**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





**WASHINGTON,
      D.C. 20549**





**FORM
      10-K**


**ý** **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **FOR
        THE FISCAL YEAR ENDED DECEMBER 31, 2007**
 
 **OR**
 
 **o** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **FOR
        THE TRANSITION PERIOD FROM _______
        TO ___________**
  **COMMISSION
        FILE NO. 001-33709**


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**


*(Exact
      Name Of Registrant As Specified In Its Charter)*





**Delaware**
            
            **51-05021250***(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            *(I.R.S.
                Employer*
              *Identification
                No.)***105
                Baishi Road, Jiuzhou West Avenue, Zhuhai 519070**
              **People’s
                Republic of China**
            
            **N/A***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*





REGISTRANT’S
      TELEPHONE NUMBER, INCLUDING AREA CODE: **0086-756-8538908**




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:




Title
                of Each Class
            
            Name
                of Each Exchange on Which RegisteredCommon
                Stock, $0.001 par value
            
            American
                Stock Exchange




SECURITIES
      REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:


None.





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes o No ý




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes o No ý




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.       Yes ý No o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
      be contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-K
      or any amendment to this Form 10-K. o







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




Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filerý
              Smaller
                  reporting companyo*(Do
                  not check if a smaller**reporting
                  company)*




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




Yes o No ý




The
      registrant’s common stock commenced trading on the American Stock Exchange on
      September 28, 2007. The aggregate market value of the registrant's issued and
      outstanding shares of common stock held by non-affiliates of the registrant
      as
      of March 28, 2008 (based on the price at which the registrant’s common stock was
      last sold on such date) was approximately $100,247,992.




There
      were 51,088,144 shares outstanding of the registrant’s common stock, par value
      $0.001 per share, as of March 28, 2008. The registrant’s common stock is listed
      on the American Stock Exchange under the ticker symbol “RCH.”




DOCUMENTS
      INCORPORATED BY REFERENCE: The information required by Part III of Form 10-K
      is
      incorporated by reference from the registrant's definitive proxy statement
      on
      Schedule 14A that will be filed no later than the end of the 120-day period
      following the registrant's fiscal year end, or, if the registrant's definitive
      proxy statement is not filed within that time, the information will be filed
      as
      part of an amendment to this annual report on Form 10-K/A, not later than the
      end of the 120-day period.







**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**TABLE
      OF CONTENTS TO ANNUAL REPORT ON FORM 10-K**


**For
      the Fiscal Year Ended December 31, 2007**




**ITEM**
              
              
              **Page****PART I**Item
                  1.
              
              Business
              4Item 1A.
              
              Risk
                  Factors
              12Item 1B.
              
              Unresolved
                  Staff Comments
              24Item
                  2.
              
              Properties
              25Item
                  3.
              
              Legal
                  Proceedings
              26Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              26**PART II**Item
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              27Item
                  6.
              
              Selected
                  Financial Data
              29Item
                  7.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              30Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosures about Market Risk
              39Item
                  8.
              
              Financial
                  Statements and Supplementary Data
              40Item
                  9.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              40Item
                  9A.
              
              Controls
                  and Procedures
              40Item
                  9B.
              
              Other
                  Information
              41**PART III**Item
                  10.
              
              Directors,
                  Executive Officers and Corporate Governance
              41Item
                  11.
              
              Executive
                  Compensation
              42Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              42Item
                  13.
              
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              42Item
                  14.
              
              Principal
                  Accounting Fees and Services
              42**PART IV**Item
                  15.
              
              Exhibits,
                  Financial Statement Schedules
              43Signatures
              44


i


**CAUTIONARY
      STATEMENT REGARDING FORWARD-LOOKING STATEMENTS**




The
      information contained in this report, including in the documents incorporated
      by
      reference into this report, includes some statements that are not purely
      historical and that are “forward-looking statements.” Such forward-looking
      statements include, but are not limited to, statements regarding our and their
      management’s expectations, hopes, beliefs, intentions or strategies regarding
      the future, including our financial condition, results of operations, and the
      expected impact of the Share Exchange on the parties’ individual and combined
      financial performance. In addition, any statements that refer to projections,
      forecasts or other characterizations of future events or circumstances,
      including any underlying assumptions, are forward-looking statements. The words
      “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,”
“intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,”
“projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the
      negatives of such terms, may identify forward-looking statements, but the
      absence of these words does not mean that a statement is not
      forward-looking.





The
      forward-looking statements contained in this report are based on current
      expectations and beliefs concerning future developments and the potential
      effects on the parties and the transaction. There can be no assurance that
      future developments actually affecting us will be those anticipated. These
      forward-looking statements involve a number of risks, uncertainties (some of
      which are beyond the parties’ control) or other assumptions that may cause
      actual results or performance to be materially different from those expressed
      or
      implied by these forward-looking statements, including the
      following:





·
            Our
                dependence on government contracts;




·
            Fluctuation
                and unpredictability of costs related to our products and
                services;




·
            Changes
                in the laws of the PRC that affect our
                operations;




·
            Our
                failure to meet or timely meet contractual performance standards
                and
                schedules;




·
            Any
                recurrence of severe acute respiratory syndrome (SARS) or Avian
                Flu;




·
            Reduction
                or reversal of our recorded revenue or profits due to “percentage of
                completion” method of accounting;




·
            Our
                dependence on the steel and aluminum
                markets;




·
            Exposure
                to product liability and defect
                claims;




·
            Our
                ability to obtain all necessary government certifications and/or
                licenses
                to conduct our business;




·
            Development
                of a public trading market for our
                securities;




·
            Expenses
                and costs related to our issuance of the
                Bonds;




·
            The
                cost of complying with current and future governmental regulations
                and the
                impact of any changes in the regulations on our operations;
                and




·
            The
                other factors referenced in this report, including, without limitation,
                under the sections entitled “Risk Factors,” “Management’s Discussion and
                Analysis of Financial Condition and Results of Operations,” and
                “Business.”




These
      risks and uncertainties, along with others, are also described below under
      the
      heading “Risk Factors.” Should one or more of these risks or uncertainties
      materialize, or should any of the parties’ assumptions prove incorrect, actual
      results may vary in material respects from those projected in these
      forward-looking statements. We undertake no obligation to update or revise
      any
      forward-looking statements, whether as a result of new information, future
      events or otherwise, except as may be required under applicable securities
      laws.


3


**PART
      I**




**Item
      1. Business**




**Overview**





We
      specialize in high-end curtain wall systems (including glass, stone and metal
      curtain walls), roofing systems, steel construction systems, eco-energy saving
      building 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 and
      construction of structural exterior cladding systems. We compete on the strength
      of our reputation, track record, strong 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 believe we are able to add artistic and technological
      value to projects at cost-effective price points.





In
      November 2007, we acquired Techwell Engineering Ltd. and its wholly owned
      subsidiaries, Techwell Building Systems (Shenzhen) Ltd. and Techwell
      International Ltd. in Macau for approximately $11.7 million. We believe this
      acquisition is a natural step in the expansion of our overseas business
      development. We believe Techwell’s experienced management teams will provide the
      operating platform for us to enter into other international
      markets.





**Market
      Opportunities in China and Internationally**





The
      continuing expansion of the Chinese economy has spurred the substantial growth
      of China’s construction industry, especially in the commercial and public works
      sectors. As architectural designs for these buildings have become more complex,
      challenging and modern in scope, there has been an increased need for technology
      driven companies providing high-end specialty curtain wall systems. As China’s
      economy continues to develop, it is expected that increased construction will
      be
      required to accommodate growth in education, culture, social welfare and
      business. Libraries, museums, exhibition halls, stadiums, planetariums and
      science centers are among the types of structures increasingly needed in China
      today. In addition, governmental agencies and international regulators are
      becoming more environmentally conscious in the enactment of regulations
      governing new construction. Rising fuel costs and environmental concerns have
      resulted in regulation designed to ensure that new commercial and public works
      buildings have a low environmental impact. Technologies such as solar lighting,
      advanced shading systems and circulating sea water systems are constantly
      improving the ability of structures to interact with the environment by taking
      advantage of natural conditions, thus meeting the dual goals of reducing energy
      costs and lessening environmental impact.





A
      global
      market opportunity for our products and services also exists, namely in Hong
      Kong, Macau, Australia, Dubai (UAE), Doha (Qatar), and North America. Hong
      Kong
      has recently undergone an economic recovery, and the government has indicated
      that it expects to increase its expenditures for infrastructure projects over
      the next few years. Macau’s economy continues to be strong, particularly in the
      gaming and tourism sector, and the Macau government has increased its investment
      in infrastructure. In Australia, we are nearing completion of a small
      engineering project, and we are seeking to obtain several additional projects
      in
      Australia and countries in Southeast Asia. The construction markets in Dubai,
      UAE and Doha, Qatar are experiencing significant growth, and, in 2007, we agreed
      upon the terms for a number of projects in Dubai and Doha. We are also in
      discussions on several projects in Central Asia and Eastern Europe, and have
      started to explore the North American market, where we believe there is a
      significant potential for growth due to an increasing popularity of curtain
      walls.





**Products
      and Services**





We
      specialize in high-end curtain wall systems (including glass, stone and metal
      curtain walls), roofing systems, steel construction systems, eco-energy saving
      building 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 and
      construction of structural exterior cladding systems. We design and develop
      systems to offer custom-designed solutions for developers of commercial and
      public works projects with special architectural features. In terms of project
      management, we exercises overall project planning and control over key areas
      of
      activities such as design and engineering, procurement, production scheduling,
      quality control and site installation. Our comprehensive package of services
      allows us to offer customized engineering solutions at an affordable cost to
      meet the requirements of our clients.




4


For
      the
      year ended December 31, 2007, approximately 98% of our sales came from new
      construction projects starting in 2007 and for the year ended December 31,
      2006,
      approximately 95% of our sales came from new construction projects starting
      in
      2006. The remainder is comprised primarily of projects where we add new glass
      skins to old buildings. A number of these projects have been done in Hong Kong,
      where the goal was to preserve the original style and features of the structure
      while applying a new skin, which would protect the building and add new
      energy-saving and aesthetic features.





***Concept
      and Project Management***





Initially,
      we work with the architect to develop, clarify and enhance the overall creative
      vision for the project. In the design of a curtain wall system, architects
      are
      freely able to choose different structure systems to meet the requirements
      of
      various architectural models. All contracts awarded are assigned a project
      number, which is used to track each component and man-hour associated with
      the
      project through the entire construction process. All project drawings,
      specifications and completion schedules on a project are reviewed by our senior
      management team, and all projects are assigned to one or more project managers,
      who assume primary responsibility for all aspects of the project. Reporting
      to
      the project manager are construction supervisors, safety and administration
      staff, quality control staff and project engineering staff. Each of these
      project team members coordinates with internal functional departments and
      outside suppliers as appropriate. Often a project manager assigned to a given
      project will have significant experience in similar projects. A project manager
      generally will be responsible for a number projects in various stages of
      completion at any given time, depending on the scope, complexity, and geographic
      location of such projects. Each project is divided into critical sequences
      that
      follow the anticipated curtain wall construction path. Each sequence follows
      a
      timeline, the status of which is continually monitored. Project managers
      coordinate and manage design changes or other changes in scheduled completion
      deadlines in an effort to minimize overall project delays.





***Design***





Specific
      technical parameters of the concept are established as new design elements
      are
      created and combined with existing technologies. During the design phase, our
      engineers and technicians review preliminary and completed designs and make
      recommendations regarding types of connections, possible savings on fabrication
      techniques, and methods of installation. Operating state-of-the art
      computer-aided design (CAD) stations, these individuals provide customized
      design solutions in the form of structural calculations, drawings, fabrication
      and installation details, together with technical advice and consultancy on
      specifications, feasibility studies and material procurement. At the
      implementation stage of the project, detailed fabrications/shop-drawings are
      produced, discussed and agreed with the project architect/manager. These form
      the blueprint for project execution and scheduling. Every order is scheduled
      for
      production through CAD and computer-aided manufacturing (CAM) systems with
      progress tracked at each stage of the project process. Quality control and
      assurance programs are a combination of our specifications with quality
      inspectors working at all production stages.





***Engineering***





We
      maintain significant in-house structural engineering and detailing capabilities
      that enable us to implement and coordinate with our shop and field personnel
      original project specifications and changes to building and structural designs
      sought by our clients. These resources help influence critical determinations
      as
      to the most cost-effective systems, designs, connections, and installation
      procedures for a particular project. Our engineers work on-site with suppliers
      to machine our patented curtain wall elements and to procure the appropriate
      raw
      materials. Our detailers prepare detail shop drawings of the dimensions,
      positions, locations, and connections, and the fabrication and installation
      sequences, of each component utilized in a project, and continually update
      these
      drawings to accommodate design and other changes. Our automated detailing
      systems produce updated detail drawings electronically, which can be delivered
      to our domestic and foreign field locations. Detailers coordinate directly
      with
      customers and our suppliers and installation teams to determine and plan the
      order of fabrication and installation of a project and associated personnel
      and
      equipment requirements.


5


***Fabrication***





Although
      we are responsible for hiring suppliers and manufacturers, we subcontract the
      manufacture of parts made from glass, metal and other materials used in our
      exterior cladding systems. Once parts have been manufactured by subcontracted
      factories, we will occasionally process them further. This processing takes
      place in our facilities in Beijing, Shunde and Zhuhai and usually entails
      procedures such as adding metal frames to or drilling holes in glass panes,
      or
      cutting and bending steel rods into customized shapes. All of our products
      are
      fabricated in accordance with applicable industry and specific customer
      standards and specifications. We have developed project-specific and
      company-wide quality assurance and quality control programs, and utilize
      sophisticated systems to inspect all fabricated components. We prepare load
      lists that identify the sequence and date that each individual component is
      required on a project, a procedure that reduces the handling of and the need
      to
      store materials in the field. After the completion of processing to customer
      specifications, finished pieces are loaded for shipment to the construction
      site.




***Installation***





We
      have
      76 full-time project managers/supervisors and 332 part-time on-site workers
      who
      are engaged on our projects. Our installation teams consist of highly trained,
      skilled and experienced field operatives with established lines of communication
      between the work site, the technical design department and the factory, ensuring
      that clients are provided with optimum and cost-effective practical solutions.
      Site installation is managed through our trained project management staff,
      and
      each project has a dedicated project team. On site there are a number of our
      supervisors who are each responsible for a different section of the curtain
      wall
      project. Each supervisor typically manages 30 to 50 of our workers. A small
      project may have just one work team while a very large project may have five
      or
      more. Because the workers are all trained by us and are familiar with the
      workflow process, they can work on any project in any location. Our project
      supervisors are often internally developed from our pool of workers.
      Occasionally, we will hire additional contract labor for specific sections
      of a
      very large project or if there are several projects being installed
      simultaneously, but these extra workers only supplement our core project team.
      The installation team coordinates its site delivery program with the main
      contract schedule to meet completion deadlines. The installation process
      typically consists of pre-assembly of metal and glass component parts at the
      project site, the lifting of components by crane to the appropriate location
      at
      the site and the final assembly of major components.





***Customer
      Service***





Our
      quality control and assurance department is comprised of trained technicians
      who
      are responsible for the quality assurance, including quality control of
      in-process fabrication and site installation by a detailed inspection as well
      as
      continued maintenance after project completion. We have adopted important safety
      policies that are administered and enforced by our senior management and provide
      training on safety procedures and techniques to our shop and field
      personnel.





**Strategy**





To
      reach
      the goal of being a preferred choice for Chinese and international government,
      developer, contractor and architectural clients, we are focusing
      on:





·
            *Emphasizing
                innovative services.*We
                focus our design, engineering and installation expertise on distinct
                product segments requiring unique or innovative techniques as we
                have
                extensive experience in providing services requiring complex design,
                engineering and installation techniques and other unusual project
                needs.




·
            *Providing
                full service solutions.*We
                believe that a key factor in our success has been our ability to
                provide,
                through our in-house personnel, valuable input and assistance to
                our
                customers with respect to overall project design, engineering fabrication,
                and installation sequences and other critical project
                decisions.




·
            *Leveraging
                our brand and reputation.*We
                believe that the strength of our brand is increasing in China and
                internationally as we build on our large range of projects and our
                offering of comparative cost advantages and supply-chain management
                for
                some of the most complex exterior cladding systems in the
                world




·
            *Expanding
                our coverage in China.*We
                believe that we have long-standing relationships with China’s top
                construction officials and leading Chinese and international architects,
                having completed high profile projects in China, including the National
                Grand Theater in Beijing, the Shanghai South Railway Station, the
                Shenzhen
                International Airport and the National Palace Museum in Beijing.
                We plan
                to continue to meet the needs of government and private sector customers
                in the larger cities as well as expand to medium-sized second and
                third
                tier cities in China.




6


·
            *Expanding
                our coverage internationally.*We
                believe that international expansion of our business is attractive
                because
                it may provide us with higher margins as compared to similar projects
                in
                China, and we hope to increase our revenues from international projects
                as
                a percentage of our total revenue. We have launched initiatives to
                expand
                sales in Hong Kong, Macau, Australia, Southeast Asia, Dubai (UAE),
                Doha
                (Qatar), other Middle Eastern countries, Central Asia, Eastern Europe
                and
                North America.




**Product
      Attributes**





Our
      exterior cladding systems products are highly engineered specialty wall systems
      consisting primarily of a series of glass panels set in metal frames, stone
      panels, or metal panels, as well as roofing systems and related products. A
      curtain wall is fixed to the commercial building by mechanical connection,
      either in a primarily inoperable mode or adjustable with special settings with
      spring or press systems. Glass panels are connected to the metal support system
      by metal clamps and fixing bolts. The support system of fixing bolts could
      be a
      steel, aluminum and or glass structure, with glass flank or spidery tension
      rod
      or cable.





We
      offer
      a variety of support systems:





*Glass
      Fin Support System.* The
      facial glass mixing with the glass fin provides facade with maximum
      transparence, which eliminates the differential expansion among glass metal
      structures.





*Metal
      Structure Support System.* This
      system utilizes both steel post and steel truss of aluminum post in a metal
      structure. One of our most popular support systems, its flexibility can fully
      meet the criteria of demanding modern architecture. At the same time, the
      combination of transparent glass and steady metal structure completely realizes
      a harmony between beauty and force, elegance and strength.





*Spidery
      Tension Rod/Cable Support System.* This
      system utilizes a stainless steel tension rod connector for connecting the
      tension rod or the tension cable to the steel structure in order to form a
      stable spidery structure for glass curtain wall supporting. A response to the
      challenge of modern architecture, architects are able to create a smooth and
      transparent facade.





We
      use a
      variety of clamping devices to integrate the glass frame to the support system.
      Metal “spider” clamps are cast from stainless or high-strength carbonic steel in
      and provide the features of high strength, simple installment and easy
      maintenance. Our metal clamps integrate the facial glass with the structure,
      enhancing the hardness of an entity. Transferable cabling structure makes the
      curtain wall stretch higher, meeting designers’ requirements for the larger size
      of vertical space. The combination of steel and glass embodies the feature
      of
      stability, lightness and transparency, expressing the majesty and originality
      of
      a building.




Our
      fixing bolts are made of stainless steel and are used for holding the glass
      glazing. These specifically designed bolts transfer the wind loads, deflection
      stress and the weight of glass itself to the metal support system, which helps
      reduce the strain on the glass and ensure structural integrity. These bolts
      are
      offered in both countersink and flat head. Countersink head fixing bolts they
      provide a smooth surface when fit flush in the outward surfaces of the glass.
      They are typically utilized in single and double glazed glass structures. The
      cylindrical head of our flat head fixing bolts protrude from the surface of
      glass, which provides more strength against wind force and shear force and
      can
      use to fix laminated and insolated glass.





We
      offer
      a variety of glass panels allowing a diverse selection of styles to meet the
      architectural demands of our clients:





*Insulating
      Glass* .
      Increases a window’s thermal performance and sound insulation; constructed with
      two or more pieces of glass separated by a desiccant-filled spacer and sealed
      with an organic sealant. The desiccant absorbs the insulating glass unit’s
      internal moisture.




7


*Laminated
      Glass* .
      Consists of two or more pieces of glass fused with a vinyl or urethane
      interlayer and is used primarily for skylight, security and hurricane-resistant
      application.





