**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 March 31, 2007**





**OR**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





**Commission
      File Number**


**333-114622**





**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 50,000,000 shares outstanding of registrant’s common stock, par value $.001
      per share, as of May 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 March 31, 2007 (unaudited)
            2Consolidated
                Statements of Income of Registrant for the three month periods ending
                March 31, 2007 and 2006 (unaudited)
            4Consolidated
                Statements of Stockholders’ Equity for the three-month periods ending
                March 31, 2007 and 2006 (unaudited)
            5Consolidated
                Statements of Cash Flows for the three month periods ending March
                31, 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
            22ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
            32ITEM
                4.
            CONTROLS
                AND PROCEDURES
            32PART
                II - OTHER INFORMATIONITEM
                1.
            LEGAL
                PROCEEDINGS
            33ITEM
                1A.
            RISK
                FACTORS
            33ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            33ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            33ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            33ITEM
                5.
            OTHER
                INFORMATION
            33ITEM
                6.
            EXHIBITS
            34SIGNATURES
            
            35














**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. included in the Form 10-K for the fiscal year ended December
      31, 2006 as filed with the Securities and Exchange Commission on April 17,
      2007.





1





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                BALANCE SHEETS****AS
                AT MARCH 31, 2007 AND 2006****(Stated
                in US Dollars) (Unaudited)**




*Notes*
            
            *2007*
            
            *2006***ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            2,568,389
            
            $
            991,623Restricted
                cash
            
            
            
            
            
            2,316,371
            
            
            518,359Contract
                receivables, net
            
            
            3
            
            
            32,799,623
            
            
            12,762,766Costs
                and earnings in excess of billings
            
            
            
            
            
            11,565,506
            
            
            10,640,224Job
                disbursements advances
            
            
            
            
            
            6,296,999
            
            
            1,111,406Tender
                and other site deposits
            
            
            
            
            
            1,739,547
            
            
            2,111,336Other
                receivables
            
            
            
            
            
            2,035,073
            
            
            2,722,546Inventories
            
            
            5
            
            
            205,691
            
            
            28,059Total
                current assets
            
            
            
            
            $
            59,527,199
            
            $
            30,886,319Plant
                and equipment, net
            
            
            6
            
            
            699,867
            
            
            429,217Security
                deposit
            
            
            
            
            
            200,894
            
            
            254,125**TOTAL
                ASSETS**
            
            
            
            
            $
            60,427,960
            
            $
            31,569,661**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilitiesShort-term
                bank loan
            
            
            8
            
            $
            34,254
            
            $
            560,036Accounts
                payable
            
            
            
            
            
            18,954,049
            
            
            12,732,814Amount
                due to shareholder
            
            
            13
            
            
            716,839
            
            
            2,533,404Other
                payables
            
            
            
            
            
            4,296,552
            
            
            2,026,701Income
                tax payable
            
            
            
            
            
            1,338,975
            
            
            1,079,992Business
                and other taxes payable
            
            
            
            
            
            2,885,700
            
            
            1,289,133Customers’
                deposits
            
            
            
            
            
            6,942,282
            
            
            1,292,348Accruals
            
            
            
            
            
            283,870
            
            
            232,982Total
                current liabilities
            
            
            
            
            $
            35,452,521
            
            $
            21,747,410Long
                term liabilities bank loan
            
            
            8
            
            
            2,735,135
            
            
            -**TOTAL
                LIABILITIES**
            
            
            
            
            $
            38,187,656
            
            $
            21,747,410




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




2


**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                BALANCE SHEETS****AS
                AT MARCH 31, 2007 AND 2006****(Stated
                in US Dollars) (Unaudited)**




*Notes*
            
            *2007*
            
            *2006***STOCKHOLDERS’
                EQUITY**Preferred
                stock, $0.001 par value, 10,000,000 sharesauthorized,
                0 shares issued and outstanding atMarch
                31, 2007 and 2006Common
                stock, $0.001 par value, 100,000,000 sharesauthorized,
                50,000,000 shares issued and outstandingat
                March 31, 2007; 43,304,125 shares issued andoutstanding
                at March 31, 2006
            
            
            9
            
            $
            50,000
            
            $
            43,304Additional
                paid in capital
            
            
            9
            
            
            7,106,561
            
            
            -Statutory
                reserves
            
            
            
            
            
            1,449,655
            
            
            1,449,655Accumulated
                other comprehensiveincome
            
            
            
            
            
            501,945
            
            
            (4,158
            )Retained
                earnings
            
            
            
            
            
            13,132,143
            
            
            8,333,450$
            22,240,304
            
            $
            9,822,251**TOTAL
                LIABILITIES AND****STOCKHOLDERS’
                EQUITY**
            
            
            
            
            $
            60,427,960
            
            $
            31,569,661








See
        notes to consolidated financial statements and
        accountant's report.
  3





