**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 June 30, 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 o No x




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 August 15, 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 June 30, 2007 (unaudited) and December 31,
                2006
            2Consolidated
                Statements of Income of Registrant for the three and six month periods
                ending June 30, 2007 and 2006 (unaudited)
            4Consolidated
                Statements of Stockholders’ Equity for periods ending June 30, 2007
                (unaudited)
            5Consolidated
                Statements of Cash Flows for the three and six month periods ending
                June
                30, 2007 and 2006 (unaudited)
            6Notes
                to the Consolidated Financial Statements (unaudited)
            7ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATION
            25ITEM
                3.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
            33ITEM
                4.
            CONTROLS
                AND PROCEDURES
            33PART
                II - OTHER INFORMATIONITEM
                1.
            LEGAL
                PROCEEDINGS
            34ITEM
                1A.
            RISK
                FACTORS
            34ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            37ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            37ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            37ITEM
                5.
            OTHER
                INFORMATION
            38ITEM
                6.
            EXHIBITS
            39SIGNATURES
            
            40









**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 JUNE 30, 2007 AND DECEMBER 31, 2006****(Stated
                in US Dollars)**




Notes
            
            
            June
                30, 2007
              (unaudited)
            
            
            December
                31, 2006**ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            6,008,770
            
            $
            2,115,966Restricted
                cash
            
            
            
            
            
            2,588,490
            
            
            2,743,142Contract
                receivables, net
            
            
            3
            
            
            11,253,935
            
            
            7,573,913Costs
                and earnings in excess of billings
            
            
            
            
            
            33,054,759
            
            
            22,487,792Job
                disbursements advances
            
            
            
            
            
            2,278,619
            
            
            5,236,327Tender
                and other site deposits
            
            
            
            
            
            2,789,358
            
            
            3,427,490Other
                receivables
            
            
            
            
            
            424,907
            
            
            213,257Inventories
            
            
            5
            
            
            23,464
            
            
            23,108Total
                current assets
            
            
            
            
            
            58,411,003
            
            $
            43,820,995Plant
                and equipment, net
            
            
            6
            
            
            889,176
            
            
            474,498Security
                deposit
            
            
            
            
            
            485,349
            
            
            565,795**TOTAL
                ASSETS**
            
            
            
            
            $
            59,796,827
            
            $
            44,861,288**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilitiesShort-term
                bank loan
            
            
            8
            
            $
            35,285
            
            $
            -Accounts
                payable
            
            
            
            
            
            11,612,278
            
            
            15,202,029Amount
                due to shareholder
            
            
            4
            
            
            -
            
            
            1,735Other
                payables
            
            
            
            
            
            3,331,928
            
            
            1,091,382Income
                tax payable
            
            
            
            
            
            1,537,749
            
            
            1,263,491Business
                and other taxes payable
            
            
            
            
            
            3,312,634
            
            
            2,058,327Customers’
                deposits
            
            
            
            
            
            256,787
            
            
            1,272,312Accruals
            
            
            
            
            
            256,054
            
            
            894,329Total
                current liabilities
            
            
            7
            
            
            20,342,715
            
            
            21,783,605Long
                term liabilities bank loan
            
            
            7
            
            
            2,741,501
            
            
            2,564,979Convertible
                bond payable, net
            
            
            8
            
            
            5,544,064
            
            
            -**TOTAL
                LIABILITIES**
            
            
            
            
            $
            28,628,280
            
            $
            24,348,584




See
      notes to consolidated financial statements and
      accountant's report




2




Notes
            
            
            June
                30, 2007
              (unaudited)
            
            
            December
                31, 2006**STOCKHOLDERS’
                EQUITY**Preferred
                stock, $0.001 par value, 10,000,000 sharesauthorized,
                0 shares issued and outstanding atJune
                30, 2007 and 2006Common
                stock, $0.001 par value, 100,000,000 sharesauthorized,
                50,000,000 shares issued and outstandingat
                June 30, 2007 and December 31, 2006
            
            
            8
            
            $
            50,000
            
            $
            50,000Additional
                paid in capital
            
            
            8
            
            
            11,710,602
            
            
            7,074,701Statutory
                reserves
            
            
            
            
            
            1,520,634
            
            
            1,437,223Accumulated
                other comprehensiveincome
            
            
            
            
            
            515,787
            
            
            469,964Retained
                earnings
            
            
            
            
            
            17,371,524
            
            
            11,480,81631,168,547
            
            
            20,512,704**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            
            
            
            $
            59,796,827
            
            $
            44,861,288




See
      notes
      to consolidated financial statements and accountant’s report




3




**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****FOR
                THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND
                2006****(Stated
                in US Dollars) (Unaudited)**




Three
                months ended
            Six
                months endedJune
                30,
            June
                30,2007
            
            
            2006
            
            
            2007
            
            
            2006NoteContract
                revenues earned
            
            
            11
            
            $
            19,453,645
            
            $
            14,423,972
            
            $
            33,883,737
            
            $
            27,142,993Cost
                of contract revenues earned
            
            
            
            
            
            (11,961,163
            )
            
            (9,102,350
            )
            
            (23,493,770
            )
            
            (19,189,463
            )Gross
                profit
            
            
            
            
            
            7,492,482
            
            
            5,321,622
            
            
            10,389,967
            
            
            7,953,530Selling
                expenses
            
            
            
            
            
            (173,758
            )
            
            (342,284
            )
            
            (379,971
            )
            
            (448,944
            )Administrative
                and general expenses
            
            
            
            
            
            (1,515,938
            )
            
            (1,023,394
            )
            
            (2,184,100
            )
            
            (1,762,886
            )Income
                from operations
            
            
            
            
            
            5,802,786
            
            
            3,955,944
            
            
            7,825,896
            
            
            5,741,700Interest
                expenses
            
            
            
            
            
            (572,379
            )
            
            (8,846
            )
            
            (576,459
            )
            
            (20,876
            )Interest
                income
            
            
            
            
            
            -
            
            
            -
            
            
            3,637
            
            
            2,253Income
                before taxation
            
            
            
            
            
            5,230,407
            
            
            3,947,098
            
            
            7,253,074
            
            
            5,723,076Income
                tax
            
            
            12
            
            
            (937,630
            )
            
            (550,623
            )
            
            (1,264,678
            )
            
            (856,703
            )Equity
                loss and minority interests
            
            
            
            
            
            (14,277
            )
            
            -
            
            
            (14,277
            )
            
            -Net
                income
            
            
            
            
            $
            4,278,500
            
            $
            3,396,475
            
            $
            5,974,119
            
            $
            4,866,373Basic
                net income per common share
            
            
            
            
            $
            0.09
            
            $
            0.08
            
            $
            0.12
            
            $
            0.11Diluted
                net income per common share
            
            
            
            
            $
            0.08
            
            $
            0.08
            
            $
            0.12
            
            $
            0.11Basic
                weighted average common shares outstanding
            
            
            
            
            
            50,000,000
            
            
            43,304,125
            
            
            50,000,000
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            
            
            
            50,826,000
            
            
            43,304,125
            
            
            50,476,098
            
            
            43,304,125





See
      notes
      to consolidated financial statements and accountant’s report




4




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




AccumulatedTotal
            
            
            
            
            
            Additional
            
            
            
            
            
            othernumber
                of
            
            
            Common
            
            
            paid
                  in
            
            
            Statutory
            
            
            comprehensive
            
            
            Retainedshares
            
            
            Stock
            
            
            capital
            
            
            reserves
            
            
            income
            
            
            earnings
            
            
            TotalBalance,
                January 1, 2006
            
            
            43,304,125
            
            $
            43,304
            
            $
            -
            
            $
            1,403,699
            
            $
            (51,957
            )
            $
            6,903,786
            
            $
            8,298,832Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,149,768
            
            
            6,149,768Dividend
                paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,576,796
            )
            
            (1,576,796
            )Issuance
                of Common Stock (Note 9)
            
            
            6,695,875
            
            
            6,696
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,696Additional
                paid in capital from issuance of common stock in cash, to third party
                for
                services, and from conversion of original capital from Full Art (Note
                9)
            
            
            
            
            
            
            
            
            7,106,561
            
            
            
            
            
            
            
            
            
            
            
            7,106,561Adjustment
                of Additional Paid in Capital to Retained Earnings in connection
                with
                Share Exchange
            
            
            
            
            
            
            
            
            (37,572
            )
            
            
            
            
            
            
            
            37,582
            
            
            -Increase
                to Additional Paid in Capital from Reverse Acquisition Transaction
                reflecting Cash held by SRKP 1, Inc.
            