*Energy-
      Efficient Coated Glass.* Provides
      solar control, both minimizing heat gain and controlling thermal transfer,
      by
      adding coatings to glass. In addition, coatings add color and varying levels
      of
      reflectively.





*Spandrel
      Glass.* The use
      of full coverage paint on insulated glass or polyester opacifier film backing
      on
      high performance coated glass for the non-vision areas of the
      building.





Stone
      or
      metal may also be used as paneling.





**Projects**





Our
      work
      is performed under cost-plus-fee contracts and fixed-price contracts. The length
      of our contracts varies but typically has duration of one to two
      years.





Approximately
      90% of our sales are from fixed price contracts. The remaining 10% of our sales
      are from cost-plus-fee contracts. Under fixed-price contracts, we receive a
      fixed price. Approximately 70% of contracts are modified after they begin,
      usually to accommodate requests from clients to increase project size and scope.
      In cases where fixed-price contracts are modified, the fixed price is
      renegotiated and adjusted upwards accordingly. A disadvantage of fixed-price
      contracts is that we realize a profit only if we control our costs and prevent
      cost over-runs on the contracts, which can oftentimes be out of our control,
      such as cost of materials. An advantage of these contracts is that we can adjust
      the material and technology that we use in the project, as long as we satisfy
      the requirements of our customer, and there is a potential to benefit from
      lower
      costs of materials.




Under
      cost-plus-fee contracts, which may be subject to contract ceiling amounts,
      we
      are reimbursed for allowable costs and fees, which may be fixed or
      performance-based. If our costs exceed the contract ceiling or are not allowable
      under the provisions of the contract or any applicable regulations, we may
      not
      be reimbursed for all our costs. An advantage of cost-plus-fee contracts is
      that
      the cost of materials generally has no effect on our profit, since we are
      reimbursed for costs. A disadvantage is that the profit resulting from any
      cost
      savings on the materials goes to the contractor and not us.





During
      2007, we completed 26 projects, including the National Grand Theater in Beijing,
      the Grand Theater and the Qintai Cultural & Art Center in
      Wuhan.





**Sales
      and Marketing**





*Sales*





Sales
      managers lead our sales and marketing efforts through our domestic headquarters
      in Zhuhai, China, and our regional sales offices in 12 cities. Outside of China,
      we have sales managers in Hong Kong, Sydney (Australia), Dubai (the United
      Arab
      Emirates), Doha (Qatar), and New York (the United States). Each sales manager
      is
      responsible primarily for our estimates, sales, and marketing efforts in defined
      geographic areas. In addition, we employ full-time project estimators and chief
      estimators. Our sales representatives attempt to maintain relationships with
      governments, developers, general contractors, architects, engineers, and other
      potential sources of business to determine potential new projects under
      consideration. Our sales efforts are further supported by our executive officers
      and engineering personnel, who have substantial experience in the design,
      engineering, fabrication, and installation of high-end specialty curtain
      walls.




We
      compete for new project opportunities through our relationships and interaction
      with our active and prospective customer base, which we believe provides us
      with
      valuable current market information and sales opportunities. In addition, we
      are
      often contacted by governmental agencies in connection with public construction
      projects, and by large private-sector project owners and general contractors
      and
      engineering firms in connection with new building projects both in China and
      other countries, sometimes at the recommendation of architects and engineers
      we
      have worked with in the past.




8


Upon
      selection of projects to bid or price, our estimating division reviews and
      prepares projected costs of shop, field, detail drawing preparation, raw
      materials, and other costs. On bid projects, a formal bid is prepared detailing
      the specific services and materials we plans to provide, payment terms and
      project completion timelines. Upon acceptance, our bid proposal is finalized
      in
      a definitive contract. 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 are typically paid by the contractor the entire amount due
      to
      us for our services and products once the entire project is completed, which
      could be significantly after we complete the curtain wall portion of the
      project. National policy requires the contractor to pay 85% of our total
      contract value to us before the project is completed, and the remainder may
      be
      paid when the contractor completes the entire project. In addition, current
      national policy in China dictates that for government projects sub-contractors
      will be paid directly from the government budget offices, not through general
      contractors and/or developers. Because our payment cycle is considerably shorter
      than our receivable cycle, we may experience working capital shortages. We
      have
      used bank loans, cash provided by operations and other financings to fund our
      operations.





Our
      three
      largest projects are the Grand Theater and the Qintai Cultural & Art Center
      in Wuhan, the Guangzhou Opera House and the Dalian Star Development Project,
      all
      of which accounted for approximately 14%,7% and 5% of our sales, respectively,
      for the year ended December 31, 2007.





*Marketing*





Management
      believes that we have developed a reputation for innovative technology and
      quality in the specialty high-end curtain wall industry. Marketing efforts
      are
      geared towards advancing us as a brand of choice for building the world’s most
      modern and challenging projects.





The
      focus
      of our marketing plan is print advertising, participation in tradeshows,
      exhibitions, lecture and technology briefings to architects and property owners.
      With a targeted approach, our print advertisements appear regularly in popular
      consumer and industry publications and trade journals. To better showcase our
      diverse products to potential customers, we regularly exhibit at leading trade
      shows and exhibitions. Our dynamic, state-of-the-art trade show exhibits are
      developed internally to showcase our latest product offerings.





**Production**





*Supplier
      Selection*





We
      procure high quality glass panes, metal support beams, and other curtain wall
      components from a number of regional and international suppliers, depending
      on
      the requirements of the contract. Once the suppliers are chosen, our engineers
      work with them to configure their production processes to manufacture anything
      from a standard glass pane to a patented fixing bolt or connector. All
      manufacturing is monitored and approved by our quality control and engineering
      departments.





*Component
      Processing and Delivery*





Once
      the
      curtain wall components are produced, they are either shipped directly to the
      site or sent to one of our facilities for further processing. Such processing
      typically involves drilling holes in glass panes, affixing metal frame pieces
      to
      glass panes, and cutting steel rods and bending them into customized shapes.
      The
      project manager and project engineer jointly approve all factory
      purchases.





**Quality
      Control**





Our
      manufacturing production facilities are designed and maintained with a view
      towards conforming to good practice standards. To comply with the strict
      requirements of our customer base, we have implemented a quality assurance
      plan
      setting forth our quality assurance procedures. Our quality control department
      is responsible for maintaining quality standards throughout the production
      process. Quality control executes the following functions:





·
            setting
                internal controls and regulations for semi-finished and finished
                products;





·
            implementing
                sampling systems and sample
                files;


9




·
            maintaining
                quality of equipment and
                instruments;





·
            auditing
                production records to ensure delivery of quality
                products;





·
            articulating
                the responsibilities of quality control staff;
                and





·
            on-site
                evaluation of supplier quality control
                systems.





We
      have
      received the following certifications in recognition of our production and
      quality assurance program:




·
            ISO
                9001 - International Quality System Certification, valid from February
                2005 to April 2008;





·
            ISO
                14001 - International Environmental System Certification, valid from
                April
                2005 to April 2008; and





·
            ISO
                18001 - International Safety System Certification, valid from June
                2005 to
                June 2008.





We
      are
      finalizing approvals for the renewal for another three years for the above
      three
      certifications.




**Research
      and Development**





Companies
      such as us are under pressure from customers to respond more quickly with new
      designs and product innovations to support rapidly changing consumer tastes
      and
      regulatory requirements. We believe that the engineering and technical expertise
      of our management and key personnel, together with our emphasis on continuing
      research and development in support of our high-end curtain wall technologies,
      allows us to efficiently and timely identify and bring new, innovative products
      to market for our customers using the latest technologies, materials and
      processes. We believe that continued research and development activities are
      critical to maintaining our offering of technologically-advanced products to
      serve a broader array of our customers.





For
      example, in an effort to add value and create new markets, we are working to
      develop high performance systems that reduce the need for air conditioning
      in
      the summer and heat in the winter. Our products under development are designed
      to both reduce the direct light and heat coming into the building and, through
      the use of photovoltaic cells, to harness the energy collected from the sun
      and
      further reduce external energy costs by generating power for use in other areas
      of the building. Other features are designed to add a level of programmed
      intelligence, automatically adjusting louvers/blinds and other façade controls
      to achieve predetermined levels for user comfort. These efforts are made to
      meet
      the demand for self-sustaining buildings and clean, renewable power in response
      to climbing energy prices and declining energy reserves.





Our
      research and development strategy relies primarily on internal innovation and
      development, supplemented with collaboration with academic and research
      institutions. For example, in 2001, we were appointed by the Chinese Ministry
      of
      Construction to lead the committee tasked with establishing national standards
      for the fixing bolt glass curtain wall technology industry. Luo Ken Yi, our
      Chief Executive Officer and Chief Operating Officer, was the Editor-in-Chief
      for
      the new standard code. Also, in recognition of our contributions to the curtain
      wall industry, Luo Ken Yi and two other of our engineers were appointed to
      senior posts at the Architectural Glass and Metal Structure Institute of Qinghua
      University in Beijing, one of the most prestigious research institutions in
      China, which we helped to create in 1999. We were able to incorporate many
      of
      the academic research results by the Institute into our projects, including
      the
      National Grand Theater in Beijing and the Hangzhou Grand Theater, both completed
      recently.





We
      actively track research developmental trends and government regulations, and
      continually seek to both improve and perfect existing products and develop
      new
      ones in accelerated product development cycles. In addition, we seek to recruit
      and retain qualified Chinese and foreign technical personnel. As of December
      31,
      2007, we employed 85 designers and engineers and additional 65 research and
      development personnel.




10


We
      currently own sixty-two patents, of which forty-nine are approved, four are
      pending approval and nine are in the application stage. Of the forty-nine
      approved, forty-seven are in China and two are in the US, Europe, Japan and
      Hong
      Kong.





We
      expended $111,129, $50,117, and $58,865 on research and development activities
      for each of the years ended December 31, 2007, 2006 and 2005, respectively.
      These amounts exclude design and construction of customized molds used to
      manufacture the pieces used for a particular project, as well as sample and
      testing costs.





**Backlog**





As
      of
      December 31, 2007, our total backlog of orders considered to be firm was
      approximately $106.3 million, compared with $10.0 million and $26.2 million
      at
      December 31, 2006 and 2005, respectively. Of our 2007 amounts, 76% of the
      backlog, or $80.3 million, is expected to generate revenues in fiscal 2008,
      compared to 100% of our 2006 backlog ($10.0 million) realized in fiscal 2007
      and
      40% of our 2005 backlog ($10.5 million) realized in fiscal 2006.





Of
      the
      2008 backlog, 36% consists of orders for projects outside our home market of
      China.





We
      view
      backlog as an important statistic in evaluating the level of sales activity
      and
      short-term sales trends in our business. However, as backlog is only one
      indicator, and is not an effective indicator of the ultimate profitability
      of
      our sales, we do not believe that backlog should be used as the sole indicator
      of our future earnings.





**Competition**





The
      markets that we serve are highly competitive, price and lead-time sensitive
      and
      are impacted by changes in the commercial construction industry, including
      unforeseen delays in project timing and workflow. In addition, competition
      in
      the markets of the building industry is intense. It is based primarily on:





·
            quality;





·
            service;





·
            delivery;





·
            ability
                to provide added value in the design and engineering of
                buildings;





·
            price;





·
            speed
                of construction in buildings and components;
                and





·
            personal
                relationships with customers.





We
      compete with several large integrated glass manufacturers, numerous specialty,
      architectural glass and window fabricators, and major contractors and
      subcontractors. We also compete with a number of other manufacturers of
      engineered building systems ranging from small local firms to large national
      firms. Many of our competitors have greater financial or other resources than
      we
      do. In addition, we and other manufacturers of engineered high-end curtain
      walls
      compete with alternative methods of building construction. If these alternative
      building methods compete successfully against us, such competition could
      adversely affect us. Demand for our services is cyclical and vulnerable to
      economic downturns. If the economy weakens, then our revenues, profits and
      financial condition may deteriorate.





**Government
      Regulation**





China’s
      construction industry is heavily regulated by the national government. On
      November 1, 1997, the National Government of the PRC published the Construction
      Law of the PRC, Presidential Order No. 91, which is the basic construction
      law
      of China. This law outlines the basic requirements and rules for all
      construction activity in China. Underneath the National Government, the Ministry
      of Construction also writes laws. On March 14, 2001, the Ministry of
      Construction published Rule No. 87, which puts forth licensing requirements
      for
      all construction companies operating in China. The Ministry of Construction
      also
      writes specific standards for all different types of construction. The three
      standards from the Ministry of Construction which are most relevant to our
      business are: (i) the Curtain Wall Engineering and Design Licensing Standard,
      and (ii) the Light-Duty Steel Building Structure Engineering and Design
      Licensing Standard, and (iii) the Automated Building Control System Standard.
      These standards stipulate the basic requirements for construction companies
      in
      China in such areas as registered capital, tangible assets, liability insurance,
      employee regulations and engineering certifications. The standards also have
      graded levels of qualification. We have first class certification for the
      Curtain Wall Standard and Second Class Certification for the Light Steel
      Structure Standard. In addition, provincial and municipal governments may also
      enact regulations through their own construction bureaus.




11


**Employees**





As
      of
      December 31, 2007, we had 328 full-time employees, 4 part-time employees and
      an
      additional 332 part-time on-site employees. Substantially all of our employees
      are located in China and Hong Kong. We now have a small number of employees
      in
      Doha (Qatar), Dubai (the United Arab Emirates), the United States &
Australia. Approximately one-quarter of our employees are designers and
      engineers, one-third are project managers/supervisors and the remaining
      employees are supply chain and administrative staff. We believe that our
      relationship with our employees is good.





We
      are
      required to contribute a portion of our employees’ total salaries to the Chinese
      government’s social insurance funds, including medical insurance, unemployment
      insurance and job injuries insurance, and a housing assistance fund, in
      accordance with relevant regulations. We are required to contribute to
      government social security, medical insurance, unemployment insurance,
      disability insurance and so on for our employees based in Hong Kong, Australia
      and the United States.





**Item
      1A. Risk Factors**





Any
      investment in our securities involves a high degree of risk. Investors should
      carefully consider the risks described below and all of the information
      contained in this report before deciding whether to purchase our securities.
      Our
      business, financial condition or results of operations could be materially
      adversely affected by these risks if any of them actually occur. The trading
      price of our common stock and the value of the Bonds and Bond Warrants could
      decline due to any of these risks, and an investor may lose all or part of
      his
      investment. Some of these factors have affected our financial condition and
      operating results in the past or are currently affecting our company. This
      report also contains forward-looking statements that involve risks and
      uncertainties. Our actual results could differ materially from those anticipated
      in these forward-looking statements as a result of certain factors, including
      the risks we face as described below and elsewhere in this report. With respect
      to this discussion, the terms, “we,” “us,” or “our” refer to China Architectural
      Engineering, Inc., and all of our subsidiaries.





**RISKS
      RELATED TO OUR OPERATIONS**





**Because
      we depend on governmental agencies for a significant portion of our revenue,
      our
      inability to win or renew government contracts could harm our operations and
      significantly reduce or eliminate our profits.**





Revenues
      from Chinese government contracts represented approximately 72% of our revenues
      for the year ended December 31, 2007. Our inability to win or renew Chinese
      government contracts could harm our operations and significantly reduce or
      eliminate our profits. Chinese government contracts are typically awarded
      through a regulated procurement process. Some Chinese government contracts
      are
      awarded to multiple competitors, causing increases in overall competition and
      pricing pressure. The competition and pricing pressure, in turn may require
      us
      to make sustained post-award efforts to reduce costs in order to realize
      revenues under these contracts. If we are not successful in reducing the amount
      of costs we anticipate, our profitability on these contracts will be negatively
      impacted. Finally, Chinese government clients can generally terminate or modify
      their contracts with us at their convenience.




12


**If
      we are unable to accurately estimate and control our contract costs and
      timelines, then we may incur losses on our contracts, which may result in
      decreases in our operating margins and in a significant reduction or elimination
      of our profits.**





If
      we do
      not control our contract costs, we may be unable to maintain positive operating
      margins or experience operating losses. Approximately 90% of our sales are
      from
      fixed-price contracts. The remaining 10% of our sales are from cost-plus-fee
      contracts. Under fixed-price contracts, we receive a fixed price. Consequently,
      we realize a profit on fixed-price contracts only if we control our costs and
      prevent cost over-runs on the contracts. Approximately 70% of contracts are
      modified after they begin, usually to accommodate requests from clients to
      increase project size and scope. In cases where fixed-price contracts are
      modified, the fixed price is renegotiated and adjusted upwards accordingly.
      Under cost-plus-fee contracts, which may be subject to contract ceiling amounts,
      we are reimbursed for allowable costs and fees, which may be fixed or
      performance-based. If our costs exceed the contract ceiling or are not allowable
      under the provisions of the contract or any applicable regulations, we may
      not
      be reimbursed for all our costs. Under each type of contract, if we are unable
      to estimate and control costs and/or project timelines, we may incur losses
      on
      our contracts, which may result in decreases in our operating margins and in
      a
      significant reduction or elimination of our profits.





**If
      we fail to timely complete, miss a required performance standard or otherwise
      fail to adequately perform on a project, then we may incur a loss on that
      project, which may affect our overall profitability.**





We
      may
      commit to a client that we will complete a project by a scheduled date. We
      may
      also commit that a project, when completed, will achieve specified performance
      standards. If the project is not completed by the scheduled date or subsequently
      fails to meet required performance standards, we may either incur significant
      additional costs or be held responsible for the costs incurred by the client
      to
      rectify damages due to late completion or failure to achieve the required
      performance standards. The uncertainty of the timing of a project can present
      difficulties in planning the amount of personnel needed for the project. If
      the
      project is delayed or canceled, we may bear the cost of an underutilized
      workforce that was dedicated to fulfilling the project. In addition, performance
      of projects can be affected by a number of factors beyond our control, including
      unavoidable delays from weather conditions, unavailability of vendor materials,
      changes in the project scope of services requested by clients or labor
      disruptions. In some cases, should we fail to meet required performance
      standards, we may also be subject to agreed-upon financial damages, which are
      determined by the contract. To the extent that these events occur, the total
      costs of the project could exceed our estimates and we could experience reduced
      profits or, in some cases, incur a loss on that project, which may affect our
      overall profitability.




**Our
      use of the “percentage-of-completion” method of accounting could result in
      reduction or reversal of previously recorded revenues and
      profits.**





A
      substantial portion of our revenues and profits are measured and recognized
      using the “percentage-of-completion” method of accounting, which is discussed
      further in Note 2, “Summary Of Significant Accounting Policies” to our
“Financial Statements.” Our use of this method results in recognition of
      revenues and profits ratably over the life of a contract, based generally on
      the
      proportion of costs incurred to date to total costs expected to be incurred
      for
      the entire project. The effect of revisions to revenues and estimated costs
      is
      recorded when the amounts are known or can be reasonably estimated. Such
      revisions could occur in any period and their effects could be material.
      Although we have historically made reasonably reliable estimates of the progress
      towards completion of long-term engineering, program and construction management
      or construction contracts in process, the uncertainties inherent in the
      estimating process make it possible for actual costs to vary materially from
      estimates, including reductions or reversals of previously recorded revenues
      and
      profits.





**Our
      future revenues depend on our ability to consistently bid and win new contracts
      and renew existing contracts and, therefore, our failure to effectively obtain
      future contracts could adversely affect our profitability.**





Our
      future revenues and overall results of operations require us to successfully
      bid
      on new contracts and renew existing contracts. Contract proposals and
      negotiations are complex and frequently involve a lengthy bidding and selection
      process, which is affected by a number of factors, such as market conditions,
      financing arrangements and required governmental approvals. If negative market
      conditions arise, or if we fail to secure adequate financial arrangements or
      the
      required governmental approval, we may not be able to pursue particular
      projects, which could adversely affect our profitability.





**Our
      results could be adversely impacted by product quality and
      performance.**





We
      manufacture or install products based on specific requirements of each of our
      customers. We believe that future orders of our products or services will depend
      on our ability to maintain the performance, reliability and quality standards
      required by our customers. If our products or services have performance,
      reliability or quality problems, we may experience delays in the collection
      of
      accounts receivables, higher manufacturing or installation costs, additional
      warranty and service expense, and reduced, cancelled or discontinued orders.
      Additionally, performance, reliability or quality claims from our customers,
      with or without merit, could result in costly and time-consuming litigation
      that
      could require significant time and attention of management and involve
      significant monetary damages.




