**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, 2006**
 
 **OR**
 
 **o** **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 **FOR
        THE TRANSITION PERIOD FROM _______
        TO ___________**
  **COMMISSION
        FILE NO. 333-114622**
  **CHINA
        ARCHITECTURAL ENGINEERING, INC.**
 *(Exact
        Name Of Registrant As Specified In Its Charter)*
 
 **Delaware**
              
              **51-05021250***(State
                  or other jurisdiction of*
                *incorporation
                  or organization)*
              
              *(I.R.S.
                  Employer*
                *Identification
                  No.)***105
                  Baishi Road, Jiuzhou West Avenue, Zhuhai 519070**
                **People’s
                  Republic of China**
              
              **N/A***(Address
                  of principal executive offices)*
              
              *(Zip
                  Code)*
 
 REGISTRANT’S
        TELEPHONE NUMBER, INCLUDING AREA CODE: **0086-756-8538908**
  SECURITIES
        REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
  None.
  SECURITIES
        REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
  None.
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
  Yes o No 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 x No o
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.  Yes x No o
  Indicate
        by check mark if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
        be contained, to the best of registrant’s knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-K
        or any amendment to this Form 10-K. o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
        accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act. (Check one):
  Large
        accelerated filer o Accelerated filer o Non-accelerated filer  x
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act).
  Yes o No x
  Our
        shares of common stock are not currently listed or quoted for trading on
        any
        national securities exchange or national quotation system. There were 50,000,000
        shares of common stock outstanding as of April 1, 2007
  Documents
        Incorporated by Reference: None.
 
 
 **CHINA
        ARCHITECTURAL ENGINEERING, INC.**
 **TABLE
        OF CONTENTS TO ANNUAL REPORT ON FORM 10-K**
 **For
        the Fiscal Year Ended December 31, 2006**
  **ITEM**
                
                
                
                
                **Page****PART
                    I**Item
                    1.
                
                Business
                
                
                2Item
                    1A.
                
                Risk
                    Factors
                
                
                12Item
                    1B.
                
                Unresolved
                    Staff Comments
                
                
                24Item
                    2.
                
                Properties
                
                
                24Item
                    3.
                
                Legal
                    Proceedings
                
                
                24Item
                    4.
                
                Submission
                    of Matters to a Vote of Security Holders
                
                
                24**PART
                    II**Item
                    5.
                
                Market
                    for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                    Purchases of Equity Securities
                
                
                25Item
                    6.
                
                Selected
                    Financial Data
                
                
                27Item
                    7.
                
                Management's
                    Discussion and Analysis of Financial Condition and Results of
                    Operations
                
                
                28Item
                    7A.
                
                Quantitative
                    and Qualitative Disclosures about Market Risk
                
                
                38Item
                    8.
                
                Financial
                    Statements and Supplementary Data
                
                
                38Item
                    9.
                
                Changes
                    in and Disagreements with Accountants on Accounting and Financial
                    Disclosure
                
                
                38Item
                    9A.
                
                Controls
                    and Procedures
                
                
                38Item
                    9B.
                
                Other
                    Information
                
                
                39**PART
                    III**Item
                    10.
                
                Directors,
                    Executive Officers and Corporate Governance
                
                
                40Item
                    11.
                
                Executive
                    Compensation
                
                
                42Item
                    12.
                
                Security
                    Ownership of Certain Beneficial Owners and Management and Related
                    Stockholder Matters
                
                
                44Item
                    13.
                
                Certain
                    Relationships and Related Transactions, and Director
                    Independence
                
                
                46Item
                    14.
                
                Principal
                    Accounting Fees and Services
                
                
                46**PART
                    IV**Item
                    15.
                
                Exhibits
                    and Financial Statement Schedules
                
                
                47Signatures
                
                
                48
  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 statement that are not purely
        historical and that are “forward-looking statements.” Such forward-looking
        statements include, but are not limited to, statements regarding our and
        their
        management’s expectations, hopes, beliefs, intentions or strategies regarding
        the future, including our financial condition, results of operations, and
        the
        expected impact of the Share Exchange on the parties’ individual and combined
        financial performance. In addition, any statements that refer to projections,
        forecasts or other characterizations of future events or circumstances,
        including any underlying assumptions, are forward-looking statements. The
        words
“anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,”
“intends,” “may,” “might,” “plans,” “possible,” “potential,” “predicts,”
“projects,” “seeks,” “should,” “will,” “would” and similar expressions, or the
        negatives of such terms, may identify forward-looking statements, but the
        absence of these words does not mean that a statement is not
        forward-looking.
 
 The
        forward-looking statements contained in this report are based on current
        expectations and beliefs concerning future developments and the potential
        effects on the parties and the transaction. There can be no assurance that
        future developments actually affecting us will be those anticipated. These
        forward-looking statements involve a number of risks, uncertainties (some
        of
        which are beyond the parties’ control) or other assumptions that may cause
        actual results or performance to be materially different from those expressed
        or
        implied by these forward-looking statements, including the
        following:
 
 ·
            Our
                dependence on government contracts;  ·
            Fluctuation
                and unpredictability of costs related to our products and
                services;  ·
            Changes
                in the laws of the PRC that affect our
                operations;  ·
            Our
                failure to meet or timely meet contractual performance standards
                and
                schedules;  ·
            Any
                recurrence of severe acute respiratory syndrome (SARS) or Avian
                Flu;  ·
            Reduction
                or reversal of our recorded revenue or profits due to “percentage of
                completion” method of accounting;  ·
            Our
                dependence on the steel and aluminum
                markets;  ·
            Exposure
                to product liability and defect claims;  ·
            Our
                ability to obtain all necessary government certifications and/or
                licenses
                to conduct our business;  ·
            Development
                of a public trading market for our securities;  ·
            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 Full Art’s Financial Condition and Results of Operations,” and
                “Business.”  These
        risks and uncertainties, along with others, are also described above 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.
  1
 
 **PART
        I**
  **Item
        1. Business**
  **Overview**
 
 We
        specialize in the design, engineering and installation of high-end specialty
        curtain wall systems, including glass curtain walls, stone curtain walls,
        metal
        curtain walls, roofing systems, and related products, for public works projects
        and commercial real estate. We have designed and installed nearly one hundred
        projects throughout China, including the National Grand Theater, Exhibition
        Conservatory of Beijing Botanical Garden, The COSCO Tower at Changlian Avenue
        Beijing, and the Wumen Exhibition Hall in Beijing’s Forbidden City, and a number
        of commercial structures in Southeast Asia. We believe that we compete on
        the
        strength of our reputation, track record, strong relationships with government
        clients and our ability to give expression to the vision of leading architects.
        By focusing on innovation while outsourcing commoditized manufacturing work,
        we
        believe we are able to add artistic and technological value to projects at
        cost-effective price points.
 
 **Corporate
        Information**
 
 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
        pursuant to which we (i) became the 100% parent of Full Art International,
        Ltd.,
        a Hong Kong Company (“Full Art”), which has four subsidiaries, including its
        wholly-owned subsidiary Zhuhai King Glass Engineering Co., Ltd., a company
        formed under the laws of the People’s Republic of China (“PRC” or “China”), (ii)
        assumed the operations of Full Art and its subsidiaries and (iii) changed
        our
        name from SRKP 1, Inc. to China Architectural Engineering, Inc. Our corporate
        offices are located at 105 Baishi Road, Jiuzhou West Avenue, Zhuhai, 519070,
        People’s Republic of China.
 
 **Market
        Opportunities**
 
 The
        continuing expansion of the Chinese economy has spurred the substantial growth
        of China’s construction industry, especially in the commercial and public works
        sectors. As architectural designs for these buildings have become more complex,
        challenging and modern in scope, there has been an increased need for technology
        driven companies providing high-end specialty curtain wall systems.
 
