UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-K





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


THE
SECURITIES EXCHANGE ACT OF 1934





FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009





OR





 ̈ 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
                People’s
      Republic of China
              
              519070(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
                
                NASDAQ
      Global Select Market




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  ̈ No x




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  ̈ No x




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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).       Yes  ̈No  ̈





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.               ̈





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





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




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





The
aggregate market value of the registrant's issued and outstanding shares of
common stock held by non-affiliates of the registrant as of June 30, 2009 (based
on the price at which the registrant’s common stock was last sold on such date)
was approximately $43.2 million.





There
were 55,156,874 shares outstanding of the registrant’s common stock, par value
$0.001 per share, as of March 28, 2010.   The registrant’s common
stock is listed on the Nasdaq Global Select Market under the ticker symbol
“CAEI”.





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, 2009




ITEM
              
              
              PagePART I
              
              
              1Item
      1.
              
              Business
              1Item 1A.
              
              Risk
      Factors
              10Item 1B.
              
              Unresolved
      Staff Comments
              28Item
      2.
              
              Properties
              28Item
      3.
              
              Legal
      Proceedings
              29Item
      4.
              
              (Removed
      and Reserved)
              29PART II
              
              
              30Item
      5.
              
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              30Item
      6.
              
              Selected
      Financial Data
              33Item
      7.
              
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              34Item
      7A.
              
              Quantitative
      and Qualitative Disclosures about Market Risk
              44Item
      8.
              
              Financial
      Statements and Supplementary Data
              45Item
      9.
              
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              45Item
      9A.
              
              Controls
      and Procedures
              45Item
      9B.
              
              Other
      Information
              47PART III
              
              
              47Item
      10.
              
              Directors,
      Executive Officers and Corporate Governance
              47Item
      11.
              
              Executive
      Compensation
              47Item
      12.
              
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              48Item
      13.
              
              Certain
      Relationships and Related Transactions, and Director
      Independence
              48Item
      14.
              
              Principal
      Accounting Fees and Services
              48PART IV
              
              
              49Item
      15.
              
              Exhibits,
      Financial Statement Schedules
              49Signatures
              50




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 and results of operations. 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 and government sponsored
      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;





·
            Adverse
      capital and credit market
conditions;





·
            Any
      occurrence of epidemic diseases and other cross-region infectious
      diseases;




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





·
            Increasing
      provisions for bad debt related to our accounts
  receivable;




·
            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;




·
            Expenses
      and costs related to our issuance of our bonds and bond
      warrants;




·
            Our
      intended acquisition of an ownership interest in Shanghai ConnGame Network
      Co. Ltd.;





·
            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.


ii





PART
I




ITEM
1.  BUSINESS





Overview





We have
traditionally specialized 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, installation and construction of structural exterior cladding
systems. We compete on the strength of our reputation, relationships with
government and commercial clients, and our ability to give expression to the
vision of leading architects. By focusing on innovation while outsourcing
commoditized manufacturing work, we believe we are able to add artistic and
technological value to projects at cost-effective price
points.





Proposed
Acquisition of 60% Equity Interest in ConnGame





In
December 2009, we and First Jet entered into a letter of intent for the
Acquisition (“Letter of Intent”) that set forth the principal terms under which
we would issue up to 25,000,000 shares of our common stock to First Jet to
acquire 60% of the equity interest of Shanghai ConnGame Network Co. Ltd., a
company formed under the laws of the People’s Republic of China (“ConnGame”),
which is a developer and publisher of MMORPG (Massively Multiplayer Online Role
Playing Game).  In January 2010, our board of directors and
stockholders approved our acquisition of a 60% equity interest in
ConnGame.





We
believe that our proposed acquisition of ConnGame will expand our core
capabilities and facilitate our planned transformation into a high-end
architectural design consultant and service provider, as we intend to leverage
ConnGame’s design engines and virtual applications to broaden our service
capabilities and scope of architectural collaborations. We intend to utilize
ConnGame's technology and online platform to provide technical consulting and
advisory services to architects, real estate developers and governments. We
believe our acquisition of ConnGame will enable us to strengthen our core
architectural engineering and design abilities. We believe that our planned
focus on design and construction will reduce our exposure to unpredictable
operational risks that relate to construction projects, in addition to providing
us with the tools to strengthen our ability to complete projects within budget
limitations. We also believe that the acquisition of ConnGame and its
technologies will enable us to better evaluate estimated profitable of
construction projects before we enter into contracts. We believe that our
technology profile will be strengthened, particularly with ConnGame’s virtual
and online and graphic technologies, and that the technology and capabilities
will permit us to render more animated, detailed, and interactive designs that
could assist us in attaining highly desirable projects from our bidding
competitors.





We
believe that our acquisition would also enable us to enter China's large online
game market, with ConnGame’s two to-be-released MMORPG games.  We
believe that the online game industry and its related business model will be a
growing market in China.





If and
when the acquisition of the 60% interest of ConnGame is completed, we will seek
to divide our business services into the following:





·
            Construction and
      fabrication—We intend conduct our construction and fabrication
      services within China.





·
            Construction consulting and
      design services—We believe that we will be able to utilize the
      technical skills and expertise of ConnGame to provide unique consulting
      services for the design and fabrication projects globally, with such
      services to include real-time and interactive
  capabilities.





·
            Online Games—ConnGame
      has targeted to launch its first game in mid-2010 and its second game in
      late 2010, subject to final
testing.





·
            Network Gaming and Home
      Decoration—We intend to develop a platform to provide services on
      home decoration through an interactive style, develop online games to
      provide to architects, other professionals, and individual consumers the
      ability to design and interact with other
users.





Completion
of the proposed acquisition is subject to negotiation and execution of a
definitive equity transfer agreement, regulatory approvals, and other customary
closing conditions.  Therefore, there can be no guarantee that the
acquisition will be consummated.





For
additional information regarding our planned operations after the proposed
acquisition, please see “Item
7—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Proposed Acquisition of 60% Equity Interest in
ConnGame.”


1


International
and Domestic (China) Construction Market





Historically,
the relative growth of the Chinese economy had assisted in the 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. In addition,
governmental agencies and international regulators are becoming more
environmentally conscious in the enactment of regulations governing new
construction. Awareness of 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.





In 2009,
as China’s economy has also been negatively impacted by the global economic
crisis, investments in the construction sector have been significantly reduced
and, as a consequence, China’s construction industry has become a challenging
environment in which to operate. The government of the People's Republic of
China adopted an economic stimulus package designed to limit the amount of
damage that the global financial crisis could do to China’s economy, the third
largest economy in the world. The PRC government indicated that the stimulus
funds were to be invested in key areas such as housing, rural infrastructure,
transportation, health and education, environment, industry, disaster
rebuilding, income-building, tax cuts, and finance. We expect that we may be
able to benefit from the stimulus plans over the next few years. Preliminary
government spending plans indicate that there may be an opportunity for the use
of our products, especially on the infrastructure related projects such as large
scale railway stations and airport terminals, and public facilities, such as
libraries, museums, exhibition halls, stadiums, planetariums and science
centers.





The
recent trends in the global economy have had a significant adverse impact on the
commercial construction industry as a whole. As a result, the competitive
environment in which we operate has become more competitive, increasing the
number of re-bid construction projects and amount of time between bidding and
award of a project, reducing selling prices, and causing competitors to modify
the scope and type of projects on which they bid. In 2008 we increased the
number of international construction projects, but in 2009 the spread of the
global recession and reduction in the nature and scope of international
construction projects has led us to primarily focus our attention on domestic
projects in China. Dubai, Doha, Kuwait and other middle east region have been
suffered a great impact markedly under the global financial crisis. Our projects
suffered a certain degree of impact as well. However, we conducted our Dubai and
Doha Projects construction under the original schedule, and executed the design
for Kuwait project. After the completion of “soft-open” of Dubai Metro Rail
Project in September 2009, the contractor called bonds and refused to sign and
pay for the project payments, which have resulted in a cash flow difficulties
for our company. We dispute the contractor’s rights to call the bonds and
seeking remedies for its actions. In addition, after a thorough review and
analysis of the feasibility and profitability of the Singapore Project, we
determined that it was in the best interests of our company to withdraw from the
project.





We do not
believe that the international economy will experience a swift recovery in the
near future and therefore its negative impact on construction industry still
exists and will exist in the near future. As a result, we suspended the orders
of the construction of international projects, and shifted the focus of our
business to design and professional consulting services. We have taken steps to
continue our development and research of new technologies and to maintain our
company’s position in the industry. To develop projects and generate revenue, we
have sought to join new projects in the position of design and project
consultant and the role of material supplier.





Although
we believe that a global market opportunity still exists for our services and
products despite the difficult environment, we believe that it would be more
advantageous to our business to take advantage of our low design and production
cost in China. We believe that the Chinese market has faired much better than
most of the international markets. With the strength of our reputation and
history of notable projects in China, we are focusing our resources and efforts
in our domestic market. We believe that we have long-standing relationships with
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, the National Palace
Museum in Beijing, the Wuhan Qintai Grand Theatre and Wuhan International Horse
Racing Course. During the year 2009, we commenced certain landmark projects in
China, which consisted of the Changsha Train Station, Changsha Museum, Guangzhou
Science Town, and projects in Jinan and Inner Mongolia. These projects are
expected to be completed in 2010. We plan to continue to meet the needs of
government and private sector customers in the larger cities.





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,
installation 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 conduct overall project planning and control
over key areas of activities such as design and engineering, procurement,
production scheduling, quality control and site installation.


2





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 was designed 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 of 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.





We hope
that the proposed acquisition of ConnGame will enable us to leverage ConnGame’s
design engines and virtual applications to broaden our service capabilities and
scope of architectural collaborations. We intend to utilize ConnGame's
technology and online platform to provide technical consulting and advisory
services to architects, real estate developers and governments.





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.





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 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.




Installation





We have
38 full-time project managers/supervisors and approximately 500 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. 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.  The installation
team coordinates its site delivery program with the main contract schedule to
meet completion deadlines.


3





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.





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.





·
            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.




4


Projects





General





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
95% of our sales are from fixed price contracts.  Our remaining 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
2009, we completed approximately 37 projects.  Our three largest
projects are Dubai Metro Red Line, Guangdong Science City Headquarter Phase I,
and Doha High Rise Office Tower, which accounted for approximately 43.2 %, 9.2 %
and 7.0% of our sales, respectively, for the year ended December 31,
2009.  For the year ended December 31, 2009, approximately 24% of our
sales came from new construction projects starting in 2009 and for the year
ended December 31, 2008, approximately 58% of our sales came from new
construction projects starting in 2008.





Nine
Dragon Project





In May
2009, we entered into a Framework Agreement to undertake several large scale
constructions of projects at the Zhejiang Nine Dragon Holiday Resort in China.
Pursuant to the terms of the Framework Agreement, the projects are to include
the construction of a marine park, playland, movie city and hotel.  In
July 2009, we entered into a Letter of Intent of Land Transfer with the
affiliates of Shanghai Nine Dragon, and we agreed to sell 17 million shares of
our common stock to affiliates of Nine Dragon, with the related proceeds being
used as the working capital for the construction of Nine Dragon Project.
However, the affiliates attempted to renegotiate the use of proceeds to instead
be used for the purchase the apartments of Nine Dragon. Such request was
rejected by our board of directors and majority of the stockholders, and as a
result, the transaction was not completed. We actively maintain communication
with Shanghai Nine Dragon, endeavoring to obtain the design and construction
work contracts of the project.





Sales
and Marketing





Sales





Sales
managers lead our sales and marketing efforts through our domestic headquarters
in Zhuhai, China, and our main regional sales offices in Beijing, Shanghai,
Guangzhou, Shenzhen, and Wuhan. We deal with overseas operational issues through
our subsidiaries in Hong Kong and USA, and establish local project departments
only when the project possesses substantial feasibility. 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
primarily 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, often at the recommendation of
architects and engineers we have worked with in the past.




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. China’s 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.


5





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.  Our marketing plan has historically
focused on print advertising, participation in tradeshows, exhibitions, lecture
and technology briefings to architects and property owners. 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;




·
            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 April 9,
      2008 to April 8, 2011;




·
            ISO
      14001 - International Environmental System Certification, valid from April
      9, 2008 to April 8, 2011; and




·
            ISO
      18001 - International Safety System Certification, valid from April 16,
      2008 to April 15, 2011.




6


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 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 in 2007.





As of
December 31, 2009, we employed 108 designers and engineers.  We
currently own 79 patents, of which 51 are approved, and 28 pending approval. Of
the 51 approved, 48 are in China and 3 are in other countries.





We
expended $2,926, $711,318 and $111,129 on research and development activities
for each of the years ended December 31, 2009, 2008 and 2007, 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, 2009, our total backlog of orders considered to be firm was
approximately $39 million, compared with $176 and $106 million at December 31,
2008 and 2007, respectively. Of our 2009 amounts, 92 % of the backlog, or $36
million, is expected to generate revenues in fiscal 2010, compared to 66% of our
2008 backlog ($117 million) realized in fiscal 2009; 80% of our 2007 backlog
($85 million) realized in fiscal 2008 and 100% of our 2006 backlog ($10 million)
realized in fiscal 2007. The decrease in backlog is primarily due to the absence
of new international projects taken by the company. Our backlog as at December
31, 2009 consisted entirely of projects within our home market of
China.





We define
backlog as the total anticipated revenue from projects already begun and
upcoming projects for which contracts have been signed or awarded and pending
signing.  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.  There can be no assurance that
the backlog at any point in time will translate into net revenue in any
subsequent period.





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;




7




·
            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.





Government
Regulation





Construction industry





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.





Business license





Any
company that conducts business in the PRC must have a business license that
covers a particular type of work. Our business license covers our present
business, which is to design, fabricate and install curtain wall systems
(including glass, stone and metal curtain walls), roofing systems, steel
construction systems, eco-energy saving building conservation systems and
provision of related products, for public works and commercial real estate
projects.  Prior to expanding our business beyond that of our business
license, we are required to apply and receive approval from the PRC
government.





Employment
laws





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.  Changes in Chinese labor laws that became
effective January 1, 2008 that results in an increase of labor costs and impose
restrictions on our relationship with our employees. There can be no assurance
that the labor laws will not change further or that their interpretation and
implementation will vary, which may have a negative effect upon our business and
results of operations.





Patent
protection in China





The PRC’s
intellectual property protection regime is consistent with those of other modern
industrialized countries. The PRC has domestic laws for the protection of rights
in copyrights, patents, trademarks and trade secrets.





The PRC
is also a signatory to most of the world’s major intellectual property
conventions, including:





·
            Convention
      establishing the World Intellectual Property Organization (WIPO
      Convention) (June 4, 1980);




·
            Paris
      Convention for the Protection of Industrial Property (March 19,
      1985);




·
            Patent
      Cooperation Treaty (January 1, 1994);
and




·
            The
      Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs)
      (November 11, 2001).




8




Patents
in the PRC are governed by the China Patent Law and its Implementing
Regulations, each of which went into effect in 1985. Amended versions of the
China Patent Law and its Implementing Regulations came into effect in 2001 and
2003, respectively.





The PRC
is signatory to the Paris Convention for the Protection of Industrial Property,
in accordance with which any person who has duly filed an application for a
patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the
convention.





The
Patent Law covers three kinds of patents—patents for inventions, utility models
and designs. The Chinese patent system adopts the principle of first to file;
therefore, where more than one person files a patent application for the same
invention, a patent can only be granted to the person who first filed the
application. Consistent with international practice, the PRC only allows the
patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability. For a design to be
patentable, it cannot be identical with or similar to any design which, before
the date of filing, has been publicly disclosed in publications in the country
or abroad or has been publicly used in the country, and should not be in
conflict with any prior right of another.





PRC law
provides that anyone wishing to exploit the patent of another must conclude a
written licensing contract with the patent holder and pay the patent holder a
fee. One broad exception to this rule, however, is that, where a party possesses
the means to exploit a patent but cannot obtain a license from the patent holder
on reasonable terms and in reasonable period of time, the PRC State Intellectual
Property Office, or SIPO, is authorized to grant a compulsory license. A
compulsory license can also be granted where a national emergency or any
extraordinary state of affairs occurs or where the public interest so requires.
SIPO, however, has not granted any compulsory license to date. The patent holder
may appeal such decision within three months from receiving notification by
filing a suit in a people’s court.




PRC law
defines patent infringement as the exploitation of a patent without the
authorization of the patent holder. Patent holders who believe their patent is
being infringed may file a civil suit or file a complaint with a PRC local
Intellectual Property Administrative Authority, which may order the infringer to
stop the infringing acts. Preliminary injunction may be issued by the People’s
Court upon the patentee’s or the interested parties’ request before instituting
any legal proceedings or during the proceedings. Damages in the case of patent
infringement is calculated as either the loss suffered by the patent holder
arising from the infringement or the benefit gained by the infringer from the
infringement. If it is difficult to ascertain damages in this manner, damages
may be reasonably determined in an amount ranging from one to more times of the
license fee under a contractual license. The infringing party may be also fined
by Administration of Patent Management in an amount of up to three times the
unlawful income earned by such infringing party.





Foreign
currency exchange





Under the
PRC foreign currency exchange regulations applicable to us, the Renminbi is
convertible for current account items, including the distribution of dividends,
interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment,
loan, security investment and repatriation of investment, however, is still
subject to the approval of the PRC State Administration of Foreign Exchange, or
SAFE. Foreign-invested enterprises may only buy, sell and/or remit foreign
currencies at those banks authorized to conduct foreign exchange business after
providing valid commercial documents and, in the case of capital account item
transactions, obtaining approval from the SAFE. Capital investments by
foreign-invested enterprises outside of China are also subject to limitations,
which include approvals by the Ministry of Commerce, the SAFE and the State
Reform and Development Commission.  We currently do not hedge our
exposure to fluctuations in currency exchange rates.





Dividend
distributions





Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China are required to set aside at least 10.0% of
their after-tax profit based on PRC accounting standards each year to its
general reserves until the accumulative amount of such reserves reach 50.0% of
its registered capital. These reserves are not distributable as cash dividends.
The board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation





Employees





As of
December 31, 2009, we had 298 full-time employees.  We now have a
small number of employees in Doha (Qatar), Dubai (the United Arab Emirates), the
United States and Australia.  Approximately 36% of our employees are
designers and engineers, 10% are project managers/supervisors and the remaining
employees are supply chain and administrative staff. We believe that our
relationship with our employees is good.


9





Available
Information





The
Company maintains a website at www.caebuilding.com.  This corporate
website provides free access to the Company’s Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
as soon as reasonably practicable after electronic filing such material with, or
furnishing it to, the Securities and Exchange Commission.





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 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





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 95% of our sales are from
fixed-price contracts. The remaining 5% 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.





Due
to global recession, its negative effect on the construction industry, and other
reasons, we do not intend to engage in any international projects in 2010, which
accounted for a majority of our revenues in 2009.  We have shifted our
focus to projects located in mainland China and our contract revenues and net
income will be materially reduced if we are not able to secure sufficient
projects in China.





For
fiscal 2009, 2008 and 2007, revenue from sales of our products and services
internationally (for our purposes, outside of China) represented approximately
57%, 44.6% and 4.9%, respectively, of our total revenue.  As a result of
our recent restructure and reorganization to turn back to local instead of
oversea market due to the recent change in international economic environments,
our Shenzhen office was down sized and moved out from the leasehold multi-floor
office building to a smaller leased place at minimal operations in September
2009. The set up of the Shenzhen office was originally for the support of the
overseas operations which we have decided to discontinue. As a result, the
current improvement works to the leasehold multi-floor office building were
stopped and was written off in the third quarter of 2009, a loss of $1.9
million.  In addition, a substantial percentage of our revenue has
been derived from international projects in the past few years, and with the
loss of such sources of revenue going forward, our results of operations will
suffer if we are unable to secure a sufficient amount of projects in mainland
China to offset the void in revenue that we have received from international
projects in the past, which could negatively affect our stock
price.





We
depend on a small number of customers for the vast majority of our sales. A
reduction in business from any of these customers could cause a significant
decline in our sales and profitability.





The vast
majority of our sales are generated from a small number of customers. For the
year ended December 31, 2009, we had three customers that each accounted for at
least 7.0% of the revenues that we generated, with one customer accounting for
43.2% of our revenue. These three customers accounted for a total of
approximately 59.4% of our revenue for that period. We expect that we will
continue to depend upon a small number of customers for a significant majority
of our sales for the foreseeable future.  A reduction in business from
any of these customers could cause a significant decline in our sales and
profitability.




10


A
substantial portion of our assets has been comprised of construction contract
receivables representing amounts owed by a small number of customers. If any of
these customers fails to timely pay us amounts owed, we could suffer a
significant decline in cash flow and liquidity which, in turn, could cause us to
be unable to pay our liabilities and purchase an adequate amount of inventory to
sustain or expand our sales volume.





Our
construction contract receivables represented approximately 65.7% and 68.8% of
our total current assets as of December 31, 2009 and 2008, respectively. As of
December 31, 2009, our largest customer represented over 43.9% of the total
amount of our construction contract receivables. As a result of the substantial
amount and concentration of our construction contract receivables, if any of our
major customers fails to timely pay us amounts owed, we could suffer a
significant decline in cash flow and liquidity which could adversely affect our
ability to borrow funds to pay our liabilities and to purchase inventory to
sustain or expand our current sales volume.





The
growth of aging receivables and a deterioration in the collectability of these
accounts could adversely affect our results of operations.





We
provide for bad debts principally based upon the aging of accounts receivable,
in addition to collectability of specific customer accounts, our history of bad
debts, and the general condition of the industry.  We recorded a
general provision for doubtful accounts amounting to approximately $5.2 million
in 2008 and $1.4 million in 2009, which management believes is commensurate to
cover the associated credit risk in the portfolio of our construction contract
related receivables.  As of December 31, 2009 our provision for
doubtful accounts was $6.6 million, which was 6.9% of our construction contract
related receivables of $95.8 million. We believed it was appropriate to increase
the reserve for doubtful accounts primarily due to an increase in the aging of
our accounts receivable, the growth of the outstanding balance of receivables as
of December 31, 2009, and the general decline in the domestic and global
economy.  Due to the difficulty in assessing future trends, we could
be required to further increase our provisions for doubtful
accounts.  As our accounts receivable age and become uncollectible our
cash flow and results of operations are negatively impacted.





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.  There are uncertainties inherent in the estimating
process, and estimate revisions may occur.  Such revisions could occur
in any period and their effects could be material.   As is customary
in the construction industry, we intend to conduct interim reviews on a rolling
basis, and it may be determined during these reviews that actual costs on a
project or projects vary materially from estimates, including reductions or
reversals of previously recorded revenues and profits.  Our results of
operations for current and past periods may be negatively affected by revisions
to estimates and reductions or reversals of previously recorded revenues and
profits, which could harm the value of our securities.





Our
dispute with the master contractor on the Dubai Metro Rail Project may result in
costly and time-consuming litigation that could require significant time and
attention of management and a reversal of recognized revenue in accordance with
the “percentage of completion” method of accounting, either of which may have a
material adverse effect on our financial position and results of
operations.





Techwell,
our wholly owned subsidiary, was removed by the master contractor of the Dubai
Metro Rail Project, and such master contractor also called for and received
payment of $2.1 million in performance bonds and $7.3 million in advance payment
bonds that were issued on Techwell's behalf for the project. The calling of the
advance payment bonds was based on the master contractor's belief that it had
paid in excess of the construction work performed.  We and certain of
our subsidiaries are guarantor of the bonds that were paid by the banks, and we
are liable under the guarantee agreements for such amounts paid by the
banks.  Although we do not believe that the master contractor had a
proper basis for calling the bonds, there can be no assurance can be given that
the dispute will be resolved in our favor.  We had generated
approximately $105.4 million in total revenue since construction began in 2008,
and depending on the evolving status of the dispute, we may be required to
reverse revenue that we have recognized in previously periods under the
“percentage of completion” accounting method, which would have a material
adverse effect on our results of operations.