13




**Continued
      price volatility and supply constraints in the steel and aluminum markets could
      prevent us from meeting delivery schedules to our customers or reduce our profit
      margins** .





We
      buy
      semi-finished products made of aluminum, steel and glass, and, to a degree,
      our
      business is dependent on the prices and supply of steel and aluminum, which,
      along with glass, are the principal raw materials used in our products. The
      steel and aluminum industries are highly cyclical in nature, and steel and
      aluminum prices have been volatile in recent years and may remain volatile
      in
      the future. Our purchases of aluminum ranged from approximately $1.00 to $1.40
      per pound between December 15, 2005 and 2006, a fluctuation of approximately
      40%, and from $0.60 to $1.40 per pound during the five years ended December
      15,
      2006, a fluctuation of approximately 133%. The price we paid for steel also
      fluctuated. For the year ended December 31, 2006, prices for seamless steel
      tubes ranged from approximately RMB 4,730 to 5,700 RMB per ton (a difference
      of
      approximately 21%), prices for angled steel ranged from approximately RMB 3,143
      to RMB 3,465 per ton (a difference of approximately 10%), and prices for steel
      plates ranged from approximately RMB 3,332 to RMB 4,688 per ton (a difference
      of
      approximately 41%). The fluctuations continued through December 31,
      2007.




Steel
      and
      aluminum prices are influenced by numerous factors beyond our control, including
      general economic conditions, competition, labor costs, production costs, import
      duties and other trade restrictions. In the past, there have been unusually
      rapid and significant increases in steel and aluminum prices and severe
      shortages in the steel and aluminum industries due in part to increased demand
      from China’s expanding economy and high energy prices. We do not have any
      long-term contracts for the purchase of steel and aluminum and normally do
      not
      maintain inventories of steel and aluminum in excess of our current production
      requirements. We can give you no assurance that steel and aluminum will remain
      available or that prices will not continue to be volatile. If the available
      supply of steel and aluminum declines, we could experience price increases
      that
      we are not able to pass on to our customers, a deterioration of service from
      our
      suppliers or interruptions or delays that may cause us not to meet delivery
      schedules to our customers. Any of these problems could adversely affect our
      results of operations and financial condition.





**Our
      business is characterized by long periods for collection from our customers
      and
      short periods for payment to our suppliers, the combination of which may cause
      us to have liquidity problems.**





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
      deposits 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 are
      typically paid by the contractor the entire amount due to us for our services
      and products once the entire project is completed, which could be significantly
      after we complete the curtain wall portion of the project. National policy
      requires the contractor to pay 85% of our total contract value to us before
      the
      project is completed, and the remainder may be paid when the contractor
      completes the entire project. Because our payment cycle is considerably shorter
      than our receivable cycle, we may experience working capital shortages. Working
      capital management, including prompt and diligent billing and collection, is
      an
      important factor in our results of operations and liquidity. We cannot assure
      you that system problems, industry trends or other issues will not extend our
      collection period, adversely impact our working capital.





**The
      industries in which we operate are highly competitive.**





The
      markets we serve are very competitive, price and lead-time sensitive and are
      impacted by changes in the commercial construction industry, including
      unforeseen delays in project timing and work flow. In addition, competition
      in
      the markets of the building industry and in the metal coil coating industry
      is
      intense. It is based primarily on:


·
                  quality;
 ·
                service;


·
                delivery;


·
                ability
                    to provide added value in the design and engineering of
                    buildings;


14


·
                price;


·
                speed
                    of construction in buildings and components;
                    and


·
              personal
                  relationships with customers.





We
      compete with several large integrated glass manufacturers, numerous specialty,
      architectural glass and window fabricators, and major contractors and
      subcontractors. We also compete with a number of other manufacturers of
      engineered building systems ranging from small local firms to large national
      firms. In addition, we and other manufacturers of engineered high-end curtain
      walls compete with alternative methods of building construction. If these
      alternative building methods compete successfully against us, such competition
      could adversely affect us. Demand for our services is cyclical and vulnerable
      to
      economic downturns. If the economy weakens, then our revenues, profits and
      our
      financial condition may deteriorate. Many of our competitors have greater
      financial or other resources than we do.





**Our
      business activities may require our employees to travel to and work in high
      security risk countries, which may result in employee death or injury,
      repatriation costs or other unforeseen costs.**





As
      a
      multinational company, our employees often travel to and work in high security
      risk countries around the world that are undergoing political, social and
      economic upheavals resulting in war, civil unrest, criminal activity or acts
      of
      terrorism. For example, currently we have approximately 10 employees working
      in
      Doha, Qatar and 10 employees in Dubai, UAE. During the peak construction period,
      we will have about 150 employees in Doha and about 200 employees in Dubai,
      which
      will consist of about 20% full-time company employees (engineers, project
      managers and supervisors) and 80% non-company contract labor. As a result,
      we
      may be subject to costs related to employee death or injury, repatriation or
      other unforeseen circumstances.





**Force
      majeure events, including natural disasters and terrorists’ actions have
      negatively impacted and could further negatively impact the economies in which
      we operate, which may affect our financial condition, results of operations
      or
      cash flows.**





*Force
      majeure* events,
      including natural disasters, such as Typhoon Pai Bi An that affected the
      Southeastern China Coast in August 2006 and terrorist attacks, such as those
      that occurred in New York and Washington, D.C. on September 11, 2001, could
      negatively impact the economies in which we operate.





We
      typically remain obligated to perform our services after a terrorist action
      or
      natural disaster unless the contract contains a *force
      majeure* clause
      that relieves us of our contractual obligations in such an extraordinary event.
      If we are not able to react quickly to *force
      majeure* ,
      our
      operations may be affected significantly, which would have a negative impact
      on
      our financial condition, results of operations or cash flows.




**We
      may suffer as a result of product liability or defective
      products.**





We
      may
      produce products which injure or kill individuals despite proper testing.
      Existing PRC, Qatar and UAE laws and regulations do not require us to maintain
      third party liability insurance to cover product liability claims. In the United
      States and Australia, we are required to maintain third party liability
      insurance. However, if a product liability claim is brought against us, it
      may,
      regardless of merit or eventual outcome, result in damage to our reputation,
      breach of contract with our customers, decreased demand for our products, costly
      litigation, product recalls, loss of revenue, and the inability to commercialize
      some products.





**We
      incur costs to comply with environmental laws and have liabilities for
      environmental cleanups.**





Because
      we have air emissions, discharge wastewater, and handle hazardous substances
      and
      solid waste at our fabrication facilities, we incur costs and liabilities to
      comply with environmental laws and regulations and may incur significant
      additional costs as those laws and regulations change in the future or if there
      is an accidental release of hazardous substances into the environment. The
      operations of our fabrication facilities are subject to stringent and complex
      environmental laws and regulations that regulate the cleanup of hazardous
      substances that may have been released at properties currently or previously
      owned or operated by us or locations to which we have sent waste for disposal.
      Failure to comply with these laws and regulations may trigger a variety of
      administrative, civil and criminal enforcement measures, including the
      assessment of monetary penalties, the imposition of remedial requirements,
      and
      the issuance of orders enjoining future operations.


15


**If
      our partners fail to perform their contractual obligations on a project, we
      could be exposed to legal liability, loss of reputation or reduced
      profits.**





We
      sometimes enter into subcontracts, joint ventures and other contractual
      arrangements with outside partners to jointly bid on and execute a particular
      project. The success of these joint projects depends upon, among other things,
      the satisfactory performance of the contractual obligations of our partners.
      If
      any of our partners fails to satisfactorily perform its contractual obligations,
      we may be required to make additional investments and provide additional
      services to complete the project. If we are unable to adequately address our
      partner’s performance issues, then our client could terminate the joint project,
      exposing us to legal liability, loss of reputation or reduced
      profits.





**We
      are dependent on certain key personnel and loss of these key personnel could
      have a material adverse effect on our business, financial condition and results
      of operations.**





Our
      success is, to a certain extent, attributable to the management, sales and
      marketing, and operational expertise of key personnel. Luo Ken Yi, our Chief
      Executive Officer and Chief Operating Officer, Tang Nianzhong, our Vice General
      Manager, and Ye Ning, our Vice General Manager, perform key functions in the
      operation of our business. There can be no assurance that we will be able to
      retain these managers after the term of their employment contracts expire.
      The
      loss of these managers could have a material adverse effect upon our business,
      financial condition, and results of operations. We must attract, recruit and
      retain a sizeable workforce of technically competent employees. Our ability
      to
      effectively implement our business strategy will depend upon, among other
      factors, the successful recruitment and retention of additional highly skilled
      and experienced management and other key personnel. We cannot assure you that
      we
      will be able to hire or retain such employees.





**We
      cannot guarantee the protection of our intellectual property rights and if
      infringement or counterfeiting of our intellectual property rights occurs,
      our
      reputation and business may be adversely affected.**





Our
      success depends in part on our ability to preserve our patents and trade secrets
      and operate without infringing the proprietary rights of third parties. We
      currently own sixty-two patents, of which forty-nine are approved, four are
      pending approval and nine are in the application stage. Of the forty-nine
      approved, forty-seven are in China and two are in the US, Europe, Japan and
      Hong
      Kong. If we fail to maintain our patents and trade secret protections, we may
      not be able to prevent third parties from using our proprietary rights. In
      addition, our issued patents may not contain claims sufficiently broad to
      protect us against third parties with similar technologies or products or
      provide us with any competitive advantage. If a third party initiates litigation
      regarding our patents, and is successful, a court could revoke our patents
      or
      limit the scope of coverage for those patents. We also rely upon trade secrets,
      proprietary know-how and continuing technological innovation to remain
      competitive. We attempt to protect this information with security measures
      such
      as the use of confidentiality agreements with our employees, consultants and
      corporate collaborators. It is possible that these individuals will breach
      these
      agreements and that any remedies for a breach will be insufficient to allow
      us
      to recover our costs. Furthermore, our trade secrets, know-how and other
      technology may otherwise become known or be independently discovered by our
      competitors.





Furthermore,
      we have registered and applied for registration of our trademarks in the PRC,
      where we have a substantial business presence, to protect the reputation of
      our
      products. Our products are sold under these trademarks. There is no assurance
      that there will not be any infringement of our brand name or other registered
      trademarks or counterfeiting of our products in the future. Should any such
      infringement or counterfeiting occur, our reputation and business may be
      adversely affected. We may also incur significant expenses and substantial
      amounts of time and effort to enforce our intellectual property rights in the
      future. Such diversion of our resources may adversely affect our existing
      business and future expansion plans.





**We
      enjoy certain preferential tax concessions and loss of these preferential tax
      concessions will cause our tax liabilities to increase and our profitability
      to
      decline.**





We
      enjoy
      preferential tax concessions in the PRC as a high-tech enterprise. Pursuant
      to
      the State Council’s Regulations on Encouraging Investment in and Development, we
      were granted a reduction in our income tax rate to a rate of 15%. In addition,
      there is no assurance that the preferential tax treatment in the PRC will remain
      unchanged and effective. Our tax liabilities will increase and our profits
      may
      accordingly decline if our reduced income tax rate is no longer applicable
      and/or the tax relief on investment in PRC is no longer available.


16


Additionally,
      the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007.
      Under the EIT Law, effective January 1, 2008, China will adopt a uniform tax
      rate of 25.0% for all enterprises (including foreign-invested enterprises)
      and
      cancel several tax incentives enjoyed by foreign-invested enterprises. However,
      for foreign-invested enterprises established before the promulgation of the
      EIT
      Law, a five-year transition period is provided during which reduced rates will
      apply but gradually be phased out. We are classified as high tech
      foreign-invested enterprise, therefore prior to 2008 we were subject to a 15%
      preferential tax rate in China. We believe that our tax rate will gradually
      increase to 25% during a five-year transition period commencing in 2008 until
      it
      reaches 25% in 2012. Further, any future increase in the enterprise income
      tax
      rate applicable to us or other adverse tax treatments, such as the
      discontinuation of preferential tax treatments for high and new technology
      enterprises altogether, would have a material adverse effect on our results
      of
      operations and financial condition.




**RISKS
      RELATED TO US DOING BUSINESS IN CHINA**





**All
      of our assets are located in China and substantially all of our revenues are
      derived from our operations in China, and changes in the political and economic
      policies of the PRC government could have a significant impact upon the business
      we may be able to conduct in the PRC and the results of operations and financial
      condition.**





Our
      business operations may be adversely affected by the current and future
      political environment in the PRC. The PRC has operated as a socialist state
      since the mid-1900s and is controlled by the Communist Party of China. The
      Chinese government exerts substantial influence and control over the manner
      in
      which we must conduct our business activities. The PRC has only permitted
      provincial and local economic autonomy and private economic activities since
      the
      late-1970s. The government of the PRC has exercised and continues to exercise
      substantial control over virtually every sector of the Chinese economy through
      regulation and state ownership. Our ability to operate in China may be adversely
      affected by changes in Chinese laws and regulations, including those relating
      to
      taxation, import and export tariffs, raw materials, environmental regulations,
      land use rights, property and other matters. Under current leadership, the
      government of the PRC has been pursuing economic reform policies that encourage
      private economic activity and greater economic decentralization. There is no
      assurance, however, that the government of the PRC will continue to pursue
      these
      policies, or that it will not significantly alter these policies from time
      to
      time without notice.





**Failure
      to comply with the United States Foreign Corrupt Practices Act could subject
      us
      to penalties and other adverse consequences.**





We
      are
      subject to the United States Foreign Corrupt Practices Act, which generally
      prohibits United States companies from engaging in bribery or other prohibited
      payments to foreign officials for the purpose of obtaining or retaining
      business. In addition, we are required to maintain records that accurately
      and
      fairly represent our transactions and have an adequate system of internal
      accounting controls. Foreign companies, including some that may compete with
      us,
      are not subject to these prohibitions, and therefore may have a competitive
      advantage over us. Corruption, extortion, bribery, pay-offs, theft and other
      fraudulent practices occur from time-to-time in the PRC, particularly in our
      industry since it deals with contracts from the Chinese Government, and our
      executive officers and employees have not been subject to the United States
      Foreign Corrupt Practices Act prior to 2007. We can make no assurance that
      our
      employees or other agents will not engage in such conduct for which we might
      be
      held responsible. If our employees or other agents are found to have engaged
      in
      such practices, we could suffer severe penalties and other consequences that
      may
      have a material adverse effect on our business, financial condition and results
      of operations.


17


**The
      PRC laws and regulations governing our**  **current
      business operations are sometimes vague and uncertain. Any changes in such
      PRC
      laws and regulations may have a material and adverse effect on our
      business.**





The
      PRC’s
      legal system is a civil law system based on written statutes, in which system
      decided legal cases have little value as precedents unlike the common law system
      prevalent in the United States. There are substantial uncertainties regarding
      the interpretation and application of PRC laws and regulations, including but
      not limited to the laws and regulations governing our business, or the
      enforcement and performance of our arrangements with customers in the event
      of
      the imposition of statutory liens, death, bankruptcy and criminal proceedings.
      The Chinese government has been developing a comprehensive system of commercial
      laws, and considerable progress has been made in introducing laws and
      regulations dealing with economic matters such as foreign investment, corporate
      organization and governance, commerce, taxation and trade. However, because
      these laws and regulations are relatively new, and because of the limited volume
      of published cases and judicial interpretation and their lack of force as
      precedents, interpretation and enforcement of these laws and regulations involve
      significant uncertainties. New laws and regulations that affect existing and
      proposed future businesses may also be applied retroactively. We are considered
      a foreign persons or foreign funded enterprise under PRC laws, and as a result,
      we are required to comply with PRC laws and regulations. We cannot predict
      what
      effect the interpretation of existing or new PRC laws or regulations may have
      on
      our businesses. If the relevant authorities find us in violation of PRC laws
      or
      regulations, they would have broad discretion in dealing with such a violation,
      including, without limitation:




·
            levying
                fines;




·
            revoking
                our business and other licenses;




·
            requiring
                that we restructure our ownership or operations;
                and




·
                requiring
                    that we discontinue any portion or all of our
                    business.





**Inflation
      in the PRC could negatively affect our profitability and
      growth.**





While
      the
      PRC economy has experienced rapid growth, such growth has been uneven among
      various sectors of the economy and in different geographical areas of the
      country. Rapid economic growth can lead to growth in the money supply and rising
      inflation. During the past three decades, the rate of inflation in China has
      been as high as approximately 20% and China has experienced deflation as low
      as
      approximately minus 2%. If prices for our products and services rise at a rate
      that is insufficient to compensate for the rise in the costs of supplies such
      as
      raw materials, it may have an adverse effect on our profitability. In order
      to
      control inflation in the past, the PRC government has imposed controls on bank
      credits, limits on loans for fixed assets and restrictions on state bank
      lending. The implementation of such policies may impede economic growth. In
      October 2004, the People’s Bank of China, the PRC’s central bank, raised
      interest rates for the first time in nearly a decade and indicated in a
      statement that the measure was prompted by inflationary concerns in the Chinese
      economy. The central bank has raised interest rates a number of times since
      then. Expected repeated rises in interest rates by the central bank to combat
      inflation would likely slow economic activity in China which could, in turn,
      materially increase our costs and also reduce demand for our products and
      services.





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





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




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


18


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





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





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





If
      the
      CSRC or another PRC regulatory agency subsequently determines that CSRC approval
      was required for our initial public offering that was completed on October
      3,
      2007, we may face regulatory actions or other sanctions from the CSRC or other
      PRC regulatory agencies. These regulatory agencies may impose fines and
      penalties on our operations in the PRC, limit our operating privileges in the
      PRC, delay or restrict the repatriation of the proceeds from our initial public
      offering or subsequent offerings into the PRC, or take other actions that could
      have a material adverse effect on our business, financial condition, results
      of
      operations, reputation and prospects, as well as the trading price of our Common
      Stock. The CSRC or other PRC regulatory agencies also may take actions requiring
      us, or making it advisable for us, to halt future offerings before settlement
      and delivery of the Common Stock offered thereby. Consequently, if you engage
      in
      market trading or other activities in anticipation of and prior to settlement
      and delivery, you do so at the risk that settlement and delivery may not
      occur.





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




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





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





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


19


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




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





**Any
      recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
      widespread public health problem, in the PRC could adversely affect our
      operations.**





A
      renewed
      outbreak of Severe Acute Respiratory Syndrome, Avian Flu or another widespread
      public health problem in China, where all of our manufacturing facilities are
      located and where all of our sales occur, could have a negative effect on our
      operations. Such an outbreak could have an impact on our operations as a result
      of:





·
            quarantines
                or closures of some of our manufacturing facilities, which would
                severely
                disrupt our operations,





·
            the
                sickness or death of our key officers and employees,
                and





·
            a
                general slowdown in the Chinese
                economy.




Any
      of
      the foregoing events or other unforeseen consequences of public health problems
      could adversely affect our operations.





**If
      we fail to maintain effective internal controls over financial reporting, the
      price of our common stock may be adversely affected.**





PRC
      companies have historically not adopted a Western style of management and
      financial reporting concepts and practices, which includes strong corporate
      governance, internal controls and, computer, financial and other control
      systems. In addition, we may have difficulty in hiring and retaining a
      sufficient number of qualified employees to work in the PRC. As a result of
      these factors, we may experience difficulty in establishing management, legal
      and financial controls, collecting financial data and preparing financial
      statements, books of account and corporate records and instituting business
      practices that meet Western standards. Therefore, we may, in turn, experience
      difficulties in implementing and maintaining adequate internal controls as
      required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result
      in
      significant deficiencies or material weaknesses in our internal controls which
      could impact the reliability of our financial statements and prevent us from
      complying with SEC rules and regulations and the requirements of the
      Sarbanes-Oxley Act of 2002. Any actual or perceived weaknesses and conditions
      that need to be addressed in our internal control over financial reporting,
      disclosure of management’s assessment of our internal controls over financial
      reporting or disclosure of our public accounting firm’s attestation to or report
      on management’s assessment of our internal controls over financial reporting may
      have an adverse impact on the price of our common stock.