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****FOR
                THE THREE-MONTH PERIODS ENDED MARCH 31, 2007 AND
                2006****(Stated
                in US Dollars) (Unaudited)**




*Notes*
            
            *2007*
            
            *2006*Contract
                revenues earned
            
            
            11
            
            $
            14,430,092
            
            $
            12,719,021Cost
                of contract revenues earned
            
            
            
            
            
            (11,532,607
            )
            
            (10,087,113
            )Gross
                profit
            
            
            
            
            $
            2,897,485
            
            $
            2,631,908Selling
                expenses
            
            
            
            
            
            (206,213
            )
            
            (106,660
            )Administrative
                and general expenses
            
            
            
            
            
            (668,162
            )
            
            (739,492
            )Income
                from operations
            
            
            
            
            $
            2,023,110
            
            
            1,785,756Interest
                expenses
            
            
            
            
            
            (4,080
            )
            
            (12,030
            )Interest
                income
            
            
            
            
            
            3,637
            
            
            2,253Income
                before taxation
            
            
            
            
            $
            2,022,667
            
            $
            1,775,978Income
                tax
            
            
            12
            
            
            (327,048
            )
            
            (306,080
            )Net
                income
            
            
            
            
            $
            1,695,619
            
            $
            1,469,898Basic
                net income per common share
            
            
            
            
            $
            0.03
            
            $
            0.03Diluted
                net income per common share
            
            
            
            
            $
            0.03
            
            $
            0.03Basic
                weighted average common shares outstanding
            
            
            
            
            
            50,000,000
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            
            
            
            50,000,000
            
            
            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 THREE-MONTH PERIODS ENDED MARCH 31, 2007 AND
                2006****(Stated
                in US Dollars) (Unaudited)**




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
            )
            
            6,909,508
            
            
            8,304,554Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,469,898
            
            
            1,469,898Appropriations
                to statutoryrevenue
                reserves
            
            
            
            
            
            
            
            
            
            
            
            45,956
            
            
            
            
            
            (45,956
            )
            
            -Foreign
                currency translationadjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            47,799
            
            
            
            
            
            47,799Balance,
                March 31, 2006
            
            
            43,304,125
            
            $
            43,304
            
            
            -
            
            
            1,449,655
            
            
            (4,158
            )
            
            8,333,450
            
            
            9,822,251Balance,
                January 1, 2007
            
            
            50,000,000
            
            $
            50,000
            
            
            7,106,561
            
            
            1,437,223
            
            
            469,964
            
            
            11,448,956
            
            
            20,512,704Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,695,619
            
            
            1,772,960Appropriations
                to statutory
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -revenue
                reserves
            
            
            
            
            
            
            
            
            
            
            
            12,432
            
            
            
            
            
            (12,432
            )
            
            -Foreign
                currency translation
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            31,981
            
            
            
            
            
            31,981Balance,
                March 31, 2007
            
            
            50,000,000
            
            $
            50,000
            
            
            7,106,561
            
            
            1,449,655
            
            
            501,945
            
            
            13,132,143
            
            
            22,240,304





See
        notes to consolidated financial statements and
        accountant's report.
  5


**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE THREE-MONTH PERIODS ENDED MARCH 31, 2007 AND
                2006****(Stated
                in US Dollars) (Unaudited)**




*2007*
            
            *2006**Cash
                flows from operating activities:*Net
                income
            
            $
            1,695,619
            
            $
            1,469,898Depreciation
            
            
            47,599
            
            
            46,529(Increase)/decrease
                in inventories
            
            
            (182,583
            )
            
            (4,670
            )Increase
                in receivables
            
            
            (15,497,969
            )
            
            (8,689,416
            )Increase/(decrease)
                in payables
            
            
            12,919,558
            
            
            5,802,723Net
                cash used in operating activities
            
            $
            (1,017,776
            )
            $
            (1,374,936
            )*Cash
                flows from investing activities:*Disposals(purchases)
                of land use rights
            
            $
            -
            
            $
            694,946Decrease/(increase)
                in restricted cash
            
            
            426,771
            
            
            -Decrease
                (Increase) in security deposit
            
            
            364,901
            
            
            (254,125
            )Purchases
                of plant and equipment
            
            
            (272,968
            )
            
            (563,020
            )Net
                cash provided by (used in) investing activities
            
            $
            518,704
            
            $
            (122,199
            )*Cash
                flows from financing activities:*Repayment
                of long-term loan
            
            $
            (5,496
            )
            $
            (183,706
            )Proceeds
                from long-term loan
            
            
            191,192
            
            
            -Amount
                due to shareholder
            
            
            715,104
            
            
            2,112,848Net
                cash provided by (used in) financing activities
            
            $
            900,800
            
            $
            1,929,142Net
                (decrease)/increase in cash and cash equivalents
            
            $
            401,728
            
            $
            432,007Effect
                of foreign currency translation on cash and cash
                equivalents
            
            
            50,695
            
            
            47,799Cash
                and cash equivalents - beginning of year
            
            
            2,115,966
            
            
            511,817Cash
                and cash equivalents - end of year
            
            $
            2,568,389
            
            $
            991,623*Other
                supplementary information:*Interest
                paid
            
            $
            4,080
            
            $
            12,030Income
                tax paid
            
            $
            251,564
            
            $
            306,080





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





6


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)** **(Unaudited)**





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





China
      Architectural Engineering, Inc. (the Company) formerly SKRP 1, Inc., was
      incorporated in the States of Delaware, United States on March 16, 2004.