Our
failure to adequately recover on claims brought by us against project
contractors, such as the contractor of the Dubai Metro Rail Project, for
additional contract costs could have a negative impact on our liquidity and
profitability.




We have
brought claims against project contractors for additional costs exceeding the
contract price or for amounts not included in the original contract
price.  These types of claims occur due to matters such as contractor-
or owner-caused delays or changes from the initial project scope, both of which
may result in additional cost.  Often, these claims can be the subject
of lengthy arbitration or litigation proceedings, and it is difficult to
accurately predict when these claims will be fully resolved.  For
example, we are currently in a dispute with the contractor of the Dubai Metro
Rail Project for amounts that we believe are owed to us but with which the
project owner disagrees, including additional contract costs.  At
dispute is approximately $42.1 million.  When these types of events
occur and unresolved claims are pending, we have used working capital in
projects to cover cost overruns pending the resolution of the relevant
claims.  A failure to promptly recover on these types of claims, if at
all, could have a negative impact on our liquidity and
profitability.


11





In
2009, the contractor of the Dubai Metro Rail Project called bonds that were
established on our behalf, and our ability to maintain adequate bonding capacity
is necessary for us to successfully bid on and win contracts.




In line
with industry practice, we are often required to provide performance or payment
bonds to clients under contracts. These bonds indemnify the customer should we
fail to perform our obligations under the contract. If a bond is required for a
particular project and we are unable to obtain an appropriate bond, we cannot
pursue that project. In 2009, the contractor of Dubai Metro Rail Project called
for and received payment of $2.1 million in performance bonds and $7.3 million
in advance payment bonds that were issued on our behalf for the project. Such
action had a negative effect on our bonding capacity. We have experienced a
decrease in the trading price of our common stock, and as a result, the value of
the stock price has lead to insufficient collateral value of bonds and credits.
We believe that we still have bonding capacity but, as is typically the case,
the issuance of a bond is at the surety’s sole discretion. Moreover, due to
events that affect the insurance and bonding markets generally, bonding may be
more difficult to obtain in the future or may only be available at significantly
higher costs. There can be no assurance that our bonding capacity will continue
to be available to us on reasonable terms. Our inability to obtain adequate
bonding and, as a result, to bid on new contracts could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.





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.




We
have failed to make the required interest payment under our $28 million
convertible bonds.  The bondholders may declare a default under the
Bonds and require us to pay the Bonds.  We have entered into a waiver
with the bondholders, but if we are unable to meet the terms and condition of
the waiver agreement, which could result in bankruptcy or otherwise impair our
ability to maintain sufficient liquidity to continue our
operations.




On
February 24, 2010, we and the holders of our Bonds and the 2008 Bond Warrants
entered into an Amendment and Waiver Agreement (the
“Waiver”).  Pursuant to Waiver, which has a three month term, the
bondholders and warrantholder agreed to waive their right to a reduction in the
conversion price of the Bonds and exercise price of the 2008 Bond Warrants due
to our proposed issuance of up to 25,000,000 shares of common stock to First Jet
Investment Limited to acquire an equity interest in ConnGame at a price per
share less than the current conversion prices of the Bonds and exercise price of
the 2008 Bond Warrants.  Pursuant to the Waiver, we agreed to pay the
bondholders the interest in arrears owed on the Bonds as of March 31, 2010 in
two equal payments on March 31, 2010 and May 31, 2010 of approximately
$1.26 million each and to pay 100% of the interest payments on the Bonds that
becomes due in April 2010 to be paid on April 15, 2010 of approximately
$1.32 million, for aggregate payments of approximately $3.84
million.  We also agreed to repay the principal and all accrued
interest that we owe to ABN AMRO Bank (China) Co., Ltd., Shenzhen Branch (the
“Overdraft Lender”) under an Overdraft Facility letter in three equal separate
installments. The total amount owed to the Overdraft Lender is equal to
approximately $4.91 million. The first installment is due no later than March
31, 2010, the second installment is due on April 30, 2010 and the third
installment is due on May 31, 2010.





We
further agreed that we will not repay or prepay any debt prior to its currently
scheduled due date until we make all of the payments specified in the Waiver and
the Bonds have been redeemed in full and that any new indebtedness incurred by
us for the purpose of repaying the overdraft facility shall (i) not exceed the
outstanding amount due and payable under the overdraft facility and (ii) be
subordinated to all amount owed under the Bonds.





If we
fail to make any of the payments specified in the Waiver or fail to uphold any
obligation in the Waiver, then the waiver will be null and void and the
bondholders are declare a default and call the bonds for payment.  If
we are required to redeem all or a portion of the Bonds, we may be required to
seek 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
would have a material adverse effect on our results of operation, financial
position, and cash flows and liquidity, and could result in
bankruptcy.


12





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 $8 million and $20 million
outstanding Bonds, this may have a material adverse effect on our liquidity and
cash resources, and may impair our ability to continue to operate. In addition,
at any time after April 12, 2010, each holder of the 2007 Bonds can require us
to redeem the 2007 Bonds at 126.51% of the principal amount of the 2007 Bonds
and we are required to redeem any outstanding 2007 Bonds at 150.87% of its
principal amount on April 4, 2012.  Also, on April 15 and October 15
of each year on or after April 15, 2010, the holders of the 2008 Bonds may
require us to redeem the 2008 Bonds at 116.61% of their principal
amount.  We are required to redeem any outstanding 2008 Bonds at
116.61% of its principal amount on April 15, 2011.  If a triggering
event occurs and we are requested by the holders to repurchase all or a portion
of the 2007 or 2008 Bonds, we will be required to pay cash to redeem all or a
portion of the Bonds.





Pursuant
to the Waiver, upon our timely payment of all of the required payments under the
Waiver, the bondholders have agreed to commence negotiations in good faith with
us to waive their rights under the trust deed governing the 2007 Bonds to
require us to redeem the 2007 Bonds at 126.51% of the principal amount, plus all
accrued but unpaid interest, at any time after April 12, 2010, and their rights
under the trust deed governing the 2008 Bonds to require us to redeem the 2008
Bonds at 116.61% of the principal amount of the Bonds redeemed, plus all accrued
but unpaid interest, on any Interest Payment Date on or after April 15,
2010.  However, we cannot assure you that we will be able to reach an
agreement with the bondholders for their waiver of such rights.  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.





There
are restrictive covenants in the trust deeds governing our outstanding Bonds and
the Waiver relating to our ability to incur future indebtedness.





Each of
the trust deeds governing the 2007 and 2008 Bonds does not limit our ability to
incur indebtedness, except that as long as any of such 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 deeds do 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.





Pursuant
to the Waiver, we agreed that we will not repay or prepay any debt prior to its
currently scheduled due date until we make all of the payments required by the
Waiver and the Bonds have been redeemed in full.  Additionally, we
agreed that any new indebtedness incurred by us for the purpose of repaying the
amounts owed to the Overdraft Lender under the overdraft facility letter (i)
will not exceed the amounts due under the facility and (ii) will be subordinated
to all amounts owed under the Bonds.  Therefore, after we make all of
the required payments pursuant to the Waiver, we 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.





We
issued convertible bonds that include features that will have the effect of
reducing our reported operating results during the term of the
bonds.





We issued
$10,000,000 Variable Rate Convertible Bonds due in 2012 in April 2007 (the “2007
Bonds”) and $20,000,000 12% Convertible Bonds due in 2011 in April 2008 (the
“2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”). At of December
31, 2009, $2 million of the 2007 Bonds have been converted.  The terms
of 2007 Bonds and 2008 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.  The accounting treatment related to the beneficial
conversion and mandatory redemption features of the 2007 and 2008 Bonds and the
value of the warrants to purchase 300,000 shares of our common stock expiring
2013 issued in connection with the 2008 Bonds (the “2008 Bond Warrants”) will
have an adverse impact on our results of operations for the term of the Bonds.
The application of Generally Accepted Accounting Principles required us to
allocate $2,171,429 to the beneficial conversion feature of the 2007 Bonds, and
$2,183,085 and $1,413,503 to the 2007 Bonds Warrants and 2008 Bond Warrants,
respectively, 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 2007 and 2008 Bonds is
$4,138,418 and ($702,579), respectively. 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.




13


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 35.2% and 24.4% of
our revenues for the years ended December 31, 2009 and 2008, respectively. 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.





Adverse
capital and credit market conditions, in addition to the negative effects of our
rapid growth, may significantly affect our ability to meet liquidity needs,
access to capital and cost of capital.





The
capital and credit markets have been experiencing extreme volatility and
disruption in recent months, including, among other things, extreme volatility
in securities prices, severely diminished liquidity and credit availability,
ratings downgrades of certain investments and declining valuations of others.
Governments have taken unprecedented actions intended to address extreme market
conditions that have included severely restricted credit and declines in real
estate values. In some cases, the markets have exerted downward pressure on
availability of liquidity and credit capacity for certain issuers. While
currently these conditions have not impaired our ability to utilize our current
credit facilities and finance our operations, there can be no assurance that
there will not be a further deterioration in financial markets and confidence in
major economies such that our ability to access credit markets and finance our
operations might be impaired. Without sufficient liquidity, we may be forced to
curtail our operations. Adverse market conditions may limit our ability to
replace, in a timely manner, maturing liabilities and access the capital
necessary to operate and grow our business. As such, we may be forced to delay
raising capital or bear an unattractive cost of capital which could decrease our
profitability and significantly reduce our financial flexibility. Demand for our
services is cyclical and vulnerable to economic downturns.   The
current tightening of credit in financial markets could adversely affect the
ability of our customers to obtain financing for purchases of our services and
could result in a decrease in or cancellation of orders for our services. We are
unable to predict the duration and severity of the current disruption in
financial markets and the global adverse economic conditions and the effect such
events might have on our business. Our results of operations, financial
condition, cash flows and capital position could be materially adversely
affected by disruptions in the financial markets.





In
addition, our ability to meet liquidity needs and access capital has been
detrimentally affected by our failure to timely control the speed and magnitude
of the company’s expansion after the listing of our common stock on a US
national exchange in 2007.  In addition, the delayed payment by
customers caused insufficient cash flows, the difficulty of payments caused the
delayed payment of bond interests and bank loans, and breaching the
contracts.  Rapid growth has caused the internal management and
control unable to maintain proper development during and after the expansion
such that operation costs dramatically increased.  In response, we
have increased our cost-cutting efforts in the first half of
2009.  Nevertheless, the large amount of preliminary spending and
substantial costs due to the downsizing have caused the depletion of our capital
to the point that it may no longer be able to continue or support regular
operations.





The
global economic conditions caused by the decline in the worldwide economy and
constraints in the credit market has caused, and may continue to cause, clients
to delay, curtail or cancel proposed and existing projects, thus decreasing the
overall demand for our services and weakening our financial
results.




Our
clients and potential clients have been impacted by the global economic
conditions caused by the decline in the overall economy and constraints in the
credit market.  As a result, some clients have delayed, curtailed or
cancelled proposed and existing projects and may continue to do so, thus
decreasing the overall demand for our services and adversely impacting our
results of operations.   Since 2008, we have conducted a substantial
work for the development and undertaking of the international projects, and
contributed a large amount of labor, materials and financial resources. As a
result, we rapidly obtained numerous high value and high profit projects, and
the team and management system were built up at the same
time.  However, after the global financial crisis worsened, these
projects failed to progress smoothly.  Some national projects were
stopped and some unconstructed projects were shut down or the progress of them
were slowed down, such as Hong Kong Polytechnic University Project, Nine Dragon
Marine Park and Studios Projects, Abu Dhabi Project and the U.S 371
Project.  In addition, progress of other projects were delayed and the
receipt of payments for those projects were slowed down, such as Guangzhou Opera
House Project, Kuwait Project, Singapore Conservatory Complex, and the At
Gardens By the Bay Project.  We have taken a number of measures to
prevent the deterioration of the situation, but the results were minimal, and a
significant portion of our preliminary spending did not result in revenues for
our company.





The
current economic volatility has also made it very difficult for us to predict
the short-term and long-term impacts on our business and made it more difficult
to forecast our business and financial trends.  In addition, our
clients may find it more difficult to raise capital in the future due to
substantial limitations on the availability of credit and other uncertainties in
the federal, municipal and corporate credit markets.  Also, our
clients may find it increasingly difficult to timely pay invoices for our
services, which would impact our future cash flows and liquidity.  Any
inability to timely collect our invoices may lead to an increase in our accounts
receivable and potentially to increased write-offs of uncollectible
invoices.  The economic downturn, tightened credit markets and the
decline in commodity prices have resulted in reductions in spending capital for
the development of new production facilities, adversely affecting our
revenues.  Also, ongoing credit constraints in the market could limit
our ability to access credit markets in the future and, therefore, impact our
liquidity.


14





Demand
for our services is cyclical and vulnerable to economic downturns and reductions
in government and private industry spending.  If the global economy
remains weak or client spending declines further, then our revenues, profits and
our financial condition may continue to deteriorate.




In fiscal
2009, we experienced a substantial decline in our revenues compared to fiscal
2008 and a decrease in project awards.  If the economy remains weak or
client spending declines further, then our revenues, backlog, net income and
overall financial condition may continue to deteriorate.  In light of
current macroeconomic conditions, we are projecting declines in revenues in our
power and industrial and commercial market sectors for 2009.  Demand
for our services is cyclical and vulnerable to economic downturns and reductions
in government and private industry spending, which may result in delaying,
curtailing or canceling proposed and existing projects by clients.





If
our goodwill resulting from our 2007 acquisition of Techwell becomes impaired,
then our financial condition and profits may be reduced.




A decline
in our stock price and market capitalization, such as our stock price decline in
2009, could result in an impairment of a material amount of our goodwill, which
could reduce our earnings.  Goodwill may be impaired if the estimated
fair value of one or more of our reporting units’ goodwill is less than the
carrying value of the unit’s goodwill.  In 2007, we acquired Techwell
Engineering, and its accordingly recorded goodwill assets in the amount of
approximately $8.0 million, which represents a significant portion of our
assets.  We perform an analysis on our goodwill balances to test for
impairment on an annual basis and whenever events occur that indicate an
impairment could exist.  There are several instances that may cause us
to further test our goodwill for impairment between the annual testing periods
including:  (i) continued deterioration of market and economic
conditions that may adversely impact our ability to meet our projected results;
(ii) declines in our stock price caused by continued volatility in the financial
markets that may result in increases in our weighted-average cost of capital or
other inputs to our goodwill assessment; (iii) the occurrence of events that may
reduce the fair value of a reporting unit below its carrying amount, such as the
sale of a significant portion of one or more of our reporting
units.





Our
impairment review did not indicate an impairment of the goodwill, however while
this review indicated that the estimated fair value exceeded the carrying value
of goodwill, it is reasonably possible that changes in the numerous variables
associated with the judgments, assumptions and estimates we made in assessing
the fair value of our goodwill, could cause the respective value of this or
other reporting units to become impaired.  If our goodwill is
impaired, we would be required to record a non-cash charge that could have a
material adverse effect on our condensed consolidated financial
statements.





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.





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 $5.49 to $7.86
per pound and $3.48 to $6.65 per pound during the years ended December 31, 2009
and 2008, respectively, fluctuations of approximately 30% and 91% respectively.
The price we paid for steel also fluctuated. For the year ended December 31,
2009, prices for seamless steel tubes ranged from approximately $658 to $731 per
ton (a difference of approximately 10%), prices for angled steel ranged from
approximately $556 to $614 per ton (a difference of approximately 10%), and
prices for steel plates ranged from approximately $527 to $629 per ton (a
difference of approximately 17%).


15





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 two months to as
high as one year from the time we provide services to the time we receive
payment from our customers for domestic contracts.  For our overseas
projects, we typically experience an account settlement period according to the
contracts.  In most international contracts, the account settlement
period is approximately two months.   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. China’s
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;




·
            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.




16


We
are currently a defendant in a lawsuit in Hong Kong regarding our acquisition of
Techwell Engineering Limited (“Techwell”) in November 2007, pursuant to which
the sellers have alleged that,  inter alia , (i) we misrepresented to
them the financial status of our company and operations during the course the
negotiations of the acquisition; and (ii) we failed to perform our obligations
under a settlement agreement alleged to have been agreed to by us in January
2009.  We believe this lawsuit to have limited merit and we shall
vigorously defend such lawsuit. If however we are unsuccessful in defending the
lawsuit, we may be required to pay damages and we may potentially lose our
ownership of Techwell.




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





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




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




We intend
to vigorously defend this pending lawsuit; however, no assurance can be given
that the lawsuit will be resolved in our favor.  Even if we successfully
defend the lawsuit, we may incur substantial costs defending or settling the
lawsuit, in addition to a possible diversion of the time and attention of our
management from our business.  If we are unsuccessful in defending the
lawsuit, we may be required to pay a significant amount of damages and/or we may
potentially lose ownership of Techwell, which will have a material adverse
effect on our business, financial condition or results of
operations.   In the event we lose ownership of Techwell, we will
lose the approximately $17.3 million of profit contribution since the
acquisition of Techwell.





If
we acquire or invest in other businesses or other assets, we may be unable to
integrate them with our business, our financial performance may be impaired or
we may not realize the anticipated financial and strategic goals for such
transactions.





If
appropriate opportunities present themselves, we may acquire or make investments
in businesses and other assets that we believe are strategic. We may not be able
to identify, negotiate or finance any future acquisition or investment
successfully. Even if we do succeed in acquiring or investing in a business or
other asset, such acquisitions and investments involve a number of risks,
including:





·
            retaining
      key employees and maintaining the key business and customer relationships
      of the businesses we acquire;




·
            cultural
      challenges associated with integrating employees from an acquired company
      or business into our organization;




·
            the
      possibility that the combined company would not achieve the expected
      benefits, including any anticipated operating and product synergies, of
      the acquisition as quickly as anticipated or that the costs of, or
      operational difficulties arising from, an acquisition would be greater
      than anticipated;




·
            significant
      acquisition-related accounting adjustments or charges, particularly
      relating to an acquired company's deferred revenue, that may cause
      reported revenue and profits of the combined company to be lower than the
      sum of their stand-alone revenue and
profits;




·
            the
      need to integrate an acquired company's accounting, management
      information, human resource and other administrative systems to permit
      effective management and timely reporting, and the need to implement or
      remediate controls, procedures and policies appropriate for a public
      company in an acquired company that, prior to the acquisition, lacked
      these controls, procedures and policies;
and




·
            litigation
      or other claims in connection with, or inheritance of claims or litigation
      risks as a result of, an acquisition, including claims from terminated
      employees, customers or other third
parties.




17




Future
acquisitions and investments could also involve the issuance of our equity and
equity-linked securities (potentially diluting our existing stockholders), the
incurrence of debt, contingent liabilities or amortization expenses, write-offs
of goodwill, intangibles, or acquired in-process technology, or other increased
cash and non-cash expenses such as stock-based compensation. Any of the
foregoing factors could harm our financial condition or prevent us from
achieving improvements in our financial condition and operating performance that
could have otherwise been achieved by us on a stand-alone basis. Our
stockholders may not have the opportunity to review, vote on or evaluate future
acquisitions or investments.





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





As a
company that engaged in international projects, our employees have often
traveled to and worked 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. Currently we have approximately
31 employees working in Doha, Qatar and 3 employees in Dubai, UAE. During the
peak construction period, we had approximately 52 installation workers in Doha
and about 400 installation workers in Dubai, which consist of about 49%
full-time company employees (engineers, project managers and supervisors) and
75% 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 aforce majeure clause that
relieves us of our contractual obligations in such an extraordinary event. If we
are not able to react quickly toforce 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.





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.





Our
failure to attract and retain key employees could impair our ability to provide
services to our clients and otherwise conduct our business
effectively.





As we
shift the focus of our business to that of a professional and technical services
company, we will become increasingly labor intensive, and, therefore, our
ability to attract, retain and expand our senior management and our professional
and technical staff is an important factor in determining our future
success.  Key personnel include, but is not limited to, Luo Ken Yi,
our Chief Executive Officer, Tang Nianzhong, our Vice General Manager, and Ye
Ning, our Vice General Manager, each of whom perform vital functions in the
operation of our business.  From time to time, it may be difficult to
attract and retain qualified individuals with the expertise and in the timeframe
demanded by our clients.   In addition, we rely heavily upon the
expertise and leadership of our senior management.  If we are unable
to retain executives and other key personnel, the roles and responsibilities of
those employees will need to be filled, which may require that we devote time
and resources in identifying, hiring and integrating new
employees.  In addition, the failure to attract and retain key
individuals could impair our ability to provide services to our clients and
conduct our business effectively.


18




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. 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
enjoyed certain preferential tax concessions and loss of these preferential tax
concessions may cause our tax liabilities to increase and our profitability to
decline.





We have
historically enjoyed preferential tax concessions in the PRC as a high-tech
enterprise. The PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on
March 16, 2007. Under the EIT Law, which became effective on January 1, 2008,
China adopted a uniform tax rate of 25.0% for all enterprises (including
foreign-invested enterprises) and canceled 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. Because we are classified as high tech foreign-invested enterprise, 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





Substantially
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.




19


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 involves obtaining project contracts from the government of
China and other countries.  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.




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. According to the National Bureau of Statistics of China, the change
in China’s Consumer Price Index increased to 8.5% in April 2008. 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.





Furthermore,
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. In January 2010, the Chinese government took steps to
tighten the availability of credit including ordering banks to increase the
amount of reserves they hold and to reduce or limit their 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. In April 2006, the
People’s Bank of China raised the interest rate again. Repeated rises in
interest rates by the central bank would likely slow economic activity in China
which could, in turn, materially increase our costs and also reduce demand for
our products and services.




20


PRC
regulations relating to acquisitions of PRC companies by foreign entities has
created 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 a national securities exchange in the United States could have a
material adverse effect on our business, operating results, reputation and
trading price of our common stock.





Within
the last five years, the PRC government has, on several occasions, amended its
regulations relating to overseas listings of PRC businesses. Most recently, on
August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce,
the State Administration for Industry and Commerce, CSRC and SAFE, jointly
issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors. This regulation became effective on September 8, 2006 and
includes provisions that purport to require offshore special purpose
vehicles:





(i)
            controlled
      directly or indirectly by PRC companies or citizens;
  and


(ii)
            formed
      for the purpose of effecting an overseas listing of a PRC
      company





to obtain
the approval of CSRC prior to the completion of the overseas listing. On
September 8, 2006, CSRC published procedures regarding the approval process
associated with overseas listings of special purpose vehicles. There is little
precedent as to how CSRC will interpret the new regulation and apply the related
procedures.





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 a national
securities 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.





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 Ministry of Commerce and other government
authorities as appropriate. 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
these new rules. Our business operations or future strategy could be adversely
affected by these new rules. For example, we may be subject to more stringent
review and approval process with respect to our foreign exchange
activities.





Under
the New EIT Law, we and Full Art may be classified as “resident enterprises” of
China for tax purpose, which may subject us and Full Art to PRC income tax on
taxable global income.