20




**You
      may experience difficulties in effecting service of legal process, enforcing
      foreign judgments or bringing original actions in China based upon U.S. laws,
      including the federal securities laws or other foreign laws against us or our
      management.**




Most
      of
      our current operations are conducted in China. Moreover, most of our directors
      and officers are nationals and residents of China. All or substantially all
      of
      the assets of these persons are located outside the United States and in the
      PRC. As a result, it may not be possible to effect service of process within
      the
      United States or elsewhere outside China upon these persons. In addition,
      uncertainty exists as to whether the courts of China would recognize or enforce
      judgments of U.S. courts obtained against us or our officers and/or directors
      predicated upon the civil liability provisions of the securities law of the
      United States or any state thereof, or be competent to hear original actions
      brought in China against us or such persons predicated upon the securities
      laws
      of the United States or any state thereof.





**RISKS
      RELATED TO OUR CAPITAL STRUCTURE**





**Our
      stock price is volatile and you might not be able to resell your securities
      at
      or above the price you have paid.**





Since
      our
      initial public offering and listing of our Common Stock on the American Stock
      Exchange in October 2007, the price at which our common stock had traded has
      been highly volatile, with a high and low sales price of $4.75 and $27.25,
      respectively, as through March 28, 2008. You might not be able to sell the
      shares of our common stock at or above the price you have paid. The stock market
      has experienced extreme volatility that often has been unrelated to the
      performance of its listed companies. Moreover, only a limited number of our
      shares are traded each day, which could increase the volatility of the price
      of
      our stock. These market fluctuations might cause our stock price to fall
      regardless of our performance. The market price of our Common Stock might
      fluctuate significantly in response to many factors, some of which are beyond
      our control, including the following:




·
              actual
                  or anticipated fluctuations in our annual and quarterly results
                  of
                  operations;


·
              changes
                  in securities analysts’ expectations;


·
              variations
                  in our operating results, which could cause us to fail to meet
                  analysts’
                  or investors’ expectations;


·
              announcements
                  by our competitors or us of significant new products, contracts,
                  acquisitions, strategic partnerships, joint ventures or capital
                  commitments;


·
              conditions
                  and trends in our industry;


·
              general
                  market, economic, industry and political conditions;


·
              changes
                  in market values of comparable companies;


·
              additions
                  or departures of key personnel;


·
              stock
                  market price and volume fluctuations attributable to inconsistent
                  trading
                  volume levels; and


·
              future
                  sales of equity or debt securities, including sales which dilute
                  existing
                  investors.




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





The
      market price of our Common Stock could decline as a result of sales of a large
      number of shares of our common stock in the market or the perception that these
      sales could occur. These sales, or the possibility that these sales may occur,
      also might make it more difficult for us to sell equity securities in the future
      at a time and at a price that we deem appropriate.


21


As
      of
      December 31, 2007, we had 51,783,416 shares of Common Stock outstanding, and
      approximately 5,443,425 are freely tradable without further restriction under
      the Securities Act of 1933, as amended, by persons other than our affiliates
      (within the meaning of Rule 144 under the Securities Act). Of these freely
      tradable shares, 2,320,875 shares were sold in a private placement and are
      subject to a lock up restriction pursuant to which one-ninth of the shares
      are
      released on a monthly basis with the last release scheduled to occur on May
      25,
      2008, subject to early release by us. In addition, we registered the Bonds,
      the
      Bond Warrants, and the shares of common stock that may be issued upon the
      conversion of the Bonds and exercise of the Bond Warrants that we issued in
      a
      financing transaction in April 2007; 2,857,143 shares of common stock that
      may
      be acquired upon conversion of the Bonds, subject to adjustment; 800,000 shares
      of common stock that may be acquired upon exercise of the Bond Warrants, subject
      to adjustment; 2,000,000 shares of common stock that were issued to
      FirstAlliance Financial Group, Inc. as a designee of Full Art’s sole shareholder
      and 962,325 shares of common stock held by the affiliates of WestPark. The
      registration of the Bonds, the Bond Warrants, the shares of common stock that
      may be issued upon the conversion of the Bonds and Bond Warrants, and the
      2,962,325 shares held by FirstAlliance Financial Group, Inc. and WestPark are
      covered by an effective registration statement and the related prospectus.
      All
      of the shares included in the effective registration statement as described
      above may be freely sold and transferred except if subject to a lock up
      agreement.





In
      connection with our initial public offering in October 2007, our principal
      stockholder, which holds 33,122,554 shares, entered into a lock up agreement
      with the underwriter pursuant to which it agreed not to sell or transfer any
      of
      its shares until October 2008, subject to release from the underwriter, after
      which the shares may be sold subject to Rule 144. Under Rule 144, an affiliate
      stockholder who has satisfied a the required holding period may, under certain
      circumstances, sell within any three-month period a number of securities which
      does not exceed the greater of 1% of the then outstanding shares of common
      stock
      or the average weekly trading volume of the class during the four calendar
      weeks
      prior to such sale. As of December 31, 2007, 1% of our issued and outstanding
      shares of common stock was approximately 517,834 shares. Non-affiliate
      stockholders are not subject to volume limitations. Any substantial sale of
      common stock pursuant to any resale prospectus or Rule 144 may have an adverse
      effect on the market price of our Common Stock by creating an excessive
      supply.





**Our
      principal stockholder has significant influence over us.**




As
      of
      December 31, 2007, our largest shareholder, KGE Group, Limited, or KGE Group,
      beneficially owns or controls approximately 64.0% of our outstanding shares
      as
      of the close of the Share Exchange. Luo Ken Yi, who is our Chief Executive
      Officer, Chief Operating Officer, and Chairman of the Board, and Ye Ning, who
      is
      our Vice General Manager and a director, are directors of KGE Group. In
      addition, Luo Ken Yi and Ye Ning own approximately 70% and 10%, respectively,
      of
      KGE Group’s issued and outstanding shares. As a result of its holding, KGE Group
      has controlling influence in determining the outcome of any corporate
      transaction or other matters submitted to our shareholders for approval,
      including mergers, consolidations and the sale of all or substantially all
      of
      our assets, election of directors, and other significant corporate actions.
      KGE
      Group also has the power to prevent or cause a change in control. In addition,
      without the consent of KGE Group, we could be prevented from entering into
      transactions that could be beneficial to us. The interests of KGE Group, and
      its
      control persons, may differ from the interests of our shareholders.




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





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


22


The
      accounting treatment related to the beneficial conversion and mandatory
      redemption features of the Bonds and the value of the Bond Warrants will have
      an
      adverse impact on our results of operations for the term of the Bonds. The
      application of Generally Accepted Accounting Principles required us to allocate
      approximately $4,342,857 to the beneficial conversion feature of the Bonds
      and
      $4,036,170 to the Bonds Warrants, which have been reflected in our financial
      statements as an interest discount. Also, we have determined that the total
      redemption premium associated with the mandatory redemption feature of the
      Bonds
      is $5,087,100. All of the aforementioned amounts associated with the beneficial
      conversion and mandatory redemption feature of the Bonds and the value of the
      Bond Warrants are being amortized as additional interest expense over the term
      of the Bonds. This accounting will result in an increase in interest expense
      in
      all reporting periods during the term of the Bonds, and, as a result, reduce
      our
      net income accordingly.





**We
      may be unable to generate sufficient cash flow from which to redeem the
      Bonds.**




Our
      ability to redeem the Bonds depends on our ability to generate sufficient cash
      flow. We cannot assure you that we will be able to generate sufficient cash
      flow
      to service the Bonds and our existing indebtedness. In addition, at maturity,
      the aggregate principal amount will become due and payable on all outstanding
      Bonds. At maturity, we may not have sufficient funds to pay the aggregate
      principal amount of the Bonds then outstanding. If we do not have sufficient
      funds for the payment of any principal or early redemption amount due in respect
      of the Bonds, we will be unable to meet our obligations under the Bonds and
      we
      will default. Upon a default the Trustee may declare that all amounts owing
      on
      the Bonds becomes immediately due and payable.




**There
      are limited restrictive covenants in the Trust Deed governing the Bonds relating
      to our ability to incur future indebtedness.**




The
      Trust
      Deed for the Bonds does not limit our ability to incur indebtedness, except
      that
      as long as any of the Bonds remains outstanding, we agreed not to create any
      encumbrance upon our present or future assets or revenues to secure any
      indebtedness or to secure any guarantee of or indemnity in respect of any such
      indebtedness unless our obligations under the Bonds are secured by the same
      encumbrance or have the benefit from a guarantee or indemnity in substantially
      identical terms. The Trust Deed governing the Bonds does not contain any
      financial or operating covenants or restrictions on the payment of dividends,
      incurrence of indebtedness (other than as stated above), transactions with
      affiliates, incurrence of liens, or the issuance or repurchase of securities
      by
      us or any of our subsidiaries. We, therefore, may incur additional debt,
      including secured indebtedness or indebtedness by, or other obligations of,
      our
      subsidiaries to which the Bonds would be structurally subordinate. A higher
      level of indebtedness increases the risk that we may default on our
      indebtedness. We cannot assure you that we will be able to generate sufficient
      cash flow to pay the interest on our indebtedness or that future working
      capital, borrowings or equity financing will be available to pay or refinance
      such indebtedness.





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





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





**Our
      officers and directors have limited experience in public company reporting
      and
      financial accounting, which could impair our ability to satisfy public company
      filing requirements and increase our securities compliance
      costs.**





Our
      officers and directors have limited experience as officers and directors of
      a
      publicly traded company, or in complying with the regulatory requirements
      applicable to a public company. As a result, we could have difficulty satisfying
      the regulatory requirements applicable to public companies, which could
      adversely affect the market for our common stock. At present, we rely upon
      outside experts to advise us on matters relating to financial accounting and
      public company reporting. While we believe that it will be possible to satisfy
      our public company reporting requirements through the use of third party
      experts, our general and administrative costs will remain higher to the extent
      our officers alone are not able to satisfy our public company reporting
      requirements.


23


**Standards
      for compliance with Section 404 of the Sarbanes-Oxley Act Of 2002 are uncertain,
      and if we fail to comply in a timely manner, our business could be harmed and
      our stock price could decline.**




Rules
      adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
      require annual assessment of our internal control over financial reporting,
      and
      attestation of this assessment by our company’s independent registered public
      accountants. The SEC extended the compliance dates for non-accelerated filers,
      as defined by the SEC. Accordingly, we believe that the annual assessment of
      our
      internal controls requirement will first apply to our annual report for the
      2007
      fiscal year and the attestation requirement of management’s assessment by our
      independent registered public accountants will first apply to our annual report
      for the 2008 fiscal year. The standards that must be met for management to
      assess the internal control over financial reporting as effective are new and
      complex, and require significant documentation, testing and possible remediation
      to meet the detailed standards. We may encounter problems or delays in
      completing activities necessary to make an assessment of our internal control
      over financial reporting. In addition, the attestation process by our
      independent registered public accountants is new and we may encounter problems
      or delays in completing the implementation of any requested improvements and
      receiving an attestation of our assessment by our independent registered public
      accountants. If we cannot assess our internal control over financial reporting
      as effective, or our independent registered public accountants are unable to
      provide an unqualified attestation report on such assessment, investor
      confidence and share value may be negatively impacted.




**Compliance
      with changing regulation of corporate governance and public disclosure will
      result in additional expenses.**




Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
      regulations, have created uncertainty for public companies and significantly
      increased the costs and risks associated with accessing the public markets
      and
      public reporting. Our management team will need to invest significant management
      time and financial resources to comply with both existing and evolving standards
      for public companies, which will lead to increased general and administrative
      expenses and a diversion of management time and attention from revenue
      generating activities to compliance activities.





**The
      ability of our Chinese operating subsidiaries to pay dividends may be restricted
      due to foreign exchange control regulations of China.**





The
      ability of our Chinese operating subsidiaries to pay dividends may be restricted
      due to the foreign exchange control policies and availability of cash balance
      of
      the Chinese operating subsidiaries. Because substantially all of our operations
      are conducted in China and a majority of our revenues are generated in China,
      all of our revenue being earned and currency received are denominated in
      Renminbi (RMB). RMB is subject to the exchange control regulation in China,
      and,
      as a result, we may unable to distribute any dividends outside of China due
      to
      PRC exchange control regulations that restrict our ability to convert RMB into
      US Dollars.





**We
      do not foresee paying cash dividends in the foreseeable
      future.**




We
      do not
      plan to declare or pay any cash dividends on our shares of common stock in
      the
      foreseeable future and we currently intend to retain any future earnings for
      funding growth. As a result, you should not rely on an investment in our
      securities if you require dividend income. Capital appreciation, if any, of
      our
      shares may be your sole source of gain for the foreseeable future. Moreover,
      you
      may not be able to resell your shares in our company at or above the price
      you
      paid for them.







**Item
      1B.  Unresolved Staff Comments**





Not
      applicable.


24


**Item
      2. Properties**





We
      have
      offices and processing factories in thirteen cities in China, a corporate office
      in Hong Kong, one office in Sydney, Australia and one in Dubai, UAE. All
      buildings and land are leased. The leases end around 2010, and we have the
      right
      to renew. The central office is in Zhuhai, where the majority of design and
      engineering staff are located. The Beijing and Shanghai offices have smaller
      design teams as well. All offices are sales centers for the area. The three
      factories, which are located in Beijing, Zhuhai, and Shunde, are used for
      further processing certain curtain wall components before they are shipped
      to
      the construction site.




*Hong
                Kong**Unit
                B, 63**rd**Floor, Bank of China Tower, 1 Garden Road*
            
            240
                square meters (office)*Central,
                Hong Kong**Zhuhai*105
                Baishi Road, Jiuzhou West Avenue, Zhuhai, Guangdong
            
            1,080
                square meters (office)1,700
                square meters (factory)*Beijing*2nd
                floor, Jianbang Building, phase 1, No.19 South Lishi Road
            
            646
                square meters (office)XiCheung
                district, Beijing city
            
            3,380
                square meters (factory)*Shanghai*Room
                501 business center, Shanghai hotel, No.505 north of Wulumuqi road,
                shanghai city
            
            500
                square meters (office)*Shunde*No.5
                Technology area, Xingtan town, Shunde district, Fo Shan
                City
            
            15,000
                square meters (office & factory)*Shenzhen*13/F,
                Excellence Times Square, 4068 YianTian road, Futian district, Shenzhen
                city
            
            887.21
                square meters (office)*Wuhan*Floor
                38, No. 568 Jianshe road, Wu Han International Trade Center, Jianghan
                district,
              WuHan
                city
            
            200
                square meters (office)*Nanjing*18
                floors, phase B, Huaqiaoyin Building, No.1 north of Nanjing bridge,
                Nanjing city
            
            600
                square meters (office)*Tianjin*Rm
                1906, No.2 Jinhaian building, Jinwei road,
              Hebei
                district, Tianjin city
            
            2199
                square meters (office)*Guangzhou*101
                Chengjian building, 189 Tiyuxi road, Tianhe district, Guangzhou
                city
            
            300
                square meters (office)*Hangzhou*Room
                806, Tongfang Caifu building, 334 Fengqi Road, Hangzhou
                city
            
            86
                square meters (office)*Qingdao*6
                floor, phase B, No. 22 Jinfu building, Shandong road,
              Nanshan
                district, Qingdao city
            
            100
                square meters (office)*Chengdu*No.4
                Changshou road, Wuhou distict, Chengdu city
            
            100
                square meters (office)Zhanjiang
            
            120
                square meters (office)3rdfloor, 69 north of Shenchuan road, Chikan district, Zhanjiang
                city




25




*Australia*
              Suite
                203 Level 2 4-8 Woodville Street Hurstville NSW 2220
            
            100
                square meters (office)Dubai,
                UAE
              Room
                603 Ahmed Saeed Abdullah Belhab Al Amri Building Bin #1979 Road 60
                Al
                Barsha First, Dubai UAE
            
            100
                square meters (office)


**Item
      3. Legal Proceedings**





We
      are
      not a party to any material legal proceedings.





**Item
      4. Submission of Matters to a Vote of Security Holders**





No
      matters were submitted to the security holders to be voted on during the fourth
      quarter of 2007.


26


**PART
      II**





**Item
      5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities**





Commencing
      on September 28, 2007, our shares of common stock have been listed for trading
      on AMEX under the ticker symbol “RCH.” As of March 15, 2008, we had 83
      registered shareholders.





From
      September 28, 2007 through December 31, 2007, the high and low sales price
      for
      our common stock on AMEX was $4.80 and $27.25, per share, respectively. On
      March
      28, 2008, the closing sales price for our common stock on AMEX was $5.58 per
      share.





The
      price
      of our common stock will likely fluctuate in the future. The stock market in
      general has experienced extreme stock price fluctuations in the past few years.
      In some cases, these fluctuations have been unrelated to the operating
      performance of the affected companies. Many companies have experienced dramatic
      volatility in the market prices of their common stock. We believe that a number
      of factors, both within and outside of our control, could cause the price of
      our
      common stock to fluctuate, perhaps substantially. Factors such as the following
      could have a significant adverse impact on the market price of our common
      stock:





·
            Our
                ability to obtain additional financing and, if available, the terms
                and
                conditions of the financing;




·
            Our
                financial position and results of
                operations;




·
            Concern
                as to, or other evidence of, the reliability and efficiency of our
                proposed products and services or our competitors’ products and
                services;




·
            Announcements
                of innovations or new products or services by us or our
                competitors;




·
            U.S.
                federal and state governmental regulatory actions and the impact
                of such
                requirements on our business;




·
            The
                development of litigation against
                us;




·
            Period-to-period
                fluctuations in our operating
                results;




·
            Changes
                in estimates of our performance by any securities
                analysts;




·
            The
                issuance of new equity securities pursuant to a future offering or
                acquisition;




·
            Changes
                in interest rates;




·
            Competitive
                developments, including announcements by competitors of new products
                or
                services or significant contracts, acquisitions, strategic partnerships,
                joint ventures or capital
                commitments;




·
            Investor
                perceptions of our company; and




·
            General
                economic and other national
                conditions.




**Dividend
      Policy**





We
      do not
      expect to declare or pay any cash dividends on our common stock in the
      foreseeable future, and we currently intend to retain future earnings, if any,
      to finance the expansion of our business. The decision whether to pay cash
      dividends on our common stock will be made by our board of directors, in their
      discretion, and will depend on our financial condition, operating results,
      capital requirements and other factors that the board of directors considers
      significant. We paid cash dividends of nil, $1,576,796 and $2,571,396 during
      the
      years ended December 31, 2007, 2006 and 2005, respectively.


27




The
      ability of our Chinese operating subsidiaries to pay dividends may be restricted
      due to the foreign exchange control policies and availability of cash balance
      of
      the Chinese operating subsidiaries. Because substantially all of our operations
      are conducted in China and a majority of our revenues are generated in China,
      substantially all of our revenue being earned and currency received are
      denominated in Renminbi (RMB). RMB is subject to the exchange control regulation
      in China, and, as a result, we may unable to distribute any dividends outside
      of
      China due to PRC exchange control regulations that restrict our ability to
      convert RMB into US Dollars.





**Recent
      sales of unregistered securities**





On
      November 6, 2007, pursuant to the terms of a stock purchase agreement (the
      “Purchase Agreement”) entered into by and among Ng Chi Sum and Yam Mei Ling (the
“Shareholders”), the Company and Full Art international, Ltd. (“Full Art”), the
      Company issued an aggregate of 703,778 shares of its common stock to the
      Shareholders as consideration for 50% of the aggregate purchase price due and
      payable by Full Art for the acquisition of all of the issued and outstanding
      shares of Techwell Engineering Limited, a limited liability company incorporated
      in Hong Kong. Thirty percent of such stock consideration, or 211,134 shares
      of
      the Company’s common stock, will be held in a third party escrow account for up
      to two years to cover potential indemnification obligations of the Shareholders
      pursuant to the Purchase Agreement. The securities were offered and issued
      to
      the Shareholders in reliance upon an exemption from registration pursuant to
      Section 4(2) under the Securities Act of 1933, as amended (the “Securities
      Act”), and Rule 901 promulgated thereunder. The Shareholders are not U.S.
      persons (as defined by Rule 902 of Regulation S under the Securities
      Act).





On
      October 3, 2007, upon the closing of our initial public offering, we issued
      to
      WestPark Capital, Inc. warrants to purchase up to 73,700 shares of our common
      stock in exchange for its underwriting services provided to us in connection
      with our initial public offering. The warrants are exercisable at a per share
      exercise price of $4.20, subject to standard anti-dilution adjustments for
      stock
      splits and similar transactions, and will expire after five years. The
      securities were issued to WestPark Capital in reliance upon exemptions from
      registration pursuant to Section 4(2) under the Securities Act of 1933, as
      amended, and Rule 506 promulgated thereunder.




