, entered into by and among Mr. Ng, Chi
      Sum and Miss Yam, Mei Ling (the “Shareholders”), the Company and Full Art (the
“Techwell Acquisition”), to consummate the acquisition transaction. Pursuant to
      the terms of the Stock Purchase Agreement, the Shareholders agreed to sell
      and
      transfer all of the Techwell Shares to Full Art for a purchase consideration
      of
      US$11,654,566 payable in cash and shares of the Company. Thirty percent of
      the
      stock consideration paid to the Shareholders will be held in a third-party
      escrow account for up to two years to cover potential indemnification
      obligations of the Shareholders. Techwell is engaged in the business of
      manufacturing and constructing external building facades, including roofing
      systems for buildings and curtain wall systems and accessories.




26


**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. This quarterly report contains forward-looking statements. The words
      “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,”
“project,” “could,” “may,” and similar expressions are intended to identify
      forward-looking statements. These statements include, among others, information
      regarding future operations, future capital expenditures, and future net cash
      flow. Such statements reflect our management’s current views with respect to
      future events and financial performance and involve risks and uncertainties,
      including, without limitation, general economic and business conditions, changes
      in foreign, political, social, and economic conditions, regulatory initiatives
      and compliance with governmental regulations, the ability to achieve further
      market penetration and additional customers, and various other matters, many
      of
      which are beyond our control. Should one or more of these risks or uncertainties
      occur, or should underlying assumptions prove to be incorrect, actual results
      may vary materially and adversely from those anticipated, believed, estimated
      or
      otherwise indicated. 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
      were
      incorporated in the state of Delaware on March 16, 2004. We were originally
      organized as a “blank check” shell company to investigate and acquire a target
      company or business seeking the perceived advantages of being a publicly held
      corporation. On October 17, 2006, we closed a share exchange transaction
      described below, pursuant to which we (i) became the 100% parent of Full Art
      International, Ltd., a Hong Kong Company (“Full Art”), which has four
      subsidiaries, including its wholly-owned subsidiary, Zhuhai King Glass
      Engineering Co., Ltd., a company formed under the laws of the People’s Republic
      of China (“PRC” or “China”), (ii) assumed the operations of Full Art and its
      subsidiaries and (iii) changed our name from SRKP 1, Inc. to China Architectural
      Engineering, Inc. Full Art was incorporated in Hong Kong on July 30, 1992 under
      the Companies Ordinance of Hong Kong.





We
      specialize in the design, engineering and installation of high-end specialty
      curtain wall systems, including glass curtain walls, stone curtain walls, metal
      curtain walls, roofing systems, and related products, for public works projects
      and commercial real estate. We have designed and installed nearly one hundred
      projects throughout China, including the National Grand Theater, Exhibition
      Conservatory of Beijing Botanical Garden, The COSCO Tower at Changlian Avenue
      Beijing, and the Wumen Exhibition Hall in Beijing’s Forbidden City, and a number
      of commercial structures in Southeast Asia. We compete on the strength of our
      reputation, track record, strong relationships with government 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.





Our
      work
      is performed under cost-plus-fee contracts, fixed-price contracts, and
      fixed-price contracts modified by incentive and penalty provisions. Although
      the
      length of our contracts varies depending on the size of the project, most
      typically have a duration of approximately two years. Approximately 90% of
      our
      sales are from fixed price contracts, including one percent that are modified
      by
      incentive and penalty provisions. The remaining 10% of our sales are originated
      from are cost-plus-fee contracts. Under cost-plus-fee contracts, which may
      be
      subject to contract ceiling amounts, we are reimbursed for allowable costs
      and
      fees, which may be fixed or performance-based. If our costs exceed the contract
      ceiling or are not allowable under the provisions of the contract or any
      applicable regulations, we may not be reimbursed for all our costs. Under
      fixed-price contracts, we receive a fixed price regardless of what our actual
      costs will be. Consequently, we realize a profit on fixed-price contracts only
      if we control our costs and prevent cost over-runs on the contracts. Under
      fixed-price contracts modified by incentive and penalty provisions, we are
      paid
      a fixed price that may be increased or decreased based on incentive and
      provisions in our contracts.


27




**Recent
      Events**





***April
      2007 Issuance of Bonds and Warrants***





On
      April
      12, 2007, we 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 our common stock, subject to adjustments for stock splits or
      reorganizations as set forth in the warrant, that expire in 2010 (the “Bond
      Warrants”).





The
      Bonds
      were subscribed at a price equal to 97% of their principal amount, which is
      the
      issue price of 100% less a 3% commission to the Subscriber. The Bonds were
      issued pursuant to, and are subject to the terms and conditions of, a trust
      deed
      dated April 12, 2007 between us and The Bank of New York, London Branch, as
      amended on August 29, 2007 (the “Trust Deed”). The Bonds are also subject to a
      paying and conversion agency agreement dated April 12, 2007 between us, The
      Bank
      of New York, and The Bank of New York, London Branch. T he
      terms
      and conditions of the Bonds, as set forth in the Trust Deed include, among
      other
      thing, the following terms:





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







·
              *Conversion.*Each
                  Bond is convertible at the option of the holder at any time on
                  and after
                  September 28, 2008, through March 28, 2012, into shares of our
                  common
                  stock at an initial conversion price equal $3.50 per share, the
                  price per
                  share at which shares were sold in our initial public offering
                  of common
                  stock on AMEX. The conversion price is subject to adjustment in
                  certain
                  events, including our issuance of additional shares of common stock
                  or
                  rights to purchase common stock at a per share or per share exercise
                  or
                  conversion price, respectively, at less than the applicable per
                  share
                  conversion price of the Bonds. If for the period of 20 consecutive
                  trading
                  days immediately prior to April 12, 2009 or February 18, 2012,
                  the
                  conversion price for the Bonds is higher than the average closing
                  price
                  for the shares, then the conversion price will be reset to such
                  average
                  closing price; provided that, the conversion price will not be
                  reset lower
                  than 70% of the then existing conversion price. In addition, the
                  Trust
                  Deed provides that the conversion price of the Bonds cannot be
                  adjusted to
                  lower than $0.25 per share of common stock (as adjusted for stock
                  splits,
                  stock dividends, spin-offs, rights offerings, recapitalizations
                  and
                  similar events).




·
              *Mandatory
                  Redemptions.*If
                  on or before April 12, 2008, either (i) our common stock (including
                  the
                  shares of common stock issuable upon conversion of the Bonds and
                  exercise
                  of the Bond Warrants) are not listed on AMEX or (ii) the Bonds,
                  the Bond
                  Warrants, and shares underlying the Bonds and the Bond Warrants
                  are not
                  registered with the Securities and Exchange Commission (the “SEC”), then
                  holders of the Bonds can require us to redeem the Bonds at 106.09%
                  of the
                  principal amount. In addition, at any time after April 12, 2010,
                  holders
                  of the Bonds can require us to redeem the Bonds at 126.51% of the
                  principal amount. We are required to redeem any outstanding Bonds
                  at
                  150.87% of its principal amount on April 4,
                  2012.




On
      April
      12, 2007, we entered into a warrant instrument with the Subscriber pursuant
      to
      which the Subscriber purchased the Bond Warrants from us (the “Warrant
      Instrument”). The Bond Warrants, which are represented by a global certificate,
      are also subject to a warrant agency agreement by and among us, The Bank of
      New
      York and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant
      Agency Agreement”). Pursuant to the terms
      and conditions of the Warrant Instrument and the Warrant Agency Agreement,
      the
      Bond Warrants become exercisable on October 12, 2008 and terminate on April
      12,
      2010. The Bond Warrants are exercisable at a per share exercise price of $0.01.
      We have agreed to list the shares of common stock underlying the Bond Warrants
      on AMEX, or any alternative stock exchange by April 12, 2008. In addition,
      we
      have agreed to register the shares of common stock underlying the Bond Warrants
      on a registration statement with the SEC on or prior to October 12, 2008 and
      will keep such registration statement effective until 30 days after the Bond
      Warrants terminate. Subsequently, we verbally agreed with the Subscriber not
      to
      include its securities in this registration statement and to register them
      in a
      separate registration statement that has been filed with the SEC.





On
      April
      12, 2007 we also entered into a registration rights agreement with ABN AMRO
      pursuant to which we agreed to include the Bonds, the Bond Warrants, and the
      shares of common stock underlying the Bonds and Bond Warrants in a pre-effective
      amendment to the registration statement filed with the SEC and declared
      effective on September 27, 2007 (the “Initial Registration Statement”).
      Subsequently, we verbally agreed with ABN AMRO not to include its securities
      in
      the Initial Registration Statement and to register them in a separate
      registration statement that has been filed with the SEC.




28




The
      terms
      of Bonds include conversion features allowing the holders to convert the Bonds
      into shares of our common stock. Certain of those conversion features that
      allow
      for the reduction in conversion price upon the occurrence of stated events
      constitute a “beneficial conversion feature” for accounting purposes. In
      addition, we may be required to repurchase the Bonds at the request of the
      holders if certain events occur or do not occur, as set forth in the Bond trust
      deed. Upon the occurrence of any of the events that trigger a mandatory
      redemption, as described above, and we are requested by the holders to
      repurchase all or a portion of the Bonds, we will be required to pay cash to
      redeem all or a portion of the Bonds.