Under the
new PRC Enterprise Income Tax Law (the “New EIT Law”) and its implementing
rules, both of which became effective on January 1, 2008, enterprises are
classified as resident enterprises and non-resident enterprises. An enterprise
established outside of China with its “de facto management bodies” located
within China is considered a “resident enterprise,” meaning that it can be
treated in a manner similar to a Chinese domestic enterprise for enterprise
income tax purposes. The implementing rules of the New EIT Law define de facto
management body as a managing body that in practice exercises “substantial and
overall management and control over the production and operations, personnel,
accounting, and properties” of the enterprise. Due to the short history of the
New EIT law and lack of applicable legal precedents, it remains unclear how the
PRC tax authorities will determine the PRC tax resident treatment of a foreign
company such as us and Full Art. Both our and Full Art’s members of management
are located in China. If the PRC tax authorities determine that we or Full Art
is a “resident enterprise” for PRC enterprise income tax purposes, a number of
PRC tax consequences could follow. First, we may be subject to the enterprise
income tax at a rate of 25% on our worldwide taxable income, including interest
income on the proceeds from this offering, as well as PRC enterprise income tax
reporting obligations. Second, the New EIT Law provides that dividend paid
between “qualified resident enterprises” is exempted from enterprise income tax.
A circular issued by the State Administration of Taxation regarding the
standards used to classify certain Chinese-invested enterprises controlled by
Chinese enterprises or Chinese group enterprises and established outside of
China as “resident enterprises” clarified that dividends and other income paid
by such “resident enterprises” will be considered to be PRC source income,
subject to PRC withholding tax, currently at a rate of 10%, when recognized by
non-PRC shareholders. It is unclear whether the dividends that we or Full Art
receives from Zhuhai King Glass Engineering Co., Limited or any of our other PRC
subsidiaries will constitute dividends between “qualified resident enterprises”
and would therefore qualify for tax exemption, because the definition of
qualified resident enterprises is unclear and the relevant PRC government
authorities have not yet issued guidance with respect to the processing of
outbound remittances to entities that are treated as resident enterprises for
PRC enterprise income tax purposes. We are actively monitoring the possibility
of “resident enterprise” treatment for the applicable tax years and are
evaluating appropriate organizational changes to avoid this treatment, to the
extent possible. As a result of the New EIT Law, our historical operating
results will not be indicative of our operating results for future periods and
the value of our common stock may be adversely affected.


21


Dividends
payable by us to our foreign investors and any gain on the sale of our shares
may be subject to taxes under PRC tax laws.





If
dividends payable to our shareholders are treated as income derived from sources
within China, then the dividends that shareholders receive from us, and any gain
on the sale or transfer of our shares, may be subject to taxes under PRC tax
laws.





Under the
New EIT Law and its implementing rules, PRC enterprise income tax at the rate of
10% is applicable to dividends payable by us to our investors that are
non-resident enterprises so long as such non-resident enterprise investors do
not have an establishment or place of business in China or, despite the
existence of such establishment of place of business in China, the relevant
income is not effectively connected with such establishment or place of business
in China, to the extent that such dividends have their sources within the PRC.
Similarly, any gain realized on the transfer of our shares by such investors is
also subject to a 10% PRC income tax if such gain is regarded as income derived
from sources within China and we are considered as a resident enterprise which
is domiciled in China for tax purpose. Additionally, there is a possibility that
the relevant PRC tax authorities may take the view that the purpose of us and
Full Art is holding Zhuhai King Glass Engineering Co., Limited or any of our
other PRC subsidiaries, and the capital gain derived by our overseas
shareholders or investors from the share transfer is deemed China-sourced
income, in which case such capital gain may be subject to a PRC withholding tax
at the rate of up to 10%. If we are required under the New EIT Law to withhold
PRC income tax on our dividends payable to our foreign shareholders or investors
who are non-resident enterprises, or if you are required to pay PRC income tax
on the transfer or our shares under the circumstances mentioned above, the value
of your investment in our shares may be materially and adversely
affected.





In
January, 2009, the State Administration of Taxation promulgated the Provisional
Measures for the Administration of Withholding of Enterprise Income Tax for
Non-resident Enterprises (“Measures”), pursuant to which, the entities which
have the direct obligation to make the following payment to a non-resident
enterprise shall be the relevant tax withholders for such non-resident
enterprise, and such payment includes: incomes from equity investment (including
dividends and other return on investment), interests, rents, royalties, and
incomes from assignment of property as well as other incomes subject to
enterprise income tax received by non-resident enterprises in China. Further,
the Measures provides that in case of equity transfer between two non-resident
enterprises which occurs outside China, the non-resident enterprise which
receives the equity transfer payment shall, by itself or engage an agent to,
file tax declaration with the PRC tax authority located at place of the PRC
company whose equity has been transferred, and the PRC company whose equity has
been transferred shall assist the tax authorities to collect taxes from the
relevant non-resident enterprise. However, it is unclear whether the Measures
refer to the equity transfer by a non-resident enterprise which is a direct or
an indirect shareholder of the said PRC company. Given these Measures, there is
a possibility that we may have an obligation to withhold income tax in respect
of the dividends paid to non-resident enterprise investors.





The
foreign currency exchange rate between U.S. Dollars and Renminbi could adversely
affect our financial condition.





To the
extent that we need to convert U.S. Dollars into Renminbi for our operational
needs, our financial position and the price of our common stock may be adversely
affected should the Renminbi appreciate against the U.S. Dollar at that time.
Conversely, if we decide to convert our Renminbi into U.S. Dollars for the
operational needs or paying dividends on our common stock, the dollar equivalent
of our earnings from our subsidiaries in China would be reduced should the
dollar appreciate against the Renminbi. We currently do not hedge our exposure
to fluctuations in currency exchange rates.





Countries,
including the United States, have argued that the Renminbi is artificially
undervalued due to China’s current monetary policies and have pressured China to
allow the Renminbi to float freely in world markets. In July 2005, the PRC
government changed its policy of pegging the value of the Renminbi to the
dollar. Under the new policy the Renminbi is permitted to fluctuate within a
narrow and managed band against a basket of designated foreign currencies. While
the international reaction to the Renminbi revaluation has generally been
positive, there remains significant international pressure on the PRC government
to adopt an even more flexible currency policy, which could result in further
and more significant appreciation of the Renminbi against the
dollar.





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




22


·
            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.





Contract
drafting, interpretation and enforcement in China involves significant
uncertainty, which could leave us vulnerable to legal disputes and challenges
related to our contracts.





We have
entered into numerous contracts governed by PRC law, many of which are material
to our business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and are not as comprehensive in
defining contracting parties’ rights and obligations.  As a result,
contracts in China are more vulnerable to disputes and legal challenges. In
addition, contract interpretation and enforcement in China is not as developed
as in the United States, and the result of any contract dispute is subject to
significant uncertainties. Therefore, we cannot assure you that we will not be
subject to disputes under our material contracts, and if such disputes arise, we
cannot assure you that we will prevail.





The
scope of our business license in China is limited, and we may not expand or
continue our business without government approval and renewal,
respectively.





Any
company that conducts business in the PRC must have a business license that
covers a particular type of work. Our business license covers our present
business, which is to design, fabricate and install curtain wall systems
(including glass, stone and metal curtain walls), roofing systems, steel
construction systems, eco-energy saving building conservation systems and
provision of related products, for public works and commercial real estate
projects.  Any amendment to the scope of our business requires further
application and government approval.  In order for us to expand our
business beyond the scope of our license, we will be required to enter into a
negotiation with the PRC authorities for the approval to expand the scope of our
business.  We cannot assure you that we will be able to obtain the
necessary government approval for any change or expansion of its
business.





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





PRC
companies have not historically been required to adopt 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. 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.





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.





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.


23


We
will not be able to complete an acquisition of prospective acquisition targets
in the PRC unless their financial statements can be reconciled to U.S. generally
accepted accounting principles in a timely manner.





Companies
based in the PRC may not have properly kept financial books and records that may
be reconciled with U.S. generally accepted accounting principles. If we attempt
to acquire a significant PRC target company and/or its assets, we would be
required to obtain or prepare financial statements of the target that are
prepared in accordance with and reconciled to U.S. generally accepted accounting
principles. Federal securities laws require that a business combination meeting
certain financial significance tests require the public acquirer to prepare and
file historical and/or pro forma financial statement disclosure with the SEC.
These financial statements must be prepared in accordance with, or be reconciled
to U.S. generally accepted accounting principles and the historical financial
statements must be audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), or PCAOB. If a proposed
acquisition target does not have financial statements that have been prepared in
accordance with, or that can be reconciled to, U.S. generally accepted
accounting principles and audited in accordance with the standards of the PCAOB,
we will not be able to acquire that proposed acquisition target. These financial
statement requirements may limit the pool of potential acquisition targets with
which we may acquire and hinder our ability to expand our retail operations.
Furthermore, if we consummate an acquisition and are unable to timely file
audited financial statements and/or pro forma financial information required by
the Exchange Act, such as Item 9.01 of Form 8-K, we will be ineligible to use
the SEC’s short-form registration statement on Form S-3 to raise capital, if we
are otherwise eligible to use a Form S-3. If we are ineligible to use a Form
S-3, the process of raising capital may be more expensive and time consuming and
the terms of any offering transaction may not be as favorable as they would have
been if we were eligible to use Form S-3.





RISKS
RELATED TO THE PROPOSED ACQUISITION OF 60% EQUITY INTEREST IN
CONNGAME





Because
our current management has no experience in the development and operation of
MMORPG, our business has a higher risk of failure.





Our
current management has no professional training or technical credentials in the
field of in the development and operation of MMORPG. As a result, they may not
be able to recognize and take advantage of potential opportunities in the sector
without the aid from the management of ConnGame.  Consequently our
operations, earnings and ultimate financial success may suffer harm as a
result.





Although
we expect that the proposed acquisition will result in benefits to us, we may
not realize those benefits because of integration difficulties and other
challenges.





The
success of the proposed acquisition of ConnGame will be dependent in large part
on the success of our management in integrating the operations, technologies and
personnel of the two companies. Our failure to meet the challenges involved in
successfully completing the integration of the operations of ConnGame or to
otherwise realize any of the anticipated benefits of the acquisition, including
additional revenue opportunities, could impair our results of
operations.





Challenges
involved in this integration include, without limitation:





·
            integrating
      successfully each company's operations, technologies, products and
      services;




·
            reducing
      the costs associated with
operations;




·
            coordinating
      the publishing, distribution and marketing efforts to effectively promote
      the services and products of our combined company;
  and




·
            combining
      the corporate cultures, maintaining employee morale and retaining key
      employees.




We may
not successfully complete the integration of our operations and ConnGame in a
timely manner and we may not realize the anticipated benefits of the proposed
acquisition of ConnGame to the extent, or in the timeframe, anticipated.
Anticipated benefits assume a successful integration and are based on
projections, which are inherently uncertain, and other assumptions. Even if
integration is successful, anticipated benefits may not be
achieved.


24


Our
proposed acquisition of ConnGame is subject to adverse tax consequences,
including but not limited to the uncertainty under Circular on Strengthening the
Administration of Enterprise Income Tax on Non-resident Enterprises' Share
Transfer (“Circular 698”) released in December 2009 by China's State
Administration of Taxation (SAT), effective as of January 1, 2008.





The
recent introduction of Circular 698 increases the risk of a general anti
avoidance tax challenge by the Chinese tax authority on indirect disposals of
the shares in the underlying Chinese companies with a potential consequence of
paying Chinese tax on the gain derived from such disposals.  Pursuant
to Circular 698, where a foreign investor indirectly transfers equity interests
in a Chinese resident enterprise by selling the shares in an offshore holding
company, and the latter is located in a country (jurisdiction) where the
effective tax burden is less than 12.5% or where the offshore income of her
residents is not taxable, the foreign investor is required to provide the tax
authority in charge of that Chinese resident enterprise with the relevant
information within 30 days of the transfers.  Where a foreign investor
indirectly transfers equity interests in a Chinese resident enterprise through
the abuse of form of organization and there are no reasonable commercial
purposes such that the corporate income tax liability is avoided, the tax
authority may re-assess the nature of the equity transfer in accordance with the
“substance-over-form” principle and deny the existence of the offshore holding
company that is used for tax planning purposes.





While the
term "indirectly transfer" is not defined, we understand that the relevant PRC
tax authorities have jurisdiction regarding requests for information over a wide
range of foreign entities having no direct contact with China. The relevant
authority has not yet promulgated any formal provisions or formally declared or
stated how to calculate the effective tax in the country (jurisdiction) and to
what extent and the process of the disclosure to the tax authority in charge of
that Chinese resident enterprise. Meanwhile, there are not any formal
declarations with regard to how to decide “abuse of form of organization” and
“reasonable commercial purpose,” which can be utilized by us to balance if our
proposed acquisition will comply with the Circular 698.  As a result,
there is uncertainty as to whether the payment of our common stock for may be
subject to tax liability or foreign exchange control in the PRC and there is a
risk of unforeseen tax liability, each of which may have a material adverse
effect to our financial condition and results of operations.





Through
FirstJet, Mr. Jun Tang will become our largest shareholder and the Chairman of
our Board of Directors, and the interests of First Jet and Mr. Jun Tang may
conflict with the interests of our other shareholders.





As a
result of the issuance of 25,000,000 shares to First Jet, it will become our
largest shareholder and Mr. Jun Tang will have the ability to strongly influence
the nominations of our board of directors and determine the outcome of certain
matters submitted to our stockholders, such as the approval of significant
transactions. As a result, actions that may be supported by a majority of other
stockholders may be blocked by First Jet and Mr. Jun Tang.





If
the proposed acquisition of ConnGame closes, we will issue 25,000,000 shares of
common stock and our shareholders will suffer immediate and substantial dilution
of their investment.





We intend
to issue 25,000,000 shares of common stock upon the closing of the ConnGame
acquisition in exchange for 60% of the equity ownership of ConnGame, which does
not have substantial tangible assets.  As a result of the share
issuance, our shareholders will suffer immediate and substantial dilution of
their investment based on the adjusted net tangible book value of our company
after the transaction.





The
development of MMORPG products requires substantial up-front expenditures. We
may not be able to recover development costs for our future MMORPG
products.





Consumer
preferences for games are usually cyclical and difficult to predict, and even
the most successful titles remain popular for only limited periods of time,
unless refreshed with new content. We will be required to continuously develop
new products and enhancements to existing products. Because of the significant
complexity of MMORPG games, these products require a longer development time and
are more expensive to create than traditional console game products. In
addition, the long lead time involved in developing a MMORPG product and the
significant allocation of financial resources that each product requires means
it is critical that we accurately predict consumer demand for new MMORPG
products. If future MMORPG products do not achieve expected market acceptance or
generate sufficient sales upon introduction, we may not be able to recover the
development and marketing costs associated with new products, and our financial
results could suffer.





The
interactive entertainment industry is highly competitive and it will be
difficult to obtain market share.





We expect
to compete with other interactive entertainment gaming publishers. Those
competitors vary in size from small companies with limited resources to very
large corporations with significantly greater financial, marketing, and product
development resources than we have. Certain of these competitors may spend more
money and time on developing and testing products, undertake more extensive
marketing campaigns, and adopt more aggressive pricing policies than we
do.   Competition in the interactive entertainment industry is
intense and we expect new competitors to continue to emerge.





We
may be subject to intellectual property claims.





As the
number of interactive entertainment products increases and the features and
content of these products continue to overlap, software developers increasingly
may become subject to infringement claims.  Our products often utilize
complex technology that may become subject to emerging intellectual property
rights of others. It is possible that third parties still may claim
infringement.  From time to time, we receive communications from third
parties regarding such claims. Existing or future infringement claims against
us, whether valid or not, may be time consuming, distracting to management and
expensive to defend.


25


Intellectual
property litigation or claims could force us to do one or more of the
following:





·
            cease
      selling, incorporating, supporting or using products or services that
      incorporate the challenged intellectual
  property;




·
            obtain
      a license from the holder of the infringed intellectual property, which if
      available at all, may not be available on commercially favorable terms;
      or




·
            redesign
      the affected interactive entertainment software products or hardware
      peripherals, which could result in additional costs, delay introduction
      and possibly reduce commercial appeal of the affected
      products.




Any of
these actions may harm our business and financial results.





Integrating
and maintaining internal controls for the combined business may strain our
resources and divert management's attention. If we fail to establish and
maintain proper internal controls, our ability to produce accurate financial
statements or comply with applicable regulations could be impaired.





ConnGame
is currently not subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002 and the rules
and regulations of any stock exchange. Upon the completion of the proposed
acquisition and as a subsidiary of our company, ConnGame will be subject to such
rules and regulations. As described in Item 9A of this Form 10-K, it
was determined that we had material weaknesses in our internal control over
financial reporting. Integrating and maintaining appropriate internal controls
and procedures for the combined business will require specific compliance
training of certain officers and employees, will entail substantial costs in
order to modify existing accounting systems, and will take a significant period
of time to complete.  We may not be able to demonstrate compliance
with Section 404 of the Sarbanes-Oxley Act in a timely manner, or that our
internal controls are perceived as inadequate, or that we are unable to produce
timely or accurate financial statements, investors may lose confidence in our
operating results and our stock price could decline.





RISKS
RELATED TO OUR SECURITIES AND RELATED REGULATIONS





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





Since our
initial public offering and listing of our common stock in October 2007, the
price at which our common stock had traded has been highly volatile, with a high
and low sales price of $0.60 and $27.25, respectively, as through March 2,
2010.  On March 2, 2010, the closing trading price of our common stock
was $1.04 per share.  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, but not limited
to, the following:





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




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




·
            conditions
      and trends in our industry and the
economy;




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




If
our stock price decreases further, the Nasdaq Stock Market may delist our
securities, which could limit investors’ ability to trade in our
securities.





Nasdaq
Listing Rule 5550(a)(2) (the “Rule”) requires that our common stock maintain a
minimum bid price of $1.00 per share for 30 consecutive business
days.  As of March 2, 2010, our stock price closed at
$1.04.  If we do not meet the requirement, our securities may become
subject to delisting.  If our common stock is delisted by Nasdaq, the
trading market for our common stock would likely be adversely affected, as price
quotations may not be as readily obtainable, which would likely have a material
adverse effect on the market price of our common stock.


26


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.  As of March 2,
2010, we had approximately 55.2 million shares of Common Stock outstanding, and
approximately 25.3 million have been registered and/or are otherwise 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). In addition, we registered a total of 6.7 million
shares of common stock that are issuable upon the conversion and exercise of
outstanding bonds and warrants, based on the current conversion and exercise
prices.   All of the shares included in an effective registration
statement may be freely sold and transferred.





Our
principal stockholder holds 24.2 million shares which 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, 2009, 1% of our issued and outstanding shares of common stock was
approximately 552,000 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
March 2, 2010, our largest shareholder, KGE Group Limited, or KGE Group,
beneficially owns or controls approximately 43.7% of our outstanding
shares.  Luo Ken Yi, who is our Chief Executive Officer and Chairman
of the Board, and Ye Ning, who is our Vice General Manager, 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
stockholders.





Upon
completion of the proposed acquisition of ConnGame and the issuance of
25,000,000 shares to First Jet, it will become our largest stockholder and Mr.
Jun Tang, who is First Jet’s sole shareholder and will be our Chairman of the
Board upon the completion of the acquisition, will have the ability to strongly
influence the nominations of our board of directors and determine the outcome of
certain matters submitted to our stockholders, such as the approval of
significant transactions. The interests of First Jet, and its control persons,
may differ from the interests of our stockholders.





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.





If
we fail to comply with Section 404 of the Sarbanes-Oxley Act Of 2002, 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.  Last year’s annual report on Form 10-K for 2008
contained our first attestation requirement of management’s assessment by our
independent registered public accountants.  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.  Although we were not
required to comply with the auditor attestation requirement  this year
because we became a non-accelerated filer, we will have to comply with this
requirement against next year for our 2010 annual report.  The
attestation process by our independent registered public accountants is a
relatively new process 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, when required, are unable to provide an
unqualified attestation report on such assessment, investor confidence and share
value may be negatively impacted.


27


As more
fully discussed in Item 9A of this Form 10-K, management’s assessment of our
internal control over financial reporting identified numerous material
weaknesses that rendered our internal control over financial reporting to be
ineffective as of December 31, 2009.  A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis.  Our material weaknesses
include, but are not limited to, a lack of technical expertise and processes to
ensure compliance with our policies in a major operating subsidiary,
insufficient complement of personnel with an appropriate knowledge and skill to
comply with our specific engineering financial accounting and reporting
requirements and low materiality thresholds, and noncompliance with our
authorization policy.  While we have implemented steps to remediate
the identified deficiencies, as disclosed in Item 9A of this Form 10-K, there
can be no guarantee that we will be successful in our attempts to correct our
significant deficiencies. Our identified material weaknesses may raise concerns
for investors and may have an adverse impact on the price of our common
stock.





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 sell your shares in our company at or above the price you
paid for them.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





Not
applicable.





ITEM
2. PROPERTIES





We have
offices and processing sites in Zhuhai, Shenzhen, Guangzhou, Shanghai, Beijing,
Wuhan in China, a corporate office in Hong Kong, one in New York, U.S.A.. All
buildings and land are leased. The leases end within 2010 and are under
negotiation for renewal. 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 also sales centers for the
area.




Hong
    Kong63rd Floor, Bank of China
      Tower, 1 Garden Road
                
                577.7
      square meters (office)Central,
      Hong KongZhuhai105
      Baishi Road, Jiuzhou West Avenue, Zhuhai, Guangdong
                
                1,080
      square meters (office)1,700
      square meters (factory)Beijing1302,
      No.1 Baiyun Road, XiCheng District, Beijing
                
                146
      square meters (office)ShanghaiRoom
      102, Building A Lane 521 (Hengchang Garden), Wanping South RoadXuhui
      District, Shanghai
                
                120
      square meters (office)ShundeNo.5
      Technology area, Xingtan town, Shunde district, Fo Shan
    City
                
                5,600
      square meters (office & factory)ShenzhenWest
      Building 1302, Innovation and Technology Square II, Tain’an Cyber Park,
      Futian District, Shenzhen
                
                390
      square meters (office)]28G,
      Yayunxuan, Shi Xia Bei San Jie, Futian District, Shenzhen
                
                260
      square meters (office)WuhanFloor
      38, No. 568 Jianshe road, Wu Han International Trade Center, Jianghan
      district, WuHan city
                
                200
      square meters (office)GuangzhouRoom
      702, Hui Xiang Ge, Xianglong Garden, No.175 Tianhe North Road, Tianhe
      District, Guangzhou City
                
                137
      square meters
(office)


28





New
      York City, U.S.A
              110
      Wall St, 14th Floor,
      New York, NY 10005, USA
            
            312
      square meters (office)





ITEM
3. LEGAL PROCEEDINGS





Techwell
Litigation





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





On
January 14, 2009, the board of directors of Techwell passed a board resolution,
to dismiss both Mr. Ng and Miss Yam with immediate effect and remove Mr. Ng from
the board of Techwell (the “Resolution”).   On January 16, 2009,
Mr. Ng and Miss Yam filed a lawsuit in the High Court of Hong Kong against the
Company and its subsidiary, Full Art International Limited.  The
lawsuit alleges that,inter
alia, (i) the Company misrepresented to them the financial status of the
Company and its operations during the course the negotiations of the Techwell
acquisition; (ii) the Company failed to perform its obligations under a
settlement agreement alleged to have been agreed to by the Company in
January 2009; and (iii) the dismissal of Mr. Ng was unlawful and
invalid.  The lawsuit filed by Mr. Ng and Miss Yam requests the court
for specific performance of the settlement agreement that was allegedly entered
into, which would require the return of the Techwell company to Mr. Ng and Miss
Yam, and in the absence of such grant of relief, Mr. Ng and Miss Yam request
unspecified damages in lieu of return of the Techwell company.





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





As of the
date of this report, the Company, Mr. Ng, and Miss Yam are in discussions and
negotiations to settle all disputes between the parties.  However,
there is no guarantee that the parties will reach an agreement to settle the
dispute, in which case the Company intends to vigorously defend itself against
the lawsuit.  There can be no assurance that the lawsuit will be
resolved in the Company’s favor.  Even if the Company successfully
defends the lawsuit, the Company may incur substantial costs defending or
settling the lawsuit, in addition to a possible diversion of the time and
attention of the Company’s management away from its business.  If the
Company is unsuccessful in defending the lawsuit, its may be required to pay a
significant amount of damages and/or it may potentially lose ownership of
Techwell, which will have a material adverse effect on the Company’s business,
financial condition or results of operations.  In the event we lose
ownership of Techwell, we will lose the approximately $17.3 million of profit
contribution since the acquisition of Techwell.