On
      April
      12, 2007, we completed a financing transaction with ABN AMRO under Regulation
      S
      of the Securities Act of 1933, as amended (the “Securities Act”) and issued (i)
      $10,000,000 Variable Rate Convertible Bonds due in 2012 (the “Bonds”) and (ii)
      800,000 warrants to purchase an aggregate of 800,000 shares of our common stock,
      subject to adjustments for stock splits or reorganizations as set forth in
      the
      warrant, that expire in 2010 (the “Bond Warrants”). The Bonds and the Bond
      Warrants were offered and sold to ABN AMRO in reliance upon exemption from
      registration pursuant to Regulation S of the Securities Act. We complied with
      the conditions of Rule 903 as promulgated under the Securities Act including,
      but not limited to, the following: (i) ABN AMRO is a non-U.S. resident and
      has
      not offered or sold their shares in accordance with the provisions of Regulation
      S; (ii) an appropriate legend was affixed to the securities issued in accordance
      with Regulation S; (iii) ABN AMRO has represented that it was not acquiring
      the
      securities for the account or benefit of a U.S. person; and (iv) ABN AMRO agreed
      to resell the securities only in accordance with the provisions of Regulation
      S,
      pursuant to a registration statement under the Securities Act, or pursuant
      to an
      available exemption from registration. We will refuse to register any transfer
      of the shares not made in accordance with Regulation S, after registration,
      or
      under an exemption.





**Transfer
      Agent**





The
      transfer agent and registrar for our common stock is Computershare Trust
      Company.





**Equity
      Compensation Plan Information**





Our
      equity compensation plan information is provided as set forth in Part III,
      Item
      11.





**Additional
      Information**





Copies
      of
      our annual reports, quarterly reports, current reports, and any amendments
      to
      those reports, are available free of charge on the internet at www.sec.gov.
      All
      statements made in any of our filings, including all forward-looking statements,
      are made as of the date of the document in which the statement is included,
      and
      we do not assume or undertake any obligation to update any of those statements
      or documents unless we
      are
      required to do so by law.




28




**Item
      6. Selected Financial Data**





The
      following selected consolidated statement of operations data for each of the
      years in the five-year period ended December 31, 2007 and the consolidated
      balance sheet data as of year-end for each of the years in the five-year period
      ended December 31, 2007 were derived from the audited consolidated financial
      statements. Such selected financial data should be read in conjunction with
      the
      consolidated financial statements and the notes to the consolidated financial
      statements starting on page F-1 and with Item 7, “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations.”





**Year
                Ended December 31,****Consolidated Statements of Income**
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003*****(in
                thousands, except share amounts and earnings per
                share)***Contract
                revenues earned
            
            $
            86,617
            
            $
            63,359
            
            $
            49,515
            
            $
            28,816
            
            $
            22,480Cost
                of contract revenues earned
            
            
            (64,354
            )
            
            (46,796
            )
            
            (36,368
            )
            
            (21,419
            )
            
            (14,730
            )Gross
                profit
            
            $
            22,263
            
            $
            16,563
            
            $
            13,146
            
            $
            7,397
            
            $
            7,750Selling,
                general and administrative expenses
            
            
            (5,525
            )
            
            (5,989
            )
            
            (6,463
            )
            
            (4,636
            )
            
            (3,564
            )Non-recurring
                general and administrative expenses
            
            
            —
            
            
            (3,806
            )
            
            —
            
            
            —
            
            
            —Finance
                Expense
            
            
            208
            
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                from operations
            
            $
            16,530
            
            $
            6,768
            
            $
            6,683
            
            $
            2,761
            
            $
            4,186Interest
                income
            
            
            108
            
            
            —
            
            
            —
            
            
            63
            
            
            —Interest
                expense
            
            
            (2,145
            )
            
            —
            
            
            (117
            )
            
            (260
            )
            
            (116
            )Other
                income
            
            
            88
            
            
            700
            
            
            501
            
            
            136
            
            
            145Other
                expenses
            
            
            127
            
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                before taxation
            
            $
            14,455
            
            $
            7,468
            
            $
            7,068
            
            $
            2,700
            
            $
            4,215Income
                tax
            
            
            (2,422
            )
            
            (1,318
            )
            
            (1,157
            )
            
            (491
            )
            
            (739
            )Net
                income
            
            $
            12,032
            
            $
            6,150
            
            $
            5,910
            
            $
            2,209
            
            $
            3,476Basic
                and diluted net income per common share
            
            
            0.24
            
            
            0.14
            
            
            0.14
            
            
            0.05
            
            
            0.08Basic
                and diluted dividend paid per common share
            
            
            —
            
            
            0.04
            
            
            0.06
            
            
            0.10
            
            
            0.02Basic
                weighted average common shares outstanding
            
            
            50,357,454
            
            
            44,679,990
            
            
            43,304,125
            
            
            43,304,125
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            51,088,144
            
            
            44,679,990
            
            
            43,304,125
            
            
            43,304,125
            
            
            43,304,125




**December
                  31,****Consolidated
                  Balance Sheets**
              
              **2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003*****(in
                  thousands)***Current
                  Assets
              
              $
              84,988
              
              $
              43,821
              
              $
              21,712
              
              $
              17,454
              
              $
              15,054Total
                  Assets
              
              
              95,737
              
              
              44,861
              
              
              22,320
              
              
              18,642
              
              
              15,394Current
                  Liabilities
              
              
              39,313
              
              
              21,784
              
              
              14,016
              
              
              13,916
              
              
              8,774Long-term
                  Debt
              
              
              3,910
              
              
              2,565
              
              
              -
              
              
              -
              
              
              -Total
                  Liabilities
              
              
              43,272
              
              
              24,349
              
              
              14,016
              
              
              13,916
              
              
              8,774Total
                  Stockholders' Equity
              
              
              52,465
              
              
              20,513
              
              
              8,304
              
              
              4,725
              
              
              6,621




29




**Item
      7. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations.**





**Forward-Looking
      Statements**





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





**Overview**





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





We
      specialize in high-end curtain wall systems (including glass, stone and metal
      curtain walls), roofing systems, steel construction systems, eco-energy saving
      building conservation systems and related products, for public works and
      commercial real estate projects. 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 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, track record, strong 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.





Our
      work
      is performed under cost-plus-fee contracts and fixed-price contracts. The length
      of our contracts varies but typically has a duration of approximately one to
      two
      years. Approximately 90% of our sales are from-fixed price contracts. The
      remaining 10% of our sales are from cost-plus-fee contracts. Under fixed-price
      contracts, we receive a fixed price. Consequently, we realize a profit on
      fixed-price contracts only if we control our costs and prevent cost over-runs
      on
      the contracts. Approximately 70% of contracts are modified after they begin,
      usually to accommodate requests from clients to increase project size and scope.
      In cases where fixed-price contracts are modified, the fixed price is
      renegotiated and adjusted upwards accordingly. Under cost-plus-fee contracts,
      which may be subject to contract ceiling amounts, we are reimbursed for
      allowable costs and fees, which may be fixed or performance-based. If our costs
      exceed the contract ceiling or are not allowable under the provisions of the
      contract or any applicable regulations, we may not be reimbursed for all our
      costs.




30




**Recent
      Events**





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





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





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





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





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





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





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





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




31




***October
      2007 Initial Public Offering***





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





***November
      2007 Acquisition of Techwell***





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





**Critical
      Accounting Policies, Estimates and Assumptions**





Management’s
      discussion and analysis of results of operations and financial condition are
      based upon our consolidated financial statements. These statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. These principles require management to make certain
      estimates and assumptions that affect amounts reported and disclosed in the
      financial statements and related notes. The most significant estimates and
      assumptions include valuation of inventories, provisions for income taxes,
      allowance for doubtful accounts, and the recoverability of the long-lived
      assets. Actual results could differ from these estimates. Periodically, we
      review all significant estimates and assumptions affecting the financial
      statements and record the effect of any necessary adjustments.





The
      following critical accounting policies rely upon assumptions and estimates
      and
      were used in the preparation of our consolidated financial
      statements:





***Revenue
      and Cost Recognition –*** Revenues
      from fixed-price and modified fixed-price construction contracts are recognized
      on the percentage-of-completion method, measured by the percentage of cost
      incurred to date to the estimated total cost for each contract. The revenue
      earned in a period is based on the ratio of costs incurred to the total
      estimated costs required by the contract. Contract costs include all direct
      material and labor costs and those indirect costs related to contract
      performance, such as indirect labor, supplies, tools, repairs, and depreciation
      costs. Total estimated gross profit on a contract, being the difference between
      total estimated contract revenue and total estimated contract cost, is
      determined before the amount earned on the contract for a period can be
      recognized. The measurement of the extent of progress toward completion are
      used
      to determine the amount of gross profit earned to date; the earned revenue
      to
      date is the sum of the total cost incurred on the contract and the amount of
      gross profit earned.





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





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





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





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




32




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





***Contract
      Receivable –*** Contract
      receivable represents billings to customers on the percentage of work completed
      and recognized to date based on contract price. An allowance is provided for
      doubtful collections which is based upon a review of outstanding receivables,
      historical collection information, and existing economic conditions. We record
      an allowance for doubtful collections for our outstanding contract receivable
      at
      the end of the period in accordance with generally accepted accounting
      principles in the Untied States, and we consider that allowance to be reasonable
      at December 31, 2007, 2006, and 2005.





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





***Income
      Taxes –*** We
      use
      the accrual method of accounting to determine and report its taxable income
      and
      use the flow through method to account for tax credits, which are reflected
      as a
      reduction of income taxes for the year in which they are available. We have
      implemented *Statement
      of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
      Taxes* .
      Income
      tax liabilities computed according to the United States, People’s Republic of
      China (PRC), 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 either
      be
      taxable or deductible when the assets and liabilities are recovered or settled.
      Deferred taxes also are recognized for operating losses that are available
      to
      offset future income taxes. A valuation allowance is created to evaluate
      deferred tax assets if it is more likely than not that these items will either
      expire before we are able to realize that tax benefit, or that future
      realization is uncertain.





***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.





***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 other 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. Based on the impairment tests performed,
      there was no impairment of goodwill or other intangible assets in fiscal 2007,
      2006 and 2005.





***Foreign
      Currency Translation –*** The
      consolidated financial statements are presented in United States dollars. Our
      functional currencies as well as the functional currencies of our subsidiaries
      are Renminbi (RMB), Hong Kong Dollar (HKD), Macau Pacata (MOP) & Australian
      Dollars (AUD). The consolidated financial statements are translated into United
      States dollars from RMB, HKD, MOP and AUD at year-end exchange rates as to
      assets and liabilities and average exchange rates as to revenues and expenses.
      Capital accounts are translated at their historical exchange rates when the
      capital transactions occurred. The RMB is not freely convertible into foreign
      currency and all foreign exchange transactions must take place through
      authorized institutions. No representation is made that the RMB amounts could
      have been, or could be, converted into USD at the rates used in
      translation.




***Statutory
        Reserves –*** Surplus
        reserves for foreign investment enterprises are referring to the amount
        appropriated from the net income in accordance with PRC 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.




33







**Results
      of Operations**





The
      following table sets forth our consolidated statements of income for the years
      ended December 31, 2007, 2006 and 2005 in U.S. dollars:





**Year
                Ended December 31,****2007**
            
            **2006**
            
            **2005*****(in
                thousands, except share amounts and***
              ***earnings
                per share)***Contract
                revenues earned
            
            $
            86,617
            
            $
            63,359
            
            $
            49,515Cost
                of contract revenues earned
            
            
            (64,354
            )
            
            (46,796
            )
            
            (36,368
            )Gross
                profit
            
            $
            22,263
            
            $
            16,563
            
            $
            13,146Selling,
                general and administrative expenses
            
            
            (5,525
            )
            
            (5,989
            )
            
            (6,463
            )Non-recurring
                general and administrative expenses
            
            
            —
            
            
            (3,806
            )
            
            —Finance
                Expense
            
            
            208
            
            
            —
            
            
            —Income
                from operations
            
            $
            16,530
            
            $
            6,768
            
            $
            6,683Interest
                income
            
            
            108
            
            
            —
            
            
            —Interest
                expense
            
            
            (2,145
            )
            
            —
            
            
            (117
            )Other
                income
            
            
            88
            
            
            700
            
            
            501Other
                expenses
            
            
            127
            
            
            —
            
            
            —Income
                before taxation
            
            $
            14,455
            
            $
            7,468
            
            $
            7,068Income
                tax
            
            
            (2,422
            )
            
            (1,318
            )
            
            (1,157
            )Net
                income
            
            $
            12,032
            
            $
            6,150
            
            $
            5,910Basic
                and diluted net income per common share
            
            
            0.24
            
            
            0.14
            
            
            0.14Basic
                and diluted dividend paid per common share
            
            
            —
            
            
            0.04
            
            
            0.06Basic
                weighted average common shares outstanding
            
            
            50,357,454
            
            
            44,679,990
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            51,088,144
            
            
            44,679,990
            
            
            43,304,125




**Years
      Ended December 31, 2007 and 2006**





Contract
      revenues earned for the year ended December 31, 2007 were $86.6 million, an
      increase of $23.3 million, or 37%, from the contract revenues earned of $63.3
      million for the comparable period in 2006. The primary reason for the increase
      in contract revenues earned was an increase in the number of projects for the
      year ended December 31, 2007. In addition, we also experienced a general
      increase in the amount of revenue generated per project for the year ended
      December 31, 2007 as compared to the same period in 2006.




34




Cost
      of
      contract revenues earned for the year ended December 31, 2007 was $64.4 million,
      an increase of $17.6 million, or 38%, from $46.8 million for the comparable
      period in 2006. Cost of contract revenues earned consists of raw materials,
      labor and other operating costs related to contract performance. The increase
      in
      costs of contract revenues earned was primarily due to the increased number
      of
      projects for the year ended December 31, 2007.




Gross
      profit for the year ended December 31, 2007 was $22.3 million, an increase
      of
      $5.7 million, or 34%, from $16.6 million for the comparable period of 2006.
      Our
      gross margin for the year ended December 31, 2007 was 25.7% as compared with
      26.1% for the year ended December 31, 2006. The decrease was primarily a result
      of moderately higher raw material and labor costs.




Selling,
      general and administrative expenses were $5.5 million for the year ended
      December 31, 2007, a decrease of approximately $0.5 million, or 8%, from $6.0
      million for the comparable period in 2006. The decrease was primarily due to
      higher expenses in 2006 related to organizational restructuring prior to our
      IPO
      in 2007 and operational expansion. There were nil non-recurring general and
      administrative expenses in fiscal 2007 as compared to $3.8 million in fiscal
      2006 due to a one-time brokerage and consulting fees related to our Share
      Exchange and private placement that occurred in fiscal 2006.





Interest
      expenses and finance expenses were approximately $2.4 million for the year
      ended
      December 31, 2007, an increase of approximately $2.4 million, from $nil for
      the
      comparable period in 2006. The increase was due to our issuance of $10,000,000
      Variable Rate Convertible Bonds due in 2012 (the “Bonds”) at a discount and
      800,000 warrants to purchase an aggregate of 800,000 shares of our common stock
      in April 2007, which incurred $589,729 accretion of interest discount for
      warrants, $634,540 for accretion of interest discount for beneficial conversion
      feature, $438,332 accretion of redemption premium, $43,835 for amortization
      on
      bond discount to interest expense and $438,332 for interest
      payable.





Income
      tax was $2.4 million for the year ended December 31, 2007 at an effective tax
      rate of 16.8%, compared with $1.3 million for the year ended December 31, 2006
      at an effective tax rate of 17.7%. The primary reason for the increase was
      due
      to the increase in income before taxes and the different amounts of income
      being
      recognized in the PRC, Hong Kong, Macau & Australia under different tax
      rates on corporate profits derived from subsidiaries in each location. Our
      four
      PRC subsidiaries are generally subject to a PRC income tax rate of 33%; however,
      in accordance with the relevant tax laws and regulations of PRC, the corporation
      income tax rate is currently 15%. In addition, our four Hong Kong subsidiaries
      are subject to a Hong Kong profits tax rate of 17.5%. Our Macau subsidiary
      is
      subject to a Macau profit tax rate of 12%. Our Australia subsidiary is subject
      to an Australian corporate income tax rate of 30%. We expect our effective
      tax
      rates to increase in future periods as a result of new tax laws passed in the
      PRC.





Net
      income for the year ended December 31, 2007 was $12.03 million, an increase
      of
      $5.88 million, or 96%, from $6.15 million for the comparable period in
      2006.





**Years
      Ended December 31, 2006 and 2005**





Contract
      revenues earned for year ended December 31, 2006 were $63.3 million, an increase
      of $13.8 million, or 28%, from the contract revenues earned of $49.5 million
      for
      the year ended December 31, 2005. The primary reason for the increase in
      contract revenues earned was an increase in the number of projects for the
      year
      ended December 31, 2006. In addition, we also experienced a general increase
      in
      the amount of revenue generated per project in 2006 as compared to 2005.





Cost
      of
      contract revenues earned for the year ended December 31, 2006 was $46.8 million,
      an increase of $10.4 million, or 29%, from $36.4 million for the year ended
      December 31, 2005. The increase in costs of contract revenues earned was
      primarily due to the increased number of projects for the year ended December
      31, 2006. Gross profit for the year ended December 31, 2006 was $16.6 million,
      an increase of $3.5 million, or 26%, from $13.1 million for the year ended
      December 31, 2005. Our gross margin for the year ended December 31, 2006 was
      26.1% as compared with 26.6% for the year ended December 31, 2005.





Selling
      and administrative expenses were $6.0 million for the year ended December 31,
      2006, a decrease of approximately $0.5 million, or 7%, from $6.5 million for
      the
      year ended December 31, 2005. The decrease was primarily due to the
      implementation of internal controls on operating expenses during the year ended
      December 31, 2006, including stricter control on staff costs, entertainment
      expenses, and traveling expenses.




35




Non-recurring
      general and administrative expenses for the year ended December 31, 2006 were
      $3.8 million as compared to $nil for the year ended December 31, 2005. The
      non-recurring general and administrative expense resulted from our payment,
      through issuance of securities or payment of cash, to service providers that
      rendered services in connection with the consummation of the Share Exchange
      and
      the related transactions. Included in the non-recurring general and
      administrative expenses was the issuance at the closing of the Share Exchange
      of
      2,000,000 shares of common stock to First Alliance Financial Group for
      consulting services, issuance of 100,000 shares of common stock, and payment of
      $445,608 to brokers for services related to the private placement that closed
      concurrently with the Share Exchange. Each of the shares that were issued for
      services were valued at $1.60 per share, which is the per share sales price
      in
      the private placement.





Income
      tax was $1.3 million for the year ended December 31, 2006, an effective tax
      rate
      of 17.7%, compared with $1.2 million taxes for the year ended December 31,
      2005,
      an effective tax rate of 16.4%. The primary reason for the increase in the
      dollar amount of the tax was due to the increase in income before taxes. Through
      two of our subsidiaries, Zhuhai King Glass Engineering Co., Ltd and Zhuhai
      King
      General Glass Engineering Technology Co., Ltd, we are generally subject to
      a PRC
      income tax rate of 33%; however, in accordance with the relevant tax laws and
      regulations of PRC, the corporation income tax rate is currently 15%. In
      addition, we and two of our subsidiaries are subject to Hong Kong profits tax
      rate of 17.5%.





Net
      income for the year ended December 31, 2006 was $6.1 million, an increase of
      $0.2 million, or 4%, from $5.9 million for the comparable period in 2005.





**Liquidity
      and Capital Resources**





At
      December 31, 2007, we had cash and cash equivalents of $4,040,168. Prior to
      October 17, 2006, we have historically financed our business operations through
      short-term bank loans, cash provided by operations, and credit provided by
      suppliers. More recently, we have raised capital through debt and equity
      offerings.





On
      October 17, 2006, concurrently with the close of the Share Exchange, we received
      gross proceeds of $3.7 million in a private placement transaction (the “Private
      Placement”). For its services as placement agent, WestPark Capital, Inc.
      received an aggregate fee of approximately $446,000, which consisted of a
      commission equal to 9.0% of the gross proceeds from the financing and a
      non-accountable fee of 3% of the gross proceeds. We also incurred legal and
      accounting expenses of approximately $150,000. After commissions and expenses,
      we received net proceeds of approximately $3.1 million.