            
            
            
            
            
            
            
            5,722
            
            
            
            
            
            
            
            
            
            
            
            5,722Appropriations
                to statutory revenue reserves
            
            
            
            
            
            
            
            
            
            
            
            33,524
            
            
            
            
            
            (33,524
            )
            
            -Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            521,921
            
            
            
            
            
            521,921Balance,
                December 31, 2006
            
            
            50,000,000
            
            $
            50,000
            
            $
            7,074,701
            
            $
            1,437,223
            
            $
            469,964
            
            $
            11,480,816
            
            $
            20,512,704Balance,
                January 1, 2007
            
            
            50,000,000
            
            $
            50,000
            
            $
            7,074,701
            
            $
            1,437,223
            
            $
            469,964
            
            $
            11,480,816
            
            $
            20,512,704Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,974,119
            
            
            5,974,119Additional
                paid in capital - stock warrants & conversion feature (Note
                8)
            
            
            
            
            
            
            
            
            4,635,901
            
            
            
            
            
            
            
            
            
            
            
            4,635,901Appropriations
                to statutory revenue reserves
            
            
            
            
            
            
            
            
            
            
            
            83,411
            
            
            
            
            
            (83,411
            )
            
            -Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            45,823
            
            
            
            
            
            45,823Balance,
                June 30, 2007
            
            
            50,000,000
            
            $
            50,000
            
            $
            11,710,602
            
            $
            1,520,634
            
            $
            515,787
            
            $
            17,371,524
            
            $
            31,168,547




See
      notes
      to consolidated financial statements and accountant’s report




5




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




**Three
                months ended**
            **Six
                months ended****June
                30,**
            **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Cash
                flows from operating activitiesNet
                income
            
            $
            4,278,500
            
            $
            3,396,475
            
            $
            5,974,119
            
            $
            4,866,373Depreciation
            
            
            51,751
            
            
            38,972
            
            
            99,350
            
            
            85,501Amortization
                on bond discount
            
            
            479,965
            
            
            -
            
            
            479,965
            
            
            -Minority
                interests
            
            
            (11,299
            )
            
            -
            
            
            (11,299
            )
            
            -(Increase)/decrease
                in inventories
            
            
            182,227
            
            
            (3,275
            )
            
            (356
            )
            
            (7,945
            )Increase
                in receivables
            
            
            4,646,469
            
            
            (5,092,990
            )
            
            (10,851,500
            )
            
            (13,782,406
            )Increase/(decrease)
                in payables
            
            
            (14,393,998
            )
            
            1,989,745
            
            
            (1,474,440
            )
            
            7,792,468Net
                cash used in operating activities
            
            
            (4,766,385
            )
            
            328,927
            
            
            (5,784,161
            )
            
            (1,046,009
            )Cash
                flows from investing activitiesDisposals(purchases)
                of land use rights
            
            
            -
            
            
            -
            
            
            -
            
            
            803,886Decrease/(increase)
                in restricted cash
            
            
            (272,119
            )
            
            -
            
            
            154,652
            
            
            -Decrease
                (Increase) in security deposit
            
            
            (284,455
            )
            
            (311,670
            )
            
            80,446
            
            
            (565,795
            )Purchases
                of plant and equipment
            
            
            (241,060
            )
            
            (324,796
            )
            
            (514,028
            )
            
            (887,816
            )Net
                cash provided by (used in) investing activities
            
            
            (797,634
            )
            
            (636,466
            )
            
            (278,930
            )
            
            (649,725
            )Cash
                flows from financing activitiesRepayment
                of long-term loan
            
            
            (34,735
            )
            
            (560,036
            )
            
            35,285
            
            
            (743,742
            )Proceeds
                from long-term loan
            
            
            -
            
            
            -
            
            
            176,522
            
            
            -Amount
                due to shareholder
            
            
            (716,839
            )
            
            825,921
            
            
            (1,735
            )
            
            2,938,769Issuance
                of convertible bond and warrants
            
            
            9,700,000
            
            
            -
            
            
            9,700,000
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            8,948,426
            
            
            265,885
            
            
            9,910,072
            
            
            2,195,027Net
                (decrease)/increase in cash and cash equivalents
            
            
            3,384,407
            
            
            (41,654
            )
            
            3,846,981
            
            
            499,293Effect
                of foreign currency translation on cashand
                cash equivalents
            
            
            55,974
            
            
            6,671
            
            
            45,823
            
            
            (54,470
            )Cash
                and cash equivalents - beginning of year
            
            
            2,568,389
            
            
            991,623
            
            
            2,115,966
            
            
            511,817Cash
                and cash equivalents - end of year
            
            $
            6,008,770
            
            $
            956,640
            
            $
            6,008,770
            
            $
            956,640Other
                supplementary informationInterest
                paid
            
            $
            52,691
            
            $
            8,050
            
            $
            56,771
            
            $
            20,080Income
                tax paid
            
            $
            508,606
            
            $
            98,130
            
            $
            760,170
            
            $
            404,210





See
      notes
      to consolidated financial statements and accountant’s report





6




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





China
      Architectural Engineering, Inc. (“CAEI” or the “Company”) formerly SKRP 1 Inc.,
      was incorporated in the State of Delaware, United State on March 16, 2004.





On
      October 17, 2006, the Company underwent a reverse-merger with Full Art
      International Ltd. (a Hong Kong company) and its four wholly-owned subsidiaries
      as detailed in 2. *(b)*  *Consolidation* below,
      involving an exchange of shares whereby the Company issued an aggregate of
      43,304,125 shares of common stock in exchange for all of the issued and
      outstanding shares of Full Art. CAEI was the accounting acquiree. For financial
      reporting purposes, this transaction is classified as a recapitalization of
      China Architectural Engineering, Inc. and the historical financial statements
      of
      Full Art. The 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 six subsidiaries constituting the group.
      Inter-company transactions have been eliminated in consolidation. The
      consolidated financial statements include 100% of the assets and liabilities
      of
      these majority-owned subsidiaries, and the ownership interests of minority
      investors are recorded as minority interests.




7




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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




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





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





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





*(c)*
            *Use
                of estimates*




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





*(d)*
            *Economic
                and political risks*





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




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




8


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(e)*
            *Plant
                and equipment*





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





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






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





*(f)*
            *Land
                use rights*




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





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





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





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





During
      the reporting periods, there was no impairment loss.





*(h)*
            *Inventories*




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





*(i)*
            *Contracts
                receivable*





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




9





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**




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





*(j)*
            *Advances
                to suppliers*





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





*(k)*
            *Cash
                and cash equivalents*





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





*(l)*
            *Restricted
                cash*





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





*(m)*
            *Earnings
                per share*





The
      Company computes earnings per share (“EPS’) in accordance with Statement of
      Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
      and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
      requires companies with complex capital structures to present basic and diluted
      EPS. Basic EPS is measured as the income or loss available to common
      shareholders divided by the weighted average common shares outstanding for
      the
      period. Diluted EPS is similar to basic EPS but presents the dilutive effect
      on
      a per share basis of potential common shares (e.g., convertible securities,
      options, and warrants) as if they had been converted at the beginning of the
      periods presented, or issuance date, if later. Potential common shares that
      have
      an anti-dilutive effect (i.e., those that increase income per share or decrease
      loss per share) are excluded from the calculation of diluted EPS. Approximately
      2,857,143 dilutive shares on an “as converted” basis for the Convertible Bond
      were excluded from the calculation of diluted EPS for the three and six months
      ended June 30, 2007 since their effect would have been anti-dilutive.





The
      calculation of diluted weighted average common shares outstanding for the three
      months ended June 30, 2007 and 2006 and for the six months ended June 30, 2007
      and 2006 is based on the estimate fair value of the Company’s common stock
      during such periods applied to warrants and options using the treasury stock
      method to determine if they are dilutive. The Convertible Bond is included
      on an
“as converted “basis when these shares are dilutive.





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




**Three Months Ended June
                  30,****2007**
              
              **2006****Weighted**
              
              
              
              
              
              
              
              
              **Weighted****Average**
              
              
              
              
              
              
              
              
              **Average****Income**
              
              
              **Shares**
              
              
              **Per-Share**
              
              
              **Income**
              
              
              **Shares**
              
              
              **Per-Share**Earnings
                  per share - basicNet
                  income
              
              $
              4,278,500
              
              
              50,000,000
              
              $
              .09
              
              $
              3,396,475
              
              
              43,304,125
              
              $
              .08Effect
                  of dilutive securitiesConvertible
                  Bond
              
              
              
              
              
              _
              
              
              
              
              
              
              
              
              -
              
              
              -Warrants
              
              
              -
              
              
              826.000
              
              
              
              
              
              -
              
              
              -
              
              
              -Earnings
                  per share - diluted
              
              $
              4,278,500
              
              
              50,826,000
              
              $
              .08
              
              $
              3,396,475
              
              
              43,304,125
              
              $
              .08




10


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





**Six Months Ended June
                30,****2007**
            
            
            **2006****Weighted**
            
            
            
            
            
            
            
            
            **Weighted****Average**
            
            
            
            
            
            
            
            
            **Average****Income**
            
            
            **Shares**
            
            
            **Per-Share**
            
            
            **Income**
            
            
            **Shares**
            
            
            **Per-Share**Earnings
                per share - basicNet
                income
            
            $
            5,974,119
            
            
            50,000,000
            
            $
            0.12
            
            $
            4,866,373
            
            
            43,304,125
            
            $
            0.11Effect
                of dilutive securitiesConvertible
                Bond
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -
            
            
            -Warrants
            
            
            -
            
            
            476,098.
            