Dubai
Metro Rail Project Dispute





On
September 9, 2009, the Red Line, or first phase, of the Dubai Metro was
officially opened. The Company, through its subsidiary Techwell, had been
working towards completion of its external envelopes for stations along the Red
Line of the Dubai Metro System.  According to the Company’s original
construction blueprint, the majority of its construction work was completed at
the end of June 2009, and final construction milestones were scheduled for
completion in the third quarter of 2009.  With less than 5% of its
contract remaining to be completed, Techwell was removed by the master
contractor of the project, which also called for and received payment of $2.1
million in performance bonds and $7.3 million in advance payment bonds that were
issued on Techwell's behalf for the project. The calling of the advance payment
bonds was based on the master contractor's belief that it had paid in excess of
the construction work performed.  The Company and certain of its
subsidiaries are guarantors of the bonds that were paid by the banks, and the
Company is liable under the guarantee agreements for such amounts paid by the
banks.  The Company does not believe that the master contractor had
a proper basis for calling the bonds and intends to vigorously pursue and
defend all of its legal rights and remedies related to the
dispute.  The Company has engaged a construction claims consultant to
facilitate resolution of the dispute.  The Company and its
construction claims consultant, based on a review of the facts, documents, and
materials available, believe that the Company has a reasonable opportunity to
collect the amounts due to Techwell from the master contractor, less appropriate
credits as its final amount due for work performed through September
2009.  The Company, with the assistance of its claims consultant, have
been continuously evaluating the dispute and probability of success on this
dispute going forward and make the appropriate adjustments; however, no
assurance can be given that the dispute will be resolved in the Company’s
and Techwell’s favor.





ITEM
4.  (REMOVED AND RESERVED)


29


PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





From
September 28, 2007 to June 9, 2008, our shares of common stock were listed for
trading on the NYSE Amex under the ticket symbol “RCH.”  On June 10,
2008, our common stock commenced trading on the NASDAQ Global Select Market
under the symbol "CAEI." As of March 2, 2010 we had approximately
80 stockholders of record. This number does not include an indeterminate
number of stockholders whose shares are held by brokers in street
name.





On March
2, 2010 the closing sales price for our common stock on the NASDAQ Global Select
Market was $1.04 per share.





The
following table summarizes the high and low sales prices of our common stock as
reported by the NYSE Amex (on and prior to June 9, 2008) and NASDAQ (on and
after June 10, 2008).





High
                              
                              
                              LowYear
      ended December 31, 2009Fourth
      Quarter
                              
                              $
                              1.79
                              
                              
                              $
                              0.92Third
      Quarter
                              
                              $
                              2.84
                              
                              
                              $
                              1.46Second
      Quarter
                              
                              $
                              2.47
                              
                              
                              $
                              0.89First
      Quarter
                              
                              $
                              2.60
                              
                              
                              $
                              0.60Year
      ended December 31, 2008Fourth
      Quarter
                              
                              $
                              7.48
                              
                              
                              $
                              1.63Third
      Quarter
                              
                              $
                              9.97
                              
                              
                              $
                              5.08Second
      Quarter
                              
                              $
                              11.82
                              
                              
                              $
                              5.25First
      Quarter
                              
                              $
                              9.10
                              
                              
                              $
                              4.75





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.  Please see
“Risk Factors—Our stock price is volatile and you might not be able to sell your
securities at or above the price you have paid.”


30


Performance
Stock Graph




September
28, 2007, the date of our initial listing on a national securities exchange, to
the cumulative return over such period of The Nasdaq Stock Market Composite
Index, and the Russell 2000 Index.  We do not use a published industry
or line-of-business basis, and does not believe we could reasonably identify a
different peer group. The graph assumes that $100 was invested on the date on
which we completed the public offering of our common stock conducted with its
initial listing on September 28, 2007 and in each of the comparative indices on
the same date. The graph further assumes that such amount was initially invested
in the common stock of our company at the price to which such stock was first
offered to the public by our company on the date of our public offering price of
$3.50 per share that was conducted in connection with our initial listing. The
stock price performance on the following graph is not necessarily indicative of
future stock price performance.
  COMPARISON
OF CUMULATIVE TOTAL RETURN
 AMONG
CHINA ARCHITECTURAL ENGINEERING, INC.,
 THE
NASDAQ STOCK MARKET (U.S.) INDEX
 AND
THE RUSSELL 2000 INDEX
  
  9/28/07
              
              
              12/31/07
              
              
              3/31/08
              
              
              6/30/08
              
              
              9/30/08
              
              
              12/31/08
              
              
              3/31/09
              
              
              6/30/09
              
              
              9/30/09
              
              
              12/31/09China
      Architectural Engineering, Inc.
              
              $
              100
              
              
              $
              247.14
              
              
              $
              155.71
              
              
              $
              279.14
              
              
              $
              202.57
              
              
              $
              70.29
              
              
              $
              28.00
              
              
              $
              55.71
              
              
              $
              47.71
              
              
              $
              30.00Nasdaq
      Stock Market (U.S.)
              
              $
              100
              
              
              $
              98.18
              
              
              $
              84.36
              
              
              $
              84.88
              
              
              $
              77.43
              
              
              $
              58.38
              
              
              $
              56.58
              
              
              $
              67.93
              
              
              $
              78.56
              
              
              $
              84.00Russell
      2000 Index
              
              $
              100
              
              
              $
              95.11
              
              
              $
              85.41
              
              
              $
              85.62
              
              
              $
              84.37
              
              
              $
              62.01
              
              
              $
              52.49
              
              
              $
              63.11
              
              
              $
              75.02
              
              
              $
              77.64
 31


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 its
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.  We did not pay any cash dividends during 2009, 2008 and
2007.





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.





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.





Recent
Sales of Unregistered Securities





None.


32


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, 2009 and the consolidated
balance sheet data as of year-end for each of the years in the five-year period
ended December 31, 2009 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
                
                2009
                
                
                2008
                
                
                2007
                
                
                2006
                
                
                2005(in
      thousands, except share amounts and earnings per share)Contract
      revenues earned
                
                $
                117,191
                
                
                $
                151,666
                
                
                $
                86,617
                
                
                $
                63,359
                
                
                $
                49,515Cost
      of contract revenues earned
                
                
                (94,722
                )
                
                
                (128,885
                )
                
                
                (64,354
                )
                
                
                (46,796
                )
                
                
                (36,368
                )Gross
      profit
                
                $
                22,469
                
                
                $
                22,781
                
                
                $
                22,263
                
                
                $
                16,563
                
                
                $
                13,146Selling,
      general and administrative expenses
                
                
                (21,087
                )
                
                
                (26,063
                )
                
                
                (5,525
                )
                
                
                (5,989
                )
                
                
                (6,463
                )Non-recurring
      general and administrative expenses
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (3,806
                )
                
                
                —Finance
      Expense
                
                
                —
                
                
                
                —
                
                
                
                (208
                )
                
                
                —
                
                
                
                —Income/(Loss)
      from operations
                
                $
                1,382
                
                
                $
                (3,282
                )
                
                $
                16,530
                
                
                $
                6,768
                
                
                $
                6,683Interest
      income
                
                
                58
                
                
                
                1
                
                
                
                108
                
                
                
                —
                
                
                
                —Interest
      expense
                
                
                (6,333
                )
                
                
                (4,377
                )
                
                
                (2,145
                )
                
                
                —
                
                
                
                (117
                )Other
      income
                
                
                177
                
                
                
                1,922
                
                
                
                88
                
                
                
                700
                
                
                
                501Other
      expenses
                
                
                (329
                )
                
                
                (161
                )
                
                
                (127
                )
                
                
                —
                
                
                
                —Income/(Loss)
      before taxation
                
                $
                (5,045
                )
                
                $
                (5,897
                )
                
                $
                14,455
                
                
                $
                7,468
                
                
                $
                7,068Income
      tax
                
                
                107
                
                
                
                4
                
                
                
                (2,422
                )
                
                
                (1,318
                )
                
                
                (1,157
                )Discontinued
      Operation Loss, net of tax
                
                
                (1,901
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      Earnings/(Loss)
                
                
                (6,839
                )
                
                
                (5,893
                )
                
                
                12,032
                
                
                
                6,150
                
                
                
                5,910Net
      Loss attributable to non-controlling interest
                
                
                33
                
                
                
                20
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      income/(loss)
                
                $
                (6,806
                )
                
                $
                (5,873
                )
                
                $
                12,032
                
                
                $
                6,150
                
                
                $
                5,910Basic
      and diluted net income/(loss) per common share
                
                
                (0.13
                )
                
                
                (0.11
                )
                
                
                0.24
                
                
                
                0.14
                
                
                
                0.14Basic
      and diluted dividend paid per common share
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                0.04
                
                
                
                0.06Basic
      weighted average common shares outstanding
                
                
                53,256,874
                
                
                
                52,034,921
                
                
                
                50,357,454
                
                
                
                44,679,990
                
                
                
                43,304,125Diluted
      weighted average common shares outstanding
                
                
                53,256,874
                
                
                
                52,034,921
                
                
                
                51,088,144
                
                
                
                44,679,990
                
                
                
                43,304,125




December
      31,Consolidated
      Balance Sheets
              
              2009
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005(in
      thousands)Current
      Assets
              
              $
              135,667
              
              
              $
              127,607
              
              
              $
              84,988
              
              
              $
              43,821
              
              
              $
              21,712Total
      Assets
              
              
              146,560
              
              
              
              141,538
              
              
              
              95,737
              
              
              
              44,861
              
              
              
              22,320Current
      Liabilities
              
              
              77,324
              
              
              
              66,770
              
              
              
              39,313
              
              
              
              21,784
              
              
              
              14,016Long-term
      Debt
              
              
              24,673
              
              
              
              25,237
              
              
              
              3,910
              
              
              
              2,565
              
              
              
              -Total
      Liabilities
              
              
              101,997
              
              
              
              92,017
              
              
              
              43,272
              
              
              
              24,349
              
              
              
              14,016Total
      Stockholders' Equity
              
              
              44,563
              
              
              
              49,521
              
              
              
              52,465
              
              
              
              20,513
              
              
              
              8,304


33


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 the 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.





Domestic
(China) and International Construction





We have
traditionally specialized 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 compete on the
strength of our reputation, relationships with government and commercial
clients, and our ability to give expression to the vision of leading
architects.





The
recent trends in the global economy have had a significant adverse impact on the
commercial construction industry as a whole. As a result, the competitive
environment in which we operate has become more competitive, increasing the
number of re-bid construction projects and amount of time between bidding and
award of a project, reducing selling prices, and causing competitors to modify
the scope and type of projects on which they bid.  In 2008 we
increased the number of international construction projects, but in 2009 the
spread of the global recession and reduction in the nature and scope of
international construction projects has led us to primarily focus our attention
on domestic projects in China.  Dubai, Doha, Kuwait and other middle
east region have been suffered a great impact markedly under the global
financial crisis.  Our projects suffered a certain degree of impact as
well.  During 2009, we have experienced a decrease in the project
turnover and an increase in costs and delays in customer payments. As a result,
our results of operations have suffered.  However, we conducted our
Dubai and Doha Projects construction under the original schedule, and executed
the design for Kuwait project.  After the completion of “soft-open” of
Dubai Metro Rail Project in September 2009, the contractor called bonds and
refused to sign and pay for the project payments, which have resulted in a cash
flow difficulties for our company.  As described below, we dispute the
contractor’s rights to call the bonds and seeking remedies for its
actions.  In addition, after a thorough review and analysis of the
feasibility and profitability of the Singapore Project, we determined that it
was in the best interests of our company to withdraw from the
project.





We do not
believe that the international economy will experience a swift recovery in the
near future and therefore its negative impact on construction industry still
exists and will exist in the near future.  As a result, we suspended
the orders of the construction of international projects, and shifted the focus
of our business to design and professional consulting services. We have taken
steps to continue our development and research of new technologies and to
maintain our company’s position in the industry.   To develop
projects and generate revenue, we have sought to join new projects in the
position of design and project consultant and the role of material
supplier.





In the
past, the number and size of our international projects had been increasing, but
during 2009 our management has moved to refocus our resources to projects in the
mainland China.  During the second quarter of 2009, we decided to
terminate our work on the project in Singapore and stop the guarantee related to
the project. Our management reviewed and created updated forecasts for the
project and concluded that there will be major differences between the design
concept as originally contemplated and the final site structures. As a result,
we decided to terminate our work on the project since we did not receive
approval for our improvement proposal, and resources related to the project were
moved to projects in China.


34


We
believe that the Chinese market has faired much better than most of the
international markets.  With the strength of our reputation and
history of notable projects in China, we are focusing our resources and efforts
in our domestic market.   We believe that we have long-standing
relationships with leading Chinese and international architects, having
completed high profile projects in China.  During the year 2009, we
commenced certain landmark projects in China, which consisted of the Changsha
Train Station, Changsha Museum, Guangzhou Science Town, and projects in Jinan
and Inner Mongolia.  These projects are expected to be completed in
2010.





Revenues
and earnings recognition on many construction contracts are measured based on
progress achieved as a percentage of the total project effort or upon the
completion of milestones or performance criteria rather than evenly or linearly
over the period of performance.  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 95% of our sales are from-fixed price contracts. The remaining
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.





Proposed
Acquisition of 60% Equity Interest in ConnGame





In
December 2009, we and First Jet entered into a letter of intent for the
Acquisition (“Letter of Intent”) that set forth the principal terms under which
we would issue up to 25,000,000 shares of our common stock to First Jet to
acquire 60% of the equity interest of Shanghai ConnGame Network Co. Ltd., a
company formed under the laws of the People’s Republic of China (“ConnGame”),
which is a developer and publisher of MMORPG (Massively Multiplayer Online Role
Playing Game).  In January 2010, our board of directors and
stockholders approved our acquisition of a 60% equity interest in
ConnGame.  We believe our acquisition of ConnGame will enable us to
strengthen our core architectural engineering and design abilities, in addition
to enabling us to enter China's large online game market, with ConnGame’s two
to-be-released MMORPG games.  We believe that the online game industry
and its related business model will be a growing market in China.





Pursuant
to the terms of the Letter of Intent, we would issue the total 25,000,000 shares
of common stock to First Jet if an independent valuation firm determined that
the value of ConnGame was equal or greater to $50 million.  We
received an appraisal report dated January 17, 2010 from Shanghai Xinda Asset
Appraisal Co., Ltd.  According to the appraisal, subject to its
assumptions and limitations, the fair market value of ConnGame on January 15,
2010 was approximately $52 million (RMB 357 million), based on a discounted cash
flow model.  In addition, the proposed acquisition and the issuance of
the shares will be subject to numerous closing conditions, including the
execution of a waiver of reduction to conversion price of our outstanding Bonds
or exercise price of the 2008 Warrants.  As described below, we and
the bondholders, in addition to other parties, entered into a waiver agreement
on February 24, 2010.





Upon the
consummation of the acquisition, if and when it shall occur, it is anticipated
that Luo Ken Yi will resign as Chairman of the Board of
Directors.  Mr. Luo will remain as a member of the
Board.  Upon Mr. Luo’s resignation as the Chairman of the Board, the
Board will appoint Mr. Jun Tang, the sole shareholder of First Jet, as Chairman
of the Board.  Mr. Jun Tang, 47, currently serves as the President and
Chief Executive Officer of New Huadu Group, Fujian.  From 2004 to
2008, Mr. Tang served as President of Shanghai SNDA (Nasdaq: SNDA), a
interactive entertainment media company in China.  Prior to that, he
served as President of Microsoft China Co., Ltd from 2002 to
2004.  From 1997 to 2002, he served as General Manager of Microsoft
Global Technical Engineering Center, and from 1994 to 1997 he served as Senior
Project Manager for Microsoft US.    Mr. Tang received his
doctorate degree, master’s degree and bachelor’s degree in the U.S., Japan and
China, respectively.





Completion
of the proposed acquisition is subject to negotiation and execution of a
definitive equity transfer agreement, regulatory approvals, and other customary
closing conditions.  Therefore, there can be no guarantee that the
acquisition will be consummated.





Wavier
Agreement





On
February 24, 2010, we entered into an Amendment and Waiver Agreement (the “Waiver Agreement”)
with the holders of our outstanding Variable Rate Convertible Bonds due 2012
(the “2007
Bonds”) and 12% Convertible Bonds due 2011 (the “2008 Bonds,” and
collectively with the 2007 Bonds, the “Bonds”) and warrants
to purchase 300,000 shares of our common stock expiring 2013 (the “2008
Warrants”).  Pursuant to the Waiver Agreement, the holders of
the Bonds and the 2008 Warrants agreed to waive their right to a reduction in
the conversion price of the Bonds and the exercise price of the 2008 Warrants
upon our anticipated issuance of up to 25,000,000 shares for the proposed
acquisition of a 60% ownership interest in ConnGame.  Additionally,
the holders of the 2008 Bonds agreed to waive any default under the terms and
conditions of the trust deed governing the 2008 Bonds relating to the
requirement that KGE Group Limited, our largest shareholder, own at least 45% of
our issued and outstanding common stock.


35


The
waivers contained in the Waiver Agreement are subject to numerous
conditions.  We agreed to pay the Bondholders the interest in arrears
owed on the Bonds as of March 31, 2010 in two equal payments on March 31, 2010
and May 31, 2010 of approximately $1.26 million each and to pay 100% of the
interest payments on the Bonds that becomes due in April 2010 to be paid on
April 15, 2010 of approximately $1.32 million, for aggregate payments of
approximately $3.84 million.  We also agreed to repay the principal
and all accrued interest that we owe to ABN AMRO Bank (China) Co., Ltd.,
Shenzhen Branch (the “Overdraft Lender”)
under an Overdraft Facility letter in three equal separate installments. The
total amount owed to the Overdraft Lender is equal to approximately $4.91
million. The first installment is due no later than March 31, 2010, the second
installment is due on April 30, 2010 and the third installment is due on May 31,
2010.  We also agreed that we will not repay or prepay any debt prior
to its currently scheduled due date until we make all of the payments specified
in the Waiver Agreement and the Bonds have been redeemed in full and that any
new indebtedness incurred by us for the purpose of repaying the Overdraft
Facility will (i) not exceed the outstanding amount due and payable under the
Overdraft Facility and (ii) be subordinated to all amount owed under the
Bonds.





If we
fail to make any of the payments specified in the Waiver Agreement, then all
rights of the holders of the Bonds and 2008 Warrants waived under the Waiver
Agreement to or to be waived under the Waiver Agreement, will not be waived and
will be reinstated, and any previous waivers will be null and
void.  In such case, appropriate adjustments may be made to reduce the
conversion and exercise price of the Bonds and 2008 Warrants. In addition, the
bondholders may declare a default under the Bonds and require us to pay the
Bonds, which could result in bankruptcy or otherwise impair our ability to
maintain sufficient liquidity to continue our operations.





Dubai
Metro Rail Project





On
September 9, 2009, the Red Line, or first phase, of the Dubai Metro was
officially opened. We, through our subsidiary Techwell Engineering Limited, had
been working towards completion of our external envelopes for stations along the
Red Line of the Dubai Metro System.  According to our original
construction blueprint, the majority of our construction work was completed at
the end of June 2009, and final construction milestones were scheduled for
completion in the third quarter of 2009.  With less than 5% of our
contract remaining to be completed, Techwell was removed by the master
contractor of the project, who also called for and received payment of $2.1
million in performance bonds and $7.3 million in advance payment bonds that were
issued on Techwell's behalf for the project. The calling of the advance payment
bonds was based on the master contractor's belief that it had paid in excess of
the construction work performed.  We and certain of our subsidiaries
are guarantors of the bonds that were paid by the banks, and we are liable under
the guarantee agreements for such amounts paid by the banks.  We do
not believe that the master contractor had a proper basis for calling the bonds
and intend to vigorously pursue and defend all of our legal rights and remedies
related to this dispute.  We have engaged a construction claims
consultant to facilitate resolution of this dispute.  We and our
construction claims consultant, based on a review of the facts, documents, and
materials available, believe that we have a reasonable opportunity to collect
the amounts due to Techwell from the master contractor, less appropriate credits
as our final amount due for work performed through September
2009.  We, with the assistance of our claims consultant, have
been continuously evaluating the dispute and probability of success on this
dispute going forward and make the appropriate adjustments; however, no
assurance can be given that the dispute will be resolved in our and Techwell’s
favor.





Nine
Dragon Project





In May
2009, we entered into a Framework Agreement to undertake several large scale
constructions of projects at the Zhejiang Nine Dragon Holiday Resort in China.
Pursuant to the terms of the Framework Agreement, the projects are to include
the construction of a marine park, playland, movie city and hotel.  In
July 2009, we entered into a Letter of Intent of Land Transfer with the
affiliates of Shanghai Nine Dragon, and we agreed to sell 17 million shares of
our common stock to affiliates of Nine Dragon, with the related proceeds being
used as the working capital for the construction of Nine Dragon Project.
However, the affiliates attempted to renegotiate the use of proceeds to instead
be used for the purchase the apartments of Nine Dragon. Such request was
rejected by our board of directors and majority of the stockholders, and as a
result, the transaction was not completed. We actively maintain communication
with Shanghai Nine Dragon, endeavoring to obtain the design and construction
work contracts of the project.





Shenzhen
Office Relocation





In
September 2009, our Shenzhen office was downsized and moved out from the
leasehold multi-floor office building to a smaller leased place at minimal
operations. The move was a result from our recent restructure and reorganization
to turn back to the domestic market in China instead of overseas market due
to the recent change in international economic environments. The set up of the
Shenzhen office was originally for the support of the overseas operations which
now we decided to be discontinued.  As a result, the current improvement
works to the leasehold multi-floor office building were stopped and being
written off in the period under this report as discontinued operation loss of
$1.9 million.





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 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.


36


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





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





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 United States, and we consider
that allowance to be reasonable at December 31, 2009, 2008, and
2007.  As of December 31, 2009, our provision for doubtful accounts
was $6.6 million, which was 6.9% of our construction contract related
receivables of $95.8 million.





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
– 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 ASC 740-270, 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 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.





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.


37


Goodwill and
Intangible Assets - In accordance with ASC 350, “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 2009, 2008 and 2007.





Foreign Currency
Translation – The consolidated financial statements are presented in
United States Dollars (US$). Our functional currency is the US$, while domestic
subsidiaries’ use the Renminbi (RMB) and Hong Kong and overseas subsidiaries use
local currencies as their functional currencies.  The consolidated
financial statements are translated into United States dollars from RMB, HKD,
MOP and AED 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.





Results
of Operations





The
following table sets forth our consolidated statements of income for the years
ended December 31, 2009, 2008 and 2007 in U.S. dollars:





Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007(in thousands, except share amounts and
                    earnings
      per share)Contract
      revenues earned
                  
                  $
                  117,191
                  
                  
                  
                  151,666
                  
                  
                  
                  86,617Cost
      of contract revenues earned
                  
                  
                  (94,721
                  )
                  
                  
                  (128,885)
                  
                  
                  
                  (64,354)Gross
      profit
                  
                  $
                  22,469
                  
                  
                  
                  22,781
                  
                  
                  
                  22,263Selling,
      general and administrative expenses
                  
                  
                  (21,087)
                  
                  
                  
                  (26,063)
                  
                  
                  
                  (5,525)Non-recurring
      general and administrative expenses
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Finance
      Expense
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (208)Income/(Loss)
      from operations
                  
                  $
                  1,382
                  
                  
                  
                  (3,282)
                  
                  
                  
                  16,530Interest
      income
                  
                  
                  58
                  
                  
                  
                  1
                  
                  
                  
                  108Interest
      expense
                  
                  
                  (6,333)
                  
                  
                  
                  (4,377)
                  
                  
                  
                  (2,145)Other
      income
                  
                  
                  177
                  
                  
                  
                  1,922
                  
                  
                  
                  88Other
      expenses
                  
                  
                  (329)
                  
                  
                  
                  (161)
                  
                  
                  
                  (127)Income/(Loss)
      before taxation
                  
                  $
                  (5,046)
                  
                  
                  
                  (5,897)
                  
                  
                  
                  14,455Income
      tax
                  
                  
                  107
                  
                  
                  
                  4
                  
                  
                  
                  (2,422)Discontinued
      Operation Loss, net of tax
                  
                  
                  (1,901)
                  
                  
                  
                  —
                  
                  
                  
                  —Net
      Earnings/(Loss)
                  
                  
                  (6,839)
                  
                  
                  
                  (5,893)
                  
                  
                  
                  12,032Net
      Loss attributable to non-controlling interest
                  
                  
                  33
                  
                  
                  
                  20
                  
                  
                  
                  —Net
      Earnings/(Loss) attributable to the Company
                  
                  $
                  (6,806)
                  
                  
                  
                  (5,873)
                  
                  
                  
                  12,032Basic
      and diluted net income/(loss) per common share
                  
                  
                  (0.13)
                  
                  
                  
                  (0.11)
                  
                  
                  
                  0.24Basic
      weighted average common shares outstanding
                  
                  
                  53,256,874
                  
                  
                  
                  52,034,921
                  
                  
                  
                  50,357,454Diluted
      weighted average common shares outstanding
                  
                  
                  53,256,874
                  
                  
                  
                  52,034,921
                  
                  
                  
                  51,088,144




38


Years
ended December 31, 2009 and 2008





Contract
revenues earned for the year ended December 31, 2009 were $117.2 million, a
decrease of $34.5 million, or 23%, from the contract revenues earned of $151.7
million for the comparable period in 2008. The primary reasons for the decrease
in contract revenues earned were due to major international projects entering
the completion phase from which project revenue was declining, such as the Metro
Red Line Project in Dubai as well as projects in Doha and New
York.  During 2009, we completed approximately 37 projects, with our
three largest projects being the Dubai Metro Red Line, Guangdong Science City
Headquarter Phase I, and Doha High Rise Office Tower, which accounted for
approximately 43.2 %, 9.2 % and 7.0% of our contract revenues, respectively, for
the year ended December 31, 2009.  We do not expect to engage in
international projects in 2010.