The
      accounting treatment related to the beneficial conversion and mandatory
      redemption features of the Bonds and the value of the Bond Warrants will have
      an
      adverse impact on our results of operations for the term of the Bonds. The
      application of Generally Accepted Accounting Principles required us to allocate
      $3,507,791 to the beneficial conversion feature of the Bonds and $3,207,790
      to
      the Bonds Warrants, which have been reflected in our financial statements as
      an
      interest discount. Also, we have determined that the total redemption premium
      associated with the mandatory redemption feature of the Bonds is $5,087,100.
      All
      of the aforementioned amounts associated with the beneficial conversion and
      mandatory redemption feature of the Bonds and the value of the Bond Warrants
      are
      being amortized as additional interest expense over the term of the Bonds.
      This
      accounting will result in an increase in interest expense in all reporting
      periods during the term of the Bonds, and, as a result, reduce our net income
      accordingly.





In
      addition, if we are required to redeem all or any portion of the Bonds, this
      may
      have a material adverse effect on our liquidity and cash resources, and may
      impair our ability to continue to operate. If we are required to repurchase
      all
      or a portion of the Bonds and do not have sufficient cash to make the
      repurchase, we may be required to obtain third party financing to do so, and
      there can be no assurances that we will be able to secure financing in a timely
      manner and on favorable terms, which could have a material adverse effect on
      our
      financial performance, results of operations and stock price.





***October
      2007 Initial Public Offering***





In
      October 2007, we completed an initial public offering consisting of 847,550
      shares of our common stock. Our sale of common stock, which was sold indirectly
      by us to the public at a price of $3.50 per share, resulted in net proceeds
      of
      approximately $2.2 million. These proceeds were net of underwriting discounts
      and commissions, fees for legal and auditing services, and other offering costs.
      Upon the closing of the initial public offering, we sold to the underwriter
      warrants to purchase up to 73,700 shares of our common stock. The warrants
      are
      exercisable at a per share price of $4.20 and will expire if unexercised after
      five years from the date of issuance.





***October
      2007 Warrant Exercise***





In
      October 2007, a holder of warrants to purchase 232,088 shares of our common
      stock at a per share exercise price of $1.60 exercised the warrants. As a result
      of the exercise, we received gross exercise proceeds of $371,341 and issued
      232,088 shares of common stock to the holder.





***November
      2007 Acquisition of Techwell***





On
      November 6, 2007, we, through Full Art, acquired all of the issued and
      outstanding shares (the “Techwell Shares”) in the capital of Techwell
      Engineering Limited (which has two subsidiaries), a limited liability company
      incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
      (the “Agreement”) dated November 6, 2007, entered into by and among Mr. Ng, Chi
      Sum and Miss Yam, Mei Ling (the “Shareholders”), the Company and Full Art (the
“Techwell Acquisition”), to consummate the acquisition transaction. Pursuant to
      the terms of the Stock Purchase Agreement, the Shareholders agreed to sell
      and
      transfer all of the Techwell Shares to Full Art for a purchase consideration
      of
      US$11,654,566 payable in cash and shares of common stock of our company. Thirty
      percent of the stock consideration paid to the Shareholders will be held in
      a
      third-party escrow account for up to two years to cover potential
      indemnification obligations of the Shareholders. Techwell is engaged in the
      business of manufacturing and constructing external building facades, including
      roofing systems for buildings and curtain wall systems and
      accessories.




29




**Critical
      Accounting Policies and Estimates**





The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the United States.
      We believe the following are the critical accounting policies that impact the
      financial statements, some of which are based on management’s best estimates
      available at the time of preparation. Actual experience may differ from these
      estimates.





***Use
      of Estimates*** -
      The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue and expenses during
      the reporting period. Actual results could differ from those
      estimates.





***Consolidation
      -*** The
      consolidated financial statements include our accounts and the accounts of
      our
      subsidiaries. Significant inter-company transactions have been eliminated in
      consolidation.





***Economic
      and Political Risks*** -
      For the
      nine months ended September 30, 2007 and 2006 and the years ended December
      31,
      2006, 2005 and 2004, substantially all of our sales were to companies located
      in
      the PRC and all of our assets were located in the PRC. Our operations may be
      adversely affected by significant political, economic and social uncertainties
      in the PRC. Although the Chinese government has pursued economic reform policies
      in the past, we cannot assure you that the Chinese government will continue
      to
      pursue such policies or that such policies will not be significantly altered,
      especially in the event of a change in leadership, social or political
      disruption or unforeseen circumstances affect China’s political, economic and
      social conditions. We can give no assurance that the Chinese government’s
      pursuit of economic reforms will be consistent or effective.