 Increasingly,
        architects have come to favor designs that focus on improved natural lighting,
        active climate control and cost savings. Increasing demand for state-of-the-art
        curtain wall glass cladding has spurred technological innovation within the
        industry to provide new designs and engineering processes. Contractors are
        relying on firms that can work with architects to develop and enhance their
        vision and efficiently implement their design while maintaining high quality
        standards and cost control.
 
 There
        is
        an increasing trend in the construction industry toward complex, fast-track,
        design-build projects. These projects require that all phases of construction
        be
        accomplished in accordance with compressed time schedules that involve the
        hired
        firm at early stages of the project. These projects also are characterized
        by
        numerous design changes requiring that all construction participants coordinate
        their efforts in order to respond quickly and efficiently in implementing
        these
        changes. Those firms capable of meeting this demand must have the ability
        to
        provide a total overall solution, from design and project management, to
        complete engineering services, through manufacturing, installation and
        servicing.
 
 As
        China’s economy continues to develop, it is expected that increased construction
        will be required to accommodate growth in education, culture, social welfare
        and
        business. Libraries, museums, exhibition halls, stadiums, planetariums and
        science centers are among the types of structures increasingly needed in
        China
        today. These large public structures can be very costly in terms of energy
        consumption, calling for new ways to build efficient wall systems that actively
        conserve energy. In addition, governmental agencies and international regulators
        are becoming more environmentally conscious in the enactment of regulations
        governing new construction. Rising fuel costs and environmental concerns
        have
        resulted in regulation designed to ensure that new commercial and public
        works
        buildings have a low environmental impact. Technologies such as solar lighting,
        advanced shading systems and circulating sea water systems are constantly
        improving the ability of structures to interact with the environment by taking
        advantage of natural conditions, thus meeting the dual goals of reducing
        energy
        costs and lessening environmental impact. Currently, most innovative, cutting
        edge projects appear in the largest cities of China. Yet as development
        continues, it is expected that mid- and small-sized cities will increasingly
        move towards investing in these structures as well.
  2
  **Products
        and Services**
 
 For
        over
        10 years, we have implemented our technology-driven policy of design,
        manufacturing, and engineering excellence to meet the exacting architectural
        challenges of Chinese and international customers. We design and develop
        systems
        to offer custom-designed solutions for developers of commercial and public
        works
        projects with special architectural features. In terms of project management,
        we
        exercises overall project planning and control over key areas of activities
        such
        as design and engineering, procurement, production scheduling, quality control
        and site installation. Our comprehensive package of services allows us to
        offer
        customized engineering solutions at an affordable cost to meet the requirements
        of our clients.
 
 Our
        primary business focus is on designing, engineering and installing specialty
        high-end curtain wall systems, including glass curtain walls, stone curtain
        walls, metal curtain walls, roofing systems, and related products. For the
        year
        ended December 31, 2006, approximately 35% of our sales came from new
        construction projects. The remainder is comprised primarily of projects where
        we
        add new glass skins to old buildings. A number of these projects have been
        done
        in Hong Kong, where the goal was to preserve the original style and features
        of
        the structure while applying a new skin which would protect the building
        and add
        new energy-saving and aesthetic features.
 
 *Concept
        and Project Management.* Initially, we work with the architect to develop, clarify and enhance the
        overall creative vision for the project. In the design of a curtain wall
        system,
        architects are freely able to choose different structure systems to meet
        the
        requirements of various architectural models. All contracts awarded are assigned
        a project number, which is used to track each component and man-hour associated
        with the project through the entire construction process. All project drawings,
        specifications and completion schedules on a project are reviewed by our
        senior
        management team, and all projects are assigned to one or more project managers,
        who assume primary responsibility for all aspects of the project. Reporting
        to
        the project manager are construction supervisors, safety and administration
        staff, quality control staff and project engineering staff. Each of these
        project team members coordinates with internal functional departments and
        outside suppliers as appropriate. Often a project manager assigned to a given
        project will have significant experience in similar projects. A project manager
        generally will be responsible for a number projects in various stages of
        completion at any given time, depending on the scope, complexity, and geographic
        location of such projects. Each project is divided into critical sequences
        that
        follow the anticipated curtain wall construction path. Each sequence follows
        a
        timeline, the status of which is continually monitored. Project managers
        coordinate and manage design changes or other changes in scheduled completion
        deadlines in an effort to minimize overall project delays.
 
 *Design.* Specific
        technical parameters of the concept are established as new design elements
        are
        created and combined with existing technologies. During the design phase,
        our
        engineers and technicians review preliminary and completed designs and make
        recommendations regarding types of connections, possible savings on fabrication
        techniques, and methods of installation. Operating state-of-the art
        computer-aided design (CAD) stations, these individuals provide customized
        design solutions in the form of structural calculations, drawings, fabrication
        and installation details, together with technical advice and consultancy
        on
        specifications, feasibility studies and material procurement. At the
        implementation stage of the project, detailed fabrications/shop-drawings
        are
        produced, discussed and agreed with the project architect/manager. These
        form
        the blueprint for project execution and scheduling. Every order is scheduled
        for
        production through CAD and computer-aided manufacturing (CAM) systems with
        progress tracked at each stage of the project process. Quality control and
        assurance programs are a combination of our specifications with quality
        inspectors working at all production stages.
 
 *Engineering.* We
        maintain significant in-house structural engineering and detailing capabilities
        that enable us to implement and coordinate with our shop and field personnel
        original project specifications and changes to building and structural designs
        sought by our clients. These resources help influence critical determinations
        as
        to the most cost-effective systems, designs, connections, and installation
        procedures for a particular project. Our engineers work on-site with suppliers
        to machine our patented curtain wall elements and to procure the appropriate
        raw
        materials. Our detailers prepare detail shop drawings of the dimensions,
        positions, locations, and connections, and the fabrication and installation
        sequences, of each component utilized in a project, and continually update
        these
        drawings to accommodate design and other changes. Our automated detailing
        systems produce updated detail drawings electronically, which can be delivered
        to our domestic and foreign field locations. Detailers coordinate directly
        with
        customers and our suppliers and installation teams to determine and plan
        the
        order of fabrication and installation of a project and associated personnel
        and
        equipment requirements.
  3
  *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
        curtain wall systems. Once parts have been manufactured by subcontracted
        factories, we will occasionally process them further. This processing takes
        place in our facilities in Beijing, Shanghai and Zhuhai and usually entails
        procedures such as adding metal frames to or drilling holes in glass panes,
        or
        cutting and bending steel rods into customized shapes. All of our products
        are
        fabricated in accordance with applicable industry and specific customer
        standards and specifications. We have developed project-specific and
        company-wide quality assurance and quality control programs, and utilize
        sophisticated systems to inspect all fabricated components. We prepare load
        lists that identify the sequence and date that each individual component
        is
        required on a project, a procedure that reduces the handling of and the need
        to
        store materials in the field. After the completion of processing to customer
        specifications, finished pieces are loaded for shipment to the construction
        site.
 
 *Installation* .
        We have
        165 full-time workers and supervisors who are engaged on our projects. Our
        installation teams consist of highly-trained, skilled and experienced field
        operatives with established lines of communication between the work site,
        the
        technical design department and the factory, ensuring that clients are provided
        with optimum and cost-effective practical solutions. Site installation is
        managed through our trained project management staff, and each project has
        a
        dedicated project team. On site there are a number of our supervisors who
        are
        each responsible for a different section of the curtain wall project. Each
        supervisor typically manages 30 to 50 of our workers. A small project may
        have
        just one work team while a very large project may have five or more. Because
        the
        workers are all trained by us and are familiar with the workflow process,
        they
        can work on any project in any location. Our project supervisors are often
        internally developed from our pool of workers. Occasionally, we will hire
        additional contract labor for specific sections of a very large project or
        if
        there are several projects being installed simultaneously, but these extra
        workers only supplement our core project team. The installation team coordinates
        its site delivery program with the main contract schedule to meet completion
        deadlines. The installation process typically consists of pre-assembly of
        metal
        and glass component parts at the project site, the lifting of components
        by
        crane to the appropriate location at the site and the final assembly of major
        components.
 