Cost of
contract revenues earned for the year ended December 31, 2009 was $94.7 million,
a decrease of $34.2 million, or 27%, from $128.9 million for the comparable
period in 2008. Cost of contract revenues earned consists of raw materials,
labor and other operating costs related to contract performance. The decrease in
costs of contract revenues earned was primarily due to a decrease in revenue in
2009.  As a percentage of contract revenues, cost of contract revenues
was approximately 80.8% for the year ended December 31, 2009, as compared to
85.0% for the same period in 2008.  The decrease in cost of contract
revenues as a percentage of revenues was primarily due to various costs control
and cutting measures taken in 2009, such as the downsizing of our Shenzhen
office.





Gross
profit for the year ended December 31, 2009 was $22.5 million, a decrease of
$0.3 million, or 1%, from $22.8 million for the comparable period of 2008. Our
gross margin for the year ended December 31, 2009 was 19.2% as compared with
15.0% for the year ended December 31, 2008. The increase was primarily a result
the costs controlling and cutting measures taken place in the fourth quarter of
2009, including the downsizing of the design and engineering team and reduction
of project site-staffing.





Selling,
general and administrative expenses mainly consists of staffing related costs,
rental charges for offices and equipments, office administrative expenditures,
business travel expenses, and depreciation charges. Selling, general and
administrative expenses were $21.1 million for the year ended December 31, 2009,
a decrease of approximately $5.0 million, or 19%, from $26.1 million for the
comparable period in 2008. The decrease was primarily a result of our
operational contraction in the fourth quarter of 2009, including a reduction in
staffing, office rental and other costs savings associated with curtailing of
overseas operations during 2009.





Interest
expenses and finance expenses were approximately $6.3 million for the year ended
December 31, 2009, an increase of approximately $1.9 million, from $4.4 million
for the comparable period in 2008. The increase was primarily due to the
additional interest expense for the full year 2009 related to the $20 million
convertible bonds that we issued April 2008. The interest expenses related to
convertible bonds were $5.9 million, $2.9 million and $1.1 million for the year
ended December 31, 2009, 2008 and 2007 respectively.





Income
tax benefit was $107,000 in 2009, compared with $4,000 for the year ended
December 31, 2008. The primary reason for the decrease in tax was due to the
zero corporate income tax rate associated with revenues from the Dubai project,
our largest ongoing project during the year 2009 and the deferred tax benefit of
a subsidiary, Techwell Engineering Ltd.





Net loss
for the year ended December 31, 2009 was $6.8 million, as compared to net income
of $5.9 million in 2008.





Years
Ended December 31, 2008 and 2007





Contract
revenues earned for the year ended December 31, 2008 were $151.7 million, an
increase of $65.1 million, or 75%, from the contract revenues earned of $86.6
million for the comparable period in 2007. The primary reason for the increase
in contract revenues earned was an increase in the number and size of projects
for the year ended December 31, 2008 due to our rapid expansion into the
overseas market, such as Dubai and New York.





Cost of
contract revenues earned for the year ended December 31, 2008 was $128.9
million, an increase of $64.5 million, or 100%, from $64.4 million for the
comparable period in 2007. 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 and size of projects for the year ended December 31,
2008.   Our cost of contract revenues grew at a faster rate than
our contract revenues primarily due to the increase in costs of raw materials,
project set-up costs, and labor costs.





Gross
profit for the year ended December 31, 2008 was $22.8 million, an increase of
$0.5 million, or 2%, from $22.3 million for the comparable period of 2007. Our
gross margin for the year ended December 31, 2008 was 15.0% as compared with
25.7% for the year ended December 31, 2007. The decrease was primarily a result
of higher raw material, project set-up costs, and labor costs, especially in our
domestic market of China.





Selling,
general and administrative expenses were $26.1 million for the year ended
December 31, 2008, an increase of approximately $20.6 million, or 375%, from
$5.5 million for the comparable period in 2007. The increase was primarily due
to our operational expansion, including the growth in staff, office rental and
other start-up costs associated with the expansion of our overseas operations
during 2008. Techwell, which we acquired in November 2007, contributed
approximately half to the increase in the expenses.   In
addition, there was $5 million bad debt provision recorded in 2008 as a result
of global slowdown.


39


Interest
expenses and finance expenses were approximately $4.4 million for the year ended
December 31, 2008, an increase of approximately $2.0 million, from $2.4 million
for the comparable period in 2007. The increase was primarily due to our
issuance of $20 million convertible bonds in April 2008.





Income
tax benefit was $4,000 in 2008, compared with expenses of $2.4 million for the
year ended December 31, 2007. The primary reason for the decrease was due to the
zero corporate income tax rate associated with revenues from the Dubai project,
our largest ongoing project during the year 2008.





Net loss
for the year ended December 31, 2008 was $5.9 million, as compared to net income
of $12.03 million in 2007.





Liquidity
and Capital Resources





At
December 31, 2009, we had cash and cash equivalents of $0.7
million.





Prior to
October 17, 2006, we financed our business operations through short-term bank
loans, cash provided by operations, and credit provided by suppliers. On October
17, 2006, concurrently with the close of a share exchange transaction, we
received gross proceeds of $3.7 million in a private placement
transaction.   After commissions and expenses, we received net
proceeds of approximately $3.1 million.  In October 2007, we completed
an initial public offering consisting of 847,550 shares of our common stock. Our
sale of common stock, which was sold indirectly by us to the public at a price
of $3.50 per share, resulted in net proceeds of approximately $2.0
million.





We have
also financed our operations through the issuance of convertible
bonds.  On April 12, 2007, we completed a financing transaction
pursuant to which we issued the 2007 Bonds in the principal amount of $10
million. The 2007 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 2007 Bonds. Each 2007 Bond is convertible at an initial conversion
price of $3.50 per share.  At any time after April 12, 2010, holders
of the 2007 Bonds can require us to redeem the 2007 Bonds at 126.51% of the
principal amount. We are required to redeem any outstanding 2007 Bonds at
150.87% of its principal amount on April 4, 2012.  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.  The bondholder exercised these
warrants in November 2008, and after receipt of $8,000 in exercise proceeds, we
issued 800,000 shares of common stock to the bondholder.  Also, in
September 2008, $2 million worth of bonds were converted into shares of common
stock pursuant to which we issued 571,428 shares of common stock.





On April
15, 2008, we completed a financing transaction pursuant to which we issued the
2008 Bonds in the principal amount of $20.0 million. The 2008 Bonds bear cash
interest at the rate of 12% per annum. Interest is payable semi-annually in
arrears on April 15 and October 15 of each year (each an “Interest Payment
Date”) commencing October 15, 2008. On any Interest Payment Date on or after
April 15, 2010, the holders of the Bonds can require us to redeem the Bonds at
116.61% of the principal amount. We are required to redeem any outstanding Bonds
at 116.61% of its principal amount on April 15, 2011. We also issued 300,000
warrants in connection with the 2008 Bonds on April 15, 2008 to purchase an
aggregate of 300,000 shares of our common stock, subject to adjustments for
stock splits or reorganizations as set forth in the warrant
instrument.





On
February 24, 2010, we entered into the Waiver Agreement with the holders of our
2007 Bonds and 2008 Bonds and 2008 Warrants.  Pursuant to the Waiver
Agreement, we agreed to pay the bondholders the interest in arrears owed on the
Bonds as of March 31, 2010 in two equal payments on March 31, 2010 and May 31,
2010 of approximately $1.26 million each and to pay 100% of the interest
payments on the Bonds that becomes due in April 2010 to be paid on April 15,
2010 of approximately $1.32 million, for aggregate payments of approximately
$3.84 million.





We also
agreed to repay the principal and all accrued interest that we owe to ABN AMRO
Bank (China) Co., Ltd., Shenzhen Branch (the “Overdraft Lender”) under an
Overdraft Facility letter in three equal separate installments. The total amount
owed to the Overdraft Lender is equal to approximately $4.91 million. The first
installment is due no later than March 31, 2010, the second installment is due
on April 30, 2010 and the third installment is due on May 31, 2010.





We also
agreed that we will not repay or prepay any debt prior to its currently
scheduled due date until we make all of the payments specified in the Waiver
Agreement and the Bonds have been redeemed in full and that any new indebtedness
incurred by us for the purpose of repaying the Overdraft Facility will (i) not
exceed the outstanding amount due and payable under the Overdraft Facility and
(ii) be subordinated to all amount owed under the Bonds.





If we are
required to repurchase all or a portion of the outstanding amount of $28.0
million in bonds and we do not have sufficient cash to make the repurchase, we
will be required to obtain third party financing to do so, and there can be no
assurances that we will be able to secure financing in a timely manner and on
favorable terms, which could have a material adverse effect on our financial
performance, results of operations and stock price.


40


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. We did not have any amount outstanding as of December 31,
2009.





Our
subsidiary, Zhuhai King Glass Engineering Co., Limited, borrowed from Bank of
East Asia with a condominium as collateral. This facility, which is due October
25, 2011, is subject to a current interest rate of 5.832% and interest rate
adjusts every 6 months. We did not have any amount outstanding as of December
31, 2009.





Full Art
International Limited incurred an automobile capital lease obligation due
November 09, 2012 that had an outstanding amount of $186,349 as of December 31,
2009.





We also
lease certain administrative and production facilities from third parties.
Accordingly, for the years ended December 31, 2009 and 2008, we incurred rental
expenses of $3,254,251 and $1,602,501, respectively.





On
February 19, 2008, we and Techwell Engineering Limited were granted a bond
facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was
$10,000,000, at a tenor of up to one year with 2% flat interest rate on the
issued amount of bonds such as bank guarantees, performance bonds, advanced
payment bonds and standby letters of credit. ABN AMRO required guarantees as
follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King
Glass Engineering Co. Limited and (ii) share charge over the shares of us for a
minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May
2, 2008, the facility was increased to $12,000,000 with additional cash
collateral of $2,000,000, which is also the total amount of cash collateral for
the facility. All cash collateral was then fully used to off-set a portion of
the calling of the bonds for projects in Dubai by the beneficiary. As of
December 31, 2009, the facility is fully utilized.





On March
28, 2008, we, Full Art and Techwell Engineering Limited were granted a bonding
facility by the Hong Kong Branch of HSBC. The facility amount was $10,000,000,
at a tenor of up to one year with 1% flat interest rate on the issued amount of
bonds such as bank guarantees, performance bonds, advanced payment bonds and
standby letters of credit. HSBC required guarantees as follows: (i) an unlimited
guarantee among China Architectural Engineering, Inc., Full Art International
Limited and Techwell Engineering Limited; and (ii) an “all monies” securities
deposits with 15% margin. On August 18, 2008, the facility was increased to
$20,000,000 with additional cash collateral of $1,500,000 that increased the
total amount of cash collateral to $3,000,000. In September 2009, $2,818,440 of
the cash collateral was used to off-set of the calling of the bonds for projects
in Dubai by the beneficiary. As of December 31, 2009, we have utilized $1.8
million of the facility.





On July
19, 2008, Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”), our
wholly-owned subsidiary was granted a Bank Accepted Draft facility by the
Shenzhen Branch of ABN AMRO Bank N.V. The facility amount is RMB70,000,000
(US$10,218,978).  On September 30, 2009, the facility was amended to
allow Open Account Financing – Accounts Receivable against invoices from
acceptable buyers up to RMB21,000,000 and Open Account Financing and Overdraft
in Current Account up to RMB16,800,000.  ABN AMRO requires irrevocable
and unconditional guarantee from us and cash collateral of 20% of bank’s
acceptance bill issued. and Open Account Financing.  As of December
31, 2009, Zhuhai KGE utilized RMB nil (US$ nil) of Bank Accepted Draft and RMB
33.6 million (US$4.9 million) of Overdraft in Current Account.





In
September 2009, the beneficiary of a performance bond and advance payment bonds
for the projects in Dubai demanded the drawing of approximately $9.4 million in
total from the two issuing banks, ABN AMRO Bank NV and HSBC. The calling of the
bonds was based on the beneficiary’s belief that it had paid in excess of the
construction work performed. We do not believe that the beneficiary had the
proper basis for calling the bonds and intend to vigorously defend all of their
rights and remedies related to the dispute. As of December 31, 2009, after an
offset against collateral accounts that we held with the banks, there was
approximately $4.5 million in a shortfall amount due to ABN AMRO Bank NV by us
that was not paid off.  Such amount is currently outstanding as the
temporary loan from the bank at the interest rate at the bank’s cost of funds
plus 6%.





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.


41


We
experienced a decrease of revenue of $34.5 million for the year ended December
31, 2009 compared to an increase of $65.1 million for the same period in 2008.
Construction contract related receivables, including contract receivables and
costs and earnings in excess of billings as of December 31, 2009 were $97.3
million, an increase of $9.5 million, over construction contract related
receivables of $87.8 million as of December 31, 2008. The increase reflected the
holding of payment by the customer for our project in Dubai.  In
addition, because the collection period typically runs from two months to one
year, the increase in such receivables reflects the long collection
period.  In addition, our payment cycle is considerably shorter than
our receivable cycle, since we typically pay our suppliers all or a portion of
the purchase price in advance and for some suppliers we must maintain a deposit
for future orders.





We
provide for bad debts principally based upon the aging of accounts receivable,
in addition to collectability of specific customer accounts, our history of bad
debts, and the general condition of the industry. We are currently involved in
six lawsuits in which we are suing other parties for overdue payments. The total
amount involved is approximately $3.2 million.  We have decided to
record a general provision for doubtful accounts amounting to $1.4 million in
2009, which management believes is commensurate to cover the associated credit
risk in the portfolio of our construction contract related
receivables.  As of December 31, 2009, our provision for doubtful
accounts was $6.6 million, which was 6.9% of our construction contract related
receivables of $95.8 million.  Due to the difficulty in assessing
future trends, we could be required to further increase our provisions for
doubtful accounts.  As our accounts receivable age and become
uncollectible our cash flow and results of operations are negatively
impacted.





In
addition to the foregoing, we had a provision for contracts receivables that was
reclassified as “Other receivable” in the amount of approximately $9.9 million
that represented account receivables of a subsidiary, Techwell Engineering Ltd.
(Techwell).  The receivables were acquired through our acquisition of
the Techwell in 2007 and have been outstanding since
acquisition.   The receivables are guaranteed by previous
shareholders of Techwell if not paid within 24 months of the
acquisition.  Accordingly, the provision was made and the receivable
amount was transferred to amount due from the shareholders under other
receivable balances.





At
December 31, 2009, 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.





Net cash
used in operating activities for the year ended December 31, 2009 was
approximately $21.2 million, as compared to $3.0 million used in the same period
in 2008. The change is primarily due to the significant increase in payables in
year of 2008, which did not occur in fiscal 2009. The increase in payables in
fiscal 2008 consisted of a $10.1 million increase in notes payables and a $16.8
million increase in trade payable as result of the business
expansion.  Net cash used in operating activities for the year ended
December 31, 2008 was $3.0 million, as compared to $15.5 million used in the
same period in 2007. The change is primarily due to the significant increase in
payables, including the $10.1 million increase in notes payables, financing the
business expansion in year of 2008.





Net cash
provided by investing activities was approximately $4.2 million for the year
ended December 31, 2009 compared to approximately $10.7 million used by
investing activities for the year ended December 31, 2008. The change was mainly
a result of the decrease in restricted cash in 2009, which resulted primarily
from the release of $5.0 million fixed deposits that were pledged in 2008 for
the issuance of advance and performance bonds for Dubai projects to repay the
drawdown of the bonds by the client in 2009, in addition to purchases of plant
and equipment in 2008 that included $2.2 million for the leasehold improvement
and equipments of Shenzhen.  Net cash used by investing activities was
approximately $10.7 million for the year ended December 31, 2008 compared to
approximately $1.1 million provided for the year ended December 31, 2007. The
change was mainly a result of the increases of restricted cash and purchases of
plant and equipment in 2008 as indicated above.





Net cash
provided by financing activities was $8.3 million for the year ended December
31, 2009 compared to $16.4 million provided for year ended December 31, 2008.
The change was primarily a result of the $19.5 million received from the
issuance of convertible bonds and warrants in 2008, $9.5 million proceeds from
short-term loans in 2009 which mainly represents $4.9 million bank overdraft
financing the material purchases, and $4.5 million outstanding balance of the
advance and performance bonds drawdown by the client of projects in Dubai, $10.2
million repayments of notes payables and $9.2 million proceeds from shareholders
both in 2009.  Net cash provided by financing activities was $16.4
million for the year ended December 31, 2008 compared to $14.9 million provided
for the year ended December 31, 2007. The increase was primarily a result of the
differences in the proceeds received from the issuance of convertible bonds and
warrants, receipt from public offering, proceeds from shareholder and repayment
long-term loans among the two years.


42


Contractual
obligations





The
following table describes our contractual commitments and obligations as of
December 31, 2009:




Payments due by periodTotal
                                                                              
                                                                              
                                                                              Less than
                                                                                1 year
                                                                              
                                                                              
                                                                              1-3 years
                                                                              
                                                                              
                                                                              3-5 years
                                                                              
                                                                              
                                                                              More than
                                                                                5 yearsOperating
      Lease Obligations
                                                                              
                                                                              $
                                                                              1,063,043
                                                                              
                                                                              
                                                                              
                                                                              1,063,043
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -Contingent
      Liabilities (1)
                                                                              
                                                                              $
                                                                              5,331,411
                                                                              
                                                                              
                                                                              $
                                                                              5,331,411
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              -
                                                                              
                                                                              
                                                                              $
                                                                              —Long-term
      debt (2)
                                                                              
                                                                              $
                                                                              24,673,400
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              24,673,400
                                                                              
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              -





(1)           Includes
the $3,500,000 standby guarantee expiring May 2, 2010 issued by ABN AMRO Bank
N.V. and $1,831,411 performance bond expiring June 30, 2010 issued by
HSBC.





(2)           Includes
the $8 million convertible bond which is required to be redeemed at 150.87% at
maturity at April 4, 2012, which may also be converted into our common stock at
a current conversion price of $2.45 per share, accordingly we may re-classify
upon conversion, if any. Also includes the $20 million convertible bond which is
required to be redeemed at 116.61% at maturity at April 15, 2011, which may be
converted into our common stocks at a current conversion price of $6.35 per
share, accordingly we may re-classify upon conversion, if any.





Quarterly
Information





The table
below presents selected results of operations for the quarters
indicated.  All amounts are in thousands, except share and per share
amounts.





Quarter EndedDecember 31, 2009
                  
                  
                  September 30, 2009
                  
                  
                  June 30, 2009
                  
                  
                  March 31, 2009
                  
                  
                  TotalContract
      revenues earned
                  
                  $
                  24,691
                  
                  
                  $
                  25,558
                  
                  
                  $
                  30,599
                  
                  
                  $
                  36,343
                  
                  
                  $
                  117,191Income
      / (loss) from operations
                  
                  
                  394
                  
                  
                  
                  (5,074)
                  
                  
                  
                  3,832
                  
                  
                  
                  2,230
                  
                  
                  
                  1,382Net
      earnings (loss)
                  
                  
                  (1,913)
                  
                  
                  
                  (8,381)
                  
                  
                  
                  2,544
                  
                  
                  
                  944
                  
                  
                  
                  (6,806)Net
      earnings / (loss) per share:Basic
      and Diluted
                  
                  
                  (0.04)
                  
                  
                  
                  (0.16)
                  
                  
                  
                  0.05
                  
                  
                  
                  0.02
                  
                  
                  
                  (0.13)




Quarter EndedDecember 31, 2008
                        
                        
                        September 30, 2008
                        
                        
                        June 30, 2008
                        
                        
                        March 31, 2008
                        
                        
                        TotalContract
      revenues earned
                        
                        $
                        28,959
                        
                        
                        $
                        55,978
                        
                        
                        $
                        41,380
                        
                        
                        $
                        25,349
                        
                        
                        $
                        151,666Income
      / (loss) from operations
                        
                        
                        (28,589)
                        
                        
                        
                        11,110
                        
                        
                        
                        8,752
                        
                        
                        
                        5,445
                        
                        
                        
                        (3,282)Net
      earnings (loss)
                        
                        
                        (28,586)
                        
                        
                        
                        9,910
                        
                        
                        
                        7,629
                        
                        
                        
                        5,174
                        
                        
                        
                        (5,873)Net
      earnings / (loss) per share:Basic
                        
                        
                        (0.51)
                        
                        
                        
                        0.19
                        
                        
                        
                        0.15
                        
                        
                        
                        0.10
                        
                        
                        
                        (0.11)Diluted
                        
                        
                        (0.51)
                        
                        
                        
                        0.18
                        
                        
                        
                        0.14
                        
                        
                        
                        0.09
                        
                        
                        
                        (0.11)





Segment
Information





We have
one reportable segment that conducts business in the following geographic
regions. All amounts are in thousands.





Revenues





For
      the year ended December 31,2009
                            
                            
                            2008
                            
                            
                            2007For
      the year ended December 31Middle
      East
                            
                            $
                            58,685
                            
                            
                            $
                            64,929
                            
                            
                            $
                            -Asia
                            
                            
                            51,979
                            
                            
                            
                            83,505
                            
                            
                            
                            86,617United
      States
                            
                            
                            6,527
                            
                            
                            
                            3,232
                            
                            
                            
                            -Total
                            
                            $
                            117,191
                            
                            
                            $
                            151,666
                            
                            
                            $
                            86,617


43


Long-lived
assets





Middle East
                      
                      
                      Asia
                      
                      
                      United States
                      
                      
                      TotalAs
      of December 31, 2009Plant
      and equipment, net
                      
                      $
                      384
                      
                      
                      $
                      2,026
                      
                      
                      $
                      130
                      
                      
                      $
                      2,540Intangible
      assets
                      
                      
                      -
                      
                      
                      
                      71
                      
                      
                      
                      -
                      
                      
                      
                      71Goodwill
                      
                      
                      -
                      
                      
                      
                      7,
      996
                      
                      
                      
                      -
                      
                      
                      
                      7,
      996Other
      non-current assets
                      
                      
                      161
                      
                      
                      
                      95
                      
                      
                      
                      31
                      
                      
                      
                      287Total
                      
                      $
                      545
                      
                      
                      $
                      10,188
                      
                      
                      $
                      161
                      
                      
                      $
                      10,894As
      of December 31, 2008Plant
      and equipment, net
                      
                      $
                      488
                      
                      
                      $
                      5,187
                      
                      
                      $
                      177
                      
                      
                      $
                      5,852Intangible
      assets
                      
                      
                      -
                      
                      
                      
                      51
                      
                      
                      
                      -
                      
                      
                      
                      51Goodwill
                      
                      
                      -
                      
                      
                      
                      7,996
                      
                      
                      
                      -
                      
                      
                      
                      7,996Other
      non-current assets
                      
                      
                      -
                      
                      
                      
                      1
                      
                      
                      
                      31
                      
                      
                      
                      32Total
                      
                      $
                      488
                      
                      
                      $
                      13,235
                      
                      
                      $
                      208
                      
                      
                      $
                      13,931





Off-Balance
Sheet Arrangements





None.





New
Accounting Pronouncements





See Note 2(u) of the accompanying
audited consolidated financial statements included in this Form 10-K for a
discussion of recent accounting pronouncements.





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
six lawsuits in which we are suing other parties for overdue payments. The total
amount involved is US$3,201,424.  We decided to record a general
provision for doubtful accounts amounting to $1.4 million in 2009, which
management believes is commensurate to cover the associated credit risk in the
portfolio of our construction contract related receivables.  As of
December 31, 2009, our provision for doubtful accounts was $6.6 million, which
was 6.9% of our construction contract related receivables of $95.8 million. In
addition to the foregoing, we had a provision for contracts receivables that was
reclassified as “Other receivable” in the amount of approximately $9.9 million
that represented account receivables of a subsidiary, Techwell Engineering Ltd.
(Techwell).  The receivables were acquired through our acquisition of
the Techwell in 2007 and have been outstanding since
acquisition.   The receivables are guaranteed by previous
shareholders of Techwell if not paid within 24 months of the
acquisition.  Accordingly, the provision was made and the receivable
amount was transferred to amount due from the shareholders under other
receivable balances.





Foreign
Currency Risk





The
Company’s functional currency is United States Dollar (USD), while certain
domestic subsidiaries use Renminbi (RMB) and Hong Kong and oversea subsidiaries’
use local currencies as their functional currency.    The
majority 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.


44







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





None.





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 Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by us in the reports that we
file under the Exchange Act is accumulated and communicated to our management,
including our principal executive and financial officers, as appropriate to
allow timely decisions regarding required disclosure.





As of the
end of the period covered by this Annual Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Acting Chief Financial Officer, of our disclosure controls and procedures
(as defined in Rule 13a-15(e) of the Exchange Act). Based upon this evaluation,
our Chief Executive Officer and Acting Chief Financial Officer concluded that
the Company’s disclosure controls and procedures identified certain material
weaknesses, as described below, that caused our controls and procedures to be
ineffective.  Notwithstanding the existence of the material weaknesses
described below, management has concluded that the interim consolidated
financial statements in this Form 10-K fairly present, in all material respects,
our financial position, results of operations and cash flows for the periods and
dates presented.





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:





·
            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, 2009. 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, 2009, our internal control over financial reporting is not
effective based on those criteria and due to material weaknesses.





These
material weaknesses primarily related to one of our material operating
subsidiaries, Techwell Engineering Limited. (“Techwell”).  On November
6, 2007, we acquired Techwell and its wholly owned subsidiaries, Techwell
Building Systems (Shenzhen) Ltd. in China and Techwell International Ltd. in
Macau.  At the time, Techwell was a privately-held company and its
financial systems were not designed to facilitate the external financial
reporting required of a publicly held company under the Sarbanes-Oxley Act of
2002.  In addition, Techwell’s accounting records were historically
maintained using accounting principles generally accepted in the People's
Republic of China, its personnel was not fully familiar with accounting
principles generally accepted in the United States of America.


45


A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting such that there is a reasonable possibility
that a material misstatement of the annual or interim financial statements will
not be prevented or detected in a timely basis.  We identified the
following material weaknesses:





1.
            Techwell
      lacked the technical expertise and processes to ensure compliance with our
      policies and did not maintain adequate controls with respect to (a) timely
      updating engineering budget and analysis, (b) coordination and
      communication between Corporate Accounting and Engineering Staffs, and (c)
      timely review and analysis of corporate journals recorded in the
      consolidation process.




2.
            Techwell
      did not maintain a sufficient complement of personnel with an appropriate
      knowledge and skill to comply with our specific engineering financial
      accounting and reporting requirements and low materiality
      thresholds.  This was evidenced by a number of documents missing
      or not matching with the records and contributed to the adjustment of
      financial results.  As evidenced by the significant number and
      magnitude of out-of-period adjustments identified from Techwell during the
      period-end closing process, management has concluded that the controls
      over the period-end financial reporting process were not operating
      effectively. Specifically, controls were not effective to ensure that
      significant accounting estimates and other adjustments were appropriately
      reviewed, analyzed, and monitored on a timely
  basis.




3.
            Techwell
      did not comply with our authorization policy. This was evidenced by a
      number of expenses incurred without appropriate authorization. This
      material weakness resulted in an unauthorized and significant increase of
      expenses, which significantly impacted our operating
    results.




Remediation
Efforts





We are in
the process of developing and implementing remediation plans to address our
material weaknesses.  One key change for us going forward will be the
design and implementation of internal controls over the accounting and oversight
of all subsidiaries, including enhanced accounting systems, processes, policies
and procedures.  We have taken the following actions to address the
material weaknesses and improve our internal controls over financial
reporting:




1.
            On
      January 14, 2009, the board of directors of Techwell passed a board
      resolution to replace management of Techwell.  We have appointed
      a new general manager to Techwell, as well as three experienced project
      managers to the Dubai Metro
project.




2.
            Management
      has initiated a Sarbanes-Oxley Act of 2002 Section 404 Compliance
      Assistance Project, which is intended to meet all requirements required by
      SEC in our company and all of our subsidiaries. We engaged a
      consulting firm to assist in the set-up of project and our staff
      thereafter continued with its
implementation.




3.
            We
      have established a dedicated and qualified internal control and audit team
      to implement the policies and procedures to the standard of a US public
      company.




4.
            In
      June 2009, we reorganized and restructured Techwell’s Corporate Accounting
      by (a) modifying the reporting structure and establishing clear roles,
      responsibilities, and accountability, (b) hiring skilled technical
      accounting personnel to address our accounting and financial reporting
      requirements, and (c) assessing the technical accounting capabilities in
      the operating units to ensure the right complement of knowledge, skills,
      and training.




5.
            In
      2009, we also reorganized and restructured the budgeting process by (a)
      centralizing the procurement function to our company to ensure budgets and
      analyses of Techwell are timely prepared and properly reviewed; (b)
      implementing new policies and procedures to ensure that appropriate
      communication and collaboration protocols among our Engineering,
      Procurement and Corporate Accounting departments; and (c) hiring the
      necessary technical procurement personnel to support complex procurement
      activities.    We have hired two experienced technical
      procurement managers and expect to increase the headcount in the purchase
      department in the future if
necessary.


46





6.
            We
      strengthened the period-end closing procedures of our operating
      subsidiaries by (a) requiring all significant estimate transactions to be
      reviewed by Corporate Accounting, (b) ensuring that account
      reconciliations and analyses for significant financial statement accounts
      are reviewed for completeness and accuracy by qualified accounting
      personnel, (c) implementing a process that ensures the timely review and
      approval of complex accounting estimates by qualified accounting personnel
      and subject matter experts, where appropriate, and (d) developing better
      monitoring controls at Corporate Accounting and the operating
      units.





7.
            In
      September 2009, we hired a new Vice President of Finance who was later
      appointed as our Acting Chief Financial Officer in November
      2009.  We believe that the addition of this person will assist
      the strengthening of the controls and procedures of our
      company.





8.
            In
      December 2009, our Acting Chief Financial Officer lead an extensive review
      of the controls and procedures of our company and developed a detailed
      remediation and implementation plan for Sarbanes-Oxley Act of 2002 Section
      404 compliance to be carried out starting in 2010, which is currently
      underway.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting because
management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.





Changes
in internal control over financial reporting




Due to
the implementation of the remedial measures to address the material weaknesses
identified above, there were changes in our internal controls over financial
reporting during the fourth quarter of fiscal 2009 that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.





We
believe that we are taking the steps necessary for remediation of the material
weaknesses identified above, and we will continue to monitor the effectiveness
of these steps and to make any changes that our management deems
appropriate.





ITEM
9B. OTHER INFORMATION





On
October 5, 2009, we held a special meeting of stockholders called to approve the
sale and issuance of 17,000,000 shares of common stock pursuant to the
Securities Purchase Agreement dated August 6, 2009 (the “Private
Placement”).  Of the 53,256,874 shares eligible to vote, 27,027,752
votes were returned, which is more than 50% of the issued and outstanding common
stock, constituting a quorum. The votes returned do not include the 5,000,000
shares held by Nine Dragon (Hong Kong) Co. Ltd. that abstained from the vote as
the underlying shares were related to the sale of the 17,000,000
shares.  The results of voting on the proposal was approved with
26,634,564 shares voted for, 372,851 voted against and 20,337 abstained from
voting, thereby, approving the sale and issuance of the 17,000,000 under the
terms of the Securities Purchase Agreement.





After
receipt of stockholder approval at the special meeting, we and the investors
sought to close the sales transaction, however, the investors insisted on
certain new and modified terms and conditions, including a change in the use of
proceeds as set forth in the Securities Purchase Agreement.  After
further negotiations with the investors, we abandoned plans to conduct the
Private Placement and terminated our letter of intent to purchase land from
Zhejiang Nine Dragon Co. in connection with the Nine Dragons Resort
Project.  As such, we may be required to seek funding through other
means, such as public or private financing or through collaborative arrangements
with strategic partners.  We cannot be certain that additional capital
will be available on favorable terms, if at all, and any available additional
financing may not be adequate to meet our goals.





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 2008 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
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 2008 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.


47


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 2008 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 2008 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 2008 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.


48
  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, 2009, 2008 and 2007





Allowance for Doubtful Accounts:
                
                Balance at the Beginning
                  of the Year
                
                
                Charge to Cost
                  and Expenses
                
                
                (Deductions)/
                  Additions
                
                
                Balance at the
                  End of the YearYear
      ended December 31, 2007
                
                $
                417,648
                
                
                $
                -
                
                
                $
                (201,947
                )
                
                $
                215,701Year
      ended December 31, 2008
                
                
                215,701
                
                
                
                5,000,000
                
                
                
                -
                
                
                
                5,215,701Year
      ended December 31, 2009 (1)
                
                
                5,215,701
                
                
                
                1,426,685
                
                
                
                -
                
                
                
                6,642,386


____





(1)
            We
      had a provision for contracts receivables that was reclassified as “Other
      receivable” in the amount of approximately $9.9 million that represented
      account receivables of a subsidiary, Techwell Engineering Ltd.
      (“Techwell”).  The receivables were acquired through our
      acquisition of the Techwell in 2007 and have been outstanding since
      acquisition.   The receivables are guaranteed by previous
      shareholders of Techwell if not paid within 24 months of the
      acquisition.  Accordingly, the provision was made and the
      receivable amount was transferred to amount due from the shareholders
      under other receivable
balances.





49


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 3, 2010





China
      Architectural Engineering, Inc./s/  Luo Ken
YiLuo
      Ken YiChief
      Executive Officer and Chairman 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 and Chairman of the Board
                      (Principal Executive
      Officer)
                    
                    March
      3, 2010Luo
      Ken Yi/s/  Gene Michael
      Bennett
                    
                    Acting
      Chief Financial Officer (Principal Financial and
                      Accounting
      Officer)
                    
                    March
      3, 2010Gene
      Michael Bennett/s/  Tang
    Nianzhong
                    
                    Vice
      General Manager and Director
                    
                    March
      3, 2010Tang
      Nianzhong/s/  Zheng
Jinfeng
                    
                    Director
                    
                    March
      3, 2010Zheng
      Jinfeng/s/  Zhao Bao
    Jiang
                    
                    Director
                    
                    March
      3, 2010Zhao
      Bao Jiang/s/  Kelly Wang
                    
                    Director
                    
                    March
      3, 2010Kelly
      WangDirectorMiu
      Cheung/s/  Chia Yong
    Whatt
                    
                    Director
                    
                    March
      3, 2010Chia
      Yong Whatt


50


Exhibit Index





Exhibit
              No.
            
            ExhibitDescription2.1
            
            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 4.1 to the
      Current Report 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 4.2 to the Current Report 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 4.3 to the
      Current Report 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 4.4 to the Current Report 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 4.5 to the
      Current Report 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).4.7
            
            Trust
      Deed, dated April 15, 2008, by and between the Registrant and The Bank of
      New York, London Branch (incorporated by reference to Exhibit 4.1 to the
      Current Report on Form 8-K filed with the Securities and Exchange
      Commission on April 18, 2008).4.8
            
            Paying
      and Conversion Agency Agreement, dated April 15, 2008, by and among the
      Registrant, The Bank of New York, and The Bank of New York, London Branch
      (incorporated by reference to Exhibit 4.2 to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on April 18,
      2008).4.8(a)
            
            Amended
      and Restated Paying and Conversion Agency Agreement, originally dated
      April 15, 2008, amended and restated September 29, 2008 by and among the
      Registrant, The Bank of New York Mellon, and The Bank of New York Mellon,
      London Branch (incorporated by reference to Exhibit 4.1 to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      September 30, 2008).4.9
            
            The
      Warrant Instrument, dated April 15, 2008, by and among the Registrant, ABN
      AMRO Bank N.V., London Branch and CITIC Allco Investments Ltd.
      (incorporated by reference to Exhibit 4.3 to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on April 18,
      2008).4.10
            
            Warrant
      Agency Agreement, dated April 15, 2008, by and among the Registrant, The
      Bank of New York and The Bank of New York, London Branch (incorporated by
      reference to Exhibit 4.4 to the Current Report on Form 8-K filed with the
      Securities and Exchange Commission on April 18,
  2008).








Exhibit
              No.
            
            ExhibitDescription4.11
            
            Registration
      Rights Agreement, dated April 15, 2008, by and among the Registrant, ABN
      AMRO Bank N.V., London Branch and CITIC Allco Investments Ltd.
      (incorporated by reference to Exhibit 4.5 to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on April 18,
      2008).4.12
            
            China
      Architectural Engineering, Inc. 2009 Omnibus Incentive Plan (incorporated
      by reference to Exhibit 4.1 to the Form 8-K filed with the Securities and
      Exchange Commission on June 18, 2009).4.13
            
            Amendment
      No. 1 to China Architectural Engineering, Inc. 2009 Omnibus Incentive Plan
      (incorporated by reference to Exhibit 4.2 to the Form 8-K filed with the
      Securities and Exchange Commission on June 18,
  2009).


4.14
              
              Form
      of Stock Option Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to
      Exhibit 4.2 to the Registration Statement on Form S-8 filed with the
      Securities and Exchange Commission on January 21,
      2010).4.15
              
              Form
      of Restricted Stock Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to
      Exhibit 4.3 to the Registration Statement on Form S-8 filed with the
      Securities and Exchange Commission on January 21,
      2010).4.16
              
              Form
      of Restricted Stock Unit Agreement for 2009 Omnibus Incentive Plan (incorporated by reference to
      Exhibit 4.4 to the Registration Statement on Form S-8 filed with the
      Securities and Exchange Commission on January 21,
      2010).4.17
              
              Form
      of Stock Appreciation Rights Agreement for 2009 Omnibus Incentive Plan
      (incorporated by reference
      to Exhibit 4.5 to the Registration Statement on Form S-8 filed with the
      Securities and Exchange Commission on January 21,
      2010).


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).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
            
            Employment
      Agreement dated March 12, 2008 by and between the Registrant and Xin Yue
      Jasmine Geffner (translated to English) (incorporated by reference to
      Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities
      and Exchange Commission on March 14, 2008).10.12
            
            Employment
      Agreement dated March 12, 2008 by and between the Registrant and Charles
      John Anderson (incorporated by reference to Exhibit 10.2 to the Current
      Report on Form 8-K filed with the Securities and Exchange Commission on
      October 8, 2009).10.13
            
            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).10.14
            
            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).10.15
            
            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).10.16
            
            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).










Exhibit
                No.
              
              ExhibitDescription10.17
              
              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).10.18
              
              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).10.18(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).10.18(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).10.19
              
              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).10.20
              
              Form
      of Notice of Grant of Stock Option of the Registrant's 2007 Equity
      Incentive Plan (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).10.21
              
              Form
      of Stock Option Agreement (including Addendum) of the Registrant's 2007
      Equity Incentive Plan (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).10.22
              
              Form
      of Stock Issuance Agreement (including Addendum) of the Registrant's 2007
      Equity Incentive Plan (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).10.23
              
              Form
      of Stock Purchase Agreement (including Addendum) of the Registrant's 2007
      Equity Incentive Plan (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).10.24
              
              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).10.25
              
              Subscription
      Agreement, dated April 2, 2008, by and among the Registrant, ABN AMRO Bank
      N.V., London Branch, CITIC Allco Investments Ltd., and CITIC Capital
      Finance Ltd. (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, 2008).10.26
              
              Employment
      Agreement with Albert Jan Grisel dated as of January 12, 2009
      (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K
      filed with the Securities and Exchange Commission on January 16,
      2009).10.27
              
              Employment
      Agreement with Li Chengcheng dated as of March 30, 2009 (incorporated by
      reference to Exhibit 10.1 to Current Report on Form 8-K filed with the
      Securities and Exchange Commission on April 3, 2009).10.28
              
              Employment
      Agreement with Gene Michael Bennett dated as of October 5, 2009
      (incorporated by reference to Exhibit 10.1 to the Current Report on Form
      8-K filed with the Securities and Exchange Commission on October 8,
      2009).10.29
              
              Stock
      Option  Agreement with Gene Michael Bennett dated as of October
      5, 2009 (incorporated by reference to Exhibit 10.2 to the Current Report
      on Form 8-K filed with the Securities and Exchange Commission on October
      8, 2009).10.30
              
              Securities
      Purchase Agreement dated as of August 6, 2009 by and between China
      Architectural Engineering, Inc., KGE Group Limited and certain investors
      (incorporated by reference from Exhibit 10.1 to Current Report on Form 8-K
      filed with the Securities and Exchange Commission on August 10,
      2009).10.31
              
              Amendment
      and Waiver Agreement dated as of August 6, 2009, by and among China
      Architectural Engineering, Inc., KGE Group Limited, ABN AMRO Bank N.V.,
      London Branch, and CITIC Allco Investment Ltd.10.32
              
              Loan
      Agreement dated June 17, 2009 entered into by and between KGE Group Ltd.
      and the Company  (incorporated by reference to Exhibit 4.1 to
      the Form 8-K filed with the Securities and Exchange Commission on June 18,
      2009).
 10.33
                
                Amendment
      and Waiver Agreement dated February 24, 2010 by and among The Royal Bank
      of Scotland N.V., London Branch (formerly ABN AMRO Bank N.V., London
      Branch); CITIC Capital China Mezzanine Fund Limited; ABN AMRO Bank (China)
      Co., Ltd., Shenzhen Branch; Mr. Luo Ken Yi; Mr. Jun Tang; KGE Group
      Limited; and First Jet Investments Limited (incorporated by reference to
      Exhibit 10.1 to the Form 8-K filed with the Securities and Exchange
      Commission on February 24, 2010).10.34
                
                Framework
      Agreement of Marine Park and Holiday Resorts Project entered into by and
      between the Company and Shanghai Nine Dragon Co. Ltd (translated) (incorporated by reference to
      Exhibit 10.1 to the Quarterly Report on Form 10-Q filed with the
      Securities and Exchange Commission on August 17,
    2009).14.1
                
                Code
      of Business Conduct and Ethics
 23.1
              
              Consent
      of Samuel H. Wong & Co., LLP.21.1
              
              List
      of Subsidiaries.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.







CHINA
ARCHITECTURAL ENGINEERING, INC.





FINANCIAL
STATEMENTS




DECEMBER
31, 2009, 2008 AND 2007




(Stated
in US dollars)




INDEX




CONTENTS
                  
                  PAGESREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                  
                  F-2CONSOLIDATED
      BALANCE SHEETS
                  
                  F-3
      – F-4CONSOLIDATED
      STATEMENTS OF INCOME
                  
                  F-5CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                  
                  F-6CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME
                  
                  F-7
      – F-8NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
                  
                  F-9
      – F-32


F-1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To:
            The
      Board of Directors and Stockholders
of


China
Architectural Engineering, Inc.




We have
audited the accompanying consolidated balance sheets of China Architectural
Engineering, Inc. as of December 31, 2009 and 2008, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 2009, 2008 and 2007. 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, 2009 and 2008, and the results of its
operations and its cash flows for the years ended December 31, 2009, 2008 and
2007 in conformity with accounting principles generally accepted in the United
States of America.




South
      San Francisco, California
              Samuel
      H. Wong & Co., LLPJanuary
      20, 2010
              Certified
      Public Accountants


F-2


CHINA
ARCHITECTURAL ENGINEERING, INC.