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. 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
      accompanying audited consolidated financial statements were retroactively
      adjusted to reflect the effects of the recapitalization.





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 five subsidiaries constituting the
      group. Significant inter-company transactions have been eliminated in
      consolidation.








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 five subsidiaries since its reverse-merger on October 17,
      2006. As of March 31, 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
            
            100





For
      retrospective financial reporting purposes, the constituents of the group are
      the same as of March 31, 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
                  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)*
            *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.








10








**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.





*(n)*
            *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.*





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 (HK) 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.


11


**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 Over15%
            
            
            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
      March
      31, 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.





*(o)*
            *Advertising*





The
      Group
      expensed all advertising costs as incurred. Advertising expenses included in
      selling expenses were nil and $16,131 for the periods ended March 31, 2007
      and
      2006 respectively.





*(p)*
            *Research
                and development*





All
      research and development costs are expensed as incurred. Research and
      development costs included in general and administrative expenses were nil
      and
      $23 for the periods ended March 31, 2007 and 2006 respectively.





*(q)*
            *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.


12


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(r)*
            *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.





**March
                31, 2007**
            
            **March
                31, 2006**Year
                end HKD : US$ exchange rate
            
            
            7.8140
            
            
            7.7606Average
                yearly HKD : US$ exchange rate
            
            
            7.8085
            
            
            7.7583




**March
                31, 2007**
            
            **March
                31, 2006**Year
                end RMB : US$ exchange rate
            
            
            7.7409
            
            
            8.0352Average
                yearly RMB : US$ exchange rate
            
            
            7.7714
            
            
            8.0558





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.





*(s)*
            *Surplus
                reserves*





Surplus
      reserves for foreign investment enterprises are referring o 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.





*(t)*
            *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.


13


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(u)*
            *Recent
                accounting pronouncements*







In
      May
      2005, the FASB issued a SFAS 154, “Accounting Changes and Error Corrections” to
      replace APB Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting
      Accounting Changes in Interim Financial Statements” requiring retrospective
      application to prior periods consolidated financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change.  When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, SFAS 154 requires the new
      accounting principle be applied to the balances of assets and liabilities as
      of
      the beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement.  When it is impracticable to determine the
      cumulative effect of applying a change in accounting principle to all prior
      periods, SFAS 154 requires that the new accounting principle be applied as
      if it
      were adopted prospectively from the earliest date practicable.  The
      effective date for this statement is for accounting changes and corrections
      of
      errors made in fiscal year beginning after December 15, 2005.









In
      February 2006, the FASB issued a SFAS 155, “Accounting for Certain Hybrid
      Financial Instruments” to amend FASB Statements No. 133, Accounting for
      Derivative Instruments and Hedging Activities, and No. 140, Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
      This statement permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation and eliminate the prohibition on a qualifying special-purpose entity
      from holding a derivative financial instrument that pertains to a beneficial
      interest other than another derivative financial instrument.  This
      statement is effective for all financial instruments acquired or issued after
      the beginning of an entity’s first fiscal year that begins after September 15,
      2006.


14
 **CHINA
        ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**









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




In
      July
      2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109, which clarifies the accounting for
      uncertainty in tax positions. This Interpretation requires that the Company
      recognizes in its consolidated financial statements the impact of a tax position
      if that position is more likely than not of being sustained on audit, based
      on
      the technical merits of the position. The provisions of FIN 48 are effective
      for
      the Company on January 1, 2007, with the cumulative effect of the change in
      accounting principle, if any, recorded as an adjustment to opening retained
      earnings.






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
      September 2006, the SEC issued SAB No. 108, which provides guidance on the
      process of quantifying financial statement misstatements. In SAB No. 108, the
      SEC staff establishes an approach that requires quantification of financial
      statement errors, under both the iron-curtain and the roll-over methods, based
      on the effects of the error on each of the Company’s financial statements and
      the related financial statement disclosures. SAB No.108 is generally effective
      for annual financial statements in the first fiscal year ending after November
      15, 2006. The transition provisions of SAB No. 108 permits existing public
      companies to record the cumulative effect in the first year ending after
      November 15, 2006 by recording correcting adjustments to the carrying values
      of
      assets and liabilities as of the beginning of that year with the offsetting
      adjustment recorded to the opening balance of retained earnings.