 *Customer
        Service.* Our
        quality control and assurance department is comprised of trained technicians
        who
        are responsible for the quality assurance, including quality control of
        in-process fabrication and site installation by a detailed inspection as
        well as
        continued maintenance after project completion. We have adopted important
        safety
        policies that are administered and enforced by our senior management and
        provide
        training on safety procedures and techniques to our shop and field
        personnel.
 
 **Strategy**
 
 To
        reach
        the goal of being a preferred choice for Chinese and international government,
        contractor and architectural clients, we are focusing on the following
        strategies:
 
 *Emphasize
        Innovative Services.* We are
        committed to meeting the demands of the market, both in China and
        internationally, through technical innovation and solutions. We focus our
        design, engineering, and installation expertise on distinct product segments
        requiring unique or innovative techniques as we have extensive experience
        in
        providing services requiring complex design and installation techniques and
        other unusual project needs. These service capabilities have enabled us to
        address design-sensitive projects such as stadiums, uniquely designed commercial
        buildings, and projects that typically carry higher margins than other
        commercial and public works buildings.
 
 *Provide
        Full Service Solutions.* We meet
        the demand for fully integrated curtain wall contractors that can (i) avoid
        the
        coordination difficulties inherent in the use of multiple curtain wall
        subcontractors; and (ii) implement rapid and multiple design changes in a
        coordinated and timely manner, preventing project delays and reducing costs
        to
        the customer. We believe that a key factor in our success has been our ability
        to provide, through our in-house personnel, valuable input and assistance
        to our
        customers with respect to overall project design, engineering fabrication
        and
        installation sequences and other critical project decisions. This often results
        in overall project cost savings and efficiencies and helps to solidify key
        customer relationships. In addition to our centralized project management,
        we
        also uses a high percentage of skilled installation employees local to projects
        and utilize advanced scheduling systems to enhance our ability to provide
        project management services to customers complementary to our core engineering,
        detail drawing, shop fabrication, and field installation services.
  4
  *Leverage
        Our Brand and Reputation.* We
        believe that the strength of our brand is increasing in China and
        internationally as we build on our large range of projects and our offering
        of
        comparative cost advantages and supply-chain management for some of the most
        complex curtain wall systems in the world. We believe that we have gained
        a
        reputation in the industry as a reliable, fully integrated provider of
        design-build, engineering, installation services with the ability to complete
        large, complex projects on a timely, cost-efficient basis.
 
 *Geographic
        Expansion in China.* Our
        objective is to achieve and maintain a leading position in the geographic
        regions and project segments that we serve by providing timely, high-quality
        services to our customers. We believe that our ability to offer design-build
        services and our project management capabilities make us a preferred source
        for
        complex, design-build projects in the geographic regions we serve. We believe
        that we have long-standing relationships with China’s top construction officials
        and leading international architects, having completed high profile projects
        in
        China, including the National Theater in Beijing, Shenzhen International
        Airport
        and the National Palace Museum. We plan to continue to meet the needs of
        government and private sector customers in the larger cities within China
        where
        we are able to leverage our relationships with national and regional accounts
        and where commercial and public works development has been more prevalent.
        We
        believe that as China’s economic growth continues to reach down to second and
        third tier cities across the country, governments of those cities will want
        to
        build their own high-end public works projects.
 
 *International
        Expansion* .
        We
        intend to continue our efforts to perform work in other foreign countries.
        We
        have launched initiatives to expand sales outside of our traditional China-based
        markets. We intend to build more projects in Hong Kong and Macau, where demand
        continues to be brisk. We have also begun working on projects in Vietnam.
        In
        addition to building new projects, we intend to continue to add advanced
        curtain
        wall technology to existing structures, enabling owners and developers to
        modernize and improve cost efficiency. In the Middle East, we believe that
        demand will grow along with trade expansion and continued windfalls from
        ever-increasing oil prices. We are currently working on a project in Doha,
        Qatar.
 
 **Product
        Attributes**
 
 Our
        curtain wall 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.
  5
  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.
 
 Stone
        or
        metal may also be used as paneling.
 
 **Projects**
 
 Our
        work
        is performed under cost-plus-fee contracts, fixed-price contracts, and
        fixed-price contracts modified by incentive and penalty provisions. The length
        of our contracts varies but typically have a duration of approximately two
        years.
 
 Approximately
        90% of our sales are from fixed price contracts, including one percent that
        are
        modified by incentive and penalty provisions. The remaining 10% of our sales
        are
        originated from are cost-plus-fee contracts. Under fixed-price contracts,
        we
        receive a fixed price regardless of what our actual costs will be. A
        disadvantage of these types of 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 could 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 fixed-price
        contracts modified by incentive and penalty provisions, we are paid a fixed
        price that may be increased or decreased based on incentive and provisions,
        such
        as meeting timeline and quality objectives.
 
 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 has 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.
 
 Noteworthy
        or recently completed or awarded projects include the following:
  **Beijing
                    Botanical Garden Greenhouse**
                  
                  
                  
                  
                  [PHOTO]
                
                Bringing
                    the theme, “remembering roots”, to life, the greenhouse was constructed
                    with 8,000 pieces of irregular double glazed toughened glass
                    panes and a
                    steel structure to create a three-dimensional image of roots
                    and stems
                    intertwining. The spider and fixed-point glass curtain wall system
                    automatically adjusts for temperature, humidity, sun shading,
                    UV exposure
                    and irrigation. The structure is comprised of an elliptical atrium
                    (bud)
                    and a double -curved radiated sector (leaf). The “bud” is set on the
                    outside surface of the steel truss, and the “leaf” is on the inside, both
                    protecting the steel from the rain forest conditions inside and
                    expressing
                    the theme.
 
 
 **National
                    Grand Theater - Beijing**
                  
                  
                  [PHOTO]
                
                ·The
                    titanium roof and glass curtain wall form a multi-layered, color
                    shifting
                    elliptical shell.
                  
                  ·Changes
                    in light and temperature will produce unpredictable color
                    effects.
 
 6
 
 **Palace
                    Museum, Wumen Exhibition Hall**
                  **Forbidden
                    City, Beijing**[PHOTO]
                
                Using
                    patented point fixture glass technology, we created an installation
                    which
                    will at once preserve the ancient hall and offer maximum visibility
                    and
                    enjoyment for visitors.
 
 **Skyscraper
                    in Doha, Qatar**
                  
                  
                  [PHOTO]
                
                ·In
                    June 2005, we were awarded the contract for construction of the
                    glass
                    curtain wall and solar protection system of the Qatar high-rise
                    office
                    tower, which will be located in West Bay, Doha and will be the
                    tallest
                    building in Qatar when completed.
                  
                  ·The
                    design evokes the geometric complexity of the oriental moucharabieh,
                    a
                    typical Islamic style of interlaced wooden screenwork, while
                    also
                    functioning as a form of solar protection.
                  