CONSOLIDATED
BALANCE SHEETS


AS
OF DECEMBER 31, 2009 AND 2008


(Stated
in US Dollars)


Notes
                
                As of December 31,2009
                
                
                2008ASSETSCurrent
      assetsCash
      and cash equivalents
                
                
                $
                740,125
                
                
                $
                9,516,202Restricted
      cash
                
                
                
                3,033,819
                
                
                
                7,451,388Contract
      receivables, net
                (3)
                
                
                89,189,103
                
                
                
                71,811,627Costs
      and earnings in excess of billings
                
                
                
                8,100,580
                
                
                
                15,988,920Job
      disbursements advances
                
                
                
                2,696,794
                
                
                
                2,252,241Other
      receivables, net
                (4)
                
                
                30,768,067
                
                
                
                18,614,928Inventories
                (5)
                
                
                727,499
                
                
                
                308,842Deferred
      income taxes, current
                
                
                
                113,033
                
                
                
                3,264Other
      current assets
                
                
                
                297,838
                
                
                
                1,659,307Total
      current assets
                
                
                
                135,666,858
                
                
                
                127,606,719Non-current
      assetsPlant
      and equipment, net
                (6)
                
                
                2,539,457
                
                
                
                5,852,110Intangible
      Assets
                (7)
                
                
                70,610
                
                
                
                50,720Goodwill
                
                
                
                7,995,896
                
                
                
                7,995,896Other
      non-current assets
                
                
                
                287,586
                
                
                
                32,137TOTAL
      ASSETS
                
                
                $
                146,560,407
                
                
                $
                141,537,582LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesShort-term
      bank loans
                (8)
                
                $
                9,529,880
                
                
                $
                -Notes
      payable
                
                
                
                -
                
                
                
                10,193,088Accounts
      payable
                
                
                
                26,614,484
                
                
                
                35,510,827Billings
      over costs and estimated earnings
                
                
                
                6,098,666
                
                
                
                5,358,527Amount
      due to shareholder
                
                
                
                10,080,345
                
                
                
                924,687Other
      payables
                
                
                
                9,360,314
                
                
                
                7,364,816Income
      tax payable
                
                
                
                -
                
                
                
                2,318,743Business
      and other taxes payable
                
                
                
                4,923,771
                
                
                
                3,304,522Customers’
      deposits
                
                
                
                6,392,676
                
                
                
                -Other
      Accruals
                
                
                
                4,324,011
                
                
                
                1,794,879Total
      current liabilities
                
                
                
                77,324,147
                
                
                
                66,770,089





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, 2009 AND 2008


(Stated
in US Dollars)


Notes
              
              As of December 31,2009
              
              
              2008Non-current
      liabilitiesLong
      term bank loans
              (8)
              
              $
              109,239
              
              
              $
              328,285Convertible
      bond payable, net
              (9)
              
              
              24,564,161
              
              
              
              24,907,170TOTAL
      LIABILITIES
              
              
              $
              101,997,547
              
              
              $
              92,005,544STOCKHOLDERS’
      EQUITYPreferred
      stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and
      outstanding at December 31, 2009 and December 31, 2008Common
      stock, $0.001 par value, 100,000,000 shares authorized,
      53,256,874 shares issued and outstanding at December 31, 2009 and
      December 31, 2008
              
              
              $
              53,257
              
              
              $
              53,257Additional
      paid in capital
              
              
              
              24,938,476
              
              
              
              23,043,792Statutory
      reserves
              
              
              
              3,040,595
              
              
              
              3,040,595Accumulated
      other comprehensive income
              
              
              
              5,422,854
              
              
              
              5,443,432Retained
      earnings
              
              
              
              11,134,067
              
              
              
              17,940,421Total
      Company shareholders’ equity
              
              
              
              44,589,249
              
              
              
              49,521,497Noncontrolling
      interests
              
              
              
              (26,389
              )
              
              
              10,541Total
      shareholders’ equity
              
              
              
              44,562,860
              
              
              
              49,532,038TOTAL
      LIABILITIES ANDSTOCKHOLDERS’
      EQUITY
              
              
              $
              146,560,407
              
              
              $
              141,537,582




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, 2009, 2008 AND 2007


(Stated
in US Dollars)


Notes
                
                Years
      ended December 31,2009
                
                
                2008
                
                
                2007Contract
      revenues earned
                (10)
                
                $
                117,190,918
                
                
                $
                151,665,672
                
                
                $
                86,617,239Cost
      of contract revenues earned
                
                
                
                94,721,967
                
                
                
                128,884,736
                
                
                
                64,353,915Gross
      profit
                
                
                $
                22,468,951
                
                
                $
                22,780,936
                
                
                $
                22,263,324Selling,
      general and administrative expenses
                
                
                
                21,087,131
                
                
                
                26,062,543
                
                
                
                5,525,130Finance
      expenses
                
                
                
                -
                
                
                
                -
                
                
                
                208,197Income
      / (Loss) from operations
                
                
                $
                1,381,820
                
                
                $
                (3,281,607
                )
                
                $
                16,529,997Interest
      income
                
                
                
                58,425
                
                
                
                762
                
                
                
                108,241Interest
      expense
                
                
                
                (6,333,486
                )
                
                
                (4,377,331
                )
                
                
                (2,144,768
                )Other
      income
                
                
                
                176,871
                
                
                
                1,922,285
                
                
                
                88,385Other
      expenses
                
                
                
                (329,241
                )
                
                
                (161,422
                )
                
                
                (127,043
                )Income
      / (Loss) before taxation on Continuing Operations
                
                
                $
                (5,045,611
                )
                
                $
                (5,897,313
                )
                
                $
                14,454,812Income
      tax /(tax benefit)
                (11)
                
                
                (107,031
                )
                
                
                (3,649
                )
                
                
                2,422,484Discontinued
      Operation Loss, net of tax
                (14)
                
                
                1,900,794
                
                
                
                -
                
                
                
                -Net
      Earnings/(Loss) including non-controlling interest
                
                
                $
                (6,839,374
                )
                
                $
                (5,893,664
                )
                
                $
                12,032,328Net
      Loss attributable to non-controlling interest
                
                
                
                33,020
                
                
                
                20,249
                
                
                
                -Net
      Earnings/(Loss) attributable to the Company
                
                
                $
                (6,806,354
                )
                
                $
                (5,873,415
                )
                
                $
                12,032,328Earnings/(Loss)
      per share:Basic
                
                
                $
                (0.13
                )
                
                $
                (0.11
                )
                
                $
                0.24Diluted
                
                
                $
                (0.13
                )
                
                $
                (0.11
                )
                
                $
                0.24Weighted
      average shares outstanding:Basic
                
                
                
                53,256,874
                
                
                
                52,034,921
                
                
                
                50,357,454Diluted
                
                
                
                53,256,874
                
                
                
                52,034,921
                
                
                
                51,088,144




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, 2009, 2008 AND 2007


(Stated
in US Dollars)


Years ended December 31,2009
                          
                          
                          2008
                          
                          
                          2007Cash
      flows from operating activitiesNet
      Earnings/(loss)
                          
                          
                          $
                          (6,839,374
                          ),
                          
                          $
                          (5,893,664
                          )
                          
                          $
                          12,032,328Noncontrolling
      interest
                          
                          
                          
                          33,020
                          
                          
                          
                          20,249
                          
                          
                          
                          -Depreciation
      expense
                          
                          
                          
                          851,441
                          
                          
                          
                          761,010
                          
                          
                          
                          334,378Bad
      debt expense
                          
                          
                          
                          1,426,685
                          
                          
                          
                          5,000,000
                          
                          
                          
                          291,666Amortization
      expenses on intangible assets
                          
                          
                          
                          19,735
                          
                          
                          
                          19,666
                          
                          
                          
                          -Amortization
      expenses on convertible bond discount
                          
                          
                          
                          1,551,675
                          
                          
                          
                          1,901,739
                          
                          
                          
                          2,144,768Loss
      on disposal of fixed assets
                          
                          
                          
                          2,670,851
                          
                          
                          
                          -
                          
                          
                          
                          -(Increase)/decrease
      in inventories
                          
                          
                          
                          (418,657
                          )
                          
                          
                          219,901
                          
                          
                          
                          (505,635
                          )Increase
      in receivables
                          
                          
                          
                          (23,068,960
                          )
                          
                          
                          (35,503,221
                          )
                          
                          
                          (41,988,830
                          )(Increase)/decrease
      in other assets
                          
                          
                          
                          551,698
                          
                          
                          
                          44,596
                          
                          
                          
                          (117,038
                          )Increase  in
      payables
                          
                          
                          
                          2,061,608
                          
                          
                          
                          30,445,703
                          
                          
                          
                          12,306,736Net
      cash used in operating activities
                          
                          
                          $
                          (21,160,278
                          )
                          
                          $
                          (2,984,021
                          )
                          
                          $
                          (15,501,627
                          )Cash
      flows from investing activitiesDecrease/(increase)
      in restricted cash
                          
                          
                          $
                          4,417,569
                          
                          
                          $
                          (6,856,372
                          )
                          
                          $
                          2,148,126Purchases
      of intangible assets
                          
                          
                          
                          (44,148
                          )
                          
                          
                          -
                          
                          
                          
                          -Loss
      from disposal of intangible assets
                          
                          
                          
                          4,523
                          
                          
                          
                          -
                          
                          
                          
                          -Decrease
      in security deposit
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          565,795Purchases
      of plant and equipment
                          
                          
                          
                          (209,639
                          )
                          
                          
                          (3,886,532
                          )
                          
                          
                          (1,649,170
                          )Net
      cash provided/(used) in investing activities
                          
                          
                          $
                          4,168,305
                          
                          
                          $
                          (10,742,904
                          )
                          
                          $
                          1,064,751Cash
      flows from financing activitiesProceeds
      from short-term loans
                          
                          
                          $
                          9,529,880
                          
                          
                          $
                          -
                          
                          
                          $
                          2,578,550Repayments
      of short-term loans
                          
                          
                          
                          -
                          
                          
                          
                          (2,578,550
                          )
                          
                          
                          -Repayments
      of notes payable
                          
                          
                          
                          (10,193,088
                          )
                          
                          
                          -
                          
                          
                          
                          -Repayments
      of long-term loans
                          
                          
                          
                          (219,046
                          )
                          
                          
                          (115,596
                          )
                          
                          
                          (2,121,098
                          )Proceeds
      for amount due to shareholder
                          
                          
                          
                          9,155,658
                          
                          
                          
                          -
                          
                          
                          
                          1,442,291Repayments
      of amount due to shareholder
                          
                          
                          
                          -
                          
                          
                          
                          (410,169
                          )
                          
                          
                          -Proceeds
      from issuance of common stock
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          3,338,470Increase
      in additional paid in capital from issuance of common
stock
                          
                          
                          
                          -
                          
                          
                          
                          8,102
                          
                          
                          
                          -Issuance
      of convertible bond and warrants
                          
                          
                          
                          -
                          
                          
                          
                          19,500,000
                          
                          
                          
                          9,700,000Net
      cash provided in financing activities
                          
                          
                          $
                          8,273,404
                          
                          
                          $
                          16,403,787
                          
                          
                          $
                          14,938,213Net
      increase/(decrease) in cash and cash equivalents
                          
                          
                          $
                          (8,718,569
                          )
                          
                          $
                          2,676,862
                          
                          
                          $
                          501,337Effect
      of foreign currency translation on cash and cash
    equivalents
                          
                          
                          
                          (57,508
                          )
                          
                          
                          2,799,172
                          
                          
                          
                          1,422,865Cash
      and cash equivalents - beginning of year
                          
                          
                          
                          9,516,202
                          
                          
                          
                          4,040,168
                          
                          
                          
                          2,115,966Cash
      and cash equivalents - end of year
                          
                          
                          $
                          740,125
                          
                          
                          $
                          9,516,202
                          
                          
                          $
                          4,040,168Other
      supplementary information:Cash
      paid during the year for:Interest
      paid
                          
                          
                          $
                          508,055
                          
                          
                          $
                          816,004
                          
                          
                          $
                          119,335Income
      tax paid
                          
                          
                          $
                          -
                          
                          
                          $
                          203,682
                          
                          
                          $
                          1,012,332


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


F-6


CHINA ARCHITECTURAL ENGINEERING, INC.


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


AS
OF DECEMBER 31, 2009, 2008 AND 2007


(Amount
Stated in USD)


Total
                    Number of
                    shares
                
                
                Common
                    stock
                
                
                Additional
                    paid in
                    capital
                
                
                Statutory
                    reserves
                
                
                Accumulated other
                    comprehensive income
                
                
                Retained
                    earnings
                
                
                Noncontrolling
                    Interest
                
                
                TotalBalance,
      January 1, 2007
                
                
                50,000,000
                
                
                $
                50,000
                
                
                $
                7,074,701
                
                
                $
                1,437,223
                
                
                $
                469,964
                
                
                $
                11,480,816
                
                
                $
                -
                
                
                $
                20,512,704Net
      earnings including non-controlling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                12,032,328
                
                
                
                
                
                
                
                12,032,328Proceed
      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
                )
                
                
                
                
                
                
                -Foreign
      currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,422,865
                
                
                
                
                
                
                
                
                
                
                
                1,422,865Non-controlling
      interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                49,482
                
                
                
                49,482Balance,
      December 31, 2007
                
                
                51,783,416
                
                
                $
                51,784
                
                
                $
                23,665,558
                
                
                $
                3,040,595
                
                
                $
                1,892,829
                
                
                $
                23,813,836
                
                
                $
                49,482
                
                
                $
                52,514,084Balance,
      January 1, 2008
                
                
                51,783,416
                
                
                $
                51,784
                
                
                $
                23,665,558
                
                
                $
                3,040,595
                
                
                $
                1,892,829
                
                
                $
                23,813,836
                
                
                $
                49,482
                
                
                $
                52,514,084Net
      Loss including non-controlling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,873,415
                )
                
                
                (20,249
                )
                
                
                (5,893,664
                )Proceed
      from issuance of common stock
                
                
                902,030
                
                
                
                902
                
                
                
                602,221
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                603,123Conversion
      of bond
                
                
                571,428
                
                
                
                571
                
                
                
                1,379,908
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,380,479Less:
      Cost of stock issuance
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -Additional
      Paid-in Capital from warrants and beneficial conversion
      feature
                
                
                
                
                
                
                
                
                
                
                (2,603,895
                )
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (2,603,895
                )Appropriation
      to statutory reserveForeign
      currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,550,603
                
                
                
                
                
                
                
                
                
                
                
                3,550,603Non-controlling
      interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (18,692
                )
                
                
                (18,692
                )Balance,
      December 31, 2008
                
                
                53,256,874
                
                
                $
                53,257
                
                
                $
                23,043,792
                
                
                $
                3,040,595
                
                
                $
                5,443,432
                
                
                $
                17,940,421
                
                
                $
                10,541
                
                
                $
                49,532,038








F-7




CHINA
ARCHITECTURAL ENGINEERING, INC.


CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME –
CONTINUED


AS
OF DECEMBER 31, 2009, 2008 AND 2007


(Amount
Stated in USD)




Total
                    Number of
                    shares
                
                
                Common
                    stock
                
                
                Additional
                    paid in
                    capital
                
                
                Statutory
                    reserves
                
                
                Accumulated other
                    comprehensive
                    income
                
                
                Retained
                    earnings
                
                
                Noncontrolling
                    Interest
                
                
                TotalBalance,
      January 1, 2009
                
                
                53,256,874
                
                
                $
                53,257
                
                
                $
                23,043,792
                
                
                $
                3,040,595
                
                
                $
                5,443,432
                
                
                $
                17,940,421
                
                
                $
                10,541
                
                
                $
                49,532,038Net
      loss including non-controlling interests
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,806,354
                )
                
                
                (33,020
                )
                
                
                (6,839,374
                )Additional
      Paid-in Capital from warrants and beneficial conversion
                
                
                
                
                
                
                
                
                
                
                1,894,684
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,894,684Foreign
      currency translation adjustment
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (20,578
                )
                
                
                
                
                
                
                
                
                
                
                (20,578
                )Non-controlling
      interest
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,910
                )
                
                
                (3,910
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,969,178
                )Balance,
      December 31, 2009
                
                
                53,256,874
                
                
                $
                53,257
                
                
                $
                24,938,476
                
                
                $
                3,040,595
                
                
                $
                5,422,854
                
                
                $
                11,134,067
                
                
                $
                (26,389
                )
                
                $
                44,562,860




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, 2009, 2008 AND 2007


(Stated
in US Dollars)




1.
            ORGANIZATION
      AND PRINCIPAL ACTIVITIES




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




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




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




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




(a)
              Method
      of accounting




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




(b)
            Consolidation





The
consolidated financial statements include the accounts of the Company and its
thirteen 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 non-controlling
interests.


F-9


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




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




As of
December 31, 2009, detailed identities of the consolidating subsidiaries are as
follows: -




Name of Company
                        Place of
                          Incorporation
                        
                        Attributable Equity interest
                          %Full
      Art International Limited
                        Hong
      Kong
                        
                        
                        100Zhuhai
      King Glass Engineering Co., 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
                        
                        
                        100CAE
      Building Systems, Inc.
                        USA
                        
                        
                        100China
      Architectural Engineering (Shenzhen) Co., Ltd.
                        PRC
                        
                        
                        100Techwell
      International (SEA) Pte. Ltd.
                        Singapore
                        
                        
                        100CAE
      Building Systems (Singapore) Pte. Ltd.
                        Singapore
                        
                        
                        100





(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, 2009, 2008 AND 2007


(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, 2009, 2008 AND 2007


(Stated
in US Dollars)




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




(f)
            Goodwill
      and Intangible Assets





In
accordance with ASC 350, “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 2009, 2008 and
2007.




(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 cash being restricted to usage at site for specific
projects.




F-12


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(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 ASC 260,
“Earnings per Share”. ASC 260 requires companies with complex capital structures
to present basic and diluted EPS. Basic EPS is measured as the income or loss
available to common shareholders divided by the weighted average common shares
outstanding for the period. Diluted EPS is similar to basic EPS but presents the
dilutive effect on a per share basis of potential common shares (e.g.,
convertible securities, options, and warrants) as if they had been converted at
the beginning of the periods presented, or issuance date, if later. Potential
common shares that have an anti-dilutive effect (i.e., those that increase
income per share or decrease loss per share) are excluded from the calculation
of diluted EPS.




The
calculation of diluted weighted average common shares outstanding for the year
ended December 31, 2009, 2008 and 2007 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,
                          2009
                        
                        
                        Year ended
                          December 31,
                          2008
                        
                        
                        Year ended
                          December 31,
                          2007Net
      Earnings/(Loss) attributable to the Company
                        
                        $
                        (6,806,354
                        )
                        
                        $
                        (5,873,415
                        )
                        
                        $
                        12,032,328Basic
      Weighted Average Shares Outstanding
                        
                        
                        53,256,874
                        
                        
                        
                        52,034,921
                        
                        
                        
                        50,357,454Dilutive
      Shares:-   
      Addition to Common Stock from Conversion of Notes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        --   
      Addition to Common Stock from Exercise of Warrants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        730,690Diluted
      Weighted Average Outstanding Shares:
                        
                        
                        53,256,874
                        
                        
                        
                        52,034,921
                        
                        
                        
                        51,088,144Earnings
      Per Share-   
      Basic
                        
                        $
                        (0.13
                        )
                        
                        $
                        (0.11
                        )
                        
                        $
                        0.24-   
      Diluted
                        
                        $
                        (0.13
                        )
                        
                        $
                        (0.11
                        )
                        
                        $
                        0.24




F-13


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(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, 2009, 2008 AND 2007


(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 implementedASC 740-270, 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 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 (“Zhuhai KGE”) and Zhuhai King General
      Glass Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in
      Zhuhai and were subject to the PRC corporation income tax rate of 18% in
      2008 and 20% in 2009. In accordance to China’s Enterprise Income Tax Law
      (“EIT Law”) effective from January 1, 2008, the tax rate for these two
      subsidiaries will be gradually increased to 25% by 2012.The Company
      anticipates that as a result of the EIT law, its income tax provision will
      increase, which could adversely affect Zhuhai KGE’s financial condition
      and results of operations.





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




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





·
            Techwell
      Engineering Limited is subject to a Hong Kong profits tax rate of 16.5%.
      Techwell International Limited is a Macau registered company and therefore
      is subject to Macau profits tax rate of 12%.  Techwell Building
      System (Shenzhen) Co. Limited is located in Shenzhen and is subject to PRC
      corporate income tax rate of 20% that will be gradually increased to the
      uniform rate of 25% by 2012 as according to the new EIT
    law.


F-15


CHINA
ARCHITECTURAL ENGINEERING, INC.





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




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




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




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





·      The
Company, after a reverse-merger on October 17, 2006, revived to be an active
business enterprise because of the operations with subsidiaries in the PRC and
Hong Kong.  Based on the consolidated net earnings for the year ended
December 31, 2009, the Company shall be taxed at the 35% tax rate.





·      Techwell
Engineering Limited has established a branch in Dubai, which has zero corporate
income tax rate except on oil companies and bank.





·      Subsidiaries
in Singapore are subject a effective corporate income tax rate of 8.5% on
taxable income amount in excess of Singapore dollar $100,000 .





(n)
            Advertising





The
Company expensed all advertising costs as incurred.  Advertising
expenses included in selling expenses were $11,302, $371,664 and $140,236 for
the years ended December 31, 2009, 2008 and 2007, 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 $2,926,
$711,318 and $111,129 for the years ended December 31, 2009, 2008 and 2007,
respectively.




(p)
            Retirement
      benefits





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




(q)
            Selling,
      general and administrative expenses





Selling,
general and administrative expenses including employee salaries, pension costs,
marketing costs, insurance, rent, and depreciation, etc. The decrease was
primary due to the decrease in contract revenues.




F-16


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




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




(r)
            Foreign
      currency translation




The
accompanying consolidated financial statements are presented in United States
Dollars (US$). The Company’s functional currency is the US$, while certain
domestic subsidiaries’ use the Renminbi (RMB) and Hong Kong and overseas
subsidiaries use local currencies as their functional
currency.   The consolidated financial statements are translated
into US$ from RMB, Hong Kong Dollars (HKD), United Arab Emirate Dirham (AED) and
other local currencies at December 31, 2009 exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.




2009
                  
                  
                  2008
                  
                  
                  2007Period
      end RMB : US$ exchange rate
                  
                  
                  6.8372
                  
                  
                  
                  6.8225
                  
                  
                  
                  7.3141Average
      yearly RMB : US$ exchange rate
                  
                  
                  6.8331
                  
                  
                  
                  6.9564
                  
                  
                  
                  7.6172





Period
      end HKD : US$ exchange rate
                  
                  
                  7.7551
                  
                  
                  
                  7.7499
                  
                  
                  
                  7.8049Average
      yearly HKD : US$ exchange rate
                  
                  
                  7.7518
                  
                  
                  
                  7.7859
                  
                  
                  
                  7.8026





Period
      end AED : US$ exchange rate
                  
                  
                  3.6738
                  
                  
                  
                  3.6731
                  
                  
                  
                  N/AAverage
      yearly AED : US$ exchange rate
                  
                  
                  3.6710
                  
                  
                  
                  3.6736
                  
                  
                  
                  N/A




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, 2009, 2008 AND 2007


(Stated
in US Dollars)




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




(s)
            Statutory
      reserves




Statutory
reserves for foreign investment enterprises are referring to the amount
appropriated from the net earnings 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.




(t)
            Comprehensive
      income




Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners.  Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income are required to be
reported in a financial statement that is presented with the same prominence as
other consolidated financial statements.  The 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, 2009, 2008 AND 2007


(Stated
in US Dollars)




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




(u)
            Recent
      accounting pronouncements




In June
2009, FASB issued FASB Statement No. 166, Accounting for Transfers for
Financial Assets (FASB ASC 860 Transfers and Servicing) and
FASB Statement No. 167 (FASB ASC 810 Consolidation), a revision to
FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities(FASB ASC 810 Consolidation).




Statement
166 is a revision to FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities(FASB
ASC 860 Transfers and
Servicing), and
will require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. Statement No. 166 (FASB
ASC 860 Transfers and
Servicing) must be applied as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for interim
periods within that first annual reporting period and for interim and annual
reporting periods thereafter. Earlier application is prohibited. This Statement
must be applied to transfers occurring on or after the effective date.  The
Company is still evaluating the impact of the above pronouncement.


Statement
167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest
Entities (FASB ASC 810 Consolidation), and changes how a reporting
entity determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. The
determination of whether a reporting entity is required to consolidate another
entity is based on, among other things, the other entity’s purpose and design
and the reporting entity’s ability to direct the activities of the other entity
that most significantly impact the other entity’s economic
performance. Statement No. 167 (FASB ASC 810 Consolidation) shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter.  Earlier application is prohibited. The Company is still
evaluating the impact of the above pronouncement.


On June
30, 2009, FASB issued FASB Statement No. 168, Accounting Standards CodificationTM( FASB ASC 105 Generally Accepted Accounting
Principles) a replacement of FASB Statement No. 162  the Hierarchy of Generally Accepted
Accounting Principles. On the effective date of this standard, FASB
Accounting Standards CodificationTM (ASC) became the source of authoritative U.S.
accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission (SEC). This statement
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009.  If an accounting change results from the
application of this guidance, an entity should disclose the nature and reason
for the change in accounting principle in their financial statements.  This
new standard flattens the GAAP hierarchy to two levels: one that is
authoritative (in FASB ASC) and one that is non-authoritative (not in FASB ASC).
Exceptions include all rules and interpretive releases of the SEC under the
authority of federal securities laws, which are sources of authoritative GAAP
for SEC registrants, and certain grandfathered guidance having an effective date
before March 15, 1992. Statement No. 168 is the final standard that will be
issued by FASB in that form.  There will no longer be, for example,
accounting standards in the form of statements, staff positions, Emerging Issues
Task Force (EITF) abstracts, or AICPA Accounting Statements of
Position.





F-19


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




3.
            CONTRACT
      RECEIVABLES




December 31,2009
                    
                    
                    December
      31, 2008Contract
      receivables
                    
                    $
                    95,831,489
                    
                    
                    $
                    77,027,328Less: Allowance for
      doubtful accounts
                    
                    
                    (6,642,386
                    )
                    
                    
                    (5,215,701
                    )Net
                    
                    $
                    89,189,103
                    
                    
                    $
                    71,811,627




Allowance for Doubtful
    Accounts
                    
                    December 31,2009
                    
                    
                    December
      31, 2008Beginning
      balance
                    
                    $
                    5,215,701
                    
                    
                    $
                    215,701Add:
      Allowance created
                    
                    
                    1,426,685
                    
                    
                    
                    5,000,000Ending
      balance
                    
                    $
                    6,642,386
                    
                    
                    $
                    5,215,701




F-20


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




4.
            OTHER
      RECEIVABLES





Otherreceivablesconsisted of the following:




December 31,
                    2009
                  
                  
                  December 31,
                    2008Due from sellers of Techwell, the subsidiary
      (1)
                  
                  $
                  11,333,253
                  
                  
                  $
                  1,424,123Due
      from Kangbao Electrical Company Limited (Kangbao) , a related
      party  (2)
                  
                  
                  6,054,905
                  
                  
                  
                  11,172,032Drawdown
      of advance payment and performance bonds by client of the projects in
      Dubai (3)
                  
                  
                  9,414,397
                  
                  
                  
                  -Other
      related parties receivables
                  
                  
                  253,638
                  
                  
                  
                  -Deposits
      for site operations of projects in PRC
                  
                  
                  2,903,171
                  
                  
                  
                  5,751,476Other
                  
                  
                  808,703
                  
                  
                  
                  267,297Total
                  
                  $
                  30,768,067
                  
                  
                  $
                  18,614,928




(1)
            On
      November 6, 2007, the Company, through Full Art International, Ltd. (“Full
      Art”), acquired all of the issued and outstanding shares in the capital of
      Techwell Engineering Limited, 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 Ng Chi Sum
      and Yam Mei Ling (each a “Shareholder” and collectively, the
      “Shareholders”), the Company and Full Art.  Pursuant to the
      terms and conditions of the Agreement, the Shareholders agreed that each
      of them would pay any and all accounts receivables of Techwell if not paid
      by the customers within 24 months of the acquisition date.  The
      24 month period has expired and a total of $9,909,130 is due and payable
      from the Shareholders. The amount is included in the other receivable due
      from sellers of Techwell.




(2)
            The
      amount mainly represents the purchases advances to Kangbao Electrical
      Company Limited (Kangbao) for the supplies of materials for the projects
      of the Company.




(3)
            The
      Company believes that the client of the Dubai projects did not have proper
      grounds for the drawdown of the advance payment and performance bonds
      which the company issued for the projects,The Company also believes that
      the client should not be entitled to the drawdown and is now proceeding
      the claim back of the amount.




5.
            INVENTORIES




December 31,2009
                      
                      
                      December 31,2008Raw
      materials at sites
                      
                      $
                      727,499
                      
                      
                      $
                      308,842




F-21


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




6.
            PLANT
      AND EQUIPMENT




Plant and
equipment consist of the following as of: -




December 31,2009
                      
                      
                      December
      31, 2008At
      costMotor
      vehicle
                      
                      $
                      1,242,928
                      
                      
                      $
                      1,568,165Machinery
      and equipment
                      
                      
                      2,381,755
                      
                      
                      
                      3,221,028Furniture,
      software and officeequipment
                      
                      
                      1,795,595
                      
                      
                      
                      2,443,382Building
                      
                      
                      -
                      
                      
                      
                      311,596Leasehold
      improvement
                      
                      
                      267,038
                      
                      
                      
                      2,198,367$
                      5,687,316
                      
                      
                      $
                      9,742,538Less:
      Accumulated depreciationMotor
      vehicle
                      
                      $
                      825,536
                      
                      
                      $
                      774,977Machinery
      and equipment
                      
                      
                      1,420,536
                      
                      
                      
                      1,975,014equipment
                      
                      
                      804,516
                      
                      
                      
                      908,591Building
                      
                      
                      -
                      
                      
                      
                      24,538Leasehold
      improvement
                      
                      
                      97,271
                      
                      
                      
                      207,308$
                      3,147,859
                      
                      
                      $
                      3,890,428$
                      2,539,457
                      
                      
                      $
                      5,852,110




Depreciation
expenses included in the selling and administrative expenses for years ended
December 31 2009 and 2008 were $851,441 and $761,010 respectively.




7.
            INTANGIBLE
      ASSETS




December
      31,
                            2009
                          
                          
                          December
      31,
                            2008At
      costIntangible
      Assets
                          
                          $
                          98,673
                          
                          
                          $
                          99,567Less:
      Accumulated amortization
                          
                          
                          28,063
                          
                          
                          
                          48,847$
                          70,610
                          
                          
                          $
                          50,720




F-22




CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




8.
            LOANS





A.
            SHORT-TERM
      BANK LOANS





December
      31,
                                        2009
                                      
                                      
                                      December
      31,
                                        2008ABN
      Amro N.V. Overdraft in Current Account at interest rate at 6.5% per
      annum
                                      
                                      
                                      4,906,266
                                      
                                      
                                      
                                      -ABN
      Amro N.V. Temporary Loan for the drawing of performance and advance
      payment bonds at interest rate at Bank's Cost of Fund + 6%
                                      
                                      
                                      4,546,504
                                      
                                      
                                      
                                      -Automobile
      capital lease obligation (hire purchase),amount due within one year, last
      installment due November 9, 2012
                                      
                                      
                                      77,110
                                      
                                      
                                      
                                      -$
                                      9,529,880
                                      
                                      
                                      $
                                      -




B.
            LONG-TERM
      BANK LOANS




December 31,
                          2009
                        
                        
                        December 31,
                          2008Bank
      of East Asia (China) Ltd., Apartment Mortgage, amount due after one year,
      at 5.184% per annum, subject to variation every 6 months, last installment
      due January 4, 2012, full outstanding amount repaid in May
      2009
                        
                        $
                        -
                        
                        
                        $
                        141,811Automobile
      capital lease obligation (hire purchase),amount due after one year, last
      installment due November 9, 2012
                        
                        
                        109,239
                        
                        
                        
                        186,474$
                        109,239
                        
                        
                        $
                        328,285




Zhuhai
King Glass Engineering Co., Limited borrowed from Bank of East Asia with a
condominium as collateral. This facility is subject to a current interest rate
of 5.184% and interest rate adjusts every 6 months. The borrowing was fully
repaid in May 2009.




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, 2009, 2008 AND 2007


(Stated
in US Dollars)





9.
            CONVERTIBLE
      BONDS AND BOND WARRANTS





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





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




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




Effective from April 12, 2009, the
conversion price has been reset to $2.45, which is 70% of $3.50 as the average
closing price of the Company’s shares for the period of 20 consecutive trading
days immediately prior to April 12, 2009 was $0.94. The reset of the conversion
price resulted in additional $3.4 million of bonds discount and will be
amortized over the remaining outstanding periods of the bonds.




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




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





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


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




The
Convertible Bonds Payable, net consists of the following:




December
                    31, 2009
                  
                  
                  December
                    31, 2008Convertible
      Bonds Payable
                  
                  $
                  28,000,000
                  
                  
                  $
                  28,000,000Less:
      Interest discount – Warrants
                  
                  
                  (3,159,903
                  )
                  
                  
                  (3,159,903
                  )Less:
      Interest discount – Beneficial conversion feature
                  
                  
                  (1,737,143
                  )
                  
                  
                  (1,737,143
                  )Less:
      Bond discount
                  
                  
                  (740,000
                  )
                  
                  
                  (740,000
                  )Accretion
      of interest discount
                  
                  
                  2,201,207
                  
                  
                  
                  2,544,216Net
                  
                  $
                  24,564,161
                  
                  
                  $
                  24,907,170





As more
fully discussed in Note 17 below, the Company entered into a waiver agreement
with the Subscribers in February 2010.  See Note 17 for additional
information.




F-24


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




10.
            CONTRACT
      REVENUES EARNED




The
contract revenues earned for the years ended December 31, 2009, 2008 and 2007
consist of the following: -




Year
      ended December
                            31,
      2009
                          
                          
                          Year
      ended
                            December
      31, 2008
                          
                          
                          Year
      ended December
                            31,
      2007Billed
                          
                          $
                          73,455,515
                          
                          
                          $
                          128,509,031
                          
                          
                          $
                          60,241,592Unbilled
                          
                          
                          43,735,403
                          
                          
                          
                          23,156,641
                          
                          
                          
                          26,375,647$
                          117,190,918
                          
                          
                          $
                          151,665,672
                          
                          
                          $
                          86,617,239




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.




A single
customer accounted for 43.2% of the Company’s contract revenues for the year
ended December 31, 2009. No other customer accounts for 10% or more of the
Company’s contract revenues in 2009.




F-25


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




11.
              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 years ended December 31, 2009, 2008, and
2007: -




Year
      ended
                                December
      31, 2009
                              
                              
                              Year
      ended
                                December
      31, 2008
                              
                              
                              Year
      ended
                                December
      31, 2007Income/(loss)
      before tax
                              
                              
                              (6,806,354
                              )
                              
                              
                              (5,873,415
                              )
                              
                              
                              12,032,328Taxes
      at the applicable  income tax rates
                              
                              $
                              285
                              
                              
                              $
                              19,629
                              
                              
                              $
                              4,770,088Miscellaneous
      non taxable income and non-deductible expenses
                              
                              
                              (107,316
                              )
                              
                              
                              (23,278
                              )
                              
                              
                              (2,347,604
                              )Current
      income tax expense
                              
                              $
                              (107,031
                              )
                              
                              $
                              (3,649
                              )
                              
                              $
                              2,422,484




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.




12.
            QUARTERLY
      INFORMATION





The table
below presents selected results of operations for the quarters
indicated.  All amounts are in thousands, except share and per share
amounts.




Quarter EndedDecember 31, 2009
                  
                  
                  September 30, 2009
                  
                  
                  June 30, 2009
                  
                  
                  March 31, 2009
                  
                  
                  TotalContract
      revenues earned
                  
                  $
                  24,691
                  
                  
                  $
                  25,558
                  
                  
                  $
                  30,599
                  
                  
                  $
                  36,343
                  
                  
                  $
                  117,191Income
      / (loss) from operations
                  
                  
                  394
                  
                  
                  
                  (5,074
                  )
                  
                  
                  3,832
                  
                  
                  
                  2,230
                  
                  
                  
                  1,382Net
      earnings (loss)
                  
                  
                  (1,913
                  )
                  
                  
                  (8,381
                  )
                  
                  
                  2,544
                  
                  
                  
                  944
                  
                  
                  
                  (6,806
                  )Net
      earnings / (loss) per share:Basic
      and Diluted
                  
                  
                  (0.04
                  )
                  
                  
                  (0.16
                  )
                  
                  
                  0.05
                  
                  
                  
                  0.02
                  
                  
                  
                  (0.13
                  )




F-26




CHINA
ARCHITECTURAL ENGINEERING, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
 (Stated
in US Dollars)
  12.
                QUARTERLY
      INFORMATION (CONT'D)


Quarter EndedDecember 31, 2008
                      
                      
                      September 30, 2008
                      
                      
                      June 30, 2008
                      
                      
                      March 31, 2008
                      
                      
                      TotalContract
      revenues earned
                      
                      $
                      28,959
                      
                      
                      $
                      55,978
                      
                      
                      $
                      41,380
                      
                      
                      $
                      25,349
                      
                      
                      $
                      151,666Income
      / (loss) from operations
                      
                      
                      (28,589
                      )
                      
                      
                      11,110
                      
                      
                      
                      8,752
                      
                      
                      
                      5,445
                      
                      
                      
                      (3,282
                      )Net
      earnings (loss)
                      
                      
                      (28,586
                      )
                      
                      
                      9,910
                      
                      
                      
                      7,629
                      
                      
                      
                      5,174
                      
                      
                      
                      (5,873
                      )Net
      earnings / (loss) per share:Basic
                      
                      
                      (0.51
                      )
                      
                      
                      0.19
                      
                      
                      
                      0.15
                      
                      
                      
                      0.10
                      
                      
                      
                      (0.11
                      )Diluted
                      
                      
                      (0.51
                      )
                      
                      
                      0.18
                      
                      
                      
                      0.14
                      
                      
                      
                      0.09
                      
                      
                      
                      (0.11
                      )





13.
            SEGMENTAL
      INFORMATION





The
Company has one reportable segment and conducts business in the following
geographic regions. All amounts are in thousands.




Revenue
:




2009
                  
                  
                  2008
                  
                  
                  2007For
      the year ended December 31Middle
      East
                  
                  $
                  58,685
                  
                  
                  $
                  64,929
                  
                  
                  $
                  -Asia
                  
                  
                  51,979
                  
                  
                  
                  83,505
                  
                  
                  
                  86,617United
      States
                  
                  
                  6,527
                  
                  
                  
                  3,232
                  
                  
                  
                  -Total
                  
                  $
                  117,191
                  
                  
                  $
                  151,666
                  
                  
                  $
                  86,617




F-27




CHINA
ARCHITECTURAL ENGINEERING, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
 (Stated
in US Dollars)
  13.
                SEGMENTAL
      INFORMATION (CONT'D)


Long-lived
assets :




Middle East
                      
                      
                      Asia
                      
                      
                      United States
                      
                      
                      TotalAs
      of December 31, 2009Plant
      and equipment, net
                      
                      $
                      384
                      
                      
                      $
                      2,026
                      
                      
                      $
                      130
                      
                      
                      $
                      2,540Intangible
      assets
                      
                      
                      -
                      
                      
                      
                      71
                      
                      
                      
                      -
                      
                      
                      
                      71Goodwill
                      
                      
                      -
                      
                      
                      
                      7,
      996
                      
                      
                      
                      -
                      
                      
                      
                      7,
      996Other
      non-current assets
                      
                      
                      161
                      
                      
                      
                      95
                      
                      
                      
                      31
                      
                      
                      
                      287Total
                      
                      $
                      545
                      
                      
                      $
                      10,188
                      
                      
                      $
                      161
                      
                      
                      $
                      10,894


As
      of December 31, 2008Plant
      and equipment, net
                            
                            $
                            488
                            
                            
                            $
                            5,187
                            
                            
                            $
                            177
                            
                            
                            $
                            5,852Intangible
      assets
                            
                            
                            -
                            
                            
                            
                            51
                            
                            
                            
                            -
                            
                            
                            
                            51Goodwill
                            
                            
                            -
                            
                            
                            
                            7,996
                            
                            
                            
                            -
                            
                            
                            
                            7,996Other
      non-current assets
                            
                            
                            -
                            
                            
                            
                            1
                            
                            
                            
                            31
                            
                            
                            
                            32Total
                            
                            $
                            488
                            
                            
                            $
                            13,235
                            
                            
                            $
                            208
                            
                            
                            $
                            13,931





14.
            DISCONTINUED
      OPERATION LOSS




In
September 2009, the Company’s Shenzhen office was downsized and moved out from
the leasehold multi-floor office building to a smaller leased place at minimal
operations. The move was a result from the Company’s recent restructure and
reorganization to turn back to the domestic market in China instead of overseas
market due to the recent change in international economic environments. The set
up of the Shenzhen office was originally for the support of the overseas
operations which the Company decided to be discontinued.  As a result,
the current improvement works to the leasehold multi-floor office building were
stopped and being written off in the period under this report as discontinued
operation loss of $1,900,794.




F-28


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




15.
              COMMITMENTS
      AND CONTINGENCIES




A.
OPERATING LEASE COMMIMENTS




The
Company leases certain administrative and production facilities from third
parties.  Accordingly, for the years ended December 31, 2009, 2008 and
2007, the Company incurred rental expenses of $3,254,251, $1,602,501 and
$437,750 respectively.




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




For
      the years ended December 31,2010
                  
                  
                  1,063,0432011
                  
                  
                  -2012
                  
                  
                  -2013
      or after
                  
                  
                  -$
                  1,063,043




B.
PENDING LITIGATION




Techwell
Litigation




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




On January 14, 2009, the board of
directors of Techwell passed a board resolution, to dismiss both Mr. Ng and Miss
Yam with immediate effect and remove Mr. Ng from the board of Techwell (the
“Resolution”).   On January 16, 2009, Mr. Ng and Miss Yam filed a
lawsuit in the High Court of Hong Kong against the Company and its subsidiary,
Full Art International Limited.  The lawsuit alleges that, inter alia, (i) the Company
misrepresented to them the financial status of the Company and operations during
the course the acquisition of Techwell was being negotiated; (ii) the Company
failed to perform its obligations under a settlement agreement alleged to be
agreed by the Company in January 2009; and (iii) the dismissal of Mr. Ng
was unlawful and invalid.  The lawsuit filed by Mr. Ng and Miss Yam
requests the court for specific performance of the settlement agreement that was
allegedly entered into, which would require the return of the Techwell company
to Mr. Ng and Miss Yam, and in the absence of such grant of relief, Mr. Ng and
Miss Yam request unspecified damages lieu of return of the Techwell
company.




F-29


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)


15.
                  COMMITMENTS
      AND CONTINGENCIES
(CONT'D)


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




The Company, Mr. Ng, and Miss Yam are
in discussions and negotiations to settle the all disputes between the
parties.  However, there is no guarantee that the parties will reach
an agreement to settle the dispute, in which case the Company intends to
vigorously defend against the lawsuit.  There can be no assurance that
the lawsuit will be resolved in the Company’s favor.  Even if the
Company successfully defends the lawsuit, the Company may incur substantial
costs defending or settling the lawsuit, in addition to a possible diversion of
the time and attention of the Company’s management from its
business.  If the Company is unsuccessful in defending the lawsuit,
its may be required to pay a significant amount of damages and/or it may
potentially lose ownership of Techwell, which will have a material adverse
effect on the Company’s business, financial condition or results of
operations.





Dubai
Metro Rail Project Dispute





On
September 9, 2009, the Red Line, or first phase, of the Dubai Metro was
officially opened. The Company, through its subsidiary Techwell, had been
working towards completion of its external envelopes for stations along the Red
Line of the Dubai Metro System.  According to the Company’s original
construction blueprint, the majority of its construction work was completed at
the end of June 2009, and final construction milestones were scheduled for
completion in the third quarter of 2009.  With less than 5% of its
contract remaining to be completed, Techwell was removed by the master
contractor of the project, which also called for and received payment of $2.1
million in performance bonds and $7.3 million in advance payment bonds that were
issued on Techwell's behalf for the project. The calling of the advance payment
bonds was based on the master contractor's belief that it had paid in excess of
the construction work performed.  The Company and certain of its
subsidiaries are guarantor of the bonds that were paid by the banks, and the
Company is liable under the guarantee agreements for such amounts paid by the
banks.  The Company does not believe that the master contractor had a
proper basis for calling the bonds and intend to vigorously defend all of its
legal rights and remedies related to the dispute.  The Company has
engaged a construction claims consultant to facilitate resolution of the
dispute.  The Company and its construction claims consultant, based on
a review of the facts, documents, and materials available, believes that it has
a reasonable opportunity to collect the amounts due to Techwell from the master
contractor, less appropriate credits as its final amount due for work performed
through September 2009.  The Company, with the assistance of its
claims consultant, will continue to evaluate the dispute and probability of
success on this dispute going forward and make the appropriate adjustments;
however, no assurance can be given that the dispute will be resolved in the
Company’s and Techwell’s favor.




F-30


CHINA ARCHITECTURAL ENGINEERING,
INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)




16.
                RELATED
      PARTIES TRANSACTIONS




The
amount due to shareholder at December 31 2009, 2008 and 2007 was $10,080,345 ,
$924,687 and $1,334,856 respectively. The Loan is interest-free, fee-free and
has no fixed repayment schedule.




During
the year ended December 31, 2009, the Company purchased construction materials
amounting to $22.9 million from Guangdong Canbo Electrical Co., Ltd. (Canbo) via
its parent company, Kangbao Electrical Company Limited (Kangbao), a subsidiary
of the Company’s major shareholder, KGE Group Limited. Canbo is a preferred
supplier of the Company as it is able to procure materials at favorable price
levels due to its purchased quantities. More important, application of certain
of the Company’s patented technology is preferably routed through Canbo to
prevent undesired distribution of this technology. The Company at times provides
purchases advance payment to Kangbao in order to obtain a more favorable
pricing. As of December 31, 2009, the Company’s purchases advance to Canbo was
$5.9 million for the purpose of future supplies of materials. The Company has
also obtained trade facilities for purchases through Canbo.




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




17.
                SUBSEQUENT
      EVENTS





Waiver
of Conversion Price Adjustment on Convertible Bonds




On
February 24, 2010, the Company entered into an Amendment and Waiver Agreement
(the “Waiver”) with the holders of its outstanding Variable Rate Convertible
Bonds due 2012 (the “2007 Bonds”) and 12% Convertible Bonds due 2011 (the “2008
Bonds,” and collectively with the 2007 Bonds, the “Bonds”) and warrants to
purchase 300,000 shares of common stock of the Company expiring 2013 (the “2008
Warrants”).  Pursuant to the Waiver, the holders of the Bonds and the
2008 Warrants agreed to waive their right to a reduction in the conversion price
of the Bonds and the exercise price of the 2008 Warrants upon the Company’s
anticipated issuance of up to 25,000,000 shares of its common stock (the
“Shares”) for a proposed acquisition of a 60% ownership interest in Shanghai
ConnGame Network Co. Ltd. (“ConnGame”).  Additionally, the holders of
the 2008 Bonds agreed to waive any default under the terms and conditions of the
trust deed governing the 2008 Bonds relating to the requirement that KGE Group
Limited own at least 45% of the Company’s issued and outstanding common
stock.




F-31


CHINA
ARCHITECTURAL ENGINEERING, INC.




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007


(Stated
in US Dollars)


17.
                  SUBSEQUENT
      EVENTS (CONT'D)


The
Waiver is subject to numerous conditions.  The Company agreed to pay
the Bondholders the interest in arrears owed on the Bonds as of March 31, 2010
in two equal payments on March 31, 2010 and May 31, 2010 of approximately $1.26
million USD each and to pay 100% of the interest payments on the Bonds that
becomes due in April to be paid on April 15, 2010 of approximately $1.32 million
USD.  The foregoing interest payments, in aggregate, are equal to
approximately $3.84 million USD.  The Company also agreed to repay the
principal and all accrued interest owed by the Company to ABN AMRO Bank (China)
Co., Ltd., Shenzhen Branch (the “Overdraft Lender”) under an Overdraft Facility
letter (the “Total Amount Owed”) in three separate installments. The first
installment is due on the earlier of (a) within 30 days of the Company’s receipt
of a payment, if any, in respect to a .claim in Dubai or (b) March 31,
2010.  The second installment is due on April 30, 2010 and the third
installment is due on May 31, 2010.  The first installment equals 34%
of the Total Amount Owed and the second and third installments each equal 33% of
the Total Amount Owed.  The Total Amount Owed is equal to
approximately $4.91 million USD.  The Company further agreed that it
will not repay or prepay any debt prior to its currently scheduled due date
until the Company makes all of the payments specified in the Waiver and the
Bonds have been redeemed in full and that any new indebtedness incurred by the
Company for the purpose of repaying the Overdraft Facility shall (i) not exceed
the outstanding amount due and payable under the Overdraft Facility and (ii) be
subordinated to all amount owed under the Bonds (the “Covenants”).




The
Waiver has a term of three months, during which the Company is required to
complete the acquisition and make the payments on the required
dates.  In addition, if the Company fails to make any of the payments
specified in the Waiver, or there is otherwise a failure to uphold the
obligations under the Waiver, then all rights of the holders of the Bonds and
2008 Warrants waived under the Waiver to or to be waived under the Waiver, shall
not be waived and will be reinstated, and any previous waivers will be null and
void.  In such case, appropriate adjustments will be made to the
conversion prices of the Bonds and the exercise price of the 2008 Warrants in
the event any of the Shares are issued and an event of default under the terms
and conditions of the trust deed governing the 2008 Bonds shall exist, making
the 2008 Bonds immediately due and payable.




Grant
of Restricted Stock




On
January 18, 2010, the Board of Directors of the Company approved the issuance of
a total of 1.9 million shares of restricted stock (the “Restricted Stock
Grants”) to certain of its officers, directors, and key employees under the
China Architectural Engineering, Inc. 2009 Omnibus Incentive Plan (the “Plan”),
which was previously approved by the Company’s stockholders at its 2009 Annual
Meeting of Stockholders.  As approved by the Board, the Restricted
Stock Grants were subject to and contingent upon the Company’s filing of a
registration statement on Form S-8 with the Securities and Exchange Commission,
which occurred on January 21, 2010. Of the grants, 1.7 million shares were
subject to vesting in four equal installments quarterly in 2010 and 200,000
shares were to vest upon grant.




F-32