            
            
            
            
            -
            
            
            -
            
            
            -Earnings
                per share - diluted
            
            $
            5,974,119
            
            
            50,476,098
            
            $
            0.12
            
            $
            4,866,373
            
            
            43,304,125
            
            $
            0.11





*(n)*
            *Revenue
                and cost recognition*





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





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





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





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





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





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





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





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




11





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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








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





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





*(o)*
            *Income
                taxes*





The
      Company uses the accrual method of accounting to determine and report its
      taxable reduction of income taxes for the year in which they are available.
      The
      Company has implemented *Statement
      of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.* The
      Company also adopted *FIN
      48, Accounting for Uncertainty in Tax Positions.*





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





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





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





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


12





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





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





Taxable
      Income


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





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





*(p)*
            *Advertising*





The
      Group
      expensed all advertising costs as incurred. Advertising expenses included in
      selling expenses were $83,630 and $21,512 for the periods ended June 30, 2007
      and 2006, respectively.





*(q)*
            *Research
                and development*





Research
      and development costs are expensed as incurred. Research and development costs
      included in general and administrative expenses were $259,692 and $223,610
      for
      the three months ended June 30, 2007 and 2006, respectively.





*(r)*
            *Retirement
                benefits*





Retirement
      benefits in the form of contributions under defined contribution retirement
      plans to the relevant authorities are charged to the statements of income as
      incurred. The contributions were $46,910 and $30,968 for the three months ended
      June 30, 2007 and 2006, respectively.


13





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(s)*
            *Foreign
                currency translation*





The
      accompanying consolidated financial statements are presented in United States
      dollars. The functional currencies of the Group companies are the Hong Kong
      Dollar (HKD) and Renminbi (RMB). The consolidated financial statements are
      translated into United States dollars from HKD and RMB at year-end exchange
      rates as to assets and liabilities and average exchange rates as to revenues
      and
      expenses. Capital accounts are translated at their historical exchange rates
      when the capital transactions occurred.





**June
                30, 2007**
            
            **June
                30, 2006**Year
                end HKD : US$ exchange rate
            7.8172
            
            7.7680Average
                yearly HKD : US$ exchange rate
            7.8172
            
            7.7585




**June
                30, 2007**
            
            **June
                30, 2006**Year
                end RMB : US$ exchange rate
            7.6248
            
            8.0065Average
                yearly RMB : US$ exchange rate
            7.6891
            
            8.0229





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





*(t)*
            *Statutory
                reserves*




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





*(u)*
            *Comprehensive
                income*





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


14





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(v)*
            *Recent
                accounting pronouncements*




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




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




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




15





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





**Three
                months ended**
              **June****30,
                2007**
            
            
            **Year
                ended**
              **December
                31, 2006**Contract
                receivables
            
            $
            11,460,847
            
            $
            7,991,561*Less**:*Allowance for doubtful accounts
            
            
            (206,912
            )
            
            (417,648
            )Net
            
            $
            11,253,935
            
            $
            7,573,913





**Three
                months ended**
              **June
                30, 2007**
            
            
            **Year
                ended**
              **December
                31, 2006**Allowance
                for doubtful accounts at January 1, 2007 and 2006
            
            $
            383,311
            
            $
            403,595*Less**:*Reduction in allowance for doubtful accounts
            
            
            (182,236
            )
            
            -Foreign
                exchange adjustments
            
            
            5,837
            
            
            14,053Balances
            
            $
            206,912
            
            $
            417,648




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




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




**5.** **INVENTORIES**





**June
                30, 2007**
            
            
            **December
                31, 2006**Raw
                materials
            
            $
            23,464
            
            $
            23,108




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: -





**June
                30, 2007**
            
            
            **December
                31, 2006****At
                cost**Motor
                vehicle
            
            $
            493,466
            
            $
            453,917Machinery
                and equipment
            
            
            1,531,080
            
            
            1,417,256Furniture,
                software and officeequipment
            
            
            801,335
            
            
            669,480Building
            
            
            278,809
            
            
            -$
            3,104,690
            
            $
            2,540,653*Less**:
                Accumulated depreciation*Motor
                vehicle
            
            $
            1,298,667
            
            $
            401,862Machinery
                and equipment
            
            
            305,955
            
            
            1,190,795Furniture
                , software and officeequipment
            
            
            607,755
            
            
            473,498Building
            
            
            3,137
            
            
            -$
            2,215,514
            
            $
            2,066,155$
            889,176
            
            $
            474,498




Depreciation
      expenses included in the selling and administrative expenses for the three-month
      periods ended June 30, 2007 and 2006 were $51,751 and $38,972, respectively.




17





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**




**7.
        LONG-TERM BANK LOANS**


**June
                30, 2007**
            
            
            **December
                31, 2006**Line
                of credit from Bank of East Asia Ltd. at an
                interest rate at 5.508% subject to variation every 6 months (June 30,
                2007 RMB 19,800,000;
                December
                  31, 2006: RMB 20,000,000)Due
                October 25, 2011
            
            $
            2,596,789
            
            $
            2,564,979Secured
                loan from Bank of East Asia Ltd with a
                condominium as collateral;Interest
                rate at 5.832% (RMB 1,480,000)Due
                  November 4, 2011 (refer to Note 7(a) below)
            
            $
            179,997
            
            $
            -Less:
                current portion
            
            
            (35,285
            )
            
            -$
            144,712
            
            $
            -$
            2,741,501
            
            $
            2,564,979




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




Interest
      expenses were $52,691 and $8,050 for the three months ended June 30, 2007 and
      2006, respectively.





**7(a).
      NOTES PAYABLE**


**2007**Notes
                to Bank of East Asia Ltd. at June 30,2008
            
            $
            35,2852009
            
            
            37,3992010
            
            
            39,6392011
            
            
            42,0142012
            
            
            25,660Please
                refer to Note (7) above
            
            $
            179,997




18





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**8.
      CONVERTIBLE BONDS AND BOND WARRANTS**





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





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





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





·
            *Conversion.*Each Bond is convertible at the option of the holder at any time
                on a date
                that is 365 days after the date that our securities are traded on
                the
                American Stock Exchange (“AMEX’) through 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. If for the period of 20 consecutive trading days immediately
                prior to April 12, 2009 or February 18, 2012, the conversion price
                for the
                Bonds is higher than the average closing price for the shares, then
                the
                conversion price will be reset to such average closing price; provided
                that, the conversion price will not be reset lower than 70% of the
                then
                existing conversion price. In addition, the Trust Deed provides that
                the
                conversion price of the Bonds cannot be adjusted to lower than $0.25
                per
                share of common stock (as adjusted for stock splits, stock dividends,
                spin-offs, rights offerings, recapitalizations and similar
                events).





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




19


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





On
      April
      12, 2007, the Company entered into a warrant instrument with the Subscriber
      pursuant to which the Subscriber purchased the Warrants from us (the “Warrant
      Instrument”). The Warrants, which are represented by a global certificate, are
      also subject to a warrant agency agreement by and among us, The Bank of New
      York
      and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant
      Agency Agreement”). Pursuant to the terms and conditions of the Warrant
      Instrument and the Warrant Agency Agreement, the Warrants vested on April 12,
      2007 and will terminate on April 12, 2010. The Bond Warrants are exercisable
      at
      a per share exercise price of $0.01. The Company has agreed to list the Warrants
      on AMEX, or any alternative stock exchange by April 12, 2008. In addition,
      the
      Company has 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. Subsequently, the Company verbally agreed with the
      Subscriber not to include the Subscriber’s securities in this registration
      statement and to register them in a separate registration statement to be filed
      after the effective date of this registration statement.





On
      April
      12, 2007 the Company also entered into a registration rights agreement with
      the
      Subscriber pursuant to which the Company agreed to include the Bonds, the
      Warrants, and the shares of common stock underlying the Bonds and Warrants
      in a
      pre-effective amendment to a registration statement that the Company have on
      file with the SEC.





At
      April
      12, 2007, the date of issuance, the Company determined the fair value of the
      Bonds to be $9,700,000. The warrants and the beneficial conversion feature
      were
      $2,167,950 and $2,467,951 respectively, which were determined under the
      Black-Scholes valuation method. They are included under stockholders’ equity as
      additional paid in capital - stock warrants and additional paid in capital
      -
      beneficial conversion feature respectively in accordance with guidance of APB
      14
      and EITF No. 98-5. Accordingly, the interest discount on the warrants and
      beneficial conversion feature were recorded, and are being amortized by the
      interest method of 5 years.





As
      addressed in an earlier paragraph under Mandatory Redemptions, the Company
      will
      redeem each bond at 150.87% of its principal amount on April 4, 2012 (the
      maturity date). On the basis of this commitment, the Company has determined
      the
      total redemption premium to be $5,087,100, which is an addition to the original
      face value of the Bonds of $10,000,000. This redemption premium is to be
      amortized to interest expense over the term of the Bonds by the interest method.
      Interest expense on the accretion of redemption premium for the period from
      April 12, 2007 to June 30, 2007 amounted to $131,666 as disclosed in the
      following schedule of Convertible Bonds Payable.




20


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





Because
      of the fact that the $10,000,000 Variable Rate Convertible Bonds contain three
      separate securities and yet merged into one package, the bond security must
      identify its constituents and establish the individual value as determined
      by
      the Issuer as follows: -





(1)
            Convertible
                Bonds
            $10,000,000(2)
            Bond
                Discount
            300,000(3)
            Warrants
            2,167,950(4)
            Beneficial
                Conversion Feature
            2,467,951





The
      above
      items (2), (3), and (4) are to be amortized to interest expense over the term
      of
      the Bonds by the effective interest method as disclosed in the table
      below.





The
      Convertible Bonds Payable, net consists of the following: -





June
                30, 2007Convertible
                Bonds Payable
            
            $
            10,000,000Less:
                Interest discount - Warrants
            
            
            (2,167,950
            )Less:
                Interest discount - Beneficial conversion feature
            
            
            (2,467,951
            )Less:
                Bond discount
            
            
            (300,000
            )Accretion
                of interest discount - Warrant
            
            
            95,149Accretion
                of interest discount - Beneficial conversion feature
            
            
            108,317Amortization
                of bond discount to interest expense
            
            
            13,1676%
                Interest Payable
            
            
            131,666Accretion
                of redemption premium
            
            
            131,666Net
            
            $
            5,544,064




21


**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 June 30, 2007 and December 31, 2006 are depicted
      in the following table: -





*Name
                of Shareholder*
            *Number
                of Shares*
            *Common
                Stock Capital*
            *Additional
                Paid-in Capital*
            *%
                of Equity Holdings*KGE
                Group Ltd.
            43,304,125
            43,304
            -
            86.61%Investor
                Relations Firm
            100,000
            100
            159,900
            0.20%First
                Alliance Financial Group
            2,000,000
            2,000
            3,198,000
            4.00%Former
                CAEI shareholders
            2,275,000
            2,275
            -
            4.55%Various
                private investors
            2,320,875
            2,321
            3,711,079
            4.64%Increase
                to Additional Paid-in Capital from Reverse Acquisition Transaction
                reflecting Cash held by SRKP 1, Inc.
            
            
            5,722Stock
                Warrants
            
            
            2,167,950Beneficiary
                Conversion Feature
            ________
            ______
            2,467,951
            _______50,000,000
            50,000
            $11,716,602
            100.00%





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





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





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




22





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





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





**2007**
            
            
            **2006**Billed
            
            $
            10,677,301
            
            $
            4,788,485Unbilled
            
            
            8,776,344
            
            
            9,635,487$
            19,453,645
            
            $
            14,423,972




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





**12.** **INCOME
      TAXES**





The
      following table accounts for the differences between the actual tax provision
      and the amounts obtained by applying the relevant applicable corporation income
      tax rate to income before tax for the three months ended June 30, 2007 and
      2006:
      -





**2007**
            
            
            **2006**Income
                before tax
            
            $
            5,230,407
            
            $
            3,947,098Tax
                at the domestic income tax rate
            
            $
            1,726,034
            
            $
            1,302,542Effect
                of government grants
            
            
            (788,404
            )
            
            (751,919
            )Current
                income tax expense
            
            $
            937,630
            
            $
            550,623




23





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**




**13.** **COMMITMENTS**





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




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





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




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




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





The
      advances from the shareholder at June 30, 2007 and 2006 were $0.00 and
      $1,735.00, respectively.




24


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





**Forward-Looking
      Statements**





*The
      following discussion should be read in conjunction with our consolidated
      financial statements and related notes included elsewhere in this quarterly
      report. This quarterly report contains forward-looking statements. The words
      “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,”
“project,” “could,” “may,” and similar expressions are intended to identify
      forward-looking statements. These statements include, among others, information
      regarding future operations, future capital expenditures, and future net cash
      flow. Such statements reflect our management’s current views with respect to
      future events and financial performance and involve risks and uncertainties,
      including, without limitation, general economic and business conditions, changes
      in foreign, political, social, and economic conditions, regulatory initiatives
      and compliance with governmental regulations, the ability to achieve further
      market penetration and additional customers, and various other matters, many
      of
      which are beyond our control. Should one or more of these risks or uncertainties
      occur, or should underlying assumptions prove to be incorrect, actual results
      may vary materially and adversely from those anticipated, believed, estimated
      or
      otherwise indicated. Consequently, all of the forward-looking statements made
      in
      this report are qualified by these cautionary statements and there can be no
      assurance of the actual results or developments.*





**Overview**





We
      were
      incorporated in the state of Delaware on March 16, 2004. We were originally
      organized as a “blank check” shell company to investigate and acquire a target
      company or business seeking the perceived advantages of being a publicly held
      corporation. On October 17, 2006, we closed a share exchange transaction
      described below, pursuant to which we (i) became the 100% parent of Full Art
      International, Ltd., a Hong Kong Company (“Full Art”), which has four
      subsidiaries, including its wholly-owned subsidiary, Zhuhai King Glass
      Engineering Co., Ltd., a company formed under the laws of the People’s Republic
      of China (“PRC” or “China”), (ii) assumed the operations of Full Art and its
      subsidiaries and (iii) changed our name from SRKP 1, Inc. to China Architectural
      Engineering, Inc. Full Art was incorporated in Hong Kong on July 30, 1992 under
      the Companies Ordinance of Hong Kong.





We
      specialize in the design, engineering and installation of high-end specialty
      curtain wall systems, including glass curtain walls, stone curtain walls, metal
      curtain walls, roofing systems, and related products, for public works projects
      and commercial real estate. We have designed and installed nearly one hundred
      projects throughout China, including the National Grand Theater, Exhibition
      Conservatory of Beijing Botanical Garden, The COSCO Tower at Changlian Avenue
      Beijing, and the Wumen Exhibition Hall in Beijing’s Forbidden City, and a number
      of commercial structures in Southeast Asia. We compete on the strength of our
      reputation, track record, strong relationships with government clients and
      our
      ability to give expression to the vision of leading architects. By focusing
      on
      innovation while outsourcing commoditized manufacturing work, we are able to
      add
      artistic and technological value to projects at cost-effective price
      points.





Our
      work
      is performed under cost-plus-fee contracts, fixed-price contracts, and
      fixed-price contracts modified by incentive and penalty provisions. The length
      of our contracts varies but they 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.




25


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





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





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





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




·
            *Conversion.*Each
                Bond is convertible at the option of the holder at any time at on
                and
                after a date that is 365 days after the date that the Company’s securities
                commerce trading on the American Stock Exchange (“AMEX’) through 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 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.
                If the
                average of the closing price of the shares for the period of 20
                consecutive trading days immediately prior to April 12, 2009 or February
                18, 2012 (each a "Reset Date") is lower than the conversion price
                on the
                relevant Reset Date, the conversion price for the Bonds is higher
                than the average closing price for the shares, then the conversion
                price
                will be reset to such average closing price; provided that, the conversion
                price will not be reset lower than 70% of the then existing conversion
                price. In addition, the Trust Deed provides that the conversion price
                of
                the Bonds cannot be adjusted pursuant to the above to lower than
                $0.25 per
                share of common stock (as adjusted for stock splits, stock dividends,
                spin-offs, rights offerings, recapitalizations and similar events)
                except
                in certain circumstances.




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




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





26




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 Bond Warrants,
      and the shares of common stock underlying the Bonds and Bond Warrants in a
      pre-effective amendment to the registration statement on file with the
      Securities and Exchange Commission.





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





The
      accounting treatment related to the beneficial conversion and mandatory
      redemption features of the Bonds and the value of the Bond Warrants will have
      an
      adverse impact on our results of operations for the term of the Bonds. The
      application of Generally Accepted Accounting Principles required us to allocate
      $2,467,951 to the beneficial conversion feature of the Bonds and $2,167,950
      to
      the Bonds Warrants, which have been reflected in our financial statements as
      an
      interest discount. Also, we have determined that the total redemption premium
      associated with the mandatory redemption feature of the Bonds is $5,087,100.
      All
      of the aforementioned amounts associated with the beneficial conversion and
      mandatory redemption feature of the Bonds and the value of the Bond Warrants
      are
      being amortized as additional interest expense over the term of the Bonds.
      This
      accounting will result in an increase in interest expense in all reporting
      periods during the term of the Bonds, and, as a result, reduce our net income
      accordingly.





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





***Critical
      Accounting Policies and Estimates***





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





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





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





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





27




***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 June 30, 2007.




28


**Results
      of Operations**





The
      following table sets forth our statements of operations for the three and six
      months ended June 30, 2007 and 2006 in U.S. dollars:




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006*****(unaudited)***
            
            
            ***(unaudited)***
            
            
            ***(unaudited)***
            
            
            ***(unaudited)******(in
                thousands, except share and per share
                amounts)***Contract
                revenues earned
            
            $
            19,454
            
            $
            14,424
            
            $
            33,884
            
            $
            27,143Cost
                of contract revenues earned
            
            
            (11,961
            )
            
            (9,102
            )
            
            (23,494
            )
            
            (19,189
            )Gross
                profit
            
            $
            7,492
            
            $
            5,322
            
            $
            10,390
            
            $
            7,954Selling,
                general and administrative expenses
            
            
            (1,689
            )
            
            (1,366
            )
            
            (2,564
            )
            
            (2,212
            )Income
                from operations
            
            $
            5,803
            
            $
            3,956
            
            $
            7,826
            
            $
            5,742Interest
                expenses, net
            
            
            (572
            )
            
            (9
            )
            
            (576
            )
            
            (21
            )Interest
                Income
            
            
            -
            
            
            -
            
            
            4
            
            
            2Income
                before taxes
            
            $
            5,230
            
            $
            3,947
            
            $
            7,253
            
            $
            5,723Income
                tax
            
            
            (938
            )
            
            (551
            )
            
            (1,265
            )
            
            (857
            )Equity
                loss and minority interests
            
            
            (14
            )
            
            -
            
            
            (14
            )
            
            -Net
                income
            
            $
            4,279
            
            $
            3,396
            
            $
            5,974
            
            $
            4,866Basic
                and diluted net income per common share
            
            $
            0.09
            
            $
            0.08
            
            $
            0.12
            
            $
            0.11Basic
                and diluted dividend paid per common share
            
            $
            0.09
            
            $
            0.08
            
            $
            0.12
            
            $
            0.11Basic
                weighted average common shares outstanding
            
            
            50,000,000
            
            
            43,304,125
            
            
            50,000,000
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            50,826,000
            
            
            43,304,125
            
            
            50,476,098
            
            
            43,304,125





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





Contract
      revenues earned for the three months ended June 30, 2007 were $19.4 million,
      an
      increase of $5.0 million, or 34.9%, from the contract revenues earned of $14.4
      million for the comparable period in 2006. The primary reason for the increase
      in contract revenues earned was an increase in the number of projects for the
      three months ended June 30, 2007. In addition, we also experienced a general
      increase in the amount of revenue generated per project for the three months
      ended June 30, 2007 as compared to the same period in 2006.





Cost
      of
      contract revenues earned for the three months ended June 30, 2007 was $12.0
      million, an increase of $2.9 million, or 31.4%, from $9.1 million for the
      comparable period in 2006. Cost of contract revenues earned consists of the
      raw
      materials, labor and other operating costs related to manufacturing. The
      increase in costs of contract revenues earned was primarily due to the increased
      number of projects for the three months ended June 30, 2007.





29




Gross
      profit for the three months ended June 30, 2007 was $7.5 million, an increase
      of
      $2.2 million, or 40.79%, from $5.3 million for the comparable period of 2006.
      Our gross margin for the three months ended June 30, 2007 was 38.51% as compared
      with 36.89% for the three months ended June 30, 2006. The increase was primarily
      a result of increased prices for our services and products.





Selling,
        general and administrative expenses were approximately $1.7 million for the
        three months ended June 30, 2007, an increase of approximately $0.3 million,
        or
        23.72%, from $1.4 million for the comparable period in 2006. Selling expenses
        were $0.2 million for the three months ended June 30, 2007, a decrease of
        approximately $0.1 million, or 33.3%, from $0.3 million for the three months
        ended June 30, 2006. The decrease was primarily due to the implementation
        of
        internal controls on operating expenses during the three months ended June
        30,
        2007, including stricter control on entertainment expenses and traveling
        expenses. General and administrative expenses for the three months ended
        June
        30, 2007 were $1.5 million as compared to $1.0 million for the three months
        ended June 30, 2006. The increase was due to the increase of staff costs
        due to
        growth in operations and the increase of research and development during
        the
        three months ended June 30, 2007.





Interest
      expenses were approximately $572,000 for the three months ended June 30, 2007,
      an increase of approximately $563,000, or 6,379.48%, from $9,000 for the
      comparable period in 2006. The increase was due to our issuance of $10,000,000
      Variable Rate Convertible Bonds due in 2012 (the “Bonds”) at a discount and
      800,000 warrants to purchase an aggregate of 800,000 shares of our common stock
      during the three months ended June 30, 2007,which incurred accretion of interest
      discount for warrants ,beneficial conversion feature and redemption premium,
      and
      amortization on bond discount.





Income
      tax was approximately $938,000 for the three months ended June 30, 2007, an
      effective tax rate of 17.9%, compared with $551,000 taxes for the same period
      of
      2006, an effective tax rate of 14.0%. The primary reason for the increase was
      due to the increase in income before taxes and the different amounts of income
      being recognized in the PRC and Hong Kong under different tax rates on corporate
      profits derived from subsidiaries in each location. Through two of our
      subsidiaries, Zhuhai King Glass Engineering Co., Ltd and Zhuhai King General
      Glass Engineering Technology Co., Ltd, we are generally subject to a PRC income
      tax rate of 33%; however, in accordance with the relevant tax laws and
      regulations of PRC, the corporation income tax rate is currently 15%. In
      addition, we and two of our subsidiaries are subject to a Hong Kong profits
      tax
      rate of 17.5%. We expect our effective tax rates to increase in future periods
      as a result of new tax laws passed in China.





Net
      income for the three months ended June 30, 2007 was $4.3 million, an increase
      of
      $0.9 million, or 25.97%, from $3.4 million for the comparable period in
      2006.





**Six
      Months Ended June 30, 2007 and 2006**





Contract
      revenues earned for six months ended June 30, 2007 were $33.9 million, an
      increase of $6.7 million, or 24.8%, from the contract revenues earned of $27.1
      million for the comparable period in 2006. The primary reason for the increase
      in contract revenues earned was an increase in the number of projects for the
      six months ended June 30, 2007. In addition, we also experienced a general
      increase in the amount of revenue generated per project for the six months
      ended
      June 30, 2007 as compared to the same period in 2006.





Cost
      of
      contract revenues earned for the six months ended June 30, 2007 was $23.5
      million, an increase of $4.3 million, or 22.4%, from $19.2 million for the
      comparable period in 2006. Cost of contract revenues earned consists of the
      raw
      materials, labor and other operating costs related to manufacturing. The
      increase in costs of contract revenues earned was primarily due to the increased
      number of projects for the six months ended June 30, 2007. Gross profit for
      the
      six months ended June 30, 2007 was $10.4 million, an increase of $2.4 million,
      or 30.6%, from $8.0 million for the comparable period of 2006. Our gross margin
      for the six months ended June 30, 2007 was 30.7% as compared with 29.3% for
      the
      six months ended June 30, 2006. The increase was primarily a result of increased
      prices for our services and products.





Selling,
        general and administrative expenses were $2.6 million for the six months
        ended
        June 30, 2007, an increase of approximately $0.4 million, or 15.9%, from
        $2.2
        million for the comparable period in 2006. Selling expenses were $0.38 million
        for the six months ended June 30, 2007, a decrease of approximately $0.07
        million, or 15.6%, from $0.45 million for the six months ended June 30, 2006.
        The decrease was primarily due to the implementation of internal controls
        on
        operating expenses during the six months ended June 30, 2007, including stricter
        control on entertainment expenses and traveling expenses. General and
        administrative expenses for the six months ended June 30, 2007 were $2.2
        million
        as compared to $1.8 million for the six months ended June 30, 2006. The increase
        was due to the increase of staff costs due to growth in operations and the
        increase of research and development during the three months ended June 30,
        2007.





30




Interest
      expenses was approximately $576,000 for the six months ended June 30, 2007,
      an
      increase of approximately $556,000, or 2,661.35%, from $21,000 for the
      comparable period in 2006. The increase was due to our issuance of $10,000,000
      Variable Rate Convertible Bonds due in 2012 (the “Bonds”) at a discount and
      800,000 warrants to purchase an aggregate of 800,000 shares of our common stock
      during the three months ended June 30, 2007, which incurred accretion of
      interest discount for warrants, beneficial conversion feature and redemption
      premium, and amortization on bond discount.





Income
      tax was $1.3 million for the six months ended June 30, 2007, an effective tax
      rate of 17.4%, compared with $0.9 million for the six months ended June 30,
      of
      2006, an effective tax rate of 15.0%. The primary reason for the increase was
      due to the increase in income before taxes and the different amounts of income
      being recognized in the PRC and Hong Kong under different tax rates on corporate
      profits derived from subsidiaries in each location. Through two of our
      subsidiaries, Zhuhai King Glass Engineering Co., Ltd and Zhuhai King General
      Glass Engineering Technology Co., Ltd, we are generally subject to a PRC income
      tax rate of 33%; however, in accordance with the relevant tax laws and
      regulations of PRC, the corporation income tax rate is currently 15%. In
      addition, we and two of our subsidiaries are subject to a Hong Kong profits
      tax
      rate of 17.5%. We expect our effective tax rates to increase in future periods
      as a result of new tax laws passed in China.





Net
      income for the six months ended June 30, 2007 was $6.0 million, an increase
      of
      $1.1 million, or 22.8%, from $4.9 million for the comparable period in
      2006.





**Liquidity
      and Capital Resources**





At
      June
      30, 2007, we had cash and cash equivalents of $6,008,770. Prior to October
      17,
      2006, we have historically financed our business operations through short-term
      bank loans and cash provided by operations.




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





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





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





On
      April
      12, 2007, we completed a financing transaction pursuant to which we issued
      $10,000,000 Variable Rate Convertible Bonds that will be due in 2012 (the
“Bonds”). The Bonds bear cash interest at the rate of 6% per annum for the first
      year after April 12, 2007 and 3% per annum thereafter, of the principal amount
      of the Bonds. Each Bond is convertible at the option of the holder at any time
      on a date that is 365 days after the date that our shares of common stock
      commence trading on the American Stock Exchange (“AMEX’) at an initial
      conversion price equal to the price per share at which shares are sold in our
      proposed initial public offering on 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. If for the period of 20 consecutive trading
      days immediately prior to April 12, 2009 or February 18, 2012, the conversion
      price for the Bonds is higher than the average closing price for the shares,
      then the conversion price will be reset to such average closing price; provided
      that, the conversion price will not be reset lower than 70% of the then existing
      conversion price. In addition, the Trust Deed provides that the conversion
      price
      of the Bonds cannot be adjusted to lower than $0.25 per share of common stock
      (as adjusted for stock splits, stock dividends, spin-offs, rights offerings,
      recapitalizations and similar events).





31




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





Net
      cash
      used in operating activities for the six months ended June 30, 2007 was $5.8
      million, as compared to $1.1 million used in the same period in 2006. The change
      is primarily the result of an increase in receivables due to a relatively long
      collection period typical of the architecture industry in China and a decrease
      in payables for the six months ended June 30, 2007.





Net
      cash
      used in investing activities was approximately $279,000 for the six months
      ended
      June 30, 2007 compared to approximately $650,000 provided for the six month
      ended June 30, 2006. The decrease was a result of a decrease in purchases of
      plant and equipment and a decrease in security deposits during the six month
      ended June 30, 2007 as compared to the comparable period in 2006.





Net
      cash
      provided by financing activities was $9.9 million for the six months ended
      June
      30, 2007 compared to $2.2 million used for the six months ended June 30, 2006.
      The increase was primarily due to the receipt of $9.7 million for the issuance
      of convertible bonds and warrants for the six months ended June 30, 2007.





As
      of
      June 30, 2007, contracts receivables were $11.3 million, an increase of $3.7
      million, or 32.71%, over contracts receivables of $7.6 million as of December
      31, 2006. The increase in contracts receivable reflected an increase in contract
      revenue earned. In addition, because the collection period typically runs from
      three months to one year, the increase in contracts receivable reflects not
      only
      the increase in sales but also the long collection period. Since we require
      an
      average of one to two months to receive products we order from the date of
      our
      order, we have been increasing our inventories in order to enable us to meet
      anticipated increases in sales. In addition, our payment cycle is considerably
      shorter than our receivable cycle, since we typically pay our suppliers all
      or a
      portion of the purchase price in advance and for some suppliers we must maintain
      a deposit for future orders. 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.





**Off-Balance
      Sheet Arrangements**





None.





**New
      Accounting Pronouncements**





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





32




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





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





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





**Credit
      Risk**




We
      are
      exposed to credit risk from our cash at bank, fixed deposits and contract
      receivables. The credit risk on cash at bank and fixed deposits is limited
      because the counterparts are recognized financial institutions. Contract
      receivables are subject to credit evaluations. We periodically record a
      provision for doubtful collections based on an evaluation of the 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. We obtained judgment
      in our favor on one of the lawsuits and anticipate full payment on all of the
      overdue amounts in the near future.




**Foreign
      Currency Risk**




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




**Country
      Risk**




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





**ITEM
      4. CONTROLS AND PROCEDURES**





*(a)
      Evaluation of disclosure controls and procedures*




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




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




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




33





**PART
      II-OTHER INFORMATION**





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





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





**ITEM
      1A. RISK FACTORS**





Other
      than the risk factors stated below, 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.





**Recent
      PRC regulations relating to acquisitions of PRC companies by foreign entities
      may create regulatory uncertainties that could restrict or limit our ability
      to
      operate. Our failure to obtain the prior approval of the China Securities
      Regulatory Commission, or the CSRC, for our proposed offering and the listing
      and trading of our common stock on the American Stock Exchange could have a
      material adverse effect on our business, operating results, reputation and
      trading price of our common stock, and may also create uncertainties for our
      proposed offering.**





The
      PRC
      State Administration of Foreign Exchange, or SAFE, issued a public notice in
      January 2005 concerning foreign exchange regulations on mergers and acquisitions
      in China. The public notice states that if an offshore company controlled by
      PRC
      residents intends to acquire a PRC company, such acquisition will be subject
      to
      strict examination by the relevant foreign exchange authorities. The public
      notice also states that the approval of the relevant foreign exchange
      authorities is required for any sale or transfer by the PRC residents of a
      PRC
      company’s assets or equity interests to foreign entities for equity interests or
      assets of the foreign entities.





In
      April
      2005, SAFE issued another public notice further explaining the January notice.
      In accordance with the April notice, if an acquisition of a PRC company by
      an
      offshore company controlled by PRC residents has been confirmed by a Foreign
      Investment Enterprise Certificate prior to the promulgation of the January
      notice, the PRC residents must each submit a registration form to the local
      SAFE
      branch with respect to their respective ownership interests in the offshore
      company, and must also file an amendment to such registration if the offshore
      company experiences material events, such as changes in the share capital,
      share
      transfer, mergers and acquisitions, spin-off transaction or use of assets in
      China to guarantee offshore obligations. The April notice also provides that
      failure to comply with the registration procedures set forth therein may result
      in restrictions on our PRC resident shareholders and subsidiaries. Pending
      the
      promulgation of detailed implementation rules, the relevant government
      authorities are reluctant to commence processing any registration or application
      for approval required under the SAFE notices.





In
      addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
      State-Owned Assets Supervision and Administration Commission of the State
      Council, State Administration of Taxation, State Administration for Industry
      and
      Commerce, CSRC and SAFE, amended and released the Provisions for Foreign
      Investors to Merge and Acquire Domestic Enterprises, new foreign-investment
      rules which took effect September 8, 2006, superseding much, but not all, of
      the
      guidance in the prior SAFE circulars. These new rules significantly revise
      China’s regulatory framework governing onshore-offshore restructurings and how
      foreign investors can acquire domestic enterprises. These new rules signify
      greater PRC government attention to cross-border merger, acquisition and other
      investment activities, by confirming MOFCOM as a key regulator for issues
      related to mergers and acquisitions in China and requiring MOFCOM approval
      of a
      broad range of merger, acquisition and investment transactions. Further, the
      new
      rules establish reporting requirements for acquisition of control by foreigners
      of companies in key industries, and reinforce the ability of the Chinese
      government to monitor and prohibit foreign control transactions in key
      industries.





Specifically,
      this regulation, among other things, has some provisions that purport to require
      that an offshore special purpose vehicle, or SPV, formed for listing purposes
      and controlled directly or indirectly by PRC companies or individuals shall
      obtain the approval of the CSRC prior to the listing and trading of such SPV’s
      securities on an overseas stock exchange. On September 21, 2006, the CSRC
      published on its official website procedures specifying documents and materials
      required to be submitted to it by SPVs seeking CSRC approval of their overseas
      listings. However, the application of this PRC regulation remains unclear with
      no consensus currently existing among the leading PRC law firms regarding the
      scope and applicability of the CSRC approval requirement.





34




Our
      PRC
      counsel, Guangdong Seagull Law Firm, has advised us that because we completed
      our restructuring before September 8, 2006, the effective date of the new
      regulation, it is not necessary for us to submit the application to the CSRC
      for
      its approval, and the listing and trading of our Common Stock on the American
      Stock Exchange does not require CSRC approval.





If
      the
      CSRC or another PRC regulatory agency subsequently determines that CSRC approval
      was required for our proposed offering, we may face regulatory actions or other
      sanctions from the CSRC or other PRC regulatory agencies. These regulatory
      agencies may impose fines and penalties on our operations in the PRC, limit
      our
      operating privileges in the PRC, delay or restrict the repatriation of the
      proceeds from our proposed offering into the PRC, or take other actions that
      could have a material adverse effect on our business, financial condition,
      results of operations, reputation and prospects, as well as the trading price
      of
      our Common Stock. The CSRC or other PRC regulatory agencies also may take
      actions requiring us, or making it advisable for us, to halt our proposed
      offering before settlement and delivery of the Common Stock offered hereby.
      Consequently, if you engage in market trading or other activities in
      anticipation of and prior to settlement and delivery, you do so at the risk
      that
      settlement and delivery may not occur.





Also,
      if
      later the CSRC requires that we obtain its approval, we may be unable to obtain
      a waiver of the CSRC approval requirements, if and when procedures are
      established to obtain such a waiver. Any uncertainties and/or negative publicity
      regarding this CSRC approval requirement could have a material adverse effect
      on
      the trading price of our Common Stock.





These
      new
      rules may significantly affect the means by which offshore-onshore
      restructurings are undertaken in China in connection with offshore private
      equity and venture capital financings, mergers and acquisitions. It is expected
      that such transactional activity in China in the near future will require
      significant case-by-case guidance from MOFCOM and other government authorities
      as appropriate. It is anticipated that application of the new rules will be
      subject to significant administrative interpretation, and we will need to
      closely monitor how MOFCOM and other ministries apply the rules to ensure its
      domestic and offshore activities continue to comply with PRC law. Given the
      uncertainties regarding interpretation and application of the new rules, we
      may
      need to expend significant time and resources to maintain
      compliance.





It
      is
      uncertain how our business operations or future strategy will be affected by
      the
      interpretations and implementation of the SAFE notices and new rules. Our
      business operations or future strategy could be adversely affected by the SAFE
      notices and the new rules. For example, we may be subject to more stringent
      review and approval process with respect to our foreign exchange
      activities.





**If
      we make equity compensation grants to persons who are PRC citizens, they may
      be
      required to register with the State Administration of Foreign Exchange of the
      PRC, or SAFE. We may also face regulatory uncertainties that could restrict
      our
      ability to adopt additional equity compensation plans for our directors and
      employees and other parties under PRC law.**




On
      April
      6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
      Individuals Participating in the Employee Stock Ownership Plan or Stock Option
      Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
      whether Circular 78 covers all forms of equity compensation plans or only those
      which provide for the granting of stock options. For any plans which are so
      covered and are adopted by a non-PRC listed company, such as our company, after
      April 6, 2007, Circular 78 requires all participants who are PRC citizens to
      register with and obtain approvals from SAFE prior to their participation in
      the
      plan. In addition, Circular 78 also requires PRC citizens to register with
      SAFE
      and make the necessary applications and filings if they participated in an
      overseas listed company’s covered equity compensation plan prior to April 6,
      2007. We believe that the registration and approval requirements contemplated
      in
      Circular 78 will be burdensome and time consuming.




Although
      we have not made any equity compensation grants under our 2007 Equity Incentive
      Plan, which was adopted by our board of directors and approved by our
      shareholders in July 2007, future participants of our equity incentive plan
      or
      any other equity compensation plan we may adopt who are PRC citizens may be
      required to register with SAFE. We have officers, directors, and employees
      that
      are eligible to receive grants under our equity incentive plan who are also
      PRC
      citizens. If it is determined that any of our equity incentive plan is subject
      to Circular 78, failure to comply with such provisions may subject us and
      participants of our equity incentive plan who are PRC citizens to fines and
      legal sanctions and prevent us from being able to grant equity compensation
      to
      our PRC employees. In that case, our business operations may be adversely
      affected.





35




**Shares
      eligible for future sale may adversely affect the market price of our common
      stock, as the future sale of a substantial amount of outstanding stock in the
      public marketplace could reduce the price of our common
      stock.**




Pursuant
      to the terms of the Share Exchange, we agreed to file a registration statement
      with the Securities and Exchange Commission to register a total of 2,320,875
      shares of common stock issued in an equity financing that was conducted in
      connection with the Share Exchange that closed on October 17, 2006. The
      investors in the Private Placement also entered into a lock-up agreement
      pursuant to which they agreed not to sell their shares until our common stock
      begins to be traded on the New York Stock Exchange, American Stock Exchange,
      NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after
      which their shares are automatically released from the lock up on every 30
      days
      pro rata over a nine month period beginning with the date that is one month
      from
      the date that trading commences. We also agreed to register the IR Securities,
      which consists of 100,000 shares of our common stock and common stock underlying
      a five-year warrant to purchase 232,088 shares, in the registration statement
      filed in connection with the Private Placement.





We
      also
      agreed to register all of the 2,275,000 shares of common stock held by our
      shareholders who were shareholders immediately prior to the Share Exchange.
      Because we issued shares to these shareholders that were issued shares while
      we
      were a “blank check” shell company with no operations, these shareholders are
      considered to be promoters or affiliates. It should be noted that these shares
      may not be sold by these promoters or affiliates, or their transferees, pursuant
      to Rule 144 of the Securities Act, regardless of technical compliance with
      the
      rule. Any such resale transaction under Rule 144 would appear to be designed
      to
      distribute or redistribute such shares to the public without coming within
      the
      registration requirements of the Securities Act. Therefore, these promoters
      or
      affiliates, or their transferees, can only resell their shares through a
      registration statement filed under the Securities Act. Of the 2,275,000 shares
      held by our shareholders prior to the Share Exchange, we agreed to register
      1,312,675 shares in the registration statement filed in connection with the
      Private Placement and the remaining 962,325 shares in a subsequent registration
      statement that we originally agreed to file by May 23, 2007; however, we have
      verbally agreed with the WestPark affiliates and FirstAlliance to register
      their
      shares after the effective date of this registration statement. We also agreed
      to register 2,000,000 shares that were issued to FirstAlliance Financial Group,
      Inc. in the registration statement that we intend to file to register the shares
      held by the affiliates of WestPark. We also agreed to register the Bonds, the
      Bond Warrants, and the shares of common stock that may be issued upon the
      conversion of the Bonds and exercise of the Bond Warrants that we issued in
      a
      financing transaction in April 2007, 4,761,905 shares of common stock may be
      acquired upon conversion of the Bonds, subject to adjustment, and 800,000 may
      be
      acquired upon exercise of the Bond Warrants, subject to adjustment. All of
      the
      shares included in an effective registration statement as described above may
      be
      freely sold and transferred except if subject to a lock up
      agreement.





Subject
      to lock up agreements entered into with WestPark Capital, Inc. pursuant to
      which
      the former stockholder of Full Art and its designees agreed not to sell their
      shares for a period of 12 months from the date of our proposed public offering,
      the former stockholder of Full Art and its designees may be eligible to sell
      all
      or some of our shares of common stock by means of ordinary brokerage
      transactions in the open market pursuant to Rule 144, promulgated under the
      Securities Act (“Rule 144”), subject to certain limitations. In general,
      pursuant to Rule 144, a stockholder (or stockholders whose shares are
      aggregated) who has satisfied a one-year holding period may, under certain
      circumstances, sell within any three-month period a number of securities which
      does not exceed the greater of 1% of the then outstanding shares of common
      stock
      or the average weekly trading volume of the class during the four calendar
      weeks
      prior to such sale. As of the closing of the Share Exchange, 1% of our issued
      and outstanding shares of common stock was approximately 500,000 shares. Rule
      144 also permits, under certain circumstances, the sale of securities, without
      any limitations, by a non-affiliate that has satisfied a two-year holding
      period. Any substantial sale of common stock pursuant to any resale prospectus
      or Rule 144 may have an adverse effect on the market price of our common stock
      by creating an excessive supply.