***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 cost
      incurred to date to the estimated total cost for each contract. The revenue
      earned in a period is based on the ratio of costs incurred to the total
      estimated costs required by the contract. Contract costs include all direct
      material and labor costs and those indirect costs related to contract
      performance, such as indirect labor, supplies, tools, repairs, and depreciation
      costs. 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
      recognized. The measurement of the extent of progress toward completion are
      used
      to determine the amount of gross profit earned to date; 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:





i.
      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.





ii.
      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.





iii.
      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.





***Selling,
      General, And Administrative Costs*** -
      Selling, general, and administrative costs are charged to expense as incurred.
      Allowances 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.




30




***Contract
      Receivable -*** Contract
      receivable represents billings to customers on the percentage of work completed
      and recognized to date based on contract price. An allowance is provided for
      doubtful collections, which is based upon a review of outstanding receivables,
      historical collection information, and existing economic conditions. We record
      an allowance for doubtful collections for our outstanding contract receivable
      at
      the end of the period in accordance with generally accepted accounting
      principles in the Untied States, and we consider that allowance to be reasonable
      at September 30, 2007.





**Results
      of Operations**





The
      following table sets forth our statements of operations for the three and nine
      months ended September 30, 2007 and 2006 in U.S. dollars
      (unaudited):


**Three
                  Months Ended September 30,**
              
              **Nine
                  Months Ended September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006*****(in
                  thousands, except share and per share
                  amounts)***Contract
                  revenues earned
              
              $
              27,078
              
              $
              14,225
              
              $
              60,962
              
              $
              41,368Cost
                  of contract revenues earned
              
              
              (20,533
              )
              
              (11,122
              )
              
              (44,027
              )
              
              (30,312
              )Gross
                  profit
              
              $
              6,545
              
              $
              3,103
              
              $
              16,935
              
              $
              11,056Selling,
                  general and administrative expenses
              
              
              (1,875
              )
              
              (1,271
              )
              
              (4,439
              )
              
              (3,483
              )Income
                  from operations
              
              $
              4,670
              
              $
              1,832
              
              $
              12,496
              
              $
              7,573Interest
                  expenses, net
              
              
              (765
              )
              
              (12
              )
              
              (1,341
              )
              
              (7
              )Interest
                  Income
              
              
              11
              
              
              -
              
              
              15
              
              
              -Income
                  before taxes
              
              $
              3,916
              
              $
              1,820
              
              $
              11,170
              
              $
              7,566Income
                  tax
              
              
              (785
              )
              
              (293
              )
              
              (2,050
              )
              
              (1,149
              )Equity
                  loss and minority interests
              
              
              1
              
              
              -
              
              
              (13
              )
              
              -Net
                  income
              
              $
              3,132
              
              $
              1,527
              
              $
              9,107
              
              $
              6,417Basic
                  and diluted net income per common share
              
              $
              0.06
              
              $
              0.04
              
              $
              0.18
              
              $
              0.15Basic
                  and diluted dividend paid per common share
              
              $
              0.06
              
              $
              0.04
              
              $
              0.18
              
              $
              0.15Basic
                  weighted average common shares outstanding
              
              
              50,000,000
              
              
              43,304,125
              
              
              50,000,000
              
              
              43,304,125Diluted
                  weighted average common shares outstanding
              
              
              50,925,991
              
              
              43,304,125
              
              
              50,632,657
              
              
              43,304,125




31




**Three
      Months Ended September 30, 2007 and 2006**





Contract
      revenues earned for the three months ended September 30, 2007 were $27.1
      million, an increase of $12.9 million, or 90.85%, from the contract revenues
      earned of $14.2 million for the comparable period in 2006. The primary reason
      for the increase in contract revenues earned was an increase in the number
      of
      projects for the three months ended September 30, 2007. In addition, we also
      experienced a general increase in the amount of revenue generated per project
      for the three months ended September 30, 2007 as compared to the same period
      in
      2006.





Cost
      of
      contract revenues earned for the three months ended September 30, 2007 was
      $20.5
      million, an increase of $9.4 million, or 84.68%, from $11.1 million for the
      comparable period in 2006. Cost of contract revenues earned consists of the
      raw
      materials, labor and other operating costs related to manufacturing. The
      increase in costs of contract revenues earned was primarily due to the increased
      number of projects for the three months ended September 30, 2007.




Gross
      profit for the three months ended September 30, 2007 was $6.5 million, an
      increase of $3.4 million, or 109.68%, from $3.1 million for the comparable
      period of 2006. Our gross margin for the three months ended September 30, 2007
      was 24.17% as compared with 21.81% for the three months ended September 30,
      2006. The increase was primarily a result of increased prices for our services
      and products.