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







15





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*2007*
            
            *2006*Contract
                receivables
            
            $
            33,182,934
            
            $
            13,099,164*Less:*Allowance for doubtful accounts
            
            
            (383,311
            )
            
            (336,398
            )Net
            
            $
            32,799,623
            
            $
            12,762,766





*2007*
            
            *2006*Allowance
                for doubtful accounts at January 1, 2007 and 2006
            
            $
            417,648
            
            $
            403,595Reclassification
                to allowance for other receivable
            
            
            (47,247
            )
            
            (68,811
            )Foreign
                exchange adjustments
            
            
            12,910
            
            
            1,614Balances
                at March 31, 2007 and 2006
            
            $
            383,311
            
            $
            336,398








**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**





*2007*
            
            *2006*Raw
                materials
            
            $
            205,691
            
            $
            28,059





16


**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 March 31: -





*2007*
            
            *2006**At
                cost*Motor
                vehicle
            
            $
            452,632
            
            $
            455,093Machinery
                and equipment
            
            
            1,392,018
            
            
            1,299,305Furniture
                and officeEquipment
            
            
            713,140
            
            
            507,130Building
            
            
            274,627
            
            
            0$
            2,832,417
            
            $
            2,261,528*Less**:
                Accumulated depreciation*Motor
                vehicle
            
            $
            410,590
            
            $
            357,244Machinery
                and equipmentFurniture
                and office
            
            
            1,217,368
            
            
            1,159,174Equipment
            
            
            504,592
            
            
            315,893Building
            
            
            0
            
            
            0$
            2,132,550
            
            $
            1,832,311$
            699,867
            
            $
            429,217


Depreciation
      expenses included in the selling and administrative expenses for the periods
      ended March 31, 2007 and 2006 were 47,599 and 46,529, respectively.











17





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**7.
                SHORT-TERM BANK LOAN***2007*
            
            *2006*Loan
                from Industrial Bank Co., Ltd at an interest rate of 6.786% (RMB
                6,000,000) due June 6, 2006.
            
            $
            -
            
            $
            560,036Interest
                expense was $11,788 for 2006.**8.
                LONG-TERM BANK LOANS**I.
                Line of credit from Bank of East Asia Ltd. at an interest rate at
                5.508%
                subject to variation every 6 months (RMB 20,000,000) due October
                25,
                2011.
            
            $
            2,583,679
            
            $
            -II.
                Secured loan from Bank of East Asia Ltd with a condominium as collateral
                at an interest rate of 5.832% (RMB 1,480,000) due November 4, 2011
                (refer
                to Note 8(a) below)
            
            $
            185,710
            
            $
            -*Less:*current portion
            
            
            (34,254
            )$
            151,456
            
            $
            -$
            2,735,135
            
            $
            -





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





Interest
      expense was $1,838 for 2007.





*8(a).
                NOTES PAYABLE**2007*Notes
                due to Bank of East Asia Ltd at March 31,2008
            
            $
            34,2542009
            
            
            36,3412010
            
            
            38,4812011
            
            
            40,7862012
            
            
            35,848*Please
                refer to Note (8) above*
            
            $
            185,710





18


**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 March 31, 2007 and 2006 is depicted in the
      following table:








*March
                31, 2007*
            
            *March
                31, 2006*Name
                of Shareholder
            
            Number
                of Shares
            
            Common
                Stock Capital
            
            Additional
                Paid-in Capital
            
            %
                of Equity Holdings
            
            Common
                Stock Capital
            
            %
                of Equity HoldingsKGE
                Group Ltd.
            
            
            43,304,125
            
            
            43,304
            
            
            -
            
            
            86.61
            %
            
            43,304
            
            
            100.00
            %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
            %Conversion
                of original capitalfrom
                Full Art Internationalto
                additional paid in capital
            
            
            ________
            
            
            ______
            
            
            37,582
            
            
            _______
            
            
            _______
            
            
            _______50,000,000
            
            
            50,000
            
            $
            7,106,561
            
            
            100.00
            %
            
            43,304
            
            
            100.00
            %








The
      Company currently expects to have a Public Offering of 300,000 shares of Common
      Stock at a price of $3.00 and $4.00 per share after the Company has obtained
      the
      required clearances from the Securities and Exchange Commission.








**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
      March 31, 2007, the 232,088 shares have not been exercised.