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





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




36




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. These proceeds were net of underwriting discounts
      and commissions, fees for legal and auditing services, and other offering costs.
      Also in October 2007, a holder of warrants to purchase 232,088 shares of our
      common stock at a per share exercise price of $1.60 exercised the warrants.
      As a
      result of the exercise, we received gross exercise proceeds of $371,341 and
      issued 232,088 shares of common stock to the holder.





In
      October 2006, we opened a line of credit facility with the Zhuhai branch of
      Bank
      of East Asia for up to a maximum of RMB20,000,000. The credit facility does
      not
      require renewal until October 2011. In order to facilitate the extension of
      the
      credit facility, we agreed to deposit the equivalent amount in HKD on fixed
      deposit terms into the Hong Kong branch of Bank of East Asia. This facility
      is
      subject to a current interest rate of 5.508% and interest rate adjusts every
      6
      months. The amount outstanding as of December 31, 2007 was
      $546,889.





Our
      subsidiariy, 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 of 5.832% and interest rate
      adjusts every 6 months. The amount outstanding as of December 31, 2007 was
      $169,518.





Full
      Art
      International Limited incurred an automobile capital lease obligations due
      November 12, 2009 that had an outstanding amount of $274,363 as of Decmeber
      31,
      2007.





We
      also
      opened a line of credit and a trust receipts line with the Hong Kong Branch
      of
      Dah Sing Bank. The credit facilities are set to expire on November 28 and
      November 25, 2008, respectively, which had approximately $257,926 and $1,773,735
      , respectively, outstanding as of December 31, 2007.





On
      February 19, 2008, we and Techwell Engineering Limited were granted a
      performance bond facility by the Hong Kong Branch of ABN AMRO Bank N.V. The
      facility amount is $10,000,000, at a tenor of up to one year with 2% flat
      interest rate on the issued amount of performance bond.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.





We
      also
      lease certain administrative and production facilities from third parties.
      Accordingly, for the years ended December 31, 2007 and 2006, we incurred rental
      expenses of $437,750 and $385,386, 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.





Net
      cash
      used in operating activities for the year ended December 31, 2007 was $12.8
      million, as compared to $5.8 million used in the same period in 2006. The change
      is primarily the result of an add-back of non-cash amortization expense on
      the
      convertible bonds, an increase in receivables due to a relatively long
      collection period typical of the architecture industry in China, an increase
      in
      net operating income and an increase in payables for the year ended December
      31,
      2007.


Net
        cash
        used in operating activities for the year ended December 31, 2006 was $5.8
        million, as compared to $4.1 million provided by operating activities in
        the
        same period in 2005. The decrease in cash provided from operating activities
        is
        primarily the result of a significant increase in receivables from $6.6 million
        to $18.3 million and an increase in restricted cash, partially offset by
        an
        increase in net income and payables during the year ended December 31, 2006,
        both of which was the result of an increase in sales. The increase in restricted
        cash from $600,000 in 2005 as compared to an increase of $2.2 million in
        2006,
        resulting from our deposit of such amount on fixed deposit terms with the
        Hong
        Kong branch of Bank of East Asia to facilitate a line of credit facility
        in the
        same amount from the Zhuhai branch of Bank of East Asia. We established and
        borrowed the full amount available under the line of credit to replace a
        2005
        short term loan from another bank that was expiring.




37




We
      experienced an increase of revenue of $23.3 million for the year ended December
      31, 2007 compared to an increase of $13.8 million for the same period in 2006.
      Contracts receivables as of December 31, 2007 were $13.0 million, an increase
      of
      $5.4 million, over contracts receivables of $7.6 million as of December 31,
      2006. The increase in contracts receivable reflected an increase in contract
      revenue earned. In addition, because the collection period typically runs from
      three months to one year, the increase in contracts receivable reflects not
      only
      the increase in sales but also the long collection period. Since we require
      an
      average of one to two months to receive products we order from the date of
      our
      order, we have been increasing our inventories in order to enable us to meet
      anticipated increases in sales. In addition, our payment cycle is considerably
      shorter than our receivable cycle, since we typically pay our suppliers all
      or a
      portion of the purchase price in advance and for some suppliers we must maintain
      a deposit for future orders.





Net
      cash
      used by investing activities was approximately $1.6 million for the year ended
      December 31, 2007 compared to approximately $89,250 used for the year ended
      December 31, 2006. The change was mainly a result of an increase of fixed assets
      purchased. Net cash used by investing activities was $89,250 for the year ended
      December 31, 2006, as compared to net cash provided by investing activities
      of
      $390,287 for the year ended December 31, 2005.









Net
      cash
      provided by financing activities was $6.9 million for the year ended December
      31, 2006 compared to cash used by financing activities of $7.2 million for
      the
      year ended December 31, 2005. The increase in cash provided was primarily to
      $7.1 million received in 2006 from the issuance of common stock and $2.6 million
      received as proceeds from a long-term loan, whereas there were no such cash
      provided in 2005. In addition, we had $4.8 million in repayment of short-term
      loans in 2005 and only repayment amounts of $743,742 in 2006.





At
      December 31, 2007, we had no material commitments for capital expenditures
      other
      than for those expenditures incurred in the ordinary course of business. 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.





**Contractual
      obligations**





The
      following table describes our contractual commitments and obligations as of
      December 31, 2007:




**Payments
                due by period****Total**
            
            **Less than**
              **1
                year**
            
            **1-3 years**
            
            **3-5 years**
            
            **More**
              **than 5**
              **years**Operating
                Lease Obligations
            
            $
            487,345
            
            $
            276,195
            
            $
            211,150
            
            $
            —
            
            $
            —Long-term
                debt(1)
            
            $
            10,443,881
            
            $
            —
            
            $
            274,363
            
            $
            10,169,518
            
            $
            —





(1)
      Include the $10 million convertible bond at face value, which may convert into
      our common stocks after April 12, 2008, accordingly we may re-classify upon
      conversion.




38




**Off-Balance
      Sheet Arrangements**





None.





**New
      Accounting Pronouncements**





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





In
      February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities – Including an Amendment of SFAS 115” (SFAS
      159), which allows for the option to measure financial instruments and certain
      other items at fair value. Unrealized gains and losses on items for which the
      fair value option has been elected are reported in earnings. The objective
      of
      SFAS 159 is to provide opportunities to mitigate volatility in reported earnings
      caused by measuring related assets and liabilities differently without having
      to
      apply hedge accounting provisions. SFAS 159 also establishes presentation and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. This statement is effective for financial statements issued for
      fiscal years beginning after November 15, 2007. The Company is currently
      evaluating the impact of SFAS 159 on the Company’s consolidated financial
      statements.





In
      December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations,
      (‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the
      original pronouncement requiring that the purchase method be used for all
      business combinations, but also provides revised guidance for recognizing and
      measuring identifiable assets and goodwill acquired and liabilities assumed
      arising from contingencies, the capitalization of in-process research and
      development at fair value, and the expensing of acquisition-related costs as
      incurred. SFAS 141(R) is effective for fiscal years beginning after December
      15,
      2008. The Company will evaluate how the new requirements could impact the
      accounting for any acquisitions completed beginning in fiscal 2009 and beyond,
      and the potential impact on the Company’s consolidated financial statements.





In
      December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
      Consolidated Financial Statements − an amendment of ARB No. 51. SFAS 160
      requires that ownership interests in subsidiaries held by parties other than
      the
      parent (previously referred to as minority interests), and the amount of
      consolidated net income, be clearly identified, labeled and presented in the
      consolidated financial statements. It also requires once a subsidiary is
      deconsolidated, any retained noncontrolling equity investment in the former
      subsidiary be initially measured at fair value. Sufficient disclosures are
      required to clearly identify and distinguish between the interests of the parent
      and the interests of the noncontrolling owners as components of equity. It
      is
      effective for fiscal years beginning after December 15, 2008, and requires
      retroactive adoption of the presentation and disclosure requirements for
      existing minority interests. All other requirements are applied prospectively.
      The Company is currently evaluating the impact of SFAS 160 on the Company’s
      consolidated financial statements.





**Item
      7A. Quantitative and Qualitative Disclosures about Market
      Risk**





*Credit
      Risk* .
      We are
      exposed to credit risk from our cash at bank, fixed deposits and contract
      receivables. The credit risk on cash at bank and fixed deposits is limited
      because the counterparts are recognized financial institutions. Contract
      receivables are subject to credit evaluations. We periodically record a
      provision for doubtful collections based on an evaluation of the collectability
      of contract receivables by assessing, among other factors, the customer’s
      willingness or ability to pay, repayment history, general economic conditions
      and our ongoing relationship with the customers. We are currently involved
      in
      three lawsuits in which we are suing other parties for overdue payments. The
      total amount involved is $1,292,520. We obtained judgment in our favor on one
      of
      the lawsuits and anticipate full payment on all of the overdue amounts in the
      near future.




39




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





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





**Item
      8.  Financial Statements and Supplementary Data**





The
      information required by this Item 8 is incorporated by reference to China
      Architectural Engineering, Inc.’s Consolidated Financial Statements and
      Independent Auditors’ Report beginning at page F-1 of this Form
      10-K.





**Item
      9. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**





Not
      Applicable.





**Item
      9A. 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 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 Annual 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) and Rule 15d-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 are effective to
      ensure that information required to be disclosed by the Company in the reports
      that we file or submit under the Exchange Act is recorded, processed, summarized
      and reported within the time periods specified in the SEC’s rules and forms and
      which also are effective in ensuring that information required to be disclosed
      by the Company in the reports that it files or submits under the Exchange Act
      is
      accumulated and communicated to the Company’s management, including the
      Company’s Chief Executive Officer and Chief Financial Officer, to allow timely
      decisions regarding required disclosure.





**Management's
      Report on Internal Control over Financial Reporting**




Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting. Internal control over financial reporting,
      as
      defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
      the supervision of, our principal executive and principal financial officers
      and
      effected by our Board of Directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that:




40




·
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of our assets;




·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that our receipts and expenditures are
                being
                made only in accordance with authorizations of our management and
                directors; and




·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use of disposition of our assets that could
                have
                a material effect on the financial
                statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate. All internal control systems, no matter
      how well designed, have inherent limitations. Therefore, even those systems
      determined to be effective can provide only reasonable assurance with respect
      to
      financial statement preparation and presentation.




Our
      management assessed the effectiveness of our internal control over financial
      reporting as of December 31, 2007. In making this assessment, our
      management used the criteria set forth by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
      Framework. Based on this assessment, management believes that as of
      December 31, 2007, our internal control over financial reporting is
      effective based on those criteria.




This
      annual report does not include an attestation report of the company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the company’s registered
      public accounting firm pursuant to temporary rules of the SEC to provide only
      management’s report in this annual report.





**Changes
      in internal control over financial reporting**




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





**Item
      9B. Other Information**





None.




**PART
      III**




**Item
      10.   Directors****,
      Executive Officers and Corporate Governance**





The
      information required by this Item 10 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this annual report on Form 10-K/A,
      not
      later than the end of the 120-day period.




41




**Item
      11.   Executive Compensation**





The
      information required by this Item 11 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this annual report on Form 10-K/A,
      not
      later than the end of the 120-day period.





**Item
      12.   Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters**





The
      information required by this Item 12 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this annual report on Form 10-K/A,
      not
      later than the end of the 120-day period.





**Item
      13. Certain Relationships and Related Transactions****,
      and Director Independence**





The
      information required by this Item 13 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this annual report on Form 10-K/A,
      not
      later than the end of the 120-day period.





**Item
      14. Principal Accounting Fees and Services**





The
      information required by this Item 14 is incorporated by reference from our
      definitive proxy statement on Schedule 14A which will be filed before the end
      of
      the 120-day period immediately following the end of our 2007 fiscal year, or,
      if
      our definitive proxy statement is not filed within that time, the information
      will be filed as part of an amendment to this annual report on Form 10-K/A,
      not
      later than the end of the 120-day period.





42


**PART
      IV**




**Item
      15. Exhibits, Financial Statement Schedules**





1.
      Financial Statements: See “Index to Consolidated Financial Statements” in Part
      II, Item 8 of this Annual Report on Form 10-K.





2.
      Financial Statement Schedule: See “Schedule II—Valuation and Qualifying
      Accounts” below in this Item 15 of this Annual Report on Form 10-K.





3.
      Exhibits: The exhibits listed in the accompanying “Exhibit Index” are filed or
      incorporated by reference as part of this Form 10-K.




SCHEDULE
      II


China
      Architectural Engineering, Inc.


Valuation
      and Qualifying Accounts and Reserves


Years
      Ended December 31, 2007, 2006 and 2005





Allowance
                for Doubtful Accounts:
            
            Balance at the Beginning
              of the Year
            
            Charge to Cost
              and Expenses
            
            Deductions
            
            Balance at the
              End of the YearYear
                ended December 31, 2005
            
            $
            427,668
            
            $
            -
            
            $
            (24,073
            )
            $
            403,595Year
                ended December 31, 2006
            
            
            403,595
            
            
            14,053
            
            
            -
            
            
            417,648Year
                ended December 31, 2007
            
            
            417,648
            
            
            -
            
            
            (201,947
            )
            
            215,701




43


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized, in the City of Zhuhai, People’s
      Republic of China, on March 31, 2008.


**China
                  Architectural Engineering, Inc.**/s/
                  Luo Ken YiLuo
                  Ken YiChief
                  Executive Officer, Chief Operating Officer andChairman
                  of the Board




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





SIGNATURE
            
            TITLE
            
            DATE/s/
                Luo Ken Yi
            
            Chief
                Executive Officer, Chief Operating
              Officer
                and Chairman of the Board (Principal
              Executive
                Officer)
            
            March
                31, 2008Luo
                Ken Yi/s/
                Xinyue Jasmine Geffner
            
            Chief
                Financial Officer (Principal Financial and
              Accounting
                Officer)
            
            March
                31, 2008Xinyue
                Jasmine Geffner/s/
                Tang Nianzhong
            
            Vice
                General Manager and Director
            
            March
                31, 2008Tang
                Nianzhong/s/
                Ye Ning
            
            Vice
                General Manager and Director
            
            March
                31, 2008Ye
                Ning/s/
                Zheng Jinfeng
            
            Director
            
            March
                31, 2008Zheng
                Jinfeng/s/
                Zhao Bao Jiang
            
            Director
            
            March
                31, 2008Zhao
                Bao Jiang/s/
                Kelly Wang
            
            Director
            
            March
                31, 2008Kelly
                Wang





44




**Exhibit
      Index**





**Exhibit**
              **No.**
            
            **Exhibit
                Description**2.1
            
            Share
                Exchange Agreement, dated as of August 21, 2006, by and among the
                Registrant, KGE Group, Limited, and Full Art International, Ltd.
                (incorporated by reference from Exhibit 2.1 to Current Report on
                Form 8-K
                filed with the Securities and Exchange Commission on October 20,
                2006).2.1(a)
            
            Amendment
                No. 1 to the Share Exchange Agreement, dated as of October 17, 2006,
                by
                and among the Registrant, KGE Group, Limited, and Full Art International,
                Ltd. (incorporated by reference from Exhibit 2.1(a) to Current Report
                on
                Form 8-K filed with the Securities and Exchange Commission on October
                20,
                2006).3.1
            
            Certificate
                of Incorporation of China Architectural Engineering, Inc. (incorporated
                by
                reference from Exhibit 3.1 to Registration Statement on Form SB-2
                filed
                with the Securities and Exchange Commission on April 20,
                2004).3.1(a)
            
            Certificate
                of Amendment of Certificate of Incorporation dated July 8, 2005
                (incorporated by reference to Registrant's Quarterly Report on Form
                10-QSB
                filed August 11, 2005)3.2
            
            Bylaws
                of the Registrant (incorporated by reference from Exhibit 3.2 to
                Registration Statement on Form SB-2 filed with the Securities and
                Exchange
                Commission on April 20, 2004, and incorporated herein by reference).3.3
            
            Articles
                of Merger Effecting Name Change (incorporated by reference from Exhibit
                3.3 to Current Report on Form 8-K filed with the Securities and Exchange
                Commission on October 20, 2006).4.1
            
            Specimen
                Certificate of Common Stock (incorporated by reference to Exhibit
                4. 1 of
                the Registrant's Registration Statement on Form SB-2 filed August
                20,
                2004).4.2
            
            Trust
                Deed, dated April 12, 2007,by
                and between the Registrant and The Bank of New York, London Branch
                (incorporated by reference to Exhibit 4.1to
                the CurrentReport on Form 8-K filed with the Securities and Exchange Commission
                on
                April 18, 2007).4.2(a)
            
            Amended
                and Restated Trust Deed, originally dated April 12, 2007, amended
                and
                restated August 29, 2007 by and between the Registrant and The Bank
                of New
                York, London Branch (incorporated by reference to Exhibit 4.1 of
                the
                Registrant’s Quarterly Report on Form 10-Q filed with the Securities and
                Exchange Commission on September 4, 2007).4.3
            
            Paying
                and Conversion Agency Agreement, dated April 12, 2007, by and among
                the
                Registrant, The Bank of New York, and The Bank of New York, London
                Branch
                (incorporated by reference to Exhibit 4.2to
                the CurrentReport on Form 8-K filed with the Securities and Exchange Commission
                on
                April 18, 2007).4.4
            
            The
                Warrant Instrument, dated April 12, 2007, by and between the Registrant
                and ABN AMRO Bank N.V.(incorporated
                by reference to Exhibit 4.3to
                the CurrentReport on Form 8-K filed with the Securities and Exchange Commission
                on
                April 18, 2007).4.5
            
            Warrant
                Agency Agreement, dated April 12, 2007 among Company, The Bank of
                New York
                and The Bank of New York, London Branch (incorporated by reference
                to
                Exhibit 4.4to
                the CurrentReport on Form 8-K filed with the Securities and Exchange Commission
                on
                April 18, 2007).4.6
            
            Registration
                Rights Agreement, dated April 12, 2007, by and between the Registrant
                and
                ABN AMRO Bank N.V.(incorporated
                by reference to Exhibit 4.5to
                the CurrentReport on Form 8-K filed with the Securities and Exchange Commission
                on
                April 18, 2007).4.6(a)
            
            Written
                description of oral agreement between the Registrant and ABN AMRO
                Bank
                N.V. (incorporated by reference to Exhibit 4.8(a) to the Form S-1/A
                filed
                with the Securities and Exchange Commission on September 21,
                2007).10.1
            
            Form
                of Subscription Agreement dated October 17, 2006 (incorporated by
                reference to Exhibit 10.1 to the Form S-1/A filed with the Securities
                and
                Exchange Commission on February 5,
                2007).