                  ·The
                    curtain wall is composed of four “butterfly” aluminum elements of
                    different scales. This overall pattern changes in order to provide
                    maximal
                    protection from the strong east and west sun. The inside layer
                    is a
                    reflective glass skin, which complements protection. A system
                    of
                    roller-blinds can also be used when
                    needed.
  7
 
 **Shenzhen
                    International Airport**
                  **“Flying
                    Eagle”**
                  
                  
                  [PHOTO]
                
                ·Reflecting
                    its location at an airport, the structure was designed to give
                    the
                    impression of a great bird in flight.
                  
                  ·Transparent
                    laminated toughened glass panes were fixed to the columns by
                    spider and
                    point-supported devices.
 
 
 **Zhongguancun
                    Software Park, Beijing**
                  
                  [PHOTO]
                
                ·The
                    “Disc”, with a diameter of 85 meters, is hung 20 meters in the air
                    by
                    radial steel cables and tension cables fixed to four cone-shaped
                    steel
                    columns.
                  
                  ·The
                    “Disc” utilizes a high-tech photoelectric system for environmental
                    protection and conservation. Sunlight is converted to electrical
                    energy
                    and stored in photoelectric boards in the laminated glass.
                  
                  ·Spider
                    and point-fixed toughened laminated glass shows off the intricate
                    steel
                    structure.
 
 **Sales
          and Marketing**
 
 *Sales*
 
 Sales
          managers lead our sales and marketing efforts through our headquarters
          in
          Zhuhai, China, and our regional sales offices in Beijing, Shanghai, Nanjing,
          Guangzhou and Hangzhou, China. Each sales manager is responsible primarily
          for
          our estimates, sales, and marketing efforts in defined geographic areas.
          In
          addition, we employ full-time project estimators and chief estimators.
          Our sales
          representatives attempt to maintain relationships with the Chinese government,
          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, fabrication,
          and
          installation of high-end specialty curtain walls.
 
 We
          compete for new project opportunities through our relationships and interaction
          with our active and prospective customer base, which we believe provides
          us with
          valuable current market information and sales opportunities. In addition,
          we are
          often contacted by governmental agencies in connection with public construction
          projects, and by large private-sector project owners and general contractors
          and
          engineering firms in connection with new building projects.
 
 Upon
          selection of projects to bid or price, our estimating division reviews
          and
          prepares projected costs of shop, field, detail drawing preparation, raw
          materials, and other costs. On bid projects, a formal bid is prepared detailing
          the specific services and materials we plans to provide, payment terms
          and
          project completion timelines. Upon acceptance, our bid proposal is finalized
          in
          a definitive contract. We experience an average accounts settlement period
          ranging from three months to as high as one year from the time we provide
          services to the time we receive payment from our customers. In contrast,
          we
          typically need to place certain deposit with our suppliers on a portion
          of the
          purchase price in advance and for some suppliers we must maintain a deposit
          for
          future orders. We are typically paid by the contractor the entire amount
          due to
          us for our services and products once the entire project is completed,
          which
          could be significantly after we complete the curtain wall portion of the
          project. National policy requires the contractor to pay 85% of our total
          contract value to us before the project is completed, and the remainder
          may be
          paid when the contractor completes the entire project. Because our payment
          cycle
          is considerably shorter than our receivable cycle, we may experience working
          capital shortages. We have used short-term bank loans, cash provided by
          operations and financings to fund our operations.
  8
  *Marketing*
 
 Management
          believes that we have developed a reputation for innovative technology
          and
          quality in the specialty high-end curtain wall industry. Marketing efforts
          are
          geared towards advancing us as a brand of choice for building the world’s most
          modern and challenging projects.
 
 The
          focus
          of our marketing plan is print advertising, participation in tradeshows
          and
          exhibitions and lecture and technology briefings to designers and property
          owners. In 2005 and 2006, we maintained an annual advertising budget of
          approximately $300,000.
 
 With
          a
          targeted approach, our print ads appear regularly in popular Chinese consumer
          and industry publications and trade journals. To better showcase our diverse
          products to potential customers, we regularly exhibit at the 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 with 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;
 
 9
  ·
                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, February
                    2005;
  ·
                ISO 14001 –
                  International Environmental System Certification, April, 2005;
                  and
  ·
                ISO 18001 –
                  International Safety System Certification, June
                  2005.
  **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, we have been appointed by the Chinese Ministry
          of
          Construction to lead the committee tasked with establishing national standards
          for the fixing bolt glass curtain wall technology industry. Luo Ken Yi,
          our
          Chief Executive Officer and Chief Operating Officer, will be 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. We actively track research developmental trends and government
          regulations, and continually seek to both improve and perfect existing
          products
          and develop new ones in accelerated product development cycles. In addition,
          we
          seek to recruit and retain qualified Chinese and foreign technical personnel.
          As
          of August 24, 2006, we employed 92 designers and engineers and 5 additional
          research and development personnel.
 
 We
          expended approximately $50,117, $58,865, and $nil on research and development
          activities for each of the years ended December 31, 2006, 2005 and 2004,
          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**
 
 At
          December 31, 2006, our total backlog of orders considered to be firm was
          approximately $3.5 million, compared with $0.5 million at December 31,
          2005. Of
          these amounts, approximately $2.5 million, or 71%, of our backlog is expected
          to
          be produced and shipped in fiscal 2007 compared to $0.5 million, or 100%,
          in the
          fiscal 2006. 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.
  10
  **Competition**
 
 The
          markets that we serve are highly competitive, price and lead-time sensitive
          and
          are impacted by changes in the commercial construction industry, including
          unforeseen delays in project timing and workflow. In addition, competition
          in
          the markets of the building industry is intense. It is based primarily
          on:
  ·
                  quality;
 ·
                    service;
 ·
                      delivery;
 ·
                        ability
                            to provide added value in the design and engineering
                            of
                            buildings;
 ·
                          price;
 ·
                            speed
                                of construction in buildings and components;
                                and
 ·
                              personal
                                  relationships with
                                  customers.
 
 We
          compete with several large integrated glass manufacturers, numerous specialty,
          architectural glass and window fabricators, and major contractors and
          subcontractors. We also compete with a number of other manufacturers of
          engineered building systems ranging from small local firms to large national
          firms. Many of our competitors have greater financial or other resources
          than we
          do. In addition, we and other manufacturers of engineered high-end curtain
          walls
          compete with alternative methods of building construction. If these alternative
          building methods compete successfully against us, such competition could
          adversely affect us. Demand for our services is cyclical and vulnerable
          to
          economic downturns. If the economy weakens, then our revenues, profits
          and
          financial condition may deteriorate.
 
 **Government
          Regulation**
 
 China’s
          construction industry is heavily regulated by the national government.
          On
          November 1, 1997, the National Government of the PRC published the Construction
          Law of the PRC, Presidential Order No. 91, which is the basic construction
          law
          of China. This law outlines the basic requirements and rules for all
          construction activity in China. Underneath the National Government, the
          Ministry
          of Construction also writes laws. On March 14, 2001, the Ministry of
          Construction published Rule No. 87, which puts forth licensing requirements
          for
          all construction companies operating in China. The Ministry of Construction
          also
          writes specific standards for all different types of construction. The
          two
          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. 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.
  **Employees**
 
 As
          of
          December 31, 2006, we had 323 full-time employees and an additional 315
          part-time on-site employees. Substantially all of our employees are located
          in
          China. We believe that our relationship with our employees is good.
 
 We
          our
          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. In the last three years, Zhuhai
          contributed approximately $119,897, $106,280 and $72,462 for the years
          ended
          December 31, 2006, 2005 and 2004, respectively. We expect the amount of
          Zhuhai’s
          contribution to the government’s social insurance funds to increase in the
          future as we expand our workforce and operations.
 
 11
  **Item
          1A. Risk Factors**
 
 Any
          investment in our common stock involves a high degree of risk. Investors
          should
          carefully consider the risks described below and all of the information
          contained in this report before deciding whether to purchase our common
          stock.
          Our business, financial condition or results of operations could be materially
          adversely affected by these risks if any of them actually occur. Our shares
          of
          common stock are not currently listed or quoted for trading on any national
          securities exchange or national quotation system. If and when our common
          stock
          is traded, the trading price 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 our
          100%-owned subsidiary Full Art International, Ltd. (“Full Art”).
  **RISKS
          RELATED TO OUR OPERATIONS**
 
 **Because
          we depend on governmental agencies for a significant portion of our revenue,
          our
          inability to win or renew government contracts could harm our operations
          and
          significantly reduce or eliminate our profits.**
 
 Revenues
          from Chinese government contracts represented approximately 95% of our
          revenues
          for the year ended December 31, 2006. Our inability to win or renew Chinese
          government contracts could harm our operations and significantly reduce
          or
          eliminate our profits. Chinese government contracts are typically awarded
          through a regulated procurement process. Some Chinese government contracts
          are
          awarded to multiple competitors, causing increases in overall competition
          and
          pricing pressure. The competition and pricing pressure, in turn may require
          us
          to make sustained post-award efforts to reduce costs in order to realize
          revenues under these contracts. If we are not successful in reducing the
          amount
          of costs we anticipate, our profitability on these contracts will be negatively
          impacted. Finally, Chinese government clients can generally terminate or
          modify
          their contracts with us at their convenience.
 
 **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. We generally enter into three principal
          types of contracts with our clients: cost-plus-fee contracts, fixed-price
          contracts, and fixed-price contracts modified by incentive and penalty
          provisions. Approximately 90% of our sales are from fixed price contracts,
          including one percent that are modified by incentive and penalty provisions.
          The
          remaining 10% of our sales are originated from are cost-plus-fee contracts.
          Under fixed-price contracts, we receive a fixed price regardless of what
          our
          actual costs will be. Consequently, we realize a profit on fixed-price
          contracts
          only if we control our costs and prevent cost over-runs on the contracts.
          Under
          fixed-price contracts modified by incentive and penalty provisions, we
          are paid
          a fixed price that may be increased or decreased based on incentive and
          provisions in our contracts. Under cost-plus-fee contracts, which may be
          subject
          to contract ceiling amounts, we are reimbursed for allowable costs and
          fees,
          which may be fixed or performance-based. If our costs exceed the contract
          ceiling or are not allowable under the provisions of the contract or any
          applicable regulations, we may not be reimbursed for all our costs. Under
          each
          type of contract, if we are unable to estimate and control costs and/or
          project
          timelines, we may incur losses on our contracts, which may result in decreases
          in our operating margins and in a significant reduction or elimination
          of our
          profits.
 
 **If
          we fail to timely complete, miss a required performance standard or otherwise
          fail to adequately perform on a project, then we may incur a loss on that
          project, which may affect our overall profitability.**
 
 We
          may
          commit to a client that we will complete a project by a scheduled date.
          We may
          also commit that a project, when completed, will achieve specified performance
          standards. If the project is not completed by the scheduled date or subsequently
          fails to meet required performance standards, we may either incur significant
          additional costs or be held responsible for the costs incurred by the client
          to
          rectify damages due to late completion or failure to achieve the required
          performance standards. The uncertainty of the timing of a project can present
          difficulties in planning the amount of personnel needed for the project.
          If the
          project is delayed or canceled, we may bear the cost of an underutilized
          workforce that was dedicated to fulfilling the project. In addition, performance
          of projects can be affected by a number of factors beyond our control,
          including
          unavoidable delays from weather conditions, unavailability of vendor materials,
          changes in the project scope of services requested by clients or labor
          disruptions. In some cases, should we fail to meet required performance
          standards, we may also be subject to agreed-upon financial damages, which
          are
          determined by the contract. To the extent that these events occur, the
          total
          costs of the project could exceed our estimates and we could experience
          reduced
          profits or, in some cases, incur a loss on that project, which may affect
          our
          overall profitability.
  12
  **Our
          use of the “percentage-of-completion” method of accounting could result in
          reduction or reversal of previously recorded revenues and
          profits.**
 
 A
          substantial portion of our revenues and profits are measured and recognized
          using the “percentage-of-completion” method of accounting, which is discussed
          further in Note 2, “Summary Of Significant Accounting Policies” to our
“Financial Statements.” Our use of this method results in recognition of
          revenues and profits ratably over the life of a contract, based generally
          on the
          proportion of costs incurred to date to total costs expected to be incurred
          for
          the entire project. The effect of revisions to revenues and estimated costs
          is
          recorded when the amounts are known or can be reasonably estimated. Such
          revisions could occur in any period and their effects could be material.
          Although we have historically made reasonably reliable estimates of the
          progress
          towards completion of long-term engineering, program and construction management
          or construction contracts in process, the uncertainties inherent in the
          estimating process make it possible for actual costs to vary materially
          from
          estimates, including reductions or reversals of previously recorded revenues
          and
          profits.
 
 **Our
          future revenues depend on our ability to consistently bid and win new contracts
          and renew existing contracts and, therefore, our failure to effectively
          obtain
          future contracts could adversely affect our profitability.**
 
 Our
          future revenues and overall results of operations require us to successfully
          bid
          on new contracts and renew existing contracts. Contract proposals and
          negotiations are complex and frequently involve a lengthy bidding and selection
          process, which is affected by a number of factors, such as market conditions,
          financing arrangements and required governmental approvals. If negative
          market
          conditions arise, or if we fail to secure adequate financial arrangements
          or the
          required governmental approval, we may not be able to pursue particular
          projects, which could adversely affect our profitability.
 
 **Our
          results could be adversely impacted by product quality and
          performance.**
 
 We
          manufacture or install products based on specific requirements of each
          of our
          customers. We believe that future orders of our products or services will
          depend
          on our ability to maintain the performance, reliability and quality standards
          required by our customers. If our products or services have performance,
          reliability or quality problems, we may experience delays in the collection
          of
          accounts receivables, higher manufacturing or installation costs, additional
          warranty and service expense, and reduced, cancelled or discontinued orders.
          Additionally, performance, reliability or quality claims from our customers,
          with or without merit, could result in costly and time-consuming litigation
          that
          could require significant time and attention of management and involve
          significant monetary damages.
 
 **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** .
 
 Our
          business is dependent on the prices and supply of steel and aluminum, which,
          along with glass, are the principal raw materials used in our products.
          The
          steel and aluminum industries are highly cyclical in nature, and steel
          and
          aluminum prices have been volatile in recent years and may remain volatile
          in
          the future. Our purchases of aluminum ranged from approximately $1.00 to
          $1.40
          per pound between December 15, 2005 and 2006, a fluctuation of approximately
          40%, and from $0.60 to $1.40 per pound during the five years ended December
          15,
          2006, a fluctuation of approximately 133%. The price we paid for steel
          also
          fluctuated. For the year ended December 31, 2006, prices for seamless steel
          tubes ranged from approximately RMB 4,730 to 5,700 RMB per ton (a difference
          of
          approximately 21%), prices for angled steel ranged from approximately RMB
          3,143
          to RMB 3,465 per ton (a difference of approximately 10%), and prices for
          steel
          plates ranged from approximately RMB 3,332 to RMB 4,688 per ton (a difference
          of
          approximately 41%).
  13
  Steel
          and
          aluminum prices are influenced by numerous factors beyond our control,
          including
          general economic conditions, competition, labor costs, production costs,
          import
          duties and other trade restrictions. In the past there have been unusually
          rapid
          and significant increases in steel and aluminum prices and severe shortages
          in
          the steel and aluminum industries due in part to increased demand from
          China’s
          expanding economy and high energy prices. We do not have any long-term
          contracts
          for the purchase of steel and aluminum and normally do not maintain inventories
          of steel and aluminum in excess of our current production requirements.
          We can
          give you no assurance that steel and aluminum will remain available or
          that
          prices will not continue to be volatile. If the available supply of steel
          and
          aluminum declines, we could experience price increases that we are not
          able to
          pass on to our customers, a deterioration of service from our suppliers
          or
          interruptions or delays that may cause us not to meet delivery schedules
          to our
          customers. Any of these problems could adversely affect our results of
          operations and financial condition.
 
 **Our
          business is characterized by long periods for collection from our customers
          and
          short periods for payment to our suppliers, the combination of which may
          cause
          us to have liquidity problems.**
 
 We
          experience an average accounts settlement period ranging from three months
          to as
          high as one year from the time we provide services to the time we receive
          payment from our customers. In contrast, we typically need to place certain
          deposit with our suppliers on a portion of the purchase price in advance
          and for
          some suppliers we must maintain a deposit for future orders. We are typically
          paid by the contractor the entire amount due to us for our services and
          products
          once the entire project is completed, which could be significantly after
          we
          complete the curtain wall portion of the project. National policy requires
          the
          contractor to pay 85% of our total contract value to us before the project
          is
          completed, and the remainder may be paid when the contractor completes
          the
          entire project. 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. Many of our competitors have greater financial or other resources
          than
          we. 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 us.
  14
  **Our
          business activities may require our employees to travel to and work in
          high
          security risk countries, which may result in employee death or injury,
          repatriation costs or other unforeseen costs.**
 
 As
          a
          multinational company, our employees often travel to and work in high security
          risk countries around the world that are undergoing political, social and
          economic upheavals resulting in war, civil unrest, criminal activity or
          acts of
          terrorism. For example, we will have had approximately 150 different employees
          working in Qatar from time to time and approximately 12 employees working
          in
          Vietnam from time to time. We have also had employees in Dubai. As a result,
          we
          may be subject to costs related to employee death or injury, repatriation
          or
          other unforeseen circumstances.
 
 **Force
          majeure events, including natural disasters and terrorists’ actions have
          negatively impacted and could further negatively impact the economies in
          which
          we operate, which may affect our financial condition, results of operations
          or
          cash flows.**
 
 *Force
          majeure* events,
          including natural disasters, such as Typhoon Pai Bi An that affected the
          Southeastern China Coast in August 2006 and terrorist attacks, such as
          those
          that occurred in New York and Washington, D.C. on September 11, 2001, could
          negatively impact the economies in which we operate.
 
 We
          typically remain obligated to perform our services after a terrorist action
          or
          natural disaster unless the contract contains a *force
          majeure* clause
          that relieves us of our contractual obligations in such an extraordinary
          event.
          If we are not able to react quickly to *force
          majeure* ,
          our
          operations may be affected significantly, which would have a negative impact
          on
          our financial condition, results of operations or cash flows.
  ***We
          may suffer as a result of product liability or defective
          products.***
 
 We
          may
          produce products which injure or kill individuals despite proper testing.
          Existing PRC laws and regulations do not require us to maintain third party
          liability insurance to cover product liability claims. 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.
 
 **We
          are dependent on certain key personnel and loss of these key personnel
          could
          have a material adverse effect on our business, financial condition and
          results
          of operations.**
 
 Our
          success is, to a certain extent, attributable to the management, sales
          and
          marketing, and operational expertise of key personnel. Luo Ken Yi, our
          Chief
          Executive Officer and Chief Operating Officer, Tang Nianzhong, our Vice
          General
          Manager and Ye Ning, our Vice General Manager perform key functions in
          the
          operation of our business. There can be no assurance that we will be able
          to
          retain these managers after the term of their employment contracts expire.
          The
          loss of these managers could have a material adverse effect upon our business,
          financial condition, and results of operations. We must attract, recruit
          and
          retain a sizeable workforce of technically competent employees. Our ability
          to
          effectively implement our business strategy will depend upon, among other
          factors, the successful recruitment and retention of additional highly
          skilled
          and experienced management and other key personnel. We cannot assure you
          that we
          will be able to hire or retain such employees.
  15
  **We
          cannot guarantee the protection of our intellectual property rights and
          if
          infringement or counterfeiting of our intellectual property rights occurs,
          our
          reputation and business may be adversely affected.**
 
 Our
          success depends in part on our ability to preserve our patents and trade
          secrets
          and operate without infringing the proprietary rights of third parties.
          We
          currently own approximately 32 patents in China. If we fail to maintain
          our
          patents and trade secret protections, we may not be able to prevent third
          parties from using our proprietary rights. In addition, our issued patents
          may
          not contain claims sufficiently broad to protect us against third parties
          with
          similar technologies or products or provide us with any competitive advantage.
          If a third party initiates litigation regarding our patents, and is successful,
          a court could revoke our patents or limit the scope of coverage for those
          patents. We also rely upon trade secrets, proprietary know-how and continuing
          technological innovation to remain competitive. We attempt to protect this
          information with security measures such as the use of confidentiality agreements
          with our employees, consultants and corporate collaborators. It is possible
          that
          these individuals will breach these agreements and that any remedies for
          a
          breach will be insufficient to allow us to recover our costs. Furthermore,
          our
          trade secrets, know-how and other technology may otherwise become known
          or be
          independently discovered by our competitors.
  Furthermore,
          we have registered and applied for registration of our trademarks in the
          PRC,
          where we have a substantial business presence, to protect the reputation
          of our
          products. Our products are sold under these trademarks. There is no assurance
          that there will not be any infringement of our brand name or other registered
          trademarks or counterfeiting of our products in the future. Should any
          such
          infringement or counterfeiting occur, our reputation and business may be
          adversely affected. We may also incur significant expenses and substantial
          amounts of time and effort to enforce our intellectual property rights
          in the
          future. Such diversion of our resources may adversely affect our existing
          business and future expansion plans.
 
 **We
          enjoy certain preferential tax concessions and loss of these preferential
          tax
          concessions will cause our tax liabilities to increase and our profitability
          to
          decline.**
 
 We
          enjoy
          preferential tax concessions in the PRC as a high-tech enterprise. Pursuant
          to
          the State Council’s Regulations on Encouraging Investment in and Development, we
          were granted a reduction in our income tax rate to a rate of 15%. In addition,
          there is no assurance that the preferential tax treatment in the PRC will
          remain
          unchanged and effective. Our tax liabilities will increase and our profits
          may
          accordingly decline if our reduced income tax rate is no longer applicable
          and/or the tax relief on investment in PRC is no longer available.
  Additionally,
          the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007.
          Under the EIT Law, effective January 1, 2008, China will adopt a uniform
          tax
          rate of 25.0% for all enterprises (including foreign-invested enterprises)
          and
          cancel several tax incentives enjoyed by foreign-invested enterprises.
          However,
          for foreign-invested enterprises established before the promulgation of
          the EIT
          Law, a five-year transition period is provided during which reduced rates
          will
          apply but gradually be phased out. Since the PRC government has not announced
          implementation measures for the transitional policy with regards to such
          preferential tax rates, we cannot reasonably estimate the financial impact
          of
          the new tax law to us at this time. 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.
  **Our
          actual results could differ from the estimates and assumptions that we
          use to
          prepare our financial statements, which may significantly reduce or eliminate
          our profits.**
 
 To
          prepare financial statements in conformity with generally accepted accounting
          principles, management is required to make estimates and assumptions as
          of the
          date of the financial statements, which affect the reported values of assets
          and
          liabilities and revenues and expenses and disclosures of contingent assets
          and
          liabilities. Areas requiring significant estimates by our management include:
 
 ·
                the
                    application of the “percentage-of-completion” method of accounting, and
                    revenue recognition on contracts, change orders, and contract
                    claims;
  16
  ·
                provisions
                    for uncollectible receivables and customer claims and recoveries
                    of costs
                    from subcontractors, vendors and
                    others;
 
 ·
                provisions
                    for income taxes and related valuation
                    allowances;
 
 ·
                value
                    of goodwill and recoverability of other intangible assets;
                    and
 
 ·
                accruals
                    for estimated liabilities, including litigation and insurance
                    reserves.
 
 Our
          actual results could differ from those estimates, which may significantly
          reduce
          or eliminate our profits.
 
 **RISKS
          RELATED TO US DOING BUSINESS IN CHINA**
 
 **All
          of our assets are located in China and substantially all of our revenues
          are
          derived from our operations in China, and changes in the political and
          economic
          policies of the PRC government could have a significant impact upon the
          business
          we may be able to conduct in the PRC and the results of operations and
          financial
          condition.**
 
 Our
          business operations may be adversely affected by the current and future
          political environment in the PRC. The PRC has operated as a socialist state
          since the mid-1900s and is controlled by the Communist Party of China.
          The
          Chinese government exerts substantial influence and control over the manner
          in
          which we must conduct our business activities. The PRC has only permitted
          provincial and local economic autonomy and private economic activities
          since
          1988. The government of the PRC has exercised and continues to exercise
          substantial control over virtually every sector of the Chinese economy,
          particularly the pharmaceutical industry, through regulation and state
          ownership. Our ability to operate in China may be adversely affected by
          changes
          in Chinese laws and regulations, including those relating to taxation,
          import
          and export tariffs, raw materials, environmental regulations, land use
          rights,
          property and other matters. Under current leadership, the government of
          the PRC
          has been pursuing economic reform policies that encourage private economic
          activity and greater economic decentralization. There is no assurance,
          however,
          that the government of the PRC will continue to pursue these policies,
          or that
          it will not significantly alter these policies from time to time without
          notice.
 
 **Failure
          to comply with the United States Foreign Corrupt Practices Act could subject
          us
          to penalties and other adverse consequences.**
 
 We
          are
          subject to the United States Foreign Corrupt Practices Act, which generally
          prohibits United States companies from engaging in bribery or other prohibited
          payments to foreign officials for the purpose of obtaining or retaining
          business. In addition, we are required to maintain records that accurately
          and
          fairly represent our transactions and have an adequate system of internal
          accounting controls. Foreign companies, including some that may compete
          with us,
          are not subject to these prohibitions, and therefore may have a competitive
          advantage over us. Corruption, extortion, bribery, pay-offs, theft and
          other
          fraudulent practices occur from time-to-time in the PRC, particularly in
          our
          industry since it deals with contracts from the Chinese Government, and
          our
          executive officers and employees have not been subject to the United States
          Foreign Corrupt Practices Act prior to the completion of the Share Exchange.
          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;  17
  ·
              revoking
                  our business and other licenses;  ·
              requiring
                  that we restructure our ownership or operations;
                  and  ·
              requiring
                  that we discontinue any portion or all of our
                  business.  **Inflation
          in the PRC could negatively affect our profitability and
          growth.**
 
 While
          the
          PRC economy has experienced rapid growth, such growth has been uneven among
          various sectors of the economy and in different geographical areas of the
          country. Rapid economic growth can lead to growth in the money supply and
          rising
          inflation. During the past decade, the rate of inflation in China has been
          as
          high as approximately 20% and China has experienced deflation as low as
          approximately minus 2%. If prices for our products and services rise at
          a rate
          that is insufficient to compensate for the rise in the costs of supplies
          such as
          raw materials, it may have an adverse effect on our profitability. In order
          to
          control inflation in the past, the PRC government has imposed controls
          on bank
          credits, limits on loans for fixed assets and restrictions on state bank
          lending. The implementation of such policies may impede economic growth.
          In
          October 2004, the People’s Bank of China, the PRC’s central bank, raised
          interest rates for the first time in nearly a decade and indicated in a
          statement that the measure was prompted by inflationary concerns in the
          Chinese
          economy. 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.
 
 **Recent
          PRC regulations relating to acquisitions of PRC companies by foreign entities
          may create regulatory uncertainties that could restrict or limit our ability
          to
          operate, including our ability to pay dividends.**
 
 The
          PRC
          State Administration of Foreign Exchange, or SAFE, issued a public notice
          in
          January 2005 concerning foreign exchange regulations on mergers and acquisitions
          in China. The public notice states that if an offshore company controlled
          by PRC
          residents intends to acquire a PRC company, such acquisition will be subject
          to
          strict examination by the relevant foreign exchange authorities. The public
          notice also states that the approval of the relevant foreign exchange
          authorities is required for any sale or transfer by the PRC residents of
          a PRC
          company’s assets or equity interests to foreign entities for equity interests or
          assets of the foreign entities.
 
 In
          April
          2005, SAFE issued another public notice further explaining the January
          notice.
          In accordance with the April notice, if an acquisition of a PRC company
          by an
          offshore company controlled by PRC residents has been confirmed by a Foreign
          Investment Enterprise Certificate prior to the promulgation of the January
          notice, the PRC residents must each submit a registration form to the local
          SAFE
          branch with respect to their respective ownership interests in the offshore
          company, and must also file an amendment to such registration if the offshore
          company experiences material events, such as changes in the share capital,
          share
          transfer, mergers and acquisitions, spin-off transaction or use of assets
          in
          China to guarantee offshore obligations. The April notice also provides
          that
          failure to comply with the registration procedures set forth therein may
          result
          in restrictions on our PRC resident shareholders and subsidiaries. Pending
          the
          promulgation of detailed implementation rules, the relevant government
          authorities are reluctant to commence processing any registration or application
          for approval required under the SAFE notices.
 
 In
          addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
          State-Owned Assets Supervision and Administration Commission of the State
          Council, State Administration of Taxation, State Administration for Industry
          and
          Commerce, China Securities Regulatory Commission and SAFE, amended and
          released
          the Provisions for Foreign Investors to Merge and Acquire Domestic Enterprises,
          new foreign-investment rules which took effect September 8, 2006, superseding
          much, but not all, of the guidance in the prior SAFE circulars. These new
          rules
          significantly revise China’s regulatory framework governing onshore-offshore
          restructurings and how foreign investors can acquire domestic enterprises.
          These
          new rules signify greater PRC government attention to cross-border merger,
          acquisition and other investment activities, by confirming MOFCOM as a
          key
          regulator for issues related to mergers and acquisitions in China and requiring
          MOFCOM approval of a broad range of merger, acquisition and investment
          transactions. Further, the new rules establish reporting requirements for
          acquisition of control by foreigners of companies in key industries, and
          reinforce the ability of the Chinese government to monitor and prohibit
          foreign
          control transactions in key industries.
  18
  These
          new
          rules may significantly affect the means by which offshore-onshore
          restructurings are undertaken in China in connection with offshore private
          equity and venture capital financings, mergers and acquisitions. It is
          expected
          that such transactional activity in China in the near future will require
          significant case-by-case guidance from MOFCOM and other government authorities
          as appropriate. It is anticipated that application of the new rules will
          be
          subject to significant administrative interpretation, and we will need
          to
          closely monitor how MOFCOM and other ministries apply the rules to ensure
          its
          domestic and offshore activities continue to comply with PRC law. Given
          the
          uncertainties regarding interpretation and application of the new rules,
          we may
          need to expend significant time and resources to maintain
          compliance.
 
 It
          is
          uncertain how our business operations or future strategy will be affected
          by the
          interpretations and implementation of the SAFE notices and new rules. Our
          business operations or future strategy could be adversely affected by the
          SAFE
          notices and the new rules. For example, we may be subject to more stringent
          review and approval process with respect to our foreign exchange activities.
 
 **Any
          recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
          widespread public health problem, in the PRC could adversely affect our
          operations.**
 
 A
          renewed
          outbreak of Severe Acute Respiratory Syndrome, Avian Flu or another widespread
          public health problem in China, where all of our manufacturing facilities
          are
          located and where all of our sales occur, could have a negative effect
          on our
          operations. Such an outbreak could have an impact on our operations as
          a result
          of:
 
 ·
              quarantines
                  or closures of some of our manufacturing facilities, which would
                  severely
                  disrupt our operations,  ·
              the
                  sickness or death of our key officers and employees,
                  and  ·
              a
                  general slowdown in the Chinese economy.  Any
          of
          the foregoing events or other unforeseen consequences of public health
          problems
          could adversely affect our operations.
 
 **We
          may have difficulty establishing adequate management, legal and financial
          controls in the PRC.**
 
 PRC
          companies have historically not adopted a Western style of management and
          financial reporting concepts and practices, which includes strong corporate
          governance, internal controls and, computer, financial and other control
          systems. In addition, we may have difficulty in hiring and retaining a
          sufficient number of qualified employees to work in the PRC. As a result
          of
          these factors, we may experience difficulty in establishing management,
          legal
          and financial controls, collecting financial data and preparing financial
          statements, books of account and corporate records and instituting business
          practices that meet Western standards. Therefore, we may, in turn, experience
          difficulties in implementing and maintaining adequate internal controls
          as
          required under Section 404 of the Sarbanes-Oxley Act of 2002. This may
          result in
          significant deficiencies or material weaknesses in our internal controls
          which
          could impact the reliability of our financial statements and prevent us
          from
          complying with SEC rules and regulations and the requirements of the
          Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of
          compliance could have a materially adverse effect on our business.
 
 **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, almost all 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.
  19
 **RISKS
          RELATED TO OUR CAPITAL STRUCTURE**
 
 **There
          is no current trading market for** **our** **common stock, and there is no assurance of an established public trading
          market,
          which would adversely affect the ability of** **our** **investors to sell their securities in the public market.**
  Our
          common stock is not currently listed or quoted for trading on any national
          securities exchange or national quotation system. We are applying for the
          listing of our common stock on the American Stock Exchange (“AMEX”) in the
          future. There is no guarantee that the American Stock Exchange, or any
          other
          exchange or quotation system, will permit our shares to be listed and traded.
          If
          we fail to obtain a listing on the American Stock Exchange, we may seek
          quotation on the OTC Bulletin Board. The NASD has enacted changes that
          limit
          quotations on the OTC Bulletin Board to securities of issuers that are
          current
          in their reports filed with the Securities and Exchange Commission. The
          effect
          on the OTC Bulletin Board of these rule changes and other proposed changes
          cannot be determined at this time. The OTC Bulletin Board is an inter-dealer,
          over-the-counter market that provides significantly less liquidity than
          the
          NASDAQ Global Market or AMEX. Quotes for stocks included on the OTC Bulletin
          Board are not listed in the financial sections of newspapers as are those
          for
          the NASDAQ Global Market or AMEX. Therefore, prices for securities traded
          solely
          on the OTC Bulletin Board may be difficult to obtain and holders of common
          stock
          may be unable to resell their securities at or near their original offering
          price or at any price.
 
 **Shares
          eligible for future sale may adversely affect the market price of our common
          stock, as the future sale of a substantial amount of outstanding stock
          in the
          public marketplace could reduce the price of our common
          stock.**
  Pursuant
          to the terms of the Share Exchange, we agreed to file a registration statement
          with the Securities and Exchange Commission to register a total of 2,320,875
          shares of common stock issued in an equity financing that was conducted
          in
          connection with the Share Exchange that closed on October 17, 2006. The
          investors in the Private Placement also entered into a lock-up agreement
          pursuant to which they agreed not to sell their shares until our common
          stock
          begins to be traded on the New York Stock Exchange, American Stock Exchange,
          NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board,
          after
          which their shares will automatically be released from the lock up on a
          monthly
          basis. We also agreed to register the IR Securities, which consists of
          100,000
          shares of our common stock and common stock underlying a five-year warrant
          to
          purchase 232,088 shares, in the registration statement filed in connection
          with
          the Private Placement.
  We
          also
          agreed to register all of the 2,275,000 shares of common stock held by
          our
          shareholders who were shareholders immediately prior to the Share Exchange.
          Because we issued shares to these shareholders that were issued shares
          while we
          were a “blank check” shell company with no operations, these shareholders are
          considered to be promoters or affiliates. It should be noted that these
          shares
          may not be sold by these promoters or affiliates, or their transferees,
          pursuant
          to Rule 144 of the Securities Act, regardless of technical compliance with
          the
          rule. Any such resale transaction under Rule 144 would appear to be designed
          to
          distribute or redistribute such shares to the public without coming within
          the
          registration requirements of the Securities Act. Therefore, these promoters
          or
          affiliates, or their transferees, can only resell their shares through
          a
          registration statement filed under the Securities Act. Of the 2,275,000
          shares
          held by our shareholders prior to the Share Exchange, we agreed to register
          1,312,675 shares in the registration statement filed in connection with
          the
          Private Placement. We agreed to register the remaining 962,325 shares,
          which are
          beneficially owned by affiliates of WestPark Capital, Inc., in a subsequent
          registration statement filed by us in a subsequent registration statement
          that
          we agreed to file by May 23, 2007, which is six months and ten days after
          the
          date on which we first filed the registration statement to register the
          shares
          issued in the Private Placement. We also agreed to register 2,000,000 shares
          of
          our common stock that were issued to FirstAlliance Financial Group, Inc.,
          which
          received its shares as a designee of the sole shareholder of Full Art at
          the
          closing of the Share Exchange. The shares will be registered in the registration
          statement that is filed to register the shares held by the affiliates of
          WestPark. All of the shares included in an effective registration statement
          as
          described above may be freely sold and transferred except if subject to
          a lock
          up agreement.
  20
 
 Additionally,
          following the Share Exchange, the former stockholder of Full Art may be
          eligible
          to sell all or some of our shares of common stock by means of ordinary
          brokerage
          transactions in the open market pursuant to Rule 144, promulgated under
          the
          Securities Act (“Rule 144”), subject to certain limitations. In general,
          pursuant to Rule 144, a stockholder (or stockholders whose shares are
          aggregated) who has satisfied a one-year holding period may, under certain
          circumstances, sell within any three-month period a number of securities
          which
          does not exceed the greater of 1% of the then outstanding shares of common
          stock
          or the average weekly trading volume of the class during the four calendar
          weeks
          prior to such sale. As of the closing of the Share Exchange, 1% of our
          issued
          and outstanding shares of common stock was approximately 500,000 shares.
          Rule
          144 also permits, under certain circumstances, the sale of securities,
          without
          any limitations, by a non-affiliate that has satisfied a two-year holding
          period. Any substantial sale of common stock pursuant to any resale report
          or
          Rule 144 may have an adverse effect on the market price of our common stock
          by
          creating an excessive supply.
  **Following
          the Share Exchange, the former principal stockholder of Full Art has significant
          influence over us.**
  Our largest
          shareholder, KGE Group, Limited, or KGE Group, beneficially owns or controls
          approximately 75.5 %
          of our outstanding shares as of the close of the Share Exchange. Luo
          Ken
          Yi ,
          who is our Chief
          Executive Officer, Chief
          Operating Officer ,
          and
          Chairman of the Board, and Ye Ning, who is our Vice
          General Manager and a director, are directors of KGