UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549





FORM 10-Q




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


THE SECURITIES EXCHANGE ACT OF
1934





For the quarterly period ended June 30,
2009





OR





oTRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF
THE


SECURITIES EXCHANGE ACT OF
1934





Commission File
Number


001-33709





CHINA ARCHITECTURAL ENGINEERING,
INC.


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





Delaware
                (State or other jurisdiction of
      incorporation
                or
      organization)
              
              51-05021250
                (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 telephonenumber, 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. YesxNoo





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




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





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





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




There were53,256,874shares outstanding of
registrant’s common stock, par value $0.001 per
share, as of August9, 2009.








CHINA ARCHITECTURAL ENGINEERING,
INC.


FORM 10-Q QUARTERLY
REPORT





TABLE OF CONTENTS





PagePART I - FINANCIAL
      INFORMATIONITEM 1.
                FINANCIAL
      STATEMENTS
                1Unaudited Consolidated Balance
      Sheet as of June 30, 2009 and December 31, 2008
                2Unaudited Interim Consolidated
      Statements of Income for the three and six months ended June 30, 2009 and
      2008
                4UnauditedInterim Consolidated Statements
      of Cash Flows for the six months ended June 30, 2009 and
      2008
                5Unaudited Consolidated Statements
      of Stockholders’Equity from January 1, 2009 to
      June 30, 2009
                6Notes to the Unaudited Interim
      Consolidated Financial
      Statements
                7ITEM 2.
                MANAGEMENT’S DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATION
                21ITEM 3.
                QUANTITATIVE AND QUALITATIVE
      DISCLOSURE ABOUT MARKET RISK
                26ITEM 4.
                CONTROLS AND
      PROCEDURES
                27PART II - OTHER
    INFORMATIONITEM 1.
                LEGAL
      PROCEEDINGS
                29ITEM 1A.
                RISK
FACTORS
                29ITEM 2.
                UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF PROCEEDS
                31ITEM 3.
                DEFAULTS UPON SENIOR
      SECURITIES
                31ITEM 4.
                SUBMISSION OF MATTERS TO A VOTE
      OFSECURITY
      HOLDERS
                31ITEM 5.
                OTHER
      INFORMATION
                32ITEM 6.
                EXHIBITS
                32SIGNATURES
                
                33







PART I - FINANCIAL
INFORMATION




ITEM
1.         FINANCIAL
STATEMENTS





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


1




CHINA ARCHITECTURAL ENGINEERING,
INC.





CONSOLIDATED BALANCE
SHEETS


AS OFJUNE 30, 2009(UNAUDITED)AND DECEMBER 31, 2008


(STATED
IN US DOLLARS)





June30, 2009
                            
                            
                            December 31,
                              2008(unaudited)ASSETSCurrent
    assetsCash and cash
      equivalents
                            
                            $
                            7,042,335
                            
                            
                            $
                            9,516,202Restricted
    cash
                            
                            
                            6,134,090
                            
                            
                            
                            7,451,388Contract receivables,
      net
                            
                            
                            83,556,484
                            
                            
                            
                            71,811,627Costs and earnings in excess of
      billings
                            
                            
                            21,738,634
                            
                            
                            
                            15,988,920Job disbursements
      advances
                            
                            
                            106,488
                            
                            
                            
                            2,252,241Other
      receivables
                            
                            
                            13,599,219
                            
                            
                            
                            18,614,928Amount due from
      shareholders
                            
                            
                            1,468,319
                            
                            
                            
                            -Inventories
                            
                            
                            7,663,118
                            
                            
                            
                            308,842Deferredincometaxes,current
                            
                            
                            66,214
                            
                            
                            
                            3,264Other current
      assets
                            
                            
                            408,397
                            
                            
                            
                            1,659,307Total current assets
                            
                            
                            141,783,298
                            
                            
                            
                            127,606,719Non-current
      assetsPlant and equipment,
      net
                            
                            
                            5,000,530
                            
                            
                            
                            5,852,110Intangible
      assets
                            
                            
                            525,782
                            
                            
                            
                            50,720Goodwill
                            
                            
                            7,995,896
                            
                            
                            
                            7,995,896Other non-current
      asset
                            
                            
                            -
                            
                            
                            
                            32,137TOTAL ASSETS
                            
                            $
                            155,305,506
                            
                            
                            $
                            141,537,582LIABILITIES AND
      STOCKHOLDERS’EQUITYCurrent
      liabilitiesShort-term bank
      loans
                            
                            $
                            4,912,423
                            
                            
                            $
                            -Notes
    payable
                            
                            
                            -
                            
                            
                            
                            10,193,088Accounts
      payable
                            
                            
                            33,681,245
                            
                            
                            
                            35,510,827Billings over costs and estimated
      earnings
                            
                            
                            21,258,062
                            
                            
                            
                            5,358,527Amount due to
      shareholder
                            
                            
                            -
                            
                            
                            
                            924,687Other
    payables
                            
                            
                            6,879,704
                            
                            
                            
                            7,364,816Income tax
      payable
                            
                            
                            2,391,999
                            
                            
                            
                            2,318,743Business and other taxes
      payable
                            
                            
                            2,917,781
                            
                            
                            
                            3,304,522Other
    Accrual
                            
                            
                            3,639,745
                            
                            
                            
                            1,794,879Total current
      liabilities
                            
                            
                            75,680,959
                            
                            
                            
                            66,770,089




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


2





CHINA ARCHITECTURAL ENGINEERING,
INC.





CONSOLIDATED BALANCE SHEETS
(Continued)


AS OFJUNE 30, 2009(UNAUDITED) AND DECEMBER 31,
2008


(STATED
IN US DOLLARS)





June 30, 2009
                      
                      
                      December 31,
                        2008(unaudited)Non-current
      liabilitiesLong term bank
      loans
                      
                      $
                      145,533
                      
                      
                      $
                      328,285Convertible bond payable,
      net
                      
                      
                      26,330,959
                      
                      
                      
                      24,907,170TOTAL
      LIABILITIES
                      
                      $
                      102,157,451
                      
                      
                      $
                      92,005,544STOCKHOLDERS’EQUITYPreferred stock, $0.001 par value,
      10,000,000 shares authorized, 0 shares issued and outstanding at June
      30, 2009and December31, 2008; Common stock, $0.001 par value,
      100,000,000 shares authorized, 53,256,874shares issued and outstanding atJune 30, 2009and December 31, 2008
                      
                      $
                      53,257
                      
                      
                      $
                      53,257Additional
      paid in capital
                      
                      
                      23,043,792
                      
                      
                      
                      23,043,792Statutory
      reserves
                      
                      
                      3,227,923
                      
                      
                      
                      3,040,595Accumulated
      other comprehensive income
                      
                      
                      5,597,299
                      
                      
                      
                      5,443,432Retained
      earnings
                      
                      
                      21,240,374
                      
                      
                      
                      17,940,421Total
      Company shareholders’ equity
                      
                      
                      53,162,645
                      
                      
                      
                      49,521,497Noncontrollinginterests
                      
                      
                      (14,590
                      )
                      
                      
                      10,541Total shareholders’equity
                      
                      
                      53,148,055
                      
                      
                      
                      49,532,038TOTAL LIABILITIES
      ANDSTOCKHOLDERS’EQUITY
                      
                      $
                      155,305,506
                      
                      
                      $
                      141,537,582





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


3





CHINA
ARCHITECTURAL ENGINEERING, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF INCOME


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008


(STATED
IN US DOLLARS)





Three Months Ended
                                                June30,
                                              
                                              
                                              SixMonths
      Ended
                                                June30,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2008Contract
      revenues earned
                                              
                                              $
                                              30,598,974
                                              
                                              
                                              $
                                              41,380,189
                                              
                                              
                                              $
                                              66,942,038
                                              
                                              
                                              $
                                              66,729,495Cost
      of contract revenues earned
                                              
                                              (20,647,144)
                                              
                                              
                                              
                                              (28,038,332
                                              )
                                              
                                              
                                              (48,809,377
                                              )
                                              
                                              
                                              (44,942,086
                                              )Gross
      profit
                                              
                                              $
                                              9,951,830
                                              
                                              
                                              $
                                              13,341,857
                                              
                                              
                                              $
                                              18,132,661
                                              
                                              
                                              $
                                              21,787,409Selling,
      general and administrative expenses
                                              
                                              
                                              (6,119,798
                                              )
                                              
                                              
                                              (4,590,147
                                              )
                                              
                                              
                                              (12,070,828
                                              )
                                              
                                              
                                              (7,590,572
                                              )Income
      from operations
                                              
                                              $
                                              3,832,032
                                              
                                              
                                              $
                                              8,751,710
                                              
                                              
                                              $
                                              6,061,833
                                              
                                              
                                              $
                                              14,196,837Interest
      income
                                              
                                              
                                              46,259
                                              
                                              
                                              
                                              35,242
                                              
                                              
                                              
                                              49,965
                                              
                                              
                                              
                                              42,205Interest
      expense
                                              
                                              
                                              (1,471,835
                                              )
                                              
                                              
                                              (1,197,889
                                              )
                                              
                                              
                                              (2,783,568
                                              )
                                              
                                              
                                              (1,532,026
                                              )Other
      income
                                              
                                              
                                              138,619
                                              
                                              
                                              
                                              39,440
                                              
                                              
                                              
                                              160,456
                                              
                                              
                                              
                                              150,602Income
      before taxation
                                              
                                              $
                                              2,545,075
                                              
                                              
                                              $
                                              7,628,503
                                              
                                              
                                              $
                                              3,488,686
                                              
                                              
                                              $
                                              12,857,618Income
      tax
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (69,613
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (116,980
                                              )Net
      Earnings
                                              
                                              $
                                              2,545,075
                                              
                                              
                                              $
                                              7,558,890
                                              
                                              
                                              $
                                              3,488,686
                                              
                                              
                                              $
                                              12,740,638Net
      (earnings)/loss attributable to noncontrolling interests
                                              
                                              
                                              (1,405
                                              )
                                              
                                              
                                              18,893
                                              
                                              
                                              
                                              (1,405
                                              )
                                              
                                              
                                              10,863Net
      earnings attributable to the Company
                                              
                                              $
                                              2,543,670
                                              
                                              
                                              $
                                              7,577,783
                                              
                                              
                                              $
                                              3,487,281
                                              
                                              
                                              $
                                              12,751,501Earnings
      per share:Basic
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.15
                                              
                                              
                                              $
                                              0.07
                                              
                                              
                                              $
                                              0.25Diluted
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.14
                                              
                                              
                                              $
                                              0.07
                                              
                                              
                                              $
                                              0.23Weighted
      average shares outstanding:Basic
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              51,812,477
                                              
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              51,832,946Diluted
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              55,549,949
                                              
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              55,550,770





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


4


CHINA
ARCHITECTURAL ENGINEERING, INC.





UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008


(STATED
IN US DOLLARS)





SixMonths
      EndedJune 30,2009
                        
                        
                        2008Cash
      flows from operating activitiesNet
      income
                        
                        $
                        3,487,281
                        
                        
                        $
                        12,751,501Non-controlling
      interest
                        
                        
                        (25,131
                        )
                        
                        
                        (10,863
                        )Depreciation
      expense
                        
                        
                        464,417
                        
                        
                        
                        332,985Amortization
      expense on intangible assets
                        
                        
                        34,430
                        
                        
                        
                        65,256Amortization
      expense on convertible bond
                        
                        
                        1,423,789
                        
                        
                        
                        615,061Loss
      on disposal of fixed assets
                        
                        
                        200,599
                        
                        
                        
                        10,383Deferred
      income taxes
                        
                        
                        (62,950
                        )
                        
                        
                        (2,383
                        )(Increase)/decrease
      in inventories
                        
                        
                        (7,354,276
                        )
                        
                        
                        149,302Increase
      in receivables
                        
                        
                        (11,744,857
                        )
                        
                        
                        (27,306,892
                        )Decrease
      in other assets
                        
                        
                        1,194,339
                        
                        
                        
                        525,994Increase
      in payables
                        
                        
                        15,116,222
                        
                        
                        
                        4,969,232Net
      cash from/(used in) operating activities
                        
                        $
                        2,733,863
                        
                        
                        $
                        (7,900,424
                        )Cash
      flows from investing activitiesPurchases
      of assets
                        
                        $
                        (122,412
                        )
                        
                        $
                        (906,885
                        )Purchase
      of intangible assets
                        
                        
                        (509,492
                        )
                        
                        
                        -Proceeds
      from disposal of fixed assets
                        
                        
                        342,095
                        
                        
                        
                        -Decrease
      in restricted cash
                        
                        
                        1,317,298
                        
                        
                        
                        498,208Net
      cash provided by/(used in) investing activities
                        
                        $
                        1,027,489
                        
                        
                        $
                        (408,677
                        )Cash
      flows from financing activitiesRepayment
      of short-term loans
                        
                        $
                        (5,280,665
                        )
                        
                        $
                        (1,423,160
                        )Proceeds
      from long-term loans
                        
                        
                        
                        
                        
                        
                        1,444,502Repayment
      of long-term loans
                        
                        
                        (182,752
                        )
                        
                        
                        (48,944
                        )Repayment
      of amount due to shareholders
                        
                        
                        (924,687
                        )
                        
                        
                        (14,865
                        )Issuance
      of convertible bond and warrants
                        
                        
                        -
                        
                        
                        
                        19,500,000Net
      cash provided by/(used in) financing activities
                        
                        $
                        (6,388,104
                        )
                        
                        $
                        19,457,533Net
      increase/(decrease) in cash and cash equivalents
                        
                        $
                        (2,626,752
                        )
                        
                        $
                        11,148,432Effect
      of foreign currency translation on cash and cash
    equivalents
                        
                        
                        152,885
                        
                        
                        
                        2,575,212Cash
      and cash equivalents - beginning of period
                        
                        
                        9,516,202
                        
                        
                        
                        4,040,168Cash
      and cash equivalents - end of period
                        
                        $
                        7,042,335
                        
                        
                        $
                        17,763,812Other
      supplementary information:Cash
      paid during the period for:Interest
      paid
                        
                        $
                        255,812
                        
                        
                        $
                        477,153Income
      tax paid
                        
                        $
                        21,151
                        
                        
                        $
                        162,895




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


5




CHINA ARCHITECTURAL ENGINEERING,
INC.


UNAUDITEDCONSOLIDATED STATEMENT OF
STOCKHOLDERS’EQUITY


FOR
THE PERIOD FROM JANUARY 1, 2009 TO JUNE 30, 2009


(STATED IN US
DOLLARS)





Total
                                Number of
                                  shares
                              
                              
                              Common stock
                              
                              
                              Additional paid
                                  in capital
                              
                              
                              Statutory
                                  reserves
                              
                              
                              Accumulated
                                  other
                                  comprehensive
                                  income
                              
                              
                              Retained
                                  earnings
                              
                              
                              Noncontrolling
                                  interests
                              
                              
                              TotalBalance,
      January 1, 2009
                              
                              
                              53,256,874
                              
                              
                              $
                              53,257
                              
                              
                              $
                              23,043,792
                              
                              
                              $
                              3,040,595
                              
                              
                              $
                              5,443,432
                              
                              
                              $
                              17,940,421
                              
                              
                              $
                              10,541
                              
                              
                              $
                              49,532,038Net
      income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,487,281
                              
                              
                              
                              
                              
                              
                              
                              3,487,281Appropriations
      of retained earnings
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              187,328
                              
                              
                              
                              
                              
                              
                              
                              (187,328
                              )
                              
                              
                              
                              
                              
                              
                              -Foreign
      currency translation adjustment
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              153,867
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              153,867Non-controlling
      interests
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (25,131
                              )
                              
                              
                              (25,131
                              )Total
      comprehensive income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,616,017Balance,
      June 30, 2009
                              
                              
                              53,256,874
                              
                              
                              $
                              53,257
                              
                              
                              $
                              23,043,792
                              
                              
                              $
                              3,227,923
                              
                              
                              $
                              5,597,299
                              
                              
                              $
                              21,240,374
                              
                              
                              $
                              (14,590
                              )
                              
                              $
                              53,148,055





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


6


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008


(Stated
in US Dollars)





1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES





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




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




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




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)
            Method
      of accounting





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





(b)
            Consolidation





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





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





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




7


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





(c)
            Use
      of estimates





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





(d)
            Plant
      and equipment





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





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





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





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





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





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


During
      the reporting periods, there was no impairment loss.





(f)
            Goodwill
      and Intangible Assets





In
accordance with Statement of Financial Accounting Standard 142 (“FAS 142”),
“Goodwill and Other Intangible
Assets”, the Company does not amortize goodwill or intangible assets with
indefinite lives.





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





(g)
            Inventories





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


8


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





(h)
            Contracts
      receivable





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





(i)
            Cash
      and cash equivalents





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





(j)
            Restricted
      cash





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





(k)
              Earnings
      per share





The
Company computes earnings per share (“EPS’) in accordance with 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.





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





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





Three Months EndedJune 30,
                      
                      
                      SixMonths Ended
                        June 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Net Income
                      
                      $
                      2,543,670
                      
                      
                      $
                      7,577,783
                      
                      
                      $
                      3,487,281
                      
                      
                      $
                      12,751,501Add: Interest expenses less income
      taxes
                      
                      
                      -
                      
                      
                      
                      276,774
                      
                      
                      
                      -
                      
                      
                      
                      487,688Adjusted
    income
                      
                      
                      2,543,670
                      
                      
                      
                      7,854,557
                      
                      
                      
                      3,487,281
                      
                      
                      
                      13,239,189Basic Weighted Average Shares
      Outstanding
                      
                      
                      53,256,874
                      
                      
                      
                      51,812,477
                      
                      
                      
                      53,256,874
                      
                      
                      
                      51,832,946Dilutive
      Shares:-Addition to Common Stock from
      Conversion of Bonds
                      
                      
                      -
                      
                      
                      
                      2,857,143
                      
                      
                      
                      -
                      
                      
                      
                      2,857,143-Addition to Common Stock from
      Exercise of Warrants
                      
                      
                      -
                      
                      
                      
                      880,329
                      
                      
                      
                      -
                      
                      
                      
                      860,681Diluted Weighted Average
      Outstanding Shares:
                      
                      
                      53,256,874
                      
                      
                      
                      55,549,949
                      
                      
                      
                      53,256,874
                      
                      
                      
                      55,550,770Earnings Per
      Share-Basic
                      
                      $
                      0.05
                      
                      
                      $
                      0.15
                      
                      
                      $
                      0.07
                      
                      
                      $
                      0.25-Diluted
                      
                      $
                      0.05
                      
                      
                      $
                      0.14
                      
                      
                      $
                      0.07
                      
                      
                      $
                      0.23




9


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





(l)
              Revenue
      and cost recognition





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





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





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





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





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





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





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





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





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





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





(m)
            Income
      taxes





The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are
available.  The Company has implemented 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), Hong Kong SAR, Macau SAR and Australia tax laws are provided for
the tax effects of transactions reported in the financial statements and
consists of taxes currently due plus deferred taxes related primarily to
differences between the basis of fixed assets and intangible assets for
financial and tax reporting.  The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will be
either taxable or deductible when the assets and liabilities are recovered or
settled.  Deferred taxes also are recognized for operating losses that
are available to offset future income taxes.  A valuation allowance is
created to evaluate deferred tax assets if it is more likely than not that these
items will either expire before the Company is able to realize that tax benefit,
or that future realization is uncertain.


10


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





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





·
            Zhuhai
      King Glass Engineering Co., Limited (“Zhuhai KGE”) and Zhuhai King General
      Glass Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in
      Zhuhai and were subject to the PRC corporation income tax rate of 18% in
      2008 and 20% in 2009. In accordance to China’s Enterprise Income Tax Law
      (“EIT Law”) effective from January 1, 2008, the tax rate for these two
      subsidiaries will be gradually increased 25% in 2012. The Company
      anticipates that as a result of the EIT law, its income tax provision will
      increase, which could adversely affect Zhuhai KGE’s financial condition
      and results of operations.





·
            China
      Architectural Engineering (Shenzhen) Co., Ltd. is located in Shenzhen and
      is subject to a 20% income tax rate that will be gradually increased to
      the uniform rate of 25% by 2012 as according to the new EIT
      law.





·
            Full
      Art International Limited, King General Engineering (HK) Limited, and KGE
      Building System Limited are subject to a Hong Kong profits tax rate of
      16.5%.





·
            Techwell
      Engineering Limited is subject to a Hong Kong profits tax rate of 16.5%.
      Techwell International Limited is a Macau registered company and therefore
      is subject to Macau profits tax rate of 12%.  Techwell Building
      System (Shenzhen) Co. Limited is located in Shenzhen and is subject to PRC
      corporate income tax rate of 20% in
2009.





·
            KGE
      Australia Pty Limited is subject to a corporate income tax rate of
      30%.





·
            The
      Company is subject to United States Tax according to Internal Revenue Code
      Sections 951 and 957.





·
            The
      Company, after a reverse-merger on October 17, 2006, revived to be an
      active business enterprise because of the operations with subsidiaries in
      the PRC and Hong Kong.  Based on the consolidated net income for
      the year ended December 31, 2008, the Company shall be taxed at the 35%
      tax rate.





·
              Techwell
      Engineering Limited has established a branch in Dubai, which has zero
      corporate income tax rate.


(n)
            Advertising





The
Company expensed all advertising costs as incurred. Advertising expenses
included in selling expenses were $59 and $58,153 for the three-month periods
ended and $11,032 and $83,630 for the six-month periods ended June 30, 2009 and
2008, respectively.





(o)
            Research and
      development





All
research and development costs are expensed as incurred. Research and
development costs included in general and administrative expenses were $nil and
361,164 for the three-month periods ended and $2,926 and $689,495 for the
six-month periods ended June 30, 2009 and 2008, respectively.





(p)
            Retirement
      benefits





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





(q)
            Foreign
      currency translation





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


11





CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





June 30,
                    2009
                  
                  
                  December 31,
                    2008
                  
                  
                  June 30,
                    2008Period
      end RMB : US$ exchange rate
                  
                  
                  6.8309
                  
                  
                  
                  6.8225
                  
                  
                  
                  6.8591Average
      quarterly RMB : US$ exchange rate
                  
                  
                  6.8296
                  
                  
                  
                  6.9564
                  
                  
                  
                  6.9575





June 30,
                    2009
                  
                  
                  December 31,
                    2008
                  
                  
                  June30,
                    2008Period
      end HKD : US$ exchange rate
                  
                  
                  7.7501
                  
                  
                  
                  7.7499
                  
                  
                  
                  7.7970Average
      quarterly HKD : US$ exchange rate
                  
                  
                  7.7508
                  
                  
                  
                  7.7859
                  
                  
                  
                  7.7939




June 30,
                    2009
                  
                  
                  December 31,
                    2008
                  
                  
                  June 30,
                    2008Period
      end AED : US$ exchange rate
                  
                  
                  3.6700
                  
                  
                  
                  3.6731
                  
                  
                  
                  3.6732Average
      quarterly AED : US$ exchange rate
                  
                  
                  3.6700
                  
                  
                  
                  3.6736
                  
                  
                  
                  3.6734





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





(r)
            Statutory
      reserves





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





(s)
            Comprehensive
      income





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





(t)
            Recent
      accounting pronouncements





In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, (“FSP No. FAS 107-1 and APB 28-1”).
FSP No. FAS 107-1 and APB 28-1 amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements and also
amends Accounting Principles Board Opinion No. 28, Interim Financial
Reporting, to require those disclosures in summarized financial information at
interim reporting periods. This FSP is effective for the Company beginning
April 1, 2009. This FSP will have no impact on the Company’s financial
position, results of operations or cash flows.





In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date, that is, whether that date represents the date the financial statements
were issued or were available to be issued. SFAS 165 is effective for interim or
annual financial periods ending after June 15, 2009 and the Company has adopted
the pronouncement in this quarter. The Company evaluated ITS subsequent events
up to the date of the issuance of this Form 10-Q.


12


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





3.
            CONTRACT
      RECEIVABLES





June 30,2009
                
                
                December 31,
                  2008Contract
      receivables
                
                $
                89,105,076
                
                
                $
                77,027,328Less: Allowance for
      doubtful accounts
                
                
                (5,548,592
                )
                
                
                (5,215,701
                )Net
                
                $
                83,556,484
                
                
                $
                71,811,627





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





4.
            INVENTORIES





June 30,2009
                  
                  
                  December 31,
                    2008Raw
      materials at sites
                  
                  
                  291,587
                  
                  
                  
                  308,842Finished
      goods
                  
                  
                  7,371,531
                  
                  
                  
                  -$
                  7,663,118
                  
                  
                  $
                  308,842




13


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





5.
            PLANT
      AND EQUIPMENT





Plant and
equipment consist of the following as of:





June 30,2009
                              
                              
                              December 31,2008At
      costMotor
      vehicle
                              
                              $
                              1,480,629
                              
                              
                              $
                              1,568,165Machinery
      and equipment
                              
                              
                              2,383,946
                              
                              
                              
                              3,221,028Furniture,
      software and officeequipment
                              
                              
                              2,295,285
                              
                              
                              
                              2,443,382Building
                              
                              
                              -
                              
                              
                              
                              311,596Leasehold
      improvement
                              
                              
                              2,368,116
                              
                              
                              
                              2,198,367$
                              8,527,976
                              
                              
                              $
                              9,742,538Less:  
      Accumulated depreciationMotor
      vehicle
                              
                              $
                              809,152
                              
                              
                              $
                              774,977Machinery
      and equipment
                              
                              
                              1,331,720
                              
                              
                              
                              1,975,014Furniture,
      software and officeequipment
                              
                              
                              1,068,455
                              
                              
                              
                              908,591Building
                              
                              
                              -
                              
                              
                              
                              24,538Leasehold
      improvement
                              
                              
                              318,119
                              
                              
                              
                              207,308$
                              3,527,446
                              
                              
                              $
                              3,890,428$
                              5,000,530
                              
                              
                              $
                              5,852,110





Depreciation
expenses included in the selling and administrative expenses for six months
periods ended June 30, 2009 and 2008 were $464,417 and $332,985,
respectively.





6.
            INTANGIBLE
      ASSETS





June 30,2009
                                
                                
                                December 31,2008At
      costIntangible
      Assets
                                
                                $
                                609,059
                                
                                
                                $
                                99,567Less:
      Accumulated amortization
                                
                                
                                83,277
                                
                                
                                
                                48,847$
                                525,782
                                
                                
                                $
                                50,720




14




CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)




7.
            LOANS





A.
            SHORT-TERM
      BANK LOANS





June 30,
                              2009
                            
                            
                            December 31,
                              2008ABN
      Amro Bank N.V. Bank Overdraft in Current Account
                            
                            
                            4,912,423
                            
                            
                            
                            -$
                            4,912,423
                            
                            
                            $
                            -




B.
            LONG-TERM
      BANK LOANS




June 30,
                    2009
                  
                  
                  December 31,
                    2008Bank
      of East Asia (China) Ltd., Apartment Mortgage, amount due after one year,
      at 5.184% per annum, subject to variation every 6 months, last installment
      due January 4, 2012
                  
                  $
                  -
                  
                  
                  $
                  141,811Automobile
      capital lease obligation (hire purchase),amount due after one year, last
      installment due November 9, 2012
                  
                  
                  145,533
                  
                  
                  
                  186,474$
                  145,533
                  
                  
                  $
                  328,285




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





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




8.
            CONVERTIBLE
      BONDS AND BOND WARRANTS





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




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




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


15


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





Effective from April 12, 2009, the
conversion price has been reset to $2.45, which is 70% of $3.50 as the average
closing price of the Company’s shares for the period of 20 consecutive trading
days immediately prior to April 12, 2009 was $0.94.





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





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




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





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





The
Convertible Bonds Payable, net consists of the following:




June
      30,
                        2009
                      
                      
                      December
      31,
                        2008Convertible
      Bonds Payable
                      
                      $
                      28,000,000
                      
                      
                      $
                      28,000,000Less:
      Interest discount – Warrants
                      
                      
                      (3,159,903
                      )
                      
                      
                      (3,159,903
                      )Less:
      Interest discount – Beneficial conversion feature
                      
                      
                      (1,737,143
                      )
                      
                      
                      (1,737,143
                      )Less:
      Bond discount
                      
                      
                      (740,000
                      )
                      
                      
                      (740,000
                      )Accretion
      of interest discount
                      
                      
                      3,968,005
                      
                      
                      
                      2,544,216Net
                      
                      $
                      26,330,959
                      
                      
                      $
                      24,907,170


16


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)




9.
            CONTRACT
      REVENUES EARNED





The
contract revenues earned for the six-month periods ended June 30, 2009 and 2008
consist of the following:





Three
      Months Ended
                      June
      30,
                  
                  
                  Six
      Months Ended
                      June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Billed
                  
                  $
                  15,123,255
                  
                  
                  $
                  40,460,581
                  
                  
                  $
                  43,402,627
                  
                  
                  $
                  47,254,730Unbilled
                  
                  
                  15,475,719
                  
                  
                  
                  919,608
                  
                  
                  
                  25,826,873
                  
                  
                  
                  19,474,765$
                  30,598,974
                  
                  
                  $
                  41,380,189
                  
                  
                  $
                  66,942,038
                  
                  
                  $
                  66,729,495





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





10.
              INCOME
      TAXES





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





Three
      Months Ended
                      June
      30,
                    
                    
                    Six
      Months Ended
                      June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Taxes
      at the applicable income tax rates
                    
                    $
                    -
                    
                    
                    $
                    69,613
                    
                    
                    $
                    -
                    
                    
                    $
                    135,400Effect
      of PRC government grants
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (18,420
                    )Current
      income tax expense
                    
                    $
                    -
                    
                    
                    $
                    69,613
                    
                    
                    $
                    -
                    
                    
                    $
                    116,980


17


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





11.
              COMMITMENTS





(a)
Operating lease commitments




The
Company leases certain administrative and production facilities from third
parties.  Accordingly, for the six-month periods ended June 30, 2009
and 2008, the Company incurred rental expenses of $1,601,962 and $856,780
respectively.





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





For
      the 12 months ending June 30,2010
                    
                    
                    1,389,0942011
                    
                    
                    779,5422012
                    
                    
                    808,1972013
      or after
                    
                    
                    1,117,930$
                    4,094,763





(b)
Pending Litigation




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




On January 14, 2009, the board of
directors of Techwell passed a board resolution, to dismiss both Mr. Ngand Miss
Yam with immediate effect and remove Mr. Ng from the board of Techwell (the
“Resolution”).   On January 16, 2009, Mr. Ng and Miss Yam filed a
lawsuit in the High Court of Hong Kong against the Company and its subsidiary,
Full Art International Limited.  The lawsuit alleges that, inter alia, (i) the Company
misrepresented to them the financial status of the Company and operations during
the course the acquisition of Techwell was being negotiated; (ii) the Company
failed to perform its obligations under a settlement agreement alleged to be
agreed by the Company in January 2009; and (iii) the dismissal of Mr. Ng
was unlawful and invalid.




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




The Company intends to vigorously
defend this pending lawsuit; however, no assurance can be given that the lawsuit
will be resolved in the Company’s favor.  Even if the Company
successfully defends the lawsuit, the Company may incur substantial costs
defending or settling the lawsuit, in addition to a possible diversion of the
time and attention of the Company’s management from its business.  If
the Company is unsuccessful in defending the lawsuit, its may be required to pay
a significant amount of damages and/or it may potentially lose ownership of
Techwell, which will have a material adverse effect on the Company’s business,
financial condition or results of operations.


18


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)





12.
              RELATED
      PARTIES TRANSACTIONS





The
current account balance with shareholders at June 30 2009 was receivables of
$1,468,319 while at December 31, 2008 it was payable of $924,687.
 
 During
the six months period ended June 30, 2009, the Company purchased construction
materials amounting to $11.0 million from Guangdong Canbo Electrical Co., Ltd.
(Canbo), a subsidiary of the Company’s major shareholder, KGE Group Limited.
Canbo is a preferred supplier of the Company as it is able to procure materials
at favorable price levels due to its purchased quantities. More important,
application of certain of the Company’s patented technology is preferably routed
through Canbo to prevent undesired distribution of this technology. The Company
at times provides advance payment to Canbo in order to obtain a more favorable
pricing. As of June 30, 2009, the Company’s advance to Canbo was $0.9
million.
  The
transactions with related parties during the periods were carried out in the
ordinary course of business and on normal commercial terms.


13.
              SUBSEQUENT
      EVENTS




Nine
Dragons Framework Agreement and Letter of Intent for Land Transfer


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


Securities
Purchase Agreement





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





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





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





This
quarterly report is not an offer of securities for sale. Any securities sold in
the private placement have not been registered under the Securities Act of 1933,
as amended, and may not be offered or sold in the United States unless
registered under the Securities Act of 1933, as amended, or pursuant to an
exemption from such registration.


19


CHINA
ARCHITECTURAL ENGINEERING, INC.


NOTES
TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE- AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008
(continued)


(Stated
in US Dollars)




Waiver
of Conversion Price Adjustment on Convertible Bonds





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





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




20





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





Forward-Looking
Statements





The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this quarterly
report and the audited consolidated financial statements and related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in our annual report on Form 10-K for the year ended
December 31, 2008.





This
quarterly report contains forward-looking statements that involve substantial
risks and uncertainties.  The words “anticipated,” “believe,” “expect,
“plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar
expressions are intended to identify forward-looking statements. These
statements include, among others, information regarding future operations,
future capital expenditures, and future net cash flow. Such statements reflect
our management’s current views with respect to future events and financial
performance and involve risks and uncertainties, including, without limitation,
our dependence on government contracts and government sponsored contracts,
general economic and business conditions, adverse capital and credit market
conditions, our dependence on the steel and aluminum markets, increasing
provisions for bad debt related to our accounts receivable, fluctuation and
unpredictability of costs related to our products and services, 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. Actual results may vary materially and adversely from
those anticipated, believed, estimated or otherwise indicated should one or more
of these risks or uncertainties occur or if any of the risks or uncertainties
described elsewhere in this report or in the “Risk Factors” section of our 2008
annual report occur.  Consequently, all of the forward-looking
statements made in this report are qualified by these cautionary statements and
there can be no assurance of the actual results or developments.





Overview





We
specialize in high-end curtain wall systems (including glass, stone and metal
curtain walls), roofing systems, steel construction systems, eco-friendly energy
saving buildings and conservation systems and related products, for public works
and commercial real estate projects. We provide timely, high quality, reliable,
fully integrated and cost-effective service solutions to our clients using
specialized technical expertise in the design, engineering, fabrication,
installation and construction of structural exterior cladding systems. We have
completed over one hundred projects throughout China, Hong Kong, Macau,
Australia and Southeast Asia, including the National Grand Theater in Beijing,
the Meridian Gate Exhibition Hall of the Palace Museum in Beijing’s Forbidden
City (winner of the 2005 UNESCO Jury Commendation for Innovation of Asia Pacific
Heritage Award), the Beijing Botanical Garden Conservatory (winner of the Zhan
Tian You award in 2003), the Shenzhen Airport Terminal Building, the Shanghai
South Railway Station and the Vietnam National Conference Center.  We
compete on the strength of our reputation, relationships with government and
commercial clients, and our ability to give expression to the vision of leading
architects.  By focusing on innovation while outsourcing commoditized
manufacturing work, we are able to add artistic and technological value to
projects at cost-effective price points.  In 2008, we became a member
of U.S. Green Building Council (USGBC) and we further focused on expanding our
international operations.




Recent
Events





Most
sectors in the global economy, have been suffering through a financial slow down
and recession, particularly the construction industry.  During 2009,
we have experienced a decrease in the project turnover and an increase in costs
and delays in customer payments.  As a result, our results of
operations have suffered.





We
decided to terminate our work on the project in Singapore and stop the guarantee
related to the project.  Our management reviewed and created updated
forecasts for the project and concluded that there will be major differences
between the design concept as originally contemplated and the final site
structures. As a result, we decided to terminate our work on the project since
we did not receive approval for our improvement proposal. Management
has decided to refocus our resources to the projects in the mainland
China.  We
entered into a Framework Agreement of Investment on Marine Park and Holiday
Resorts Project (the “Framework Agreement”) with Shanghai Nine Dragon Co. Ltd
(“Nine Dragon”) to undertake the projects at the Nine Dragon Holiday Resort that
has been under development in the Yangtze River Delta in
China.  Pursuant to the terms of the Framework Agreement, the projects
include, but are not limited to, the construction of a marine park, botanical
garden, and other buildings.  According to the Framework Agreement,
various portions of the overall project are scheduled to commence in the second
half of 2009, and projected completion dates for various portions of the project
range from 2011 to 2013.  We agreed to sign an agreement with Nine
Dragons that contained separate terms and conditions for each sub-project,
including investment, the size of the construction, and the operation
procedures.  Further to the Framework Agreement, in August 2009, we
signed a Letter of Intent of Land Transfer ("LOI") to purchase land from
Zhejiang Nine Dragon Co., a subsidiary of Nine Dragon.  The property
that is subject to the LOI is a planned construction area of approximately 1.6
million square feet, and, according to the LOI, the purchase price will be equal
to approximately US$34 per square foot, for a total purchase price of
approximately US$55 million.  Pursuant to the terms of the LOI, the
parties will sign a definitive agreement and the transaction is intended to
close within six months after signing the definitive contract. According to the
LOI, the purchased land is expected to be constructed into a mixed-used complex,
which will include a residential complex.  Pursuant to the LOI, it is
expected for construction to occur in 2010 and completion to occur in
2011. 21


On August
6, 2009, we entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with KGE Group, Limited (“KGE Group”) and certain investors pursuant
to which we agreed to sell an aggregate of 17,000,000 shares (the “Shares”) of
our common stock to the investors for $1.65 per share for aggregate gross
proceeds of approximately $28 million. Pursuant to the Purchase Agreement, we
intend to sell and issue the Shares to the investors on or around September 30,
2009, provided that approval from the our stockholders is obtained prior to the
sale and issuance of the Shares. Under the Purchase Agreement, we are required
to seek, and use our best efforts to obtain stockholders approval of the sale
and issuance of the Shares. We intend to seek stockholder approval for the sale
and issuance of the Shares at a special meeting of stockholders. If stockholder
approval is not obtained for the sale and issuance of the Shares, the Shares
will not be sold to the investors.   Pursuant to the Purchase
Agreement, after the sale of the Shares to the investors, we must maintain a
substantial majority of the proceeds from the offering as a cash reserve to fund
the Shanghai Nine Dragons Project until such project has reached at least 80% of
completion as determined by us and Nine Dragon (Shanghai) Co. Ltd. According to
the Purchase Agreement, if as reported in our financial statements at the end of
any fiscal quarter, our net assets (excluding normal depreciation) do not at
least equal the value of our net assets (excluding normal depreciation) on June
30, 2009, less $2,500,000 (the "Net Assets Threshold"), KGE Group agreed to pay
to us an amount equal to the difference between the Net Assets Threshold and the
net assets (excluding normal depreciation) as reported for the period in
question (the "Net Assets Loss") in cash within six months after the end of the
period in which the Net Assets Loss occurred. The provision expires on the
earlier of (i) three years from the date of the Purchase Agreement or (ii) the
investors no longer holder at least 50% of the Shares sold pursuant to the
Purchase Agreement at the end of any fiscal quarter of our company.
 
 On August
6, 2009, and in connection with the Purchase Agreement, we and the holders of
our outstanding Bonds and warrants to purchase 300,000 shares of our common
stock expiring 2013 (the “2008 Warrants”) entered into an Amendment and Waiver
Agreement (the “Waiver”). Pursuant to Waiver, the bondholders and warrantholder
agreed to waive their right to a reduction in the conversion price of the Bonds
and exercise price of the 2008 Warrants due to our proposed sale of the shares
pursuant to the Purchase Agreement at a price per share less than the current
conversion prices of the Bonds and exercise price of the 2008 Warrants. The
holders of the 2008 Bonds also agreed that no default shall occur under
Condition 12(A)(xiv) of the trust deed governing the 2008 Bonds relating to the
requirement that KGE Group own at least 45% of our issued and outstanding common
stock. Pursuant to the Waiver, we agreed to use a portion of the net proceeds of
the sale of the Shares to the investors to pay (i) the interest payments of the
Bonds that are outstanding and due for payment in accordance with the terms of
the trust deeds governing the Bonds, and (ii) all amounts owed to ABN AMRO Band
(China) Co. Ltd., Shenzhen Branch or any other ABN AMRO Bank N.V. affiliate in
connection with the Bank Overdraft Facility and any outstanding interest on the
facility as the date of payment (collectively, the “Agreed Bondholders
Payments”). Such payments must be made no later than the earlier of (i) seven
business days after the sale of the Shares and (ii) three months from the date
of the Waiver. Remaining net proceeds shall be used to fund our operations.
Until the Agreed Bondholders Payments of are made by us after the sale of the
Shares, we agreed that we will not use proceeds from the proposed sale of shares
to repay or prepay any debt prior to our currently scheduled due date without
consent of the bondholders.
 Results
of Operations
 
 The
following table sets forth statements of operations for the three and six months
ended June 30, 2009 and 2008 in U.S. dollars (unaudited):
  ThreeMonthsEndedJune30,
                                              
                                              
                                              SixMonthsEndedJune30,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2008(in thousands, except for share
      and per share amounts)Contract
      revenues earned
                                              
                                              $
                                              30,599
                                              
                                              
                                              $
                                              41,380
                                              
                                              
                                              $
                                              66,972
                                              
                                              
                                              $
                                              66,729Cost
      of contract revenues earned
                                              
                                              
                                              20,647
                                              
                                              
                                              
                                              28,038
                                              
                                              
                                              
                                              48,809
                                              
                                              
                                              
                                              44,942Gross
      profit
                                              
                                              $
                                              9,952
                                              
                                              
                                              $
                                              13,342
                                              
                                              
                                              $
                                              18,133
                                              
                                              
                                              $
                                              21,787Selling,
      general and administrative expenses
                                              
                                              
                                              6,120
                                              
                                              
                                              
                                              4,590
                                              
                                              
                                              
                                              12,071
                                              
                                              
                                              
                                              7,591Income
      from operations
                                              
                                              $
                                              3,832
                                              
                                              
                                              $
                                              8,752
                                              
                                              
                                              $
                                              6,062
                                              
                                              
                                              $
                                              14,197Interest
      income
                                              
                                              
                                              46
                                              
                                              
                                              
                                              35
                                              
                                              
                                              
                                              50
                                              
                                              
                                              
                                              42Interest
      expenses
                                              
                                              
                                              (1,472
                                              )
                                              
                                              
                                              (1,198
                                              )
                                              
                                              
                                              (2,784
                                              )
                                              
                                              
                                              (1,532
                                              )Other
      income
                                              
                                              
                                              139
                                              
                                              
                                              
                                              39
                                              
                                              
                                              
                                              160
                                              
                                              
                                              
                                              151Income
      before taxes
                                              
                                              $
                                              2,545
                                              
                                              
                                              $
                                              7,629
                                              
                                              
                                              $
                                              3,489
                                              
                                              
                                              $
                                              12,858Income
      tax
                                              
                                              
                                              -
                                              
                                              
                                              
                                              70
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              117Net
      Earnings
                                              
                                              $
                                              2,545
                                              
                                              
                                              $
                                              7,559
                                              
                                              
                                              $
                                              3,489
                                              
                                              
                                              $
                                              12,741Net
      (earnings)/loss attributable to noncontrolling interests
                                              
                                              
                                              (1
                                              )
                                              
                                              
                                              19
                                              
                                              
                                              
                                              (2
                                              )
                                              
                                              
                                              11Net
      earnings attributable to the Company
                                              
                                              
                                              2,544
                                              
                                              
                                              
                                              7,578
                                              
                                              
                                              
                                              3,487
                                              
                                              
                                              
                                              12,752Earnings
      per share:Basic
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.15
                                              
                                              
                                              $
                                              0.07
                                              
                                              
                                              $
                                              0.25Diluted
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.14
                                              
                                              
                                              $
                                              0.07
                                              
                                              
                                              $
                                              0.23Weighted
      average shares outstanding:Basic
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              51,812,477
                                              
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              51,832,946Diluted
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              55,549,949
                                              
                                              
                                              
                                              53,256,874
                                              
                                              
                                              
                                              55,550,770
  22
 
 Three
Months Ended June 30, 2009 and 2008
 
 Contract
revenues earned for the three months ended June 30, 2009 were $30.6 million,
a decrease of $10.8 million, or 26%, from the contract revenues earned of
$41.4 million for the comparable period in 2008. The primary reason for the
decrease in contract revenues earned was due to a reduction of projects by
developers and their postponement of project commencement dates.
 
 Cost of
contract revenues earned for the three months ended June 30, 2009 was $20.6
million, a decrease of $7.4 million, or 26%, from $28.0 million for the
comparable period in 2008. Cost of contract revenues earned consists of the raw
materials, labor and other operating costs related to manufacturing. The
decrease in costs of contract revenues earned was primarily due to decrease in
revenue during the three months ended June 30, 2009.
 
 Gross
profit for the three months ended June 30, 2009 was $10.0 million, a decrease of
$3.3 million, or 25%, from $13.3 million for the comparable period of 2008. Our
gross margin for the three months ended June 30, 2009 was 32.7% as compared with
32.2% for the three months ended June 30, 2008. The slight increase in gross
margin was primarily a result of a series of costs cutting and control
measures.
 
 Selling,
general and administrative expenses were $6.1 million for the three months ended
June 30, 2009, an increase of approximately $1.5 million, or 33%, from $4.6
million for the comparable period in 2008. The increase was due to our
operational expansion, including the growth in staff, office rental and other
costs associated with the expansion of our overseas operations since
2008.  Among the selling, general and administrative expenses, payroll
and social securities was the single largest expenditure of the group, which
accounted for approximately 50% of the expenses. Other major expenses included
office administrative expenses and rental expenses.
 
 Interest
expenses and finance expenses were $1.5 million for the three months ended June
30, 2009, an increase of $0.3 million, from $1.2 million for the comparable
period in 2008.  The increase was mainly due to the use of short term
bank loan in financing of our purchase of materials.
 
 Income
tax expense was nil for the three months ended June 30, 2009 at an effective tax
rate of 0%, compared with approximately $70,000 in taxes for the same period of
2008 at an effective tax rate of 0.9%. The primary reason for the decrease was
due to zero corporate income tax rate associated with revenues from the Dubai
project, our largest ongoing project during 2009.
 
 Net
income for the three months ended June 30, 2009 was $2.5 million, a decrease of
$5.1 million, or 67%, from $7.6 million for the comparable period in
2008.
 
 Six
Months Ended June 30, 2009 and 2008
 
 Contract
revenues earned for the six months ended June 30, 2009 were $66.9 million,
a slight increase of $0.2 million, or 0.003%, from the contract revenues
earned of $66.7 million for the comparable period in 2008.
 
 Cost of
contract revenues earned for the six months ended June 30, 2009 was $48.8
million, an increase of $3.9 million, or 8.7%, from $44.9 million for the
comparable period in 2008.  The increase in costs of contract revenues
earned was primarily due to higher raw material, labor and administrative
costs.
 
 Gross
profit for the six months ended June 30, 2009 was $18.1 million, a decrease of
$3.7 million, or 17%, from $21.8 million for the comparable period of 2008. Our
gross margin for the six months ended June 30, 2009 was 27.1% as compared with
32.2% for the six months ended June 30, 2008. The decrease in gross margin was
primarily a result of higher raw material, labor and administrative costs in
Dubai, as well as our domestic market of China.
 
 Selling,
general and administrative expenses were $12.1million for the six months ended
June 30, 2009, an increase of approximately $4.5million, or 59.2%, from $7.6
million for the comparable period in 2008. The increase was due to our
operational expansion, including the growth in staff, office rental and other
costs associated with the expansion of our overseas operations since
2008.  Among the selling, general and administrative expenses, payroll
and social securities was the single largest expenditure of the group, which
accounted for approximately 50% of the expenses. Other major expenses included
office administrative expenses and rental expenses.
 
 Interest
expenses and finance expenses were $2.8 million for the six months ended June
30, 2009, an increase of $1.3 million, from $1.5 million for the comparable
period in 2008.  The increase was mainly due to the issuance of $20
million convertible bonds in April 2008.
  23
 
 Income
tax expense was nil for the six months ended June 30, 2009 at an effective tax
rate of 0%, compared with approximately $117,000 in taxes for the same period of
2008 at an effective tax rate of 0.9%. The primary reason for the decrease was
due to zero corporate income tax rate associated with revenues from the Dubai
project, our largest ongoing project during 2009.
 
 Net
income for the six months ended June 30, 2009 was $3.5 million, a decrease of
$9.3 million, or 73%, from $12.8 million for the comparable period in
2008.
 
 Liquidity
and Capital Resources
 
 At June
30, 2009, we had cash and cash equivalents of $7.0 million.
 
 Prior to
October 17, 2006, we financed our business operations through short-term bank
loans, cash provided by operations, and credit provided by suppliers. On October
17, 2006, concurrently with the close of our Share Exchange, we received gross
proceeds of $3.7 million in a private placement
transaction.   After commissions and expenses, we received net
proceeds of approximately $3.1 million.  In October 2007, we completed
an initial public offering consisting of 847,550 shares of our common stock. Our
sale of common stock, which was sold indirectly by us to the public at a price
of $3.50 per share, resulted in net proceeds of approximately $2.0
million.
 
 We have
also financed our operations through the issuance of convertible
bonds.  On April 12, 2007, we completed a financing transaction
pursuant to which we issued the 2007 Bonds in the principal amount of $10
million. In September 2008, $2 million worth of bonds were converted into shares
of common stock pursuant to which we issued 571,428 shares of common
stock.  Effective from April 12, 2009, the conversion price was reset
from $3.50 to $2.45 per share per the terms of the bonds based on the average
trading price of our common stock.
 