45




**Exhibit**
              **No.**
            
            **Exhibit
                Description**10.1(a)
            
            Form
                of Waiver of Penalties dated August 29, 2007 Related to Registration
                Rights (incorporated by reference to Exhibit 10.1 of the Registrant's
                Quarterly Report on Form 10-Q filed with the Securities and Exchange
                Commission on September 4, 2007).10.2
            
            Form
                of Subscription Agreement dated October 2004 (incorporated by reference
                to
                Exhibit 10.2 to the Form SB-2/A filed with the Securities and Exchange
                Commission on October 1, 2004).10.3
            
            Employment
                Agreement dated December 30, 2005 by and between the Registrant and
                Luo
                Ken Yi (translated to English) (incorporated by reference from Exhibit
                10.3 to the Current Report on Form 8-K filed with the Securities
                and
                Exchange Commission on October 20, 2006).10.4
            
            Employment
                Agreement dated January 11, 2004 by and between the Registrant and
                Tang
                Nianzhong (translated to English) (incorporated by reference to Exhibit
                10.4 to the Form S-1/A filed with the Securities and Exchange Commission
                on February 5, 2007).10.5
            
            Employment
                Agreement by and between the Registrant and Ye Ning (translated to
                English) (incorporated by reference from Exhibit 10.5 to the Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                October 20, 2006).10.6
            
            Employment
                Agreement dated January 1, 2006 by and between the Registrant and
                Li
                Guoxing (translated to English) (incorporated by reference to Exhibit
                10.6
                to the Form S-1/A filed with the Securities and Exchange Commission
                on
                February 5, 2007).10.7
            
            Employment
                Agreement dated January 1, 2005 by and between the Registrant and
                Bai Fai
                (translated to English) (incorporated by reference to Exhibit 10.7
                to the
                Form S-1/A filed with the Securities and Exchange Commission on February
                5, 2007).10.8
            
            Employment
                Agreement dated December 26, 2005 by and between the Registrant and
                Wang
                Zairong (translated to English) (incorporated by reference to Exhibit
                10.8
                to the Form S-1/A filed with the Securities and Exchange Commission
                on
                February 5, 2007).10.9
            
            Employment
                Agreement dated December 20, 2005 by and between the Registrant and
                Feng
                Shu (translated to English) (incorporated by reference to Exhibit
                10.9 to
                the Form S-1/A filed with the Securities and Exchange Commission
                on
                February 5, 2007).10.10
            
            Employment
                Agreement dated December 26, 2006 by and between the Registrant and
                Wang
                Xin (translated to English) (incorporated by reference to Exhibit
                10.10 to
                the Form S-1/A filed with the Securities and Exchange Commission
                on
                February 5, 2007).10.11
            
            Office
                and Factory Lease Agreement dated July 13, 2005 by and between the
                Registrant and Zhuhai Yuping Kitchen Equipment Co., Ltd. (translated
                to
                English) (incorporated by reference to Exhibit 10.11 to the Form
                S-1/A
                filed with the Securities and Exchange Commission on February 5,
                2007).10.12
            
            Lease
                Agreement by and between the Registrant and Beijing Aoxingyabo Technology
                Development Co., Ltd (translated to English) (incorporated by reference
                to
                Exhibit 10.12 to the Form S-1/A filed with the Securities and Exchange
                Commission on February 5, 2007).10.13
            
            Property
                Rental Contract by and between the Registrant and Shanghai Sandi
                CNC
                equipment Ltd. Co (translated to English) (incorporated by reference
                to
                Exhibit 10.13 to the Form S-1/A filed with the Securities and Exchange
                Commission on February 5, 2007).10.14
            
            Subscription
                Agreement, dated March 27, 2007, by and between the Registrant and
                ABN
                AMRO Bank N.V. (incorporated by reference to Exhibit 10.1 to the
                Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                April 18, 2007).10.15
            
            Joint
                Venture Agreement dated May 11, 2007 entered into by and between
                CPD
                (Australia) Holding Pty Ltd. and the Registrant (incorporated by
                reference
                to Exhibit 10.1 to the Current Report on Form 8-K filed with the
                Securities and Exchange Commission on May 15, 2007).10.16
            
            Form
                of Registration Rights Agreement entered into by and between the
                Registrant, First Alliance Financial Group, Inc. and WestPark Capital,
                Inc. Affiliates (incorporated by reference to Exhibit 10.16 to Form
                S-1/A
                filed with the Securities and Exchange Commission on September 4,
                2007).




46




**Exhibit**
              **No.**
            
            **Exhibit
                Description**10.16(a)
            
            Form
                of Waiver of Penalties Related to Registration Rights entered into
                by and
                between the Registrant, First Alliance Financial Group, Inc. and
                WestPark
                Capital, Inc. Affiliates (incorporated by reference to Exhibit 10.16(a)
                to
                the Form S-1/A filed with the Securities and Exchange Commission
                on
                September 4, 2007).10.16(b)
            
            Written
                description of oral agreement between the Registrant, First Alliance
                Financial Group, Inc., and WestPark Capital, Inc. Affiliates (incorporated
                by reference to Exhibit 10.16(b) to the Form S-1/A filed with the
                Securities and Exchange Commission on September 21,
                2007).10.17
            
            China
                Architectural Engineering, Inc. 2007 Equity Incentive Plan (incorporated
                by reference from Exhibit 10.1 to the Current Report on Form 8-K
                filed
                with the Securities and Exchange Commission on July 12,
                2007).10.18
            
            Form
                of Notice of Grant of Stock Option of the Registrant (incorporated
                by
                reference from Exhibit 10.2 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on July 12,
                2007).10.19
            
            Form
                of Stock Option Agreement (including Addendum) of the Registrant
                (incorporated by reference from Exhibit 10.3 to the Current Report
                on Form
                8-K filed with the Securities and Exchange Commission on July 12,
                2007).10.20
            
            Form
                of Stock Issuance Agreement (including Addendum) of the Registrant
                (incorporated by reference from Exhibit 10.5 to the Current Report
                on Form
                8-K filed with the Securities and Exchange Commission on July 12,
                2007).10.21
            
            Form
                of Stock Purchase Agreement (including Addendum) of the Registrant
                (incorporated by reference from Exhibit 10.4 to the Current Report
                on Form
                8-K filed with the Securities and Exchange Commission on July 12,
                2007).10.22
            
            Stock
                Purchase Agreement dated November 6, 2007, entered into by and among
                Ng
                Chi Sum, Yam Mei Ling, the Registrant and Full Art (incorporated
                by
                reference from Exhibit 10.1 to the Current Report on Form 8-K filed
                with
                the Securities and Exchange Commission on November 8,
                2007).21.1
            
            List
                of Subsidiaries (incorporated by reference from Exhibit 21.1 to Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                October 20, 2006).31.1
            
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of
                Regulation S-K, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of
                Regulation S-K, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1*
            
            Certifications
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350 as adopted 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.




47




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**FINANCIAL
      STATEMENTS**




**DECEMBER
      31, 2007, 2006, AND 2005**




**(Stated
      in US dollars)**




CONTENTS
            
            PAGEREPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            
            F-2CONSOLIDATED
                BALANCE SHEETS
            
            F-3CONSOLIDATED
                STATEMENTS OF INCOME
            
            F-5CONSOLIDATED
                STATEMENTS OF CASH FLOWS
            
            F-6CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY
            
            F-7NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            
            F-9




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To:
            The
                Board of Directors and Stockholders ofChina
                Architectural Engineering, Inc.




We
      have
      audited the accompanying consolidated balance sheets of China Architectural
      Engineering, Inc. as of December 31, 2007 and 2006, and the related consolidated
      statements of income, stockholders' equity and cash flows for the years ended
      December 31, 2007, 2006 and 2005. These consolidated financial statements are
      the responsibility of the Company's management. Our responsibility is to express
      an opinion on these consolidated financial statements based on our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of China Architectural
      Engineering, Inc. as of December 31, 2007 and 2006, and the results of its
      operations and its cash flows for the years ended December 31, 2007, 2006 and
      2005 in conformity with accounting principles generally accepted in the United
      States of America.




South
                San Francisco, California
            Samuel
                H. Wong & Co., LLPFebruary
                6, 2008
            Certified
                Public Accountants





F-2




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**CONSOLIDATED
      BALANCE SHEETS**


**AS
      OF DECEMBER 31, 2007 and 2006**


**(Stated
      in US Dollars)**




**As of December 31,****2007**
            
            **2006****ASSETS*****Current
                assets***Cash
                and cash equivalents
            
            $
            4,040,168
            
            $
            2,115,966Restricted
                cash
            
            
            595,016
            
            
            2,743,142Contract
                receivables, net
            
            
            13,047,559
            
            
            7,573,913Costs
                and earnings in excess of billings
            
            
            57,488,693
            
            
            22,487,792Job
                disbursements advances
            
            
            2,454,106
            
            
            5,236,327Tender
                and other site deposits
            
            
            83,046
            
            
            3,427,490Other
                receivables
            
            
            6,640,865
            
            
            213,257Inventories
            
            
            528,743
            
            
            23,108Other
                current assets
            
            
            109,533Total
                current assets
            
            
            84,987,729
            
            
            43,820,995***Non-current
                assets***Plant
                and equipment, net
            
            
            2,582,554
            
            
            474,498Intangible
                Assets
            
            
            70,386
            
            
            -Security
                deposits
            
            
            -
            
            
            565,795Organization
                cost
            
            
            92,741
            
            
            -Goodwill
            
            
            7,995,896
            
            
            -Other
                non-current asset
            
            
            7,505
            
            
            -**TOTAL
                ASSETS**
            
            $
            95,736,811
            
            $
            44,861,288**LIABILITIES
                AND STOCKHOLDERS’ EQUITY*****Current
                liabilities***Short-term
                bank loans
            
            $
            2,578,550
            
            $
            -Accounts
                payable
            
            
            18,737,771
            
            
            15,202,029Amount
                due to shareholder
            
            
            1,334,856
            
            
            1,735Other
                payables
            
            
            9,193,186
            
            
            1,091,382Income
                tax payable
            
            
            2,673,643
            
            
            1,263,491Business
                and other taxes payable
            
            
            3,538,336
            
            
            2,058,327Customers’
                deposits
            
            
            757,079
            
            
            1,272,312Job
                disbursements payable
            
            
            -
            
            
            -Other
                Accruals
            
            
            499,684
            
            
            894,329Total
                current liabilities
            
            
            39,313,105
            
            
            21,783,605




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




F-3




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**CONSOLIDATED
      BALANCE SHEETS (Continued)**


**AS
      OF DECEMBER 31, 2007 and 2006**


**(Stated
      in US Dollars)**




**As of December 31,****2007**
            
            **2006*****Non-current
                liabilities***Long
                term bank loans
            
            $
            443,881
            
            $
            2,564,979Convertible
                bond payable, net
            
            
            3,465,741
            
            
            -Minority
                interest
            
            
            49,482
            
            
            -**TOTAL
                LIABILITIES**
            
            $
            43,272,209
            
            $
            24,348,584**STOCKHOLDERS’
                EQUITY**Preferred
                stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued
                and
                outstanding at December 31, 2007 and 2006
            
            
            -
            
            
            -Common
                stock, $0.001 par value, 100,000,000 shares authorized, 51,783,416
                and
                50,000,000 shares issued and outstanding at December 31, 2007 and
                2006,
                respectively
            
            
            51,784
            
            
            50,000Additional
                paid in capital
            
            
            23,665,558
            
            
            7,074,701Statutory
                reserves
            
            
            3,040,595
            
            
            1,437,223Accumulated
                other comprehensive income
            
            
            1,892,829
            
            
            469,964Retained
                earnings
            
            
            23,813,836
            
            
            11,480,81652,464,602
            
            
            20,512,704**TOTAL
                  LIABILITEIS ANDSTOCKHOLDERS’
                  EQUITY**
            
            $
            95,736,811
            
            $
            44,861,288




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




F-4





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**Years ended December 31,****2007**
            
            **2006**
            
            **2005**Contract
                revenues earned
            
            $86,617,239
            
            $63,359,174
            
            $49,514,654Cost
                of contract revenues earned
            
            
            (64,353,915
            )
            
            (46,796,419
            )
            
            (36,368,231
            )Gross
                profit
            
            $
            22,263,324
            
            $
            16,562,755
            
            $
            13,146,423Selling,
                general and administrative expenses
            
            
            (5,525,130
            )
            
            (5,989,328
            )
            
            (6,463,252
            )Non-recurring
                general and administrative expenses
            
            
            -
            
            
            (3,805,608
            )
            
            -Finance
                expenses
            
            
            208,197
            
            
            -
            
            
            -Income
                from operations
            
            $
            16,529,997
            
            $
            6,767,819
            
            $
            6,683,171Interest
                income
            
            
            108,241
            
            
            -
            
            
            -Interest
                expense
            
            
            (2,144,768
            )
            
            -
            
            
            (116,750
            )Other
                income
            
            
            88,385
            
            
            700,170
            
            
            501,128Other
                expenses
            
            
            127,043
            
            
            -
            
            
            -Income
                before taxation
            
            $
            14,454,812
            
            $
            7,467,989
            
            $
            7,067,549Income
                tax
            
            
            (2,422,484
            )
            
            (1,318,221
            )
            
            (1,157,271
            )Net
                income
            
            $
            12,032,328
            
            $
            6,149,768
            
            $
            5,910,278Basic
                net income per common share
            
            $
            0.239
            
            $
            0.138
            
            $
            0.136Diluted
                net income per common share
            
            $
            0.236
            
            $
            0.138
            
            $
            0.136Basic
                weighted average common shares outstanding
            
            
            50,357,454
            
            
            44,679,990
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            51,088,144
            
            
            44,679,990
            
            
            43,304,125





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




F-5


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**Years ended December 31,****2007**
              
              **2006**
              
              **2005*****Cash
                  flows from operating activities***Net
                  income
              
              $
              12,032,328
              
              $
              6,149,768
              
              $
              5,910,278Depreciation
                  Expense
              
              
              334,378
              
              
              222,424
              
              
              200,793Bad
                  Debt Expense
              
              
              291,666
              
              
              -
              
              
              -Amortization
                  Expense on convertible bond
              
              
              2,144,768
              
              
              -
              
              
              -Profit
                  on disposal of land use rights
              
              
              -
              
              
              -
              
              
              (15,248
              )Decrease/(increase)
                  in restricted cash
              
              
              2,148,126
              
              
              (2,224,783
              )
              
              600,247Decrease/(increase)
                  in security deposit
              
              
              565,795
              
              
              (565,795
              )
              
              -(Increase)/decrease
                  in inventories
              
              
              (505,635
              )
              
              281
              
              
              (8,366
              )(Increase)/decrease
                  in receivables
              
              
              (41,988,830
              )
              
              (18,279,917
              )
              
              (6,631,038
              )(Increase)/decrease
                  in other assets
              
              
              (117,038
              )
              
              -
              
              
              -Increase/(decrease)
                  in payables
              
              
              12,306,736
              
              
              8,930,623
              
              
              4,059,391Net
                  cash provided/(used) in operating activities
              
              $
              (12,787,706
              )
              $
              (5,767,399
              )
              $
              4,116,057***Cash
                  flows from investing activities***Disposals/(purchases)
                  of land use rights
              
              $
              -
              
              $
              -
              
              $
              694,946Decrease/(increase)
                  in restricted cash
              
              
              2,148,126
              
              
              (2,224,783
              )
              
              600,247Decrease/(increase)
                  in security deposit
              
              
              565,795
              
              
              (565,795
              )
              
              -Purchases
                  of plant and equipment
              
              
              (1,649,170
              )
              
              (89,250
              )
              
              (304,659
              )Net
                  cash provided/(used) in investing activities
              
              $
              (1,649,170
              )
              $
              (89,250
              )
              $
              390,287***Cash
                  flows from financing activities***Proceeds
                  from short-term loans
              
              $
              2,578,550
              
              $
              -
              
              $
              -Repayments
                  of short-term loans
              
              
              -
              
              
              (743,742
              )
              
              (4,795,738
              )Proceeds
                  from long-term loans
              
              
              -
              
              
              2,564,979
              
              
              -Repayments
                  of long-term loans
              
              
              (2,121,098
              )
              
              -
              
              
              -Proceeds
                  for amount due to shareholder
              
              
              1,442,291
              
              
              -
              
              
              132,570Repayments
                  of amount due to shareholder
              
              
              -
              
              
              (418,821
              )
              
              -Proceeds
                  from issuance of common stock
              
              
              3,338,470
              
              
              6,696
              
              
              -Increase
                  in additional paid in capital from issuance of common
                  stock
              
              
              -
              
              
              7,106,561
              
              
              -Dividends
                  paid
              
              
              -
              
              
              (1,576,796
              )
              
              (2,571,395
              )Issuance
                  of convertible bond and warrants
              
              
              9,700,000
              
              
              -
              
              
              -Net
                  cash provided/(used) in financing activities
              
              $
              14,938,213
              
              $
              6,938,877
              
              $
              (7,234,563
              )Net
                  increase/(decrease) in cash and cash equivalents
              
              $
              501,337
              
              $
              1,082,228
              
              $
              (2,728,219
              )Effect
                  of foreign currency translation on cash and cash
                  equivalents
              
              
              1,422,865
              
              
              521,921
              
              
              251,765Cash
                  and cash equivalents - beginning of year
              
              
              2,115,966
              
              
              511,817
              
              
              2,988,271Cash
                  and cash equivalents – end of year
              
              $
              4,040,168
              
              $
              2,115,966
              
              $
              511,817***Other
                  supplementary information:***Cash
                  paid during the year for:Interest
                  paid
              
              $
              119,335
              
              $
              71,656
              
              $
              116,750Income
                  tax paid
              
              $
              1,012,332
              
              $
              798,988
              
              $
              446,850




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




F-6




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**


**CONSOLIDATED
      STATEMETN OF STOCKHOLDERS’ EQUITY**


**AS
      OF DECEMBER 31, 2007, 2006, AND 2005**


(Amount
      Stated in USD)




**Total**
              **Number of**
              **shares**
            
            **Common**
              **stock**
            
            **Additional**
              **paid in capital**
            
            **Statutory**
              **reserves**
            
            **Accumulated**
              **other**
              **Comprehensive**
              **income**
            
            **Retained**
              **earnings**
            
            **Total**Balance,
                January 1, 2005
            
            
            43,304,125
            
            $
            43,304
            
            $
            -
            
            $
            1,299,156
            
            $
            (292,312
            )
            $
            3,675,169
            
            $
            4,725,317Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5,910,278
            
            
            5,910,278Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            240,355
            
            
            
            
            
            240,355Total
                Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,150,633Dividend
                paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,571,396
            )
            
            (2,571,396
            )Increase
                to additional paid in capital from reverse acquisition transaction
                reflecting cash held by SRKP 1, Inc.
            
            
            
            
            
            
            
            
            5,722
            
            
            
            
            
            
            
            
            (5,722
            )
            
            -Appropriations
                to statutory revenue reserves
            
            
            
            
            
            
            
            
            
            
            
            104,543
            
            
            
            
            
            (104,543
            )
            
            -Balance,
                December 31, 2005
            
            
            43,304,125
            
            $
            43,304
            
            $
            5,722
            
            $
            1,403,699
            
            $
            (51,957
            )
            $
            6,903,786
            
            $
            8,304,554Balance,
                January 1, 2006
            
            
            43,304,125
            
            
            43,304
            
            
            5,722
            
            
            1,403,699
            
            
            (51,957
            )
            
            6,903,786
            
            
            8,304,554Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,149,768
            
            
            6,149,768Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            521,921
            
            
            
            
            
            521,921Total
                Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,671,689Dividend
                paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,576,796
            )
            
            (1,576,796
            )Issuance
                of common stock
            
            
            6,695,875
            
            
            6,696
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6,696Additional
                paid in capital from issuance of common stock in cash
            
            
            
            
            
            
            
            
            7,068,979
            
            
            
            
            
            
            
            
            
            
            
            7,068,979Adjustment
                of additional paid in capital to retained earnings in connection
                with
                share exchange
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,582
            
            
            37,582Appropriations
                to statutory revenue reserves
            
            
            
            
            
            
            
            
            
            
            
            33,524
            
            
            
            
            
            (33,524
            )
            
            -Balance,
                December 31, 2006
            
            
            50,000,000
            
            $
            50,000
            
            $
            7,074,701
            
            $
            1,437,223
            
            $
            469,964
            
            $
            11,480,816
            
            $
            20,512,704




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




F-7




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**


**CONSOLIDATED
      STATEMETN OF STOCKHOLDERS’ EQUITY**


**AS
      OF DECEMBER 31, 2007, 2006, AND 2005**


(Amount
      Stated in USD)




**Total**
              **Number of**
              **shares**
            
            **Common**
              **stock**
            
            **Additional**
              **paid in capital**
            
            **Statutory**
              **reserves**
            
            **Accumulated**
              **other**
              **Comprehensive**
              **income**
            
            **Retained**
              **earnings**
            
            **Total**Balance,
                January 1, 2007
            
            
            50,000,000
            
            $
            50,000
            
            $
            7,074,701
            
            $
            1,437,223
            
            $
            469,964
            
            $
            11,480,816
            
            $
            20,512,704Net
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            12,032,328
            
            
            12,032,328Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,422,865
            
            
            
            
            
            1,422,865Total
                Comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,455,193Proceed
                from issuance of common stock
            
            
            1,783,416
            
            
            1,784
            
            
            9,163,264
            
            
            
            
            
            
            
            
            
            
            
            9,165,048Less:
                Cost of stock issuance
            
            
            
            
            
            
            
            
            (951,434
            )
            
            
            
            
            
            
            
            
            
            
            (951,434
            )Adjustment
                of Zhuhai KGE Co Ltd Retained Earnings to eliminate Dividend
                Paid
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,844,897
            
            
            3,844,897Adjustment
                of Zhuhai Career Training School pre-acquisition Deficits
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            14,429
            
            
            14,429Adjustment
                of CAEI retained earnings/(deficits)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1,955,262
            )
            
            (1,955,262
            )Additional
                Paid-in Capital from warrants and beneficial conversion
                feature
            
            
            
            
            
            
            
            
            8,379,027
            
            
            
            
            
            
            
            
            
            
            
            8,379,027Appropriation
                to statutory reserve
            
            
            
            
            
            
            
            
            
            
            
            1,603,372
            
            
            
            
            
            (1,603,372
            )
            
            -Balance,
                December 31, 2007
            
            
            51,783,416
            
            $
            51,784
            
            $
            23,665,558
            
            $
            3,040,595
            
            $
            1,892,829
            
            $
            23,813,836
            
            $
            52,464,602




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




F-8




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




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




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




The
      Company through its subsidiaries conducts its principal activity as glass wall
      contractors, specifically specializing in the design, manufacturing,
      installation and maintenance of structural glass and other light structure
      building systems, throughout China, 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
      subsidiary. The length of the Company's contracts varies but is typically about
      one to two years.