Selling,
      general and administrative expenses were approximately $1.9 million for the
      three months ended September 30, 2007, an increase of approximately $0.6
      million, or 46.15%, from $1.3 million for the comparable period in 2006. Selling
      expenses were $0.13 million for the three months ended September 30, 2007,
      an
      increase of approximately $0.04 million, or 44.4%, from $0.09 million for the
      three months ended September 30, 2006. The increase was primarily due to the
      increase of entertainment expenses and traveling expenses with the increase
      of
      revenue during the three months ended September 30, 2007. General and
      administrative expenses for the three months ended September 30, 2007 were
      $1.7
      million as compared to $1.2 million for the three months ended September 30,
      2006. The increase was due to the increase of staff costs due to growth in
      operations and the increase of research and development during the three months
      ended September 30, 2007.





Interest
      expenses were approximately $0.77 million for the three months ended September
      30, 2007, an increase of approximately $0.76 million, or 7,600%, from $0.01
      million for the comparable period in 2006. The increase was due to our issuance
      of $10,000,000 Variable Rate Convertible Bonds due in 2012 (the “Bonds”) at a
      discount and 800,000 warrants to purchase an aggregate of 800,000 shares of
      our
      common stock in April 2007, which incurred $587,849 accretion of interest
      discount for warrants, beneficial conversion feature and redemption premium,
      $15,334 amortization on bond discount, and $153,333 interest.





Income
      tax was approximately $0.79 million for the three months ended September 30,
      2007 at an effective tax rate of 20.0%, compared with $0.29 million taxes for
      the same period of 2006 at an effective tax rate of 16.1%. The primary reason
      for the increase was due to the increase in income before taxes and the
      different amounts of income being recognized in the PRC and Hong Kong under
      different tax rates on corporate profits derived from subsidiaries in each
      location. Through two of our subsidiaries, Zhuhai King Glass Engineering Co.,
      Ltd and Zhuhai King General Glass Engineering Technology Co., Ltd, we are
      generally subject to a PRC income tax rate of 33%; however, in accordance with
      the relevant tax laws and regulations of PRC, the corporation income tax rate
      is
      currently 15%. In addition, we and two of our subsidiaries are subject to a
      Hong
      Kong profits tax rate of 17.5%. We expect our effective tax rates to increase
      in
      future periods as a result of new tax laws passed in China.





Net
      income for the three months ended September 30, 2007 was $3.1 million, an
      increase of $1.6 million, or 106.67%, from $1.5 million for the comparable
      period in 2006.





**Nine
      Months Ended September 30, 2007 and 2006**





Contract
      revenues earned for the nine months ended September 30, 2007 were $60.9 million,
      an increase of $19.5 million, or 47.1%, from the contract revenues earned of
      $41.4 million for the comparable period in 2006. The primary reason for the
      increase in contract revenues earned was an increase in the number of projects
      for the nine months ended September 30, 2007. In addition, we also experienced
      a
      general increase in the amount of revenue generated per project for the nine
      months ended September 30, 2007 as compared to the same period in
      2006.




32




Cost
      of
      contract revenues earned for the nine months ended September 30, 2007 was $44.0
      million, an increase of $13.7 million, or 45.2%, from $30.3 million for the
      comparable period in 2006. Cost of contract revenues earned consists of the
      raw
      materials, labor and other operating costs related to manufacturing. The
      increase in costs of contract revenues earned was primarily due to the increased
      number of projects for the nine months ended September 30, 2007.





Gross
      profit for the nine months ended September 30, 2007 was $16.9 million, an
      increase of $5.8 million, or 52.3%, from $11.1 million for the comparable period
      of 2006. Our gross margin for the nine months ended September 30, 2007 was
      27.8%
      as compared with 26.7% for the nine months ended September 30, 2006. The
      increase was primarily a result of increased prices for our services and
      products.




Selling,
      general and administrative expenses were $4.4 million for the nine months ended
      September 30, 2007, an increase of approximately $0.9 million, or 25.7%, from
      $3.5 million for the comparable period in 2006. Selling expenses were $0.51
      million for the nine months ended September 30, 2007, an increase of
      approximately $0.27 million, or 112.5%, from $0.24 million for the nine months
      ended September 30, 2006. The increase was primarily due to an increase of
      entertainment expenses and traveling expenses with the increase of revenue
      during the three months ended September 30, 2007. General and administrative
      expenses for the nine months ended September 30, 2007 were $3.9 million as
      compared to $3.2 million for the nine months ended September 30, 2006. The
      increase was due to the increase of staff costs due to growth in operations
      and
      the increase of research and development during the nine months ended September
      30, 2007.