19


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**











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


*2007*
            
            *2006*Billed
            
            $
            2,874,165
            
            $
            2,303,033Unbilled
            
            
            11,555,927
            
            
            10,415,988$
            14,430,092
            
            $
            12,719,021








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 periods ended March 31, 2007 and 2006:
      -





*2007*
            
            *2006*Income
                before tax
            
            $
            2,022,667
            
            $
            1,775,978Tax
                at the domestic income tax rate
            
            $
            667,480
            
            $
            586,073Effect
                of government grants
            
            
            (340,432
            )
            
            (279,993
            )Current
                income tax expense
            
            $
            327,048
            
            $
            306,080





20


**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 periods ended March 31, 2007 and 2006, the Group
      incurred rental expenses of $96,562 and $96,347, respectively.





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


For
                the years ended March 31,2008
            
            $
            152,5802009
            
            
            165,3502010
            
            
            91,5142011
            
            
            30,997$
            440,441











**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 March 31, 2007 and 2006 were $716,839 and
      $2,533,404, respectively.





**15.**
            **SUBSEQUENT
                EVENT**





On
      April
      12, 2007, the Company completed a financing transaction pursuant to which it
      issued $10,000,000 Variable Rate Convertible Bonds that will be due in 2012
      (the
“Bonds”). The Bonds bear 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 after
      April 12, 2008 into shares of the Company’s common stock. If on or before April
      12, 2008 certain conditions are not met, holders of the Bonds can require the
      Company 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 the Company
      to
      redeem the Bonds at 126.51% of the principal amount. The Company is required
      to
      redeem any outstanding Bonds at 150.87% of its principal amount on April 4,
      2012. The Company also issued 800,000 warrants on April 12, 2007 to purchase
      an
      aggregate of 800,000 shares of the Company’s common stock, subject to
      adjustments for stock splits or reorganizations as set forth in the
      warrant.





21


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





**Forward-Looking
      Statements**





*The
      following discussion should be read in conjunction with our consolidated
      financial statements and related notes included elsewhere in this quarterly
      report. 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, 2007, 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. The length
      of our contracts varies but 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.


22


***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
“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 (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 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 proposed 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. 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,
                reset
                after April 12, 2009, to a price not less than 70% of the initial
                conversion price.




·
            *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.
                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 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. We
      have
      agreed to list the 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 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 Warrants terminate.





On
      April
      12, 2007 we also entered into a registration rights agreement with the
      Subscriber pursuant to which we 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 we have on file with the SEC. We
      intend to have the registration statement cover the resale of the Bonds, the
      Warrants, and the shares of common stock underlying the Bonds and
      Warrants.





***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.


23


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





***Concentrations
      and Credit Risks*** -For
      the
      years ended December 31, 2006, 2005, and 2004, and for the three months ended
      March 31, 2007, 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 are 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.





***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 March 31, 2007.





***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. Our current components of other comprehensive income
      are
      the foreign currency translation adjustment.


24


***Income
      Taxes*** *-* We
      use
      the accrual method of accounting to determine and report its taxable income
      and
      use the flow through method to account for tax credits, which are reflected
      as a
      reduction of income taxes for the year in which they are available. We have
      implemented *Statement
      of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.* 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 we are able to realize that
      tax
      benefit, or that future realization is uncertain.





***Advertising*** *-* Advertising
      costs are expensed as incurred.





***Research
      and Development*** *-* All
      research and development costs are expensed as incurred. The costs of material
      and equipment acquired or constructed for research and development and having
      alternative future uses are classified as property and equipment and depreciated
      over their estimated useful lives.





***Retirement
      Benefits*** *-* We
      make
      monthly contributions to various employee retirement benefit plans organized
      by
      provincial governments in the PRC in accordance with rates prescribed by them.
      The provincial governments undertake to assume the retirement benefit
      obligations of all existing and future retired employees of our company.
      Contributions to these plans are charged to expense as incurred. The retirement
      expense for the years ended December 31, 2006, and 2005,and for the three months
      ended March 31, 2007 were $118,856, $109,941, and $24,153 respectively.





***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.
      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.





***Land
      Use Rights -*** Land
      use
      rights are stated at cost less accumulated amortization. Amortization is
      provided over the respective useful lives, using the straight-line
      method.





***Accounting
      for the Impairment of Long-Lived Assets -*** **** Long-lived
      assets 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 years, there
      was
      no impairment loss.





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





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





***Cash
      and Cash Equivalents -*** All
      highly liquid investments purchased with original maturities of three months
      or
      less to be cash equivalents. We maintain bank accounts only in the PRC and
      Hong
      Kong. We do not maintain any bank accounts in the United States of
      America.





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


25


***Foreign
      Currency Translation -*** The
      consolidated financial statements are presented in United States dollars. Our
      functional currencies as well as the functional currencies of our subsidiaries
      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. 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.





***Statutory
      Reserves -*** Surplus
      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.





***Intangibles*** -
      Under
      the Statement of Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
      Intangible Assets,” all goodwill and certain intangible assets determined to
      have indefinite lives will not be amortized, but will be tested for impairment
      at least annually. Other intangible assets will be amortized over their useful
      lives and reviewed for impairment in accordance with SFAS No. 144 “Accounting
      for Impairment or Disposal of Long-Lived Assets.”