**2.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**




*(a)* *Method
      of accounting*




The
      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
      ten 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 minority interests.




F-9





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




The
      Company owned the subsidiaries since its reverse-merger on October 17, 2006.
      As
      of December 31, 2007, detailed identities of the consolidating subsidiaries
      are
      as follows: -




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





*(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.




F-10




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(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: -


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




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




*(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-11





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(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 other 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.
      Based on the impairment tests performed, there was no impairment of goodwill
      or
      other intangible assets in fiscal 2007, 2006 and 2005.





*(g)* *Inventories*





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




*(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
      debts, 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.




F-12





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(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. Approximately
      2,857,143 dilutive shares on an “as converted” basis for the Convertible Bond
      were excluded from the calculation of diluted EPS for the year ended December
      31, 2007 since their effect would have been anti-dilutive.




The
      calculation of diluted weighted average common shares outstanding for the year
      ended December 31, 2007 and 2006 is based on the estimate fair value of the
      Company’s common stock during such periods applied to warrants and options using
      the treasury stock method to determine if they are dilutive. The Convertible
      Bond is included on an “as converted “basis when these shares are
      dilutive.




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





**Year
                ended**
              **December
                31,**
              **2007**
            
            **Year
                ended**
              **December
                31,**
              **2006**
            
            **Year
                ended**
              **December**
              **31,
                2005**Net
                Income
            
            $
            12,032,328
            
            $
            6,149,768
            
            $
            5,910,278Basic
                Weighted Average Shares
            
            
            50,357,454
            
            
            44,679,990
            
            
            43,304,125Dilutive
                Shares:-Addition
                to Common Stock from Conversion of Notes
            
            
            -
            
            
            -
            
            
            --Addition
                to Common Stock from Exercise of Warrants
            
            
            730,690
            
            
            -
            
            
            -Diluted
                Weighted Average Outstanding Shares:
            
            
            51,088,144
            
            
            44,679,990
            
            
            43,304,125Earnings
                Per Share-Basic
            
            $
            0.239
            
            $
            0.138
            
            $
            0.136-Diluted
            
            $
            0.236
            
            $
            0.138
            
            $
            0.136




F-13




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(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 time
      cost
      incurred to date to estimated total cost for each contract.




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




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




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




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




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




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


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


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





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




F-14





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(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.




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




·
            Zhuhai
                King Glass Engineering Co., Limited and Zhuhai King General Glass
                Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in Zhuhai
                and is subject to the PRC corporation income tax rate of 33%. However,
                in
                accordance with the relevant tax laws and regulations of PRC, the
                Zhuhai
                local corporation income tax rate is 15%. Zhuhai KGGET is presently
                dormant, and from the time that it has its first profitable tax year,
                it
                is exempt from corporate income tax for its first two years and is
                then
                entitled to a 50% tax reduction for the succeeding three years. Zhuhai
                KGGET has enjoyed this tax incentive in the previous years. On March
                16,
                2007, the National People’s Congress of China enacted a new PRC Enterprise
                Income Tax Law, under which foreign invested enterprises and domestic
                companies will be subject to enterprise income tax at a uniform rate
                of
                25%. The new law will become effective on January 1, 2008. During
                the
                transition period for enterprises established before March 16, the
                tax
                rate will be gradually increased starting in 2008 and be equal to
                the new
                tax rate in 2012. Zhuhai KGGETanticipates that as a result of the
                new EIT
                law, its income tax provision will increase, which could adversely
                affect
                Zhuhai KGGETfinancial condition and results of
                operations.





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





·
            Techwell
                Engineering Limited is subject to Hong Kong tax rate of 17.5%. Techwell
                International Limited is a Macau registered company and therefore
                is
                subject to Macau profit tax rate of 12%. Techwell Building System
                (Shenzhen) Co. Limited Is located in Shenzhen and is subject to PRC
                corporate income tax rate of 33%. No tax was provisioned as the Company
                acquired Techwell on November 6,
                2007.




F-15


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




·
            KGE
                Australia Pty Limited is subject to 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
                China and Hong Kong. Based on the consolidated net income for the
                year
                ended December 31, 2007, the Company shall be taxed at the 35% tax
                rate.




*(n)* *Advertising*





The
      Company expensed all advertising costs as incurred. Advertising expenses
      included in selling expenses were $140,236, $151,821, and $114,731 for the
      periods ended December 31, 2007, 2006, and 2005, 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 $111,129,
      $50,117, and $58,865 for the periods ended December 31, 2007, 2006, and 2005,
      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. The contributions were $246,656, $118,856, and $109,941 for the
      periods ended December 31, 2007, 2006, and 2005, respectively.




F-16





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(q)* *Foreign
      currency translation*




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




**2007**
            
            **2006**
            
            **2005**Period
                end RMB : US$ exchange rate
            
            
            7.3141
            
            
            7.8175
            
            
            8.0734Average
                yearly RMB : US$ exchange rate
            
            
            7.6172
            
            
            7.9819
            
            
            8.2033




**2007**
            
            **2006**
            
            **2005**Period
                end HKD : US$ exchange rate
            
            
            7.8049
            
            
            7.7794
            
            
            7.7535Average
                yearly HKD : US$ exchange rate
            
            
            7.8026
            
            
            7.7690
            
            
            7.7779





**2007**
            
            **2006**
            
            **2005**Period
                end MOP : US$ exchange rate
            
            
            8.1594
            
            
            -
            
            
            -Average
                yearly MOP : US$ exchange rate
            
            
            8.2166
            
            
            -
            
            
            -








**2007**
            
            **2006**
            
            **2005**Period
                end AUD : US$ exchange rate
            
            
            1.1419
            
            
            -
            
            
            -Average
                yearly AUD : US$ exchange rate
            
            
            1.1954
            
            
            -
            
            
            -





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.




F-17




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(r)* *Statutory
      reserves*





Statutory
      reserves for foreign investment enterprises are referring to the amount
      appropriated from the net income in accordance with PRC 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.




F-18





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




*(t)* *Recent
      accounting pronouncements*





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




In
      February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities – Including an Amendment of SFAS 115” (SFAS
      159), which allows for the option to measure financial instruments and certain
      other items at fair value. Unrealized gains and losses on items for which the
      fair value option has been elected are reported in earnings. The objective
      of
      SFAS 159 is to provide opportunities to mitigate volatility in reported earnings
      caused by measuring related assets and liabilities differently without having
      to
      apply hedge accounting provisions. SFAS 159 also establishes presentation and
      disclosure requirements designed to facilitate comparisons between companies
      that choose different measurement attributes for similar types of assets and
      liabilities. This statement is effective for financial statements issued for
      fiscal years beginning after November 15, 2007. The Company is currently
      evaluating the impact of SFAS 159 on the Company’s consolidated financial
      statements.




In
      December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations,
      (‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the
      original pronouncement requiring that the purchase method be used for all
      business combinations, but also provides revised guidance for recognizing and
      measuring identifiable assets and goodwill acquired and liabilities assumed
      arising from contingencies, the capitalization of in-process research and
      development at fair value, and the expensing of acquisition-related costs as
      incurred. SFAS 141(R) is effective for fiscal years beginning after December
      15,
      2008. The Company will evaluate how the new requirements could impact the
      accounting for any acquisitions completed beginning in fiscal 2009 and beyond,
      and the potential impact on the Company’s consolidated financial statements.




F-19




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




In
      December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
      Consolidated Financial Statements − an amendment of ARB No. 51. SFAS 160
      requires that ownership interests in subsidiaries held by parties other than
      the
      parent (previously referred to as minority interests), and the amount of
      consolidated net income, be clearly identified, labeled and presented in the
      consolidated financial statements. It also requires once a subsidiary is
      deconsolidated, any retained noncontrolling equity investment in the former
      subsidiary be initially measured at fair value. Sufficient disclosures are
      required to clearly identify and distinguish between the interests of the parent
      and the interests of the noncontrolling owners as components of equity. It
      is
      effective for fiscal years beginning after December 15, 2008, and requires
      retroactive adoption of the presentation and disclosure requirements for
      existing minority interests. All other requirements are applied prospectively.
      The Company is currently evaluating the impact of SFAS 160 on the Company’s
      consolidated financial statements.




F-20
 
  **CHINA
        ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




**December
                31,****2007**
            
            **December
                31,****2006**Contract
                receivables
            
            $
            13,263,260
            
            $
            7,991,561*Less**:*Allowance for doubtful accounts
            
            
            (215,701
            )
            
            (417,648
            )Net
            
            $
            13,047,559
            
            $
            7,573,913




*Allowance
                for Doubtful Accounts*




**December
                31,****2007**
            
            **December
                31,****2006**Beginning
                balance
            
            $
            417,648
            
            $
            403,595Add:
                Allowance created
            
            
            
            
            
            14,053*Less**:*Bad debt charged against allowance
            
            
            (201,947
            )Ending
                balance
            
            $
            215,701
            
            $
            417,648





**4.**
            **INVENTORIES**




**December
                31,****2007**
            
            **December
                31,****2006**Raw
                materials at sites
            
            $
            528,743
            
            $
            23,108




F-21


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**5.**
            **PLANT
                AND EQUIPMENT**




Plant
      and
      equipment consist of the following as of: -


**December
                  31,****2007**
              
              **December
                  31, 2****006**At
                  costMotor
                  vehicle
              
              $
              1,223,692
              
              $
              453,917Machinery
                  and equipment
              
              
              3,383,123
              
              
              1,417,256Furniture,
                        software and office equipment
              
              
              625,102
              
              
              669,480Building
              
              
              290,652
              
              
              -Leasehold
                  improvement
              
              
              189,403
              
              
              -$
              5,711,972
              
              $
              2,540,653*Less**:
                  Accumulated depreciation*Motor
                  vehicle
              
              $
              593,141
              
              $
              401,862Machinery
                  and equipment
              
              
              2,227,231
              
              
              1,190,795equipment
              
              
              269,695
              
              
              473,498Building
              
              
              9,810
              
              
              -Leasehold
                  improvement
              
              
              29,541
              
              
              -$
              3,129,418
              
              $
              2,066,155$
              2,582,554
              
              $
              474,498




Depreciation
      expenses included in the selling and administrative expenses for years ended
      December 31 2007, 2006, and 2005 were $334,378, $222,424 and $159,641
      respectively.




**6.**
            **INTAGIBLE
                ASSETS**




**December
                  31,****2007**
              
              **December
                  31,****2006****At
                  cost**Intangible
                  Assets
              
              $
              99,567
              
              $
              -*Less**:
                  Accumulated amortization*
              
              
              29,181
              
              
              -$
              70,386
              
              $
              -




F-22





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**7.**
            **LOANS**





**A.**  **SHORT-TERM BANK LOANS**


**December
                    31,****2007**
                
                **December
                    31,****2006**Bank
                    of East Asia Ltd., line of credit, at 5.508% per annum, subject
                    to
                    variation every 6 months, due October 25, 2011
                
                $
                546,889
                
                $
                -Dah
                    Sing Bank, 5.0% per annum, line of credit, due November 28,
                    2008
                
                
                257,926
                
                
                -Dah
                    Sing Bank, 5.5% per annum, trust receipts, due November 25,
                    2008
                
                
                1,773,735
                
                
                -$
                2,578,550
                
                $
                -





In
      October 2006, the Company opened a line of credit facility with the Zhuhai
      branch of Bank of East Asia for a maximum of RMB20,000,000. The credit facility
      does not require renewal until October 2011. In order to facilitate the
      extension of the credit facility, the Company agreed to deposit the equivalent
      amount in HKD on fixed deposit terms into the Hong Kong branch of Bank of East
      Asia. This facility is subject to a current interest rate of 5.508% and interest
      rate adjusts every 6 months.




**B.**
            **LONG-TERM
                BANK LOANS**




**December
                  31,****2007**
              
              **December
                  31,****2006**Bank
                  of East Asia Ltd., line of credit, at 5.832% per annum, subject
                  to
                  variation ever 6 months, due October 25, 2011
              
              $
              169,518
              
              $
              2,564,979Auto
                  capital lease obligations (hire purchase) due November 12,
                  2009
              
              
              274,363
              
              
              -$
              443,881
              
              $
              2,564,979




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 5.832% and interest rate adjusts every 6 months.




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




F-23





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




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




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




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




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





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





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




F-24




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**8.**
            **CONVERTIBLE
                BONDS AND BOND WARRANTS
                (CONTINUED)**




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




On
      April
      12, 2007, the Company also entered into a registration rights agreement with
      the
      Subscriber pursuant to which the Company agreed to include the Bonds, the
      Warrants, and the shares of common stock underlying the Bonds and Warrants
      in a
      pre-effective amendment to a registration statement that the Company have on
      file with the SEC. Subsequently, the Company verbally agreed with the Subscriber
      not to include the Subscriber’s securities in the pre-effective amendment to the
      registration statement and to register them in a separate registration statement
      to be filed promptly after the effective date of the previously filed
      registration statement. The Company registered resale of the Bonds, the
      Warrants, and the shares of common stock underlying the Bonds and Warrants
      in a
      registration statement that was declared effective by the SEC on February 7,
      2008.




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




As
      addressed in an earlier paragraph under Mandatory Redemptions, the Company
      will
      redeem each bond at 150.87% of its principal amount on April 4, 2012 (the
      maturity date). On the basis of this commitment, the Company has determined
      the
      total redemption premium to be $5,087,100, which is an addition to the original
      face value of the Bonds of $10,000,000. This redemption premium is to be
      amortized to interest expense over the term of the Bonds by the interest method.




F-25





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**8.**
            **CONVERTIBLE
                BONDS AND BOND WARRANTS
                (CONTINUED)**




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


(1)
              
              Bond
                  Discount
              
              300,000(2)
              
              Warrants
              
              4,036,170(3)
              
              Beneficial
                  Conversion Feature
              
              4,342,857




The
      above
      items (1), (2), and (3) are to be amortized to interest expense over the term
      of
      the bonds by the effective interest method as disclosed in the table
      below.




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


**December
                  31, 2007**Convertible
                  Bonds Payable
              
              $
              10,000,000Less:
                  Interest discount – Warrants
              
              
              (4,036,170
              )Less:
                  Interest discount – Beneficial conversion feature
              
              
              (4,342,857
              )Less:
                  Bond discount
              
              
              (300,000
              )Accretion
                  of interest discount – Warrant
              
              
              589,729Accretion
                  of interest discount – Beneficial conversion feature
              
              
              634,540Amortization
                  of bond discount to interest expense
              
              
              43,8356%
                  Interest Payable
              
              
              438,332Accretion
                  of redemption premium
              
              
              438,332Net
              
              $
              3,465,741




F-26





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**9.**
            **CONTRACT
                REVENUES EARNED**




The
      contract revenues earned for the years ended December 31, 2007, 2006 and 2005
      consist of the following: -


**Year ended**
                  **December 31, 2007**
                
                **Year ended**
                  **December 31, 2006**
                
                **Year ended**
                  **December 31, 2005**Billed
                
                $
                60,241,592
                
                $
                41,906,743
                
                $
                37,825,662Unbilled
                
                
                26,375,647
                
                
                21,452,431
                
                
                11,688,992$
                86,617,239
                
                $
                63,359,174
                
                $
                49,514,654





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.




F-27





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**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 December 31, 2007, 2006,
      and
      2005: -


**Year
                  endedDecember 31, 2007**
              
              **Year endedDecember 31, 2006**
              
              **Year endedDecember 31, 2005**Tax
                  at the PRC, HK, Macau & Australia income tax rates
              
              $
              4,770,088
              
              $
              2,464,436
              
              $
              2,332,291Effect
                  of PRC government grants
              
              
              (2,347,604
              )
              
              (1,146,215
              )
              
              (1,175,020
              )Current
                  income tax expense
              
              $
              2,422,484
              
              $
              1,318,221
              
              $
              1,157,271




Effective
      January 1, 2008, the PRC government implemented a new 25% tax rate across the
      board for all enterprises regardless of whether domestic or foreign enterprise
      without any tax preferences which is defined as "two-year exemption followed
      by
      three-year half exemption" enjoyed by tax payers. As a result of the new tax
      law, a standard 15% tax preference terminated as of December 31, 2007. The
      PRC
      government has established a set of transition rules to allow enterprises using
      tax preferences before January 1, 2008 to continue using the tax preferences
      on
      a transitional basis until being the new tax rates are fully implemented over
      a
      five year period.




F-28




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**11.**
            **COMMITMENTS**




The
      Company leases certain administrative and production facilities from third
      parties. Accordingly, for the years ended December 31, 2007 and 2006, the
      Company incurred rental expenses of $437,750 and $385,386
      respectively.




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


For
                  the years ended December 31,2008
              
              $
              276,1952009
              
              
              113,7302010
              
              
              89,5532011
              
              
              7,867$
              487,345




**12.**
            **RELATED
                PARTIES TRANSACTIONS**




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




The
      amount due to shareholder at December 31, 2007 and December 31, 2006 were
      $1,334,856 and $1,735, respectively.




F-29


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**13.**
            **OTHER
                EVENTS**





On
      October 3, 2007, the Company issued 847,550 shares of common stock at $3.50
      per
      share upon the closing of an initial public offering. The Company’s sale of
      common stock, which was sold indirectly by the Company to the public at a price
      of $3.50 per share, resulted in net proceeds of approximately $2.0 million.
      These proceeds were net of underwriting discounts and commissions, fees for
      legal and auditing services, and other offering costs. Upon the closing of
      the
      initial public offering, the Company sold to the underwriter warrants to
      purchase up to 73,700 shares of its common stock. The warrants are exercisable
      at a per share price of $4.20 and will expire if unexercised after five years
      from the date of issuance.




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




On
      November 6, 2007, the Company, through Full Art, acquired all of the issued
      and
      outstanding shares (the “Techwell Shares”) in the capital of Techwell
      Engineering Limited (which has two subsidiaries), a limited liability company
      incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
      (the “Agreement”) dated November 6, 2007, entered into by and among Mr. Ng, Chi
      Sum and Miss Yam, Mei Ling (the “Shareholders”), the Company and Full Art (the
“Techwell Acquisition”), to consummate the acquisition transaction. Pursuant to
      the terms of the Stock Purchase Agreement, the Shareholders agreed to sell
      and
      transfer all of the Techwell Shares to Full Art for a purchase consideration
      of
      US$11,654,566 payable in cash and shares of the Company (in equal portion).
      Thirty percent of the stock consideration paid to the Shareholders will be
      held
      in a third-party escrow account for up to two years to cover potential
      indemnification obligations of the Shareholders. Techwell is engaged in the
      business of manufacturing and constructing external building facades, including
      roofing systems for buildings and curtain wall systems and accessories. This
      transaction resulted in goodwill of $7,995,896 for the year ended December
      31,
      2007.




F-30





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005**


**(Stated
      in US Dollars)**




**14.**
            **SUBSEQUENT
                EVENTS**




On
      February 19, 2008, the Company and Techwell Engineering Limited were granted
      a
      performance bond facility by the Hong Kong Branch of ABN AMRO Bank N.V. The
      facility amount is USD10,000,000, at a tenor of up to 1 year with 2% flat
      interest rate on the issued amount of performance bond. ABN AMRO requires
      guarantees as follows:




·
            Irrevocable
                and unconditional guarantee executed by Zhuhai KGGET
                and


·
            Share
                charge over the shares of the Company for a minimum value of USD$5,000,000
                or equivalent, executed by KGE Group
                Limited.




F-31