 On April
15, 2008, we completed a financing transaction pursuant to which we issued the
2008 Bonds in the principal amount of $20.0 million. The 2008 Bonds bear cash
interest at the rate of 12% per annum. According to the terms of the Bonds,
interest was payable semi-annually in arrears on April 15 and October 15 of each
year commencing October 15, 2008.  For the interest payment that was
due on April 15, 2009, the bondholders agreed, subject to certain conditions
being met, that we may defer an interest payment of $1.2 million of the 2008
bonds. As
indicated above, we and the holders of our outstanding Bonds and the 2008
Warrants entered into an Amendment and Waiver Agreement (the “Waiver”) pursuant
to which the bondholders and warrantholder agreed to waive their right to a
reduction in the conversion price of the Bonds and exercise price of the 2008
Warrants due to our proposed sale of the shares pursuant to the Purchase
Agreement at a price per share less than the current conversion prices of the
Bonds and exercise price of the 2008 Warrants. Pursuant to the Waiver, we agreed
to use a portion of the net proceeds of the sale of the Shares to the investors
to pay (i) the interest payments of the Bonds that are outstanding and due for
payment in accordance with the terms of the trust deeds governing the Bonds, and
(ii) all amounts owed to ABN AMRO Band (China) Co. Ltd., Shenzhen Branch or any
other ABN AMRO Bank N.V. affiliate in connection with the Bank Overdraft
Facility and any outstanding interest on the facility as the date of payment
(collectively, the “Agreed Bondholders Payments”). Such payments must be made no
later than the earlier of (i) seven business days after the sale of the Shares
and (ii) three months from the date of the Waiver. Remaining net proceeds shall
be used to fund our operations. Until the Agreed Bondholders Payments of are
made by us after the sale of the Shares, we agreed that we will not use proceeds
from the proposed sale of shares to repay or prepay any debt prior to our
currently scheduled due date without consent of the
bondholders.
  If we are
required to repurchase all or a portion of the outstanding amount of $28.0
million in bonds and we do not have sufficient cash to make the repurchase, we
will 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.
 
 Our
subsidiary, Zhuhai King Glass Engineering Co., Limited, borrowed from Bank of
East Asia with a condominium as collateral. This facility, which is due October
25, 2011, is subject to a current interest rate of5.832% and interest rate
adjusts every 6 months. The amount outstanding as of June 30, 2009 was $nil as
fully repaid in May 2009.
 
 Full Art
International Limited incurred an automobile capital lease obligation due
November 09, 2012 that had an outstanding amount of $145,533 as of June 30,
2009.
 
 On
February 19, 2008, we and Techwell Engineering Limited were granted a bond
facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was
$10,000,000, at a tenor of up to one year with 2% flat interest rate on the
issued amount of bonds such as bank guarantees, performance bonds, advanced
payment bonds and standby letters of credit. ABN AMRO required guarantees as
follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King
Glass Engineering Co. Limited and (ii) share charge over the shares of us for a
minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May
2, 2008, the facility was increased to $12,000,000 with additional cash
collateral of $2,000,000. This facility is fully utilized.
 
 On March
28, 2008, we, Full Art and Techwell Engineering Limited were granted a bonding
facility by the Hong Kong Branch of HSBC. The facility amount was $10,000,000,
at a tenor of up to one year with 1% flat interest rate on the issued amount of
bonds such as bank guarantees, performance bonds, advanced payment bonds and
standby letters of credit. HSBC required guarantees as follows: (i) an unlimited
guarantee among China Architectural Engineering, Inc., Full Art International
Limited and Techwell Engineering Limited; and (ii) an “all monies” securities
deposits with 15% margin.  On August 18, 2008, the facility was
increased to $20,000,000 with additional cash collateral of
$1,500,000.  As of June 30, 2009, we have utilized $12 million of
the facility.
  24
 
 On July
19, 2008, Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”), our
wholly-owned subsidiary was granted a Bank Accepted Draft facility by the
Shenzhen Branch of ABN AMRO Bank N.V. The facility amount is RMB70,000,000
(US$10,218,978).  On June 30, 2009, the facility was amended to allow
Open Account Financing – Accounts Receivable against invoices from acceptable
buyers up to RMB21,000,000 and Overdraft in Current Account up to
RMB16,800,000.  ABN AMRO requires irrevocable and unconditional
guarantee from us and cash collateral of 20% of bank’s acceptance bill issued
and Open Account Financing.  As of June 30, 2009, Zhuhai KGE utilized
RMB nil (US$ nil) of Bank Accepted Draft and RMB 33.6 million (US$4.9 million)
of Open Account Financing and Overdraft in Current Account.
 
 We also
lease certain administrative and production facilities from third parties.
Accordingly, for the six months ended June 30, 2009 and 2008, we incurred
rental expenses of $1,601,962 and $856,780, respectively.
 
 Working
capital management, including prompt and diligent billing and collection, is an
important factor in our results of operations and liquidity. When we are awarded
construction project, we work according to the percentage-of-completion method
which matches the revenue streams with the relevant cost of construction based
on the percentage-of-completion of project as determined based on certain
criteria, such as, among other things, actual cost of raw material used compared
to the total budgeted cost of raw material and work certified by customers.
There is no guarantee that the cash inflow from these contracts is being
accounted for in parallel with the cash outflow being incurred in the
performance of such contract. In addition, a construction project is usually
deemed to be completed once we prepare a final project account, the account is
agreed upon by our customers, and all amounts related to the contract must be
settled according to the account within three months to a year from the
customer’s agreement on the final project account. As there may be different
time intervals to reach a consensus on the amount as being accounted for in the
projects before the project finalization account is being mutually agreed by
each other. We experience an average accounts settlement period ranging from
three months to as high as one year from the time we provide services to the
time we receive payment from our customers. In contrast, we typically need to
place certain deposit with our suppliers on a portion of the purchase price in
advance and for some suppliers we must maintain a deposit for future orders. We
attempt to maintain a credit policy of receiving certain amounts of deposit from
customers before we begin a new project.
  We
experienced revenue of $66.9 million for the six months ended June 30, 2009
compared to revenue of $66.7 million for the same period in 2008. Construction
contract related receivables, including contract receivables and costs and
earnings in excess of billings as of June 30, 2009 were $105.3 million, a
increase of $17.6 million over construction related receivables of $87.7 million
as of December 31, 2008. The increase in such receivables reflected the slow
down of payment by the customers.
 
 We
provide for bad debts principally based upon the aging of accounts receivable,
in addition to collectability of specific customer accounts, our history of bad
debts, and the general condition of the industry. We are currently involved in
six lawsuits in which we are suing other parties for overdue payments. The total
amount involved is approximately $3.2 million. We made additional provision
of $0.3 million for doubtful accounts in the six months ended June 30,
2009.  As of June 30, 2009, our provision for doubtful accounts was
$5.5 million, which was 5.2% of our construction contract related receivables of
$105.3 million. We believed our current reserve for doubtful accounts is
commensurate to cover the associated credit risk in the portfolio of our
construction contract related receivables.  Due to the difficulty in
assessing future trends, we could be required to further increase our provisions
for doubtful accounts.  As our accounts receivable age and become
uncollectible our cash flow and results of operations are negatively
impacted.
  As
indicated above, we entered into the Framework Agreement in June 2009 with Nine
Dragon to undertake the projects at the Nine Dragon Holiday Resort that has been
under development in the Yangtze River Delta in China.  We also
entered into the LOI in August 2009 to purchase land from Zhejiang Nine Dragon
Co., a subsidiary of Nine Dragon, for an approximate purchase price equal to $55
million.    The Nine Dragon Project will require significant
capital resources and it will require us to properly manage the project to avoid
a material adverse effect on our operating results, cash flows and
liquidity.
  We intend
to expend a significant amount of capital to purchase materials and serve as
deposits for performance bonds for new projects that we have obtained.
Additional capital for this objective may be required that is in excess of our
liquidity, requiring us to raise additional capital through an equity offering
or secured or unsecured debt financing. The availability of additional capital
resources will depend on prevailing market conditions, interest rates, and our
existing financial position and results of operations.
  Net cash
from operating activities for the six months ended June 30, 2009 was
approximately $2.7 million, as compared to net cash outflow of $7.9 million in
the same period in 2008. The change in primarily due to our improvement in cash
collection.
 
 Net cash
from investing activities was approximately $1.0 million for the six months
ended June 30, 2009 compared to approximately $0.4 million used in investing
activities for the six months ended June 30, 2008. The change was mainly a
result of the release of restricted cash from banks.
 
 Net cash
used in financing activities was $6.4 million for the six months ended June 30,
2009 compared to $19.4 million provided by financing activities during the six
months ended June 30, 2008. The change was due to repayment of short-term loans,
as compared to the issuance of convertible bond in 2008.
  25
 
 Contractual
Obligations
 
 The
following table describes our contractual commitments and obligations as of June
30, 2009:
 
 Payments
      due by periodTotal
                  
                  
                  Less than
                    1
      year
                  
                  
                  1-3 years
                  
                  
                  3-5 years
                  
                  
                  More
                    than 5
                    yearsOperating
      Lease Obligations
                  
                  $
                  4,094,763
                  
                  
                  $
                  1,389,094
                  
                  
                  $
                  1,587,739
                  
                  
                  $
                  1,117,930
                  
                  
                  $
                  -Contingent
      Liabilities (1)
                  
                  $
                  22,243,907
                  
                  
                  $
                  18,743,907
                  
                  
                  $
                  3,500,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -Long-term
      debt (2)
                  
                  $
                  35,391,600
                  
                  
                  $
                  -
                  
                  
                  $
                  23,322,000
                  
                  
                  $
                  12,069,600
                  
                  
                  $
                  -
 
 
 (1)
              Includes
      the $3,500,000 standby guarantee expiring May 2, 2010, $2,121,322
      performance bond expiring on September 30, 2009 and $5,578,164 advanced
      payment bond expiring September 30, 2009, issued by ABN AMRO Bank
      N.V.  Also includes $1,831,411 performance bond expiring
      December 31, 2009, $5,494,234 advanced payment bond expiring August 6,
      2009 and $3,718,776 advanced payment bond expiring September 30, 2009,
      issued by HSBC.
 
 
 (2)
              Includes
      the $8 million convertible bond which is required to be redeemed at
      150.87% at maturity at April 4,   2012, which may be
      converted into our common stock after September 28, 2008, accordingly we
      may re-classify upon conversion. Also includes the $20 million convertible
      bond which is required to be redeemed at 116.61% at maturity at April 15,
      2011, which may be converted into our common stocks after October 15,
      2008, accordingly we may re-classify upon
  conversion.
 
 Off-Balance
Sheet Arrangements
 
 None.
 
 Critical
Accounting Policies and Estimates
 
 The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues, expenses and allocated charges during the reporting period. Actual
results could differ from those estimates.
 
 We
describe our significant accounting policies in Note 2, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K as of and for the year ended December 31,
2008. We discuss our critical accounting policies and estimates in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K as of and for the year ended December 31,
2008.  Other than as indicated in this quarterly report, there have
been no material revisions to the critical accounting policies as filed in our
Annual Report for the fiscal year ended December 31, 2008 on Form 10-K as
filed with the SEC on March 31, 2009.
 
 Recent
Accounting Pronouncements
 
 See
Note2(t) of the
accompanying unaudited interim consolidated financial statements included in
this Form 10-Q for a discussion of recent accounting
pronouncements.
 
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 There
have been no material changes in market risk from the information provided in
Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in
our Annual Report for the fiscal year ended December 31, 2008 on Form 10-K as
filed with the SEC on March 31, 2009.
  26
 
 ITEM
4.  CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.
 
 As of the
end of the period covered by this Quarterly Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures identified certain material weaknesses, as
described below, that caused our controls and procedures to be
ineffective.  Notwithstanding the existence of the material
weaknesses described below, management has concluded that the interim
consolidated financial statements in this Form 10-Q fairly present, in all
material respects, our financial position, results of operations and cash flows
for the periods and dates presented.
 
 These
material weaknesses primarily related to one of our material operating
subsidiaries, Techwell Engineering Limited. (“Techwell”).  On November
6, 2007, we acquired Techwell and its wholly owned subsidiaries, Techwell
Building Systems (Shenzhen) Ltd. in China and Techwell International Ltd. in
Macau.  At the time, Techwell was a privately-held company and its
financial systems were not designed to facilitate the external financial
reporting required of a publicly held company under the Sarbanes-Oxley Act of
2002.  In addition, Techwell’s accounting records were historically
maintained using accounting principles generally accepted in the People's
Republic of China, its personnel was not fully familiar with accounting
principles generally accepted in the United States of America.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected in a timely basis.  We identified the
following material weaknesses:
 
 1.
              Techwell
      lacked the technical expertise and processes to ensure compliance with our
      policies and did not maintain adequate controls with respect to (a) timely
      updating engineering budget and analysis, (b) coordination and
      communication between Corporate Accounting and Engineering Staffs, and (c)
      timely review and analysis of corporate journals recorded in the
      consolidation process.
 
 2.
              Techwell
      did not maintain a sufficient complement of personnel with an appropriate
      knowledge and skill to comply with our specific engineering financial
      accounting and reporting requirements and low materiality
      thresholds.  This was evidenced by a number of documents missing
      or not matching with the records and contributed to the adjustment of
      financial results.  As evidenced by the significant number and
      magnitude of out-of-period adjustments identified from Techwell during the
      period-end closing process, management has concluded that the controls
      over the period-end financial reporting process were not operating
      effectively. Specifically, controls were not effective to ensure that
      significant accounting estimates and other adjustments were appropriately
      reviewed, analyzed, and monitored on a timely
  basis.
 
 3.
              Techwell
      did not comply with our authorization policy. This was evidenced by a
      number of expenses incurred without appropriate authorization. This
      material weakness resulted in an unauthorized and significant increase of
      expenses, which significantly impacted our operating
    results.
 
 Remediation
of Material Weaknesses
  We are in
the process of developing and implementing remediation plans to address our
material weaknesses.  One key change for us going forward will be the
design and implementation of internal controls over the accounting and oversight
of all subsidiaries, including enhanced accounting systems, processes, policies
and procedures.  We have taken the following actions to address the
material weaknesses and improve our internal controls over financial
reporting:
  27
 
 1.
              On
      January 14, 2009, the board of directors of Techwell passed a board
      resolution to replace management of Techwell.  We have appointed
      a new general manager to Techwell, as well as three experienced project
      managers to the Dubai Metro
project.
 
 2.
              Management
      has initiated a Sarbanes-Oxley Act of 2002 Section 404 Compliance
      Assistance Project, which is intended to meet all requirements required by
      SEC in our company and all of our subsidiaries.  We have engaged
      an experienced consulting firm, Protiviti, to assist in our Sarbanes-Oxley
      Act of 2002 Section 404 Compliance.
 
 3.
              We
      have established a dedicated and qualified internal control and audit team
      to implement the policies and procedures to the standard of a US public
      company.
 
 4.
              We
      reorganized and restructured Techwell’s Corporate Accounting by (a)
      modifying the reporting structure and establishing clear roles,
      responsibilities, and accountability, (b) hiring skilled technical
      accounting personnel to address our accounting and financial reporting
      requirements, and (c) assessing the technical accounting capabilities in
      the operating units to ensure the right complement of knowledge, skills,
      and training.
 
 5.
              We
      reorganized and restructured the budgeting process by (a) centralizing the
      procurement function to our company to ensure budgets and analyses of
      Techwell are timely prepared and properly reviewed; (b) implementing new
      policies and procedures to ensure that appropriate communication and
      collaboration protocols among our Engineering, Procurement and Corporate
      Accounting departments; and (c) hiring the necessary technical procurement
      personnel to support complex procurement activities.  We have
      hired two experienced technical procurement managers and expect to
      increase the headcount in the purchase department in the future if
      necessary.
 
 6.
              We
      strengthened the period-end closing procedures of our operating
      subsidiaries by (a) requiring all significant estimate transactions to be
      reviewed by Corporate Accounting, (b) ensuring that account
      reconciliations and analyses for significant financial statement accounts
      are reviewed for completeness and accuracy by qualified accounting
      personnel, (c) implementing a process that ensures the timely review and
      approval of complex accounting estimates by qualified accounting personnel
      and subject matter experts, where appropriate, and (d) developing better
      monitoring controls at Corporate Accounting and the operating
      units.
 
 We
believe that we are taking the steps necessary for remediation of the material
weaknesses identified above, and we will continue to monitor the effectiveness
of these steps and to make any changes that our management deems
appropriate.
 
 Changes
in internal control over financial reporting
  Based on
the evaluation of our management as required by paragraph (d) of Rule 13a-15 of
the Exchange Act, we believe that there were no changes in our internal control
over financial reporting that occurred during the second quarter of 2009 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting, other than as described above under
“Remediation of Material Weaknesses.”
  28
  PART
II-OTHER INFORMATION
 
 ITEM
1.         LEGAL
PROCEEDINGS
 
 See
Note11(b) of the
accompanying unaudited interim consolidated financial statements included in
this Form 10-Q for a discussion of our current legal proceedings.
 
 ITEM
1A.       RISK FACTORS
 
 Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in our public filings before deciding whether to purchase our common
stock. Except as set forth below, there have been no material revisions to the
“Risk Factors” as filed in our Annual Report on Form 10-K as of and for the
year ended December 31, 2008.
  Our
failure to properly manage the Nine Dragon Project may result in additional
costs or claims, which could have a material adverse effect on our operating
results, cash flows and liquidity.
  The Nine
Dragon Project, which we expect will be material to our operations, will involve
numerous large-scale and complex projects. The quality of our performance on the
Nine Dragon Project depends in large part upon our ability to manage our
relationship with Nine Dragon and the project itself and to timely deploy
appropriate resources. Our results of operations, cash flows and liquidity could
be adversely affected if we miscalculate the resources or time needed to
complete the Nine Dragon Project, or the resources or time needed to meet any
milestones.  Further, any defects or errors, or failures to meet in
the project could result in large damage claims against us, and, because of the
substantial cost of, and potentially long lead-time necessary to acquire certain
of the materials, damage claims may be large and thereby have a material adverse
effect on our results of operations.
  The
Waiver agreement that we entered into with the holders of our outstanding Bonds
and the 2008 Warrants impose restrictions on us, and if we are unable to comply
with the terms of the Waiver, our results of operations and financial position
will be negatively affected.
  On August
6, 2009, we and the holders of our outstanding Bonds and warrants to purchase
300,000 shares of our common stock expiring 2013 (the “2008 Warrants”) entered
into an Amendment and Waiver Agreement (the “Waiver”).  Pursuant to
Waiver, the bondholders and warrantholder agreed to waive their right to a
reduction in the conversion price of the Bonds and exercise price of the 2008
Warrants due to our proposed sale of the shares pursuant to the Purchase
Agreement at a price per share less than the current conversion prices of the
Bonds and exercise price of the 2008 Warrants.
  Pursuant
to the Waiver, we agreed to use a portion of the net proceeds of the sale of the
Shares to the investors to pay:
 ·
                the
      interest payments of the Bonds that are outstanding and due for payment in
      accordance with the terms of the trust deeds governing the Bonds,
      and
 
 ·
                (ii)
      all amounts owed to ABN AMRO Band (China) Co. Ltd., Shenzhen Branch or any
      other ABN AMRO Bank N.V. affiliate in connection with the Bank Overdraft
      Facility and any outstanding interest on the facility as the date of
      payment (collectively, the “Agreed Bondholders
  Payments”).
 
 Such
payments must be made no later than the earlier of (i) seven business days after
the sale of the Shares and (ii) three months from the date of the Waiver. We
also agreed that until the Agreed Bondholders Payments of are made by us after
the sale of the Shares, we agreed that we will not use proceeds from the
proposed sale of shares to repay or prepay any debt prior to our currently
scheduled due date without consent of the bondholders.
 
 Should we
be unable to comply with the terms and covenants of the Waiver, including
meeting the deadlines as indicated or not being able to obtain shareholder
approval of the sale of securities, we may be required to reduce the conversion
price of the Bonds and the 2008 Warrants, which would have an extensive dilution
effect on our common stock and could have a material negative effect our stock
trading price.  If we are unable to comply with the Waiver, we would
also have to make payment of the accrued and payable interest that the
bondholders have deferred.  If we are unable to make such payments, we
would be forced to request further deferment of payment.  Any of the
foregoing would have a material adverse effect on our results of operation,
financial position, cash flows and liquidity.
 29
  In
connection with the Nine Dragons Resort Project, we intend to enter into the
real estate development industry, in which we have no significant
experience.
 
 We have
no significant real estate development experience. We have historically been
engaged only in design and construction of curtain wall systems, roofing
systems, steel construction systems, eco-energy saving building conservation
systems and related products, for public works and commercial real estate
projects. Therefore, we do not have any specific real estate development history
from which you can draw conclusions about our ability to execute the Nine
Dragons Resort Project or plan to enter the real estate development industry
generally. Any failure to successfully purchase, develop, and sell a real estate
property could have a material adverse effect on our results of
operations.   In addition, our proposed entry into the
development industry will place increased demands on our operational, managerial
and administrative resources. These increased demands could cause us to operate
our business less effectively, which, in turn, could cause deterioration in the
financial performance of our overall business.
 
 We
may not have adequate funding resources to finance land acquisitions or property
developments, or to service our financing obligations.
 
 The
property development business is capital intensive. In connection with the Nine
Dragons Resort Project, we entered into a letter of intent pursuant to which we
intend to pay approximately $55 million to purchase a real estate property for
development.  Generally, we intend to finance our property
developments through a combination of securities issuances, borrowings from
banks, internal funding, in addition to other methods.  There is no
guarantee that we will have sufficient cash flow available for land acquisitions
or property developments or that we will be able to raise the requisite amount
of capital on terms acceptable to us or at all to fund land acquisitions or
property developments.
 
 We
expect to face significant property development risks before we realize any
benefits from a development.
 
 Property
developments typically require substantial capital outlays during the
construction periods, and it may take months or years before positive cash
flows, if any, can be generated by development properties. The time and costs
required to complete a property development may increase substantially due to
many factors beyond our control, including the shortage, or increased cost of
material, equipment, technical skills and labor, adverse weather conditions,
natural disasters, labor disputes, disputes with contractors, accidents, changes
in government priorities and policies, changes in market conditions, delays in
obtaining the requisite licenses, permits and approvals from the relevant
authorities and other unforeseeable problems and circumstances. Any of these
factors, singly or in aggregate, may lead to a delay in, or the failure of, the
completion of a property development and result in costs substantially exceeding
those originally budgeted. Failure to complete a property development according
to its original plan, if at all, may have an adverse effect on our reputation
and could give rise to potential liabilities. As a result, our returns on
investments, if any, might not be timely recognized or might be lower than
originally expected.
 
 Our
business and results of operations may be adversely affected if we fail to
obtain, or there are material delays in obtaining, the requisite governmental
approvals for a property development.
 
 The real
estate industry in the PRC is heavily regulated by the PRC government.
Developers must comply with a variety of legal and regulatory requirements, as
well as the policies and procedures established by local authorities to
implement such laws and regulations. To undertake and complete a property
development, a real estate developer must obtain permits, licenses, certificates
and other approvals from the relevant administrative authorities at various
stages of the property development, including land use rights documents,
planning permits, construction permits, and certificates or confirmations of
completion and acceptance. Each approval is dependent on the satisfaction of a
set of conditions.
  30
 We do not
have experience in this process and we may experience delays in obtaining such
governmental approvals in respect of property developments that would have a
material adverse effect on our business or results of operations, and we cannot
assure you that we will not encounter significant problems in satisfying the
conditions to the approvals, or that we will be able to adapt ourselves to the
laws, regulations or policies that may come into effect from time to time with
respect to the real estate industry in general or the particular processes
related to the granting of the approvals. There may also be delays on the part
of the administrative bodies in reviewing our applications and granting
approvals. If we fail to obtain, or experience material delays in obtaining, the
requisite governmental approvals, the schedule of development and sale of our
developments could be substantially disrupted, resulting in a material adverse
effect on our business, financial condition and results of
operations.
 
 Our
sales of developed properties, if any, will be affected if mortgage financing
becomes more costly or otherwise less attractive.
 
 We expect
that most purchasers of properties will rely on mortgages to fund their
purchases. Increases in interest rates may significantly increase the cost of
mortgage financing, thus reducing the attractiveness of mortgages as a source of
financing for property purchases and adversely impacting the affordability of
properties. In addition, the PRC government and commercial banks may also
increase the downpayment requirements, impose other conditions or otherwise
change the regulatory framework in a manner that would make mortgage financing
unavailable or unattractive to potential property purchasers.  If the
availability or attractiveness of mortgage financing is further reduced or
limited, many of our prospective customers may not be able to purchase
properties that we may have out for sale. As a result, our business, financial
condition and results of operations could be materially and adversely
affected.
 
 Potential
liability for environmental problems could result in substantial
costs.
 
 In
entering the real estate development industry, we will become subject to a
variety of laws and regulations concerning the protection of health and the
environment. The particular environmental laws and regulations that apply to any
given development site vary greatly according to the site’s location and
environmental condition, the present and former uses of the site and the nature
of the adjoining properties. Environmental laws and conditions may result in
delays, may cause us to incur substantial compliance and other costs and can
prohibit or severely restrict project development activity in
environmentally-sensitive regions or areas, which could have a material adverse
effect of our results of operations.
  ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 Not
applicable.
 
 ITEM
3.          DEFAULTS UPON SENIOR
SECURITIES
 
 Not
applicable.
 
 ITEM
4.         SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
 
 On June
12, 2009, we held our annual meeting of stockholders. Of the 53,256,874 shares
eligible to vote, 46,096,716, or 86.6%, votes were returned, formulating a
quorum. At the annual stockholders meeting, the following matters were submitted
to stockholders for vote:  (1) electing seven directors to the board
of directors; (2) ratifying the appointment of Samuel H. Wong & Co.,
LLP as the Company’s independent registered public accounting firm for the year
ending December 31, 2009; and (3) approving the China Architectural
Engineering, Inc. 2009 Onmibus Incentive Plan.
  31
  Proposal
I—Election of Directors
 
 The
results of voting on these proposals are as follows:
  Director
                          
                          For
                          
                          Withheld
                          
                          ElectedLuo
      Ken Yi
                          
                          43,413,013
                          
                          2,683,703
                          
                          YesTang
      Nianzhong
                          
                          43,398,408
                          
                          2,698,308
                          
                          YesYe
      Ning
                          
                          43,398,408
                          
                          2,698,308
                          
                          YesZheng
      Jinfeng
                          
                          42,970,674
                          
                          3,126,042
                          
                          YesZhao
      Boa Jiang
                          
                          42,970,556
                          
                          3,126,160
                          
                          YesKelly
      Wang
                          
                          42,970,674
                          
                          3,126,042
                          
                          YesMiu
      Cheung
                          
                          43,658,724
                          
                          2,437,992
                          
                          Yes
  All
directors are elected at our annual meeting of stockholders.
 
 Proposal
II—Ratification of the appointment of Samuel H. Wong & Co., LLP as our
independent auditors for the year ending December 31, 2009.
 
 Proposal
II was approved with 43,922,539 shares voted for, 1,341,259 voted against and
832,917 abstained from voting, thereby, ratifying the appointment of Samuel H.
Wong & Co., LLP as our independent auditors for the year ending December 31,
2009.
 Proposal
III—Approval of the China Architectural Engineering, Inc. 2009 Omnibus Incentive
Plan, a replacement of the China Architectural Engineering, Inc. 2007 Equity
Incentive Plan
  Proposal
III was approved with 33,448,012 shares voted for, 2,014,425 voted against and
5,770 abstained from voting, thereby, approving the China Architectural
Engineering, Inc. 2009 Omnibus Incentive Plan, a replacement of the China
Architectural Engineering, Inc. 2007 Equity Incentive Plan. Upon the approval of
the China Architectural Engineering, Inc. 2009 Omnibus Incentive Plan, our 2007
Equity Incentive Plan was frozen and no further grants or awards will be made
under such plan. However, the 2007 Equity Incentive Plan will continue in effect
for so long as and solely to the extent necessary to administer
previously-granted awards that remain outstanding under such plan.
 
 ITEM
5. OTHER INFORMATION
  We
entered into a Framework Agreement of Investment on Marine Park and Holiday
Resorts Project (the “Framework Agreement”) with Shanghai Nine Dragon Co. Ltd
(“Nine Dragon”) to undertake the projects at the Nine Dragon Holiday Resort that
has been under development in the Yangtze River Delta in
China.  Pursuant to the terms of the Framework Agreement, the projects
include, but are not limited to, the construction of a marine park, botanical
garden, and other buildings.  According to the Framework Agreement, various
portions of the overall project are scheduled to commence in the second half of
2009, and projected completion dates for various portions of the project range
from 2011 to 2013.  We agreed to sign an agreement with Nine Dragons
that contained separate terms and conditions for each sub-project, including
investment, the size of the construction, and the operation
procedures.  Further to the Framework Agreement, in August 2009, we
signed a Letter of Intent of Land Transfer ("LOI") to purchase land from
Zhejiang Nine Dragon Co., a subsidiary of Nine Dragon.  The property
that is subject to the LOI is a planned construction area of approximately 1.6
million square feet, and, according to the LOI, the purchase price will be equal
to approximately US$34 per square foot, for a total purchase price of
approximately US$55 million.  Pursuant to the terms of the LOI, the
parties will sign a definitive agreement and the transaction is intended to
close within six months after signing the definitive contract. According to the
LOI, the purchased land is expected to be constructed into a mixed-used complex,
which will include a residential complex.  Pursuant to the LOI, it is
expected for construction to occur in 2010 and completion to occur in
2011.
  ITEM
6.         EXHIBITS
 
 10.1
              
              Framework
      Agreement of Marine Park and Holiday Resorts Project entered into by and
      between the Company and Shanghai Nine Dragon Co. Ltd
      (translated).31.1
              
              Certification
      of Chief Executive Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of Chief Financial Officer pursuant to Section 302(a) of the
      Sarbanes-Oxley Act of 2002.32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.*
  * This
exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934 or otherwise subject to the liabilities of that section,
nor shall it be deemed incorporated by reference in any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
  32
  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
      14, 2009
                By:
                /s/  Luo
      Ken YiLuo
      Ken YiChief
      Executive Officer and Chairman of the
Board
  33