26


**Results
      of Operations**





The
      following table sets forth our statements of operations for the three months
      ended March 31, 2007 and 2006 in U.S. dollars:








**Three
                Months Ended March 31,****2007**
            
            **2006*****(in
                thousands, except share amounts and earnings per
                share)***Contract
                revenues earned
            
            $
            14,430
            
            $
            12,719Cost
                of contract revenues earned
            
            $
            (11,533
            )
            $
            (10,087
            )Gross
                profit
            
            $
            2,897
            
            $
            2,
                632Selling
                expenses
            
            $
            (206
            )
            $
            (107
            )General
                and administrative expenses
            
            $
            (668
            )
            $
            (739
            )Income
                from operations
            
            $
            2,023
            
            $
            1,786Interest
                expenses, net
            
            $
            (4
            )
            $
            (12
            )Interest
                income
            
            
            4
            
            
            2Other
                income
            
            
            --
            
            
            --Income
                before taxes
            
            $
            2,023
            
            $
            1,776Income
                tax
            
            $
            (327
            )
            $
            (306
            )Net
                income
            
            $
            1,696
            
            $
            1,470Basic
                and diluted net income per common share
            
            $
            0.03
            
            $
            0.03Basic
                and diluted dividend paid per common share
            
            
            --
            
            
            --Basic
                weighted average common shares outstanding
            
            
            50,000,000
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            50,000,000
            
            
            43,304,125





**Three
      Months Ended March 31, 2007 and 2006**





Contract
      revenues earned for the three months ended March 31, 2007 were $14.4 million,
      an
      increase of $1.7 million, or 13.5%, from the contract revenues earned of $12.7
      million for the three months ended March 31, 2006. The primary reason for the
      increase in contract revenues earned was an increase in the number of projects
      for the three months ended March 31, 2007. In addition, we also experienced
      a
      general increase in the amount of revenue generated per project in the three
      months ended March 31, 2007 as compared to the three months ended March 31,
      2006.


27


Cost
      of
      contract revenues earned for the three months ended March 31, 2007 was $11.5
      million, an increase of $1.5 million, or 14.3%, from $10 million for the three
      months ended March 31, 2006. The increase in costs of contract revenues earned
      was primarily due to the increased number of projects for the three months
      ended
      March 31, 2007. Gross
      profit for the three months ended March 31, 2007 was $2.9 million, an increase
      of $0.3 million, or 10.1%, from $2.6 million for the three months ended March
      31, 2006. Our gross margin for the three months ended March 31, 2007 was 20.1%
      as compared with 20.7% for the three months ended March 31, 2006.





Selling
      expenses were $206,213 for the three months ended March 31, 2007, an increase
      of
      approximately $99,553, or 93.3%, from $106,660 for the three months ended March
      31, 2006. The increase resulted primarily from costs associated with entering
      bids for new contracts, as well as increases in promotion expense.





General
      and administrative expenses for the three months ended March 31, 2007 were
      $668,162 as compared to $739,492 for the three months ended March 31, 2006.
      The
      decrease of $71,330 was primarily due to the internal controls on operating
      expenses during the three months ended March 31, 2007 including stricter control
      on staff costs, entertainment expenses, and traveling expenses.





Income
      tax was $327,048 for the three months ended March 31, 2007, an effective tax
      rate of 16.2%, compared with $306.080 taxes for the three months ended March
      31,
      2006, an effective tax rate of 17.2%. The slight decrease is due to 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.





Net
      income for the three months ended March 31, 2007 was $1.7 million, an increase
      of $0.2 million, or 15.4%, from $1.5 million for the comparable period in 2006.





**Liquidity
      and Capital Resources**





At
      March
      31, 2007, we had cash and cash equivalents of $2,568,389. Prior to October
      17,
      2006, we have historically financed our business operations through short-term
      bank loans, cash provided by operations, and credit provided by
      suppliers.




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%.





In
      October 2006, we opened a line of credit facility with the Zhuhai branch of
      Bank
      of East Asia for up to a maximum of $2,564,979, which is RMB 20,000,000. We
      established and borrowed the full amount available under the line of credit
      to
      replace a 2005 short term loan from another bank that was expiring. Interest
      expense on this line of credit was $18,678 for the year ended December 31,
      2006
      and $2,279 for the quarter ended March 31, 2007. The credit facility is in
      effect and does not require renewal until October 2011. In order to facilitate
      the extension of the credit facility to us by the Zhuhai branch of Bank of
      East
      Asia, we agreed to deposit the same amount on fixed deposit terms into the
      Hong
      Kong branch of Bank of East Asia.





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.





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
“Warrants”).


28


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 (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 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 proposed 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. 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,
                reset
                after April 12, 2009, to a price not less than 70% of the initial
                conversion price.