**We
      recently completed a placement of convertible bonds that included a beneficial
      conversion feature and are mandatorily redeemable and 800,000 warrants
      exercisable at $0.01 per share. The features of the bonds and the value of
      the
      warrants will have the effect of reducing our reported operating results during
      the term of the bonds.**





36




In
      April
      2007, we issued $10,000,000 Variable Rate Convertible Bonds due in 2012, or
      the
      Bonds. The terms of Bonds include conversion features allowing the holders
      to
      convert the Bonds into shares of our common stock. Certain of those conversion
      features that allow for the reduction in conversion price upon the occurrence
      of
      stated events constitute a “beneficial conversion feature” for accounting
      purposes. In addition, we may be required to repurchase the Bonds at the request
      of the holders if certain events occur or do not occur, as set forth in the
      Bond
      trust deed. If our common stock ceases to be listed on AMEX or there is a change
      of control of the company as defined in the Bond Trust Deed, each holder will
      have the right to require us to redeem all or part of that holder’s Bonds. If on
      or before April 12, 2008, the Bonds, Bond Warrants, and shares underlying the
      Bonds and Bond Warrants are not registered with the SEC, then holders of the
      Bonds can require us to redeem the Bonds at 106.09% of the principal amount.
      In
      addition, at any time after April 12, 2010, holders of the Bonds can require
      us
      to redeem the Bonds at 126.51% of the principal amount and we are required
      to
      redeem any outstanding Bonds at 150.87% of its principal amount on April 4,
      2012. If a triggering event occurs and we are requested by the holders to
      repurchase all or a portion of the Bonds, we will be required to pay cash to
      redeem all or a portion of the Bonds. Finally, in connection with the issuance
      of the Bonds, we issued the holder of the Bonds the Bond Warrants exercisable
      at
      a per share exercise price of $0.01.





The
      accounting treatment related to the beneficial conversion and mandatory
      redemption features of the Bonds and the value of the Bond Warrants will have
      an
      adverse impact on our results of operations for the term of the Bonds. The
      application of Generally Accepted Accounting Principles required us to allocate
      $2,467,951 to the beneficial conversion feature of the Bonds and $2,167,950
      to
      the Bonds Warrants, which have been reflected in our financial statements as
      an
      interest discount. Also, we have determined that the total redemption premium
      associated with the mandatory redemption feature of the Bonds is $5,087,100.
      All
      of the aforementioned amounts associated with the beneficial conversion and
      mandatory redemption feature of the Bonds and the value of the Bond Warrants
      are
      being amortized as additional interest expense over the term of the Bonds.
      This
      accounting will result in an increase in interest expense in all reporting
      periods during the term of the Bonds, and, as a result, reduce our net income
      accordingly.





**Mandatory
      redemption of the Bonds could have a material adverse effect on our liquidity
      and cash resources.**





If
      we are
      required to redeem all or any portion of the Bonds, this may have a material
      adverse effect on our liquidity and cash resources, and may impair our ability
      to continue to operate. If we are required to repurchase all or a portion of
      the
      Bonds and do not have sufficient cash to make the repurchase, we may be required
      to obtain third party financing to do so, and there can be no assurances that
      we
      will be able to secure financing in a timely manner and on favorable terms,
      which could have a material adverse effect on our financial performance, results
      of operations and stock price. Furthermore, additional equity financing may
      be
      dilutive to the holders of our common stock, and debt financing, if available,
      may involve restrictive covenants, and strategic relationships, if necessary
      to
      raise additional funds, may require that we relinquish valuable
      rights.





**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**





On July
      9 ,
      2007, a
      majority of the Company’s shareholders ratified and approved the adoption of the
      China Architectural Engineering, Inc. 2007 Equity Incentive Plan (the "Plan")
      by
      written consent. The Company’s majority shareholder, KGE Group, Limited, which
      held 37,736,452 shares of common stock on July 9, 2007, accounting for 75.5%
      of
      the 50,000,000 issued and outstanding shares of common stock on such date.
      Luo
      Ken Yi and Ye Ning, two of our executive officers, are also directors of KGE
      Group Limited and may be deemed to have voting and investment control over
      the
      shares owned by KGE Group, Limited.





The
      purpose of the Plan is to provide additional incentive to the Company’s
      officers, directors, other key employees and significant consultants by
      encouraging them to invest in shares of the Company’s common stock, and thereby
      acquire a proprietary interest in the Company and an increased personal interest
      in its continued success and progress. The adoption of the Plan enables the
      Company to provide additional compensation to recognize and reward contributions
      to its success. The
      Plan
      authorizes the issuance of options to purchase shares of common stock and the
      grant of stock awards. Administration of the Plan is carried out by the
      Company’s Board of Directors or any committee of the Board of Directors to which
      the Board of Directors has delegated all or a portion of responsibility for
      the
      implementation, interpretation or administration of the Plan. Company employees,
      officers and directors (including employees, officers and directors of the
      Company’s affiliates) are eligible to participate in the Plan. The administrator
      of the Plan will select the participants who are granted stock options or stock
      awards and, consistent with the terms of the Plan, will establish the terms
      of
      each stock option or stock award. The maximum period in which a stock option
      may
      be exercised will be fixed by the administrator. Under the Plan, the maximum
      number of shares of common stock that may be subject to stock options or stock
      awards is 5,000,000. As of the date of this quarterly report, the Company has
      not granted any securities under the Plan.





37




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





**Waiver
      of Penalties Related to Registration Rights**





On
      August
      29, 2007, the Company entered into a waiver of penalties related to
      registrations rights (the “Waiver”) with certain investors (the “Investors”),
      each of whom purchased securities of the Company in a private placement
      completed on October 17, 2006 (the “Private Placement”) and each of whom had
      entered in a subscription agreement related to that Private Placement dated
      October 17, 2006 (the “Subscription Agreement”) with the Company. Pursuant to
      Section 4 of the Subscription Agreement, the Company agreed to use its
      reasonable best efforts to cause the registration statement registering the
      securities purchased by the Investors in the Private Placement within 180 days
      after the closing of the Private Placement. The Subscription Agreement further
      stated that the Company was required to pay to each Investor a cash payment
      equal to a total of 0.0333% of the purchase prices of the shares sold to each
      Investor in the Private Placement for each business day after the 180-day period
      has expired until the registration statement is declared effective by the SEC
      (the “Penalty Payment”).





Pursuant
      to the Subscription Agreement, the terms of Section 4, including the Penalty
      Payment, could be modified without the consent or approval of all of the
      Investors provided that at least a majority of holders of the shares sold in
      the
      Private Placement have given their approval. In addition, the Subscription
      Agreement stated that the approval of a majority of the holders of shares sold
      in the Private Placement is binding on all holders of shares. The Investors,
      each of whom entered into the Waiver with the Company, hold an aggregate number
      of shares that is more than a majority of the shares sold in the Private
      Placement. Pursuant to the Waiver, the Investors agreed to remove all references
      to the Penalty Payment from the Subscription Agreement and agreed to waive
      any
      claim to payment of any penalty amount.





A
      Form of
      the Waiver is attached to this report as Exhibit
      10.1 .





**Amendment
      to Trust Deed for the Bonds**





On
      August
      29, 2007, the Company and The
      Bank
      of New York, London Branch (together, the “Parties”) entered into an amended and
      restated trust deed (the “Amendment”), amending the trust deed entered into by
      the parties on April 12, 2007 (the “Trust Deed”). Pursuant to the Trust Deed,
      the Company issued $10,000,000
      Variable Rate Convertible Bonds due in 2012 (the “Bonds”). According to
      the Amendment, the conversion right attaching to any Bond
      may
      be exercised, at the option of the holder thereof, at any time on and after
      365
      days after the date the Company’s securities begin trading on the American Stock
      Exchange up to the close of business on March 28, 2012. In addition, the
      Amendment provides that the conversion price of the Bonds cannot be adjusted
      to
      lower than $0.25 per share of common stock (as adjusted for stock splits, stock
      dividends, spin-offs, rights offerings, recapitalizations and similar
      events).





The
      Amended and Restated Trust is attached here as Exhibit
      4.1 .


38





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




(a)
      Exhibits





4.1
            Amended
                and Restated Trust Deed, dated August 29, 2007 by and between the
                Registrant and The Bank of New York, London Branch.10.1
            Form
                of Waiver of Penalties Related to Registration Rights, dated August
                29,
                200731.1
            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.




39





**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)August
                31, 2007
            By:
            /s/ Luo
                Ken YiLuo
                Ken YiChief
                Executive Officer, Chief Operating Officer and Chairman of the
                Board




40