Interest
      expenses was approximately $1.34 million for the nine months ended September
      30,
      2007, an increase of approximately $1.27 million, or 1,814.29%, from
      approximately $0.07 million for the comparable period in 2006. The increase
      was
      due to our issuance of $10,000,000 Variable Rate Convertible Bonds due in 2012
      (the “Bonds”) at a discount and 800,000 warrants to purchase an aggregate of
      800,000 shares of our common stock in April 2007, which incurred $922,981
      accretion of interest discount for warrants, beneficial conversion feature
      and
      redemption premium, $28,501 amortization on bond discount and $284,999
      interest.





Income
      tax was $2.1 million for the nine months ended September 30, 2007 at an
      effective tax rate of 18.4%, compared with $1.1 million for the nine months
      ended September 30, 2006 at an effective tax rate of 15.2%. The primary reason
      for the increase was due to the increase in income before taxes and the
      different amounts of income being recognized in the PRC and Hong Kong under
      different tax rates on corporate profits derived from subsidiaries in each
      location. Through two of our subsidiaries, Zhuhai King Glass Engineering Co.,
      Ltd and Zhuhai King General Glass Engineering Technology Co., Ltd, we are
      generally subject to a PRC income tax rate of 33%; however, in accordance with
      the relevant tax laws and regulations of PRC, the corporation income tax rate
      is
      currently 15%. In addition, we and two of our subsidiaries are subject to a
      Hong
      Kong profits tax rate of 17.5%. We expect our effective tax rates to increase
      in
      future periods as a result of new tax laws passed in China.





Net
      income for the nine months ended September 30, 2007 was $9.1 million, an
      increase of $2.7 million, or 42.2%, from $6.4 million for the comparable period
      in 2006.





**Liquidity
      and Capital Resources**





At
      September 30, 2007, we had cash and cash equivalents of $4,067,878. Prior to
      October 17, 2006, we have historically financed our business operations through
      short-term bank loans and cash provided by operations. More recently we have
      raised capital through debt and equity offerings.




We
      borrowed funds through short-term notes during the year ended December 31,
      2004
      in the amounts of $3.6 million and $1.2 million that were due and repaid by
      us
      during the 2005 fiscal year. The notes carried interest rates of 5.04% and
      6.786%, respectively, per annum. We also borrowed funds through a short-term
      notes during the year ended December 31, 2005 in the amount of $743,000 that
      we
      repaid in 2006. The notes had an interest rate of 6.1065%.





We
      lease
      certain administrative and production facilities from third parties.
      Accordingly, for the nine months ended September 30, 2007 and 2006, we incurred
      rental expenses of approximately $183,000 and $76,000,
      respectively.





On
      October 17, 2006, concurrently with the close of the Share Exchange, we received
      gross proceeds of $3,713,400 in a private placement transaction (the “Private
      Placement”). For its services as placement agent, WestPark Capital, Inc.
      received an aggregate fee of approximately $445,608, which consisted of a
      commission equal to 9.0% of the gross proceeds from the financing and a
      non-accountable fee of 3% of the gross proceeds. We also incurred legal and
      accounting expenses of approximately $150,000. After commissions and expenses,
      we received net proceeds of approximately $3,117,792.




33




On
      April
      12, 2007, we completed a financing transaction pursuant to which we issued
      the
      Bonds. The Bonds bear cash interest at the rate of 6% per annum for the first
      year after April 12, 2007 and 3% per annum thereafter, of the principal amount
      of the Bonds. Each Bond is convertible at the option of the holder at any time
      on and after September 28, 2008, at an initial conversion price of $3.50 per
      share, the price per share at which shares were sold in our initial public
      offering on AMEX. The conversion price is subject to adjustment in certain
      events, including our issuance of additional shares of common stock or rights
      to
      purchase common stock at a per share or per share exercise or conversion price,
      respectively, at less than the applicable per share conversion price of the
      Bonds. If for the period of 20 consecutive trading days immediately prior to
      April 12, 2009 or February 18, 2012, the conversion price for the Bonds is
      higher than the average closing price for the shares, then the conversion price
      will be reset to such average closing price; provided that, the conversion
      price
      will not be reset lower than 70% of the then existing conversion price. In
      addition, the Trust Deed provides that the conversion price of the Bonds cannot
      be adjusted to lower than $0.25 per share of common stock (as adjusted for
      stock
      splits, stock dividends, spin-offs, rights offerings, recapitalizations and
      similar events) except in certain instances.





If
      on or
      before April 12, 2008, (i) our common stock, including the shares of common
      stock issuable upon conversion of the Bonds and exercise of the Bond Warrants,
      is not listed on AMEX or (ii) the Bonds, the Bond Warrants, and shares
      underlying the Bonds and the Bond Warrants are not registered with the SEC,
      then
      holders of the Bonds can require us to redeem the Bonds at 106.09% of the
      principal amount. In addition, at any time after April 12, 2010, holders of
      the
      Bonds can require us to redeem the Bonds at 126.51% of the principal amount.
      We
      are required to redeem any outstanding Bonds at 150.87% of its principal amount
      on April 4, 2012. If we are required to repurchase all or a portion of the
      Bonds
      and do not have sufficient cash to make the repurchase, we may be required
      to
      obtain third party financing to do so, and there can be no assurances that
      we
      will be able to secure financing in a timely manner and on favorable terms,
      which could have a material adverse effect on our financial performance, results
      of operations and stock price. We also issued 800,000 warrants on April 12,
      2007
      to purchase an aggregate of 800,000 shares of our common stock, subject to
      adjustments for stock splits or reorganizations as set forth in the warrant
      instrument.





In
      October 2007, we completed an initial public offering consisting of 847,550
      shares of our common stock. Our sale of common stock, which was sold indirectly
      by us to the public at a price of $3.50 per share, resulted in net proceeds
      of
      approximately $2.2 million. These proceeds were net of underwriting discounts
      and commissions, fees for legal and auditing services, and other offering costs.
      Also in October 2007, a holder of warrants to purchase 232,088 shares of our
      common stock at a per share exercise price of $1.60 exercised the warrants.
      As a
      result of the exercise, we received gross exercise proceeds of $371,341 and
      issued 232,088 shares of common stock to the holder.





On
      November 6, 2007, we, through Full Art, acquired all of the issued and
      outstanding shares (the “Techwell Shares”) in the capital of Techwell
      Engineering Limited (which has two subsidiaries), a limited liability company
      incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
      (the “Agreement”) dated November 6, 2007. Pursuant to the terms of the
      Agreement, the shareholders of Techwell agreed to sell and transfer all of
      the
      Techwell Shares to Full Art for a purchase consideration of US$11,654,566
      payable in cash and shares of common stock of our company. Techwell is engaged
      in the business of manufacturing and constructing external building facades,
      including roofing systems for buildings and curtain wall systems and
      accessories.





Net
      cash
      used in operating activities for the nine months ended September 30, 2007 was
      $5.0 million, as compared to $0.08 million used in the same period in 2006.
      The
      change is primarily the result of an increase in receivables due to a relatively
      long collection period typical of the architecture industry in China and a
      decrease in payables for the nine months ended September 30, 2007.





Net
      cash
      used in investing activities was approximately $4.0 million for the nine months
      ended September 30, 2007 compared to approximately $0.24 million provided for
      the nine month ended September 30, 2006. The decrease was a result of a decrease
      in purchases of plant and equipment and a decrease in security deposits during
      the nine month ended September 30, 2007 as compared to the comparable period
      in
      2006.




34




Net
      cash
      provided by financing activities was $10.6 million for the nine months ended
      September 30, 2007 compared to $0.95 million used for the nine months ended
      September 30, 2006. The increase was primarily due to the receipt of $9.7
      million for the issuance of convertible bonds and warrants for the nine months
      ended September 30, 2007.





As
      of
      September 30, 2007, contracts receivables were $13.8 million, an increase of
      $6.2 million, or 81.58%, over contracts receivables of $7.6 million as of
      December 31, 2006. The increase in contracts receivable reflected an increase
      in
      contract revenue earned. In addition, because the collection period typically
      runs from three months to one year, the increase in contracts receivable
      reflects not only the increase in sales but also the long collection period.
      Since we require an average of one to two months to receive products we order
      from the date of our order, we have been increasing our inventories in order
      to
      enable us to meet anticipated increases in sales. In addition, our payment
      cycle
      is considerably shorter than our receivable cycle, since we typically pay our
      suppliers all or a portion of the purchase price in advance and for some
      suppliers we must maintain a deposit for future orders.





**Off-Balance
      Sheet Arrangements**





None.





**New
      Accounting Pronouncements**





In
      September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
      fair value, establishes a framework for measuring fair value in generally
      accepted accounting principles, and expands disclosures about fair value
      measurements, SFAS 157 applies under other accounting pronouncements that
      require or permit fair value measurements, where fair value is the relevant
      measurement attribute. The standard does not require any new fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      year beginning after November 15, 2007, and interim periods within those fiscal
      years.





In
      February 2007,the FASB issued SFAS No.159,”The Fair Value Option for Financial
      Assets and Financial Liabilities- Including an Amendment of SFAS 115”(SFAS
      No.159),which allows for the option to measure financial instruments and certain
      other items at fair value. Unrealized gains and losses on items for which the
      fair value option has been elected are reported in earnings. The objective
      of
      SFAS 159 is to provide opportunities to mitigate volatility in reported earnings
      caused by measuring related assets and liabilities differently without having
      to
      apply hedge accounting provisions. SFAS 159 also establishes presentation and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. This statement is effective for financial statements issued for
      fiscal years beginning after November 15, 2007. We are currently evaluating
      the
      impact of SFAS No.159 on our consolidated financial statements.





We
      do not
      anticipate that the adoption of the above standards will have a material impact
      on our consolidated financial statements.





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





**Credit
      Risk**




We
      are
      exposed to credit risk from our cash at bank, fixed deposits and contract
      receivables. The credit risk on cash at bank and fixed deposits is limited
      because the counterparts are recognized financial institutions. Contract
      receivables are subject to credit evaluations. We periodically record a
      provision for doubtful collections based on an evaluation of the collectability
      of contract receivables by assessing, among other factors, the customer’s
      willingness or ability to pay, repayment history, general economic conditions
      and our ongoing relationship with the customers.




We
      are
      currently involved in three lawsuits in which we are suing other parties for
      overdue payments. The total amount involved is $1,292,520. We obtained judgment
      in our favor on one of the lawsuits and anticipate full payment on all of the
      overdue amounts in the near future.




**Foreign
      Currency Risk**




The
      functional currencies of our company are the Hong Kong Dollar (HKD) and Renminbi
      (RMB). Substantially all of our operations are conducted in the PRC. Our sales
      and purchases are conducted within the PRC in RMB. Conversion of RMB into
      foreign currencies is regulated by the People’s Bank of China through a unified
      floating exchange rate system. Although the PRC government has stated its
      intention to support the value of the RMB, there can be no assurance that such
      exchange rate will not again become volatile or that the RMB will not devalue
      significantly against the U.S. dollar. Exchange rate fluctuations may adversely
      affect the value, in U.S. dollar terms, of our net assets and income derived
      from our operations in the PRC. In addition, the RMB is not freely convertible
      into foreign currency and all foreign exchange transactions must take place
      through authorized institutions.




35




**Country
      Risk**




A
      substantial portion of our business, assets and operations are located and
      conducted in China. While China’s economy has experienced significant growth in
      the past twenty years, growth has been uneven, both geographically and among
      various sectors of the economy. The Chinese government has implemented various
      measures to encourage economic growth and guide the allocation of resources.
      Some of these measures benefit the overall economy of China, but may also have
      a
      negative effect on us. For example, our operating results and financial
      condition may be adversely affected by government control over capital
      investments or changes in tax regulations applicable to us. If there are any
      changes in any policies by the Chinese government and our business is negatively
      affected as a result, then our financial results, including our ability to
      generate revenues and profits, will also be negatively affected.





**ITEM
      4.  CONTROLS AND PROCEDURES**





*(a)
      Evaluation of disclosure controls and procedures*




As
      of
      September 30, 2007, our management, with the participation of our Chief
      Executive Officer, or “CEO,” and Chief Financial Officer, or “CFO,” performed an
      evaluation of the effectiveness and the operation of our disclosure controls
      and
      procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
      Exchange Act of 1934, as amended, or the “Exchange Act.” Based on that
      evaluation, the CEO and CFO concluded that our disclosure controls and
      procedures were effective as of September 30, 2007.




*(b)
      Changes in internal control over financial reporting*




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





**PART
      II-OTHER INFORMATION**





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





We
      are
      not currently a party to any material legal proceedings.





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





There
      have been no material changes from the risk factors disclosed in the “Risk
      Factors” section of our annual report on Form 10-K for the year ended December
      31, 2006, as updated by our subsequent quarterly reports on Form 10-Q as filed
      with the Securities and Exchange Commission.





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





On
      October 3, 2007, we issued 847,550 shares of common stock at $3.50 per share
      upon the closing of an initial public offering. Our sale of common stock, which
      was sold indirectly by us to the public at a price of $3.50 per share, resulted
      in net proceeds of approximately $2.2 million. These proceeds were net of
      underwriting discounts and commissions, fees for legal and auditing services,
      and other offering costs. Upon the closing of the initial public offering,
      we
      sold to the underwriter warrants to purchase up to 73,700 shares of its common
      stock. The warrants are exercisable at a per share price of $4.20 and will
      expire if unexercised after five years from the date of issuance.





The
      principal purpose of the offering was to increase our working capital, create
      a
      public market for our common stock, and facilitate our future access to the
      public capital markets. The net proceeds will be used for general corporate
      purposes.




36




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





None.





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





None.





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





None.





**ITEM
      6.**  **EXHIBITS**




(a)
      Exhibits





31.1
            Certification
                of Chief Executive Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to Section 302(a) of the
                Sarbanes-Oxley Act of 2002.32.1
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002.*




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




37




**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
                14, 2007
            By:
            /s/ Luo
                Ken YiLuo
                Ken YiChief
                Executive Officer, Chief Operating Officer and
              Chairman
                of the Board




38