·
            *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.
                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 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. We
      have
      agreed to list the 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 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 Warrants terminate.





On
      April
      12, 2007 we also entered into a registration rights agreement with the
      Subscriber pursuant to which we 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 we have on file with the SEC. We
      intend to have the registration statement cover the resale of the Bonds, the
      Warrants, and the shares of common stock underlying the Bonds and
      Warrants.





Working
      capital management, including prompt and diligent billing and collection, is
      an
      important factor in our results of operations and liquidity. When we are awarded
      construction project, we work according to the percentage-of-completion method
      which matches the revenue streams with the relevant cost of construction based
      on the percentage-of-completion of project as determined based on certain
      criteria, such as, among other things, actual cost of raw material used compared
      to the total budgeted cost of raw material and work certified by customers.
      There is no guarantee that the cash inflow from these contracts is being
      accounted for in parallel with the cash outflow being incurred in the
      performance of such contract. In addition, a construction project is usually
      deemed to be completed once we prepare a final project account, the account
      is
      agreed upon by our customers, and all amounts related to the contract must
      be
      settled according to the account within three months to a year from the
      customer’s agreement on the final project account. As there may be different
      time intervals to reach a consensus on the amount as being accounted for in
      the
      projects before the project finalization account is being mutually agreed by
      each other. We experience an average accounts settlement period ranging from
      three months to as high as one year from the time we provide services to the
      time we receive payment from our customers. In contrast, we typically need
      to
      place certain deposit with our suppliers on a portion of the purchase price
      in
      advance and for some suppliers we must maintain a deposit for future orders.
      We
      attempt to maintain a credit policy of receiving certain amounts of deposit
      from
      customers before we begin a new project. Coupled with the return of retention
      money and deposits from other previously-completed projects and credit granted
      by suppliers, we have been able to maintain an overall net cash position in
      our
      operations in last two years, but there is no guarantee that we will be able
      to
      maintain a positive net cash flow position in the future.


29


Net
      cash
      used in operating activities for the three months ended March 31, 2007 was
      $1.0
      million, as compared to $1.4 million used by operating activities in the same
      period in 2006. Receivables increased by $6.8 million from $8.7 million in
      March
      31, 2006 to $15.5 million in March 2007 as a result of increased revenues
      generated by new projects. However, payables increased in the same period by
      $7.1 million during the same period because of increased costs associated with
      revenue generation and because of improved control over payments to
      suppliers.





Net
      cash
      provided by investing activities was $518,704 for the three months ended March
      31, 2007, as compared to net cash used by investing activities of $122,199
      for
      the three months ended March 31, 2006. In 2006, there was a disposal of $0.7
      million of land use rights, but there was no corresponding change in 2007.
      Security deposits decreased by $0.4 million in 2007 compared with an increase
      of
      $0.25 million in 2006 as a result of working on more and larger projects.
      Restricted cash also decreased by $0.43 million. Purchases of plant and
      equipment went down from $0.56 million in 2006 to $0.27 million in
      2007.





Net
      cash
      provided by financing activities was $900,800 for the three months ended March
      31, 2007 compared to cash provided by financing activities of $1.9 million
      for
      the three months ended March 31, 2006. The primary reason for the increase
      was
      that in 2006, there was $2.1 million due to a shareholder, while there was
      no
      such corresponding amount due in 2007.





As
      of
      March 31, 2007, contracts receivables were $32.8 million, an increase of $20
      million or 156%, over contracts receivables of $12.8 million as of March 31,
      2006. The increase in contracts receivable reflected an increase in contract
      revenue earned. In addition, the increase in contracts receivable reflects
      not
      only the increase in sales but also the long collection period because the
      collection period typically runs from three months to one year before we receive
      full payment for our services and products. 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. 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.





At
      March
      31, 2007, we had no material commitments for capital expenditures other than
      for
      those expenditures incurred in the ordinary course of business. During 2007,
      we
      intend to expend approximately $65 to $70 million to purchase materials and
      serve as deposits for performance bonds for new projects that we have obtained.
      Additional capital for this objective would be required that is in excess of
      our
      liquidity, requiring us to raise additional capital through an equity offering
      or secured or unsecured debt financing. The availability of additional capital
      resources will depend on prevailing market conditions, interest rates, and
      our
      existing financial position and results of operations.





The
      following table describes our contractual commitments and obligations as of
      December 31, 2006:





**Contractual
                obligations**
            **Payments
                due by period****Total**
            **Less
                than 1 year**
            **1-3
                years**
            **3-5
                years**
            **More
                than 5 years**Operating
                Lease Obligations
            $582,821
            $282,795
            $150,013
            $150,013
            $
                --





**Off-Balance
      Sheet Arrangements**





None.


30


**Change
      in Accountants**





On
      October 17, 2006, we dismissed AJ. Robbins, PC ("AJ. Robbins") as our
      independent registered public accounting firm following the change in control
      of
      the Company on the closing of the Share Exchange. We engaged AJ. Robbins to
      audit our financial statements for the year ended December 31, 2005 and the
      period from March 16, 2004 to December 31, 2005 and 2004. The decision to change
      accountants was approved and ratified by our Board of Directors. The report
      of
      AJ. Robbins on our financial statements for the fiscal year ended December
      31,
      2005 and for the period from March 16, 2004 to December 31, 2005 and 2004 did
      not contain any adverse opinion or disclaimer of opinion and was not qualified
      or modified as to uncertainty, audit scope, or accounting principle, except
      for
      an explanatory paragraph relative to the our ability to continue as a going
      concern. While AJ. Robbins was engaged by the us, there were no disagreements
      with AJ. Robbins on any matter of accounting principles or practices, financial
      statement disclosure, or auditing scope or procedure with respect to us, which
      disagreements if not resolved to the satisfaction of AJ. Robbins would have
      caused it to make reference to the subject matter of the disagreements in
      connection with its report on our financial statements for the fiscal year
      ended
      December 31, 2005 and the period from March 16, 2004 to December 31, 2005 and
      2004. We engaged Samuel H. Wong & Co., LLP, Certified Public Accountants, as
      our independent registered public accounting firm as of October 17, 2006. Samuel
      H. Wong & Co., LLP, Certified Public Accountants, served as Full Art’s
      independent registered certified public accountants for the fiscal years ended
      December 31, 2005 and 2004.





**New
      Accounting Pronouncements**





In
      May
      2005, the FASB issued a SFAS 154, “Accounting Changes and Error Corrections” to
      replace APB Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting
      Accounting Changes in Interim Financial Statements” requiring retrospective
      application to prior periods consolidated financial statements of changes in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change.  When it is
      impracticable to determine the period-specific effects of an accounting change
      on one or more individual prior periods presented, SFAS 154 requires the new
      accounting principle be applied to the balances of assets and liabilities as
      of
      the beginning of the earliest period for which retrospective application is
      practicable and that a corresponding adjustment be made to the opening balance
      of retained earnings (or other appropriate components of equity or net assets
      in
      the statement of financial position) for that period rather than being reported
      in an income statement.  When it is impracticable to determine the
      cumulative effect of applying a change in accounting principle to all prior
      periods, SFAS 154 requires that the new accounting principle be applied as
      if it
      were adopted prospectively from the earliest date practicable.  The
      effective date for this statement is for accounting changes and corrections
      of
      errors made in fiscal year beginning after December 15, 2005.





In
      February 2006, the FASB issued a SFAS 155, “Accounting for Certain Hybrid
      Financial Instruments” to amend FASB Statements No. 133, Accounting for
      Derivative Instruments and Hedging Activities, and No. 140, Accounting for
      Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
      This statement permits fair value remeasurement for any hybrid financial
      instrument that contains an embedded derivative that otherwise would require
      bifurcation and eliminate the prohibition on a qualifying special-purpose entity
      from holding a derivative financial instrument that pertains to a beneficial
      interest other than another derivative financial instrument.  This
      statement is effective for all financial instruments acquired or issued after
      the beginning of an entity’s first fiscal year that begins after September 15,
      2006.





In
      July
      2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109, which clarifies the accounting for
      uncertainty in tax positions. This Interpretation requires that we recognize
      in
      our consolidated financial statements the impact of a tax position if that
      position is more likely than not of being sustained on audit, based on the
      technical merits of the position. The provisions of FIN 48 are effective for
      us
      on January 1, 2007, with the cumulative effect of the change in accounting
      principle, if any, recorded as an adjustment to opening retained earnings.





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.


31


In
      September 2006, the SEC issued SAB No. 108, which provides guidance on the
      process of quantifying financial statement misstatements. In SAB No. 108, the
      SEC staff establishes an approach that requires quantification of financial
      statement errors, under both the iron-curtain and the roll-over methods, based
      on the effects of the error on each of our financial statements and the related
      financial statement disclosures. SAB No.108 is generally effective for annual
      financial statements in the first fiscal year ending after November 15, 2006.
      The transition provisions of SAB No. 108 permits existing public companies
      to
      record the cumulative effect in the first year ending after November 15, 2006
      by
      recording correcting adjustments to the carrying values of assets and
      liabilities as of the beginning of that year with the offsetting adjustment
      recorded to the opening balance of retained earnings.





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 collectibility
      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.




*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.




*Country
      Risk.* 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
      March 31, 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 March 31, 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.


32





**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.





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





None.





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


None.





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





None.





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





None.





33


**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.





34


**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)May
                15, 2007
            By:
            /s/ Luo
                Ken YiLuo
                Ken YiChief
                Executive Officer, Chief Operating Officer and Chairman of the
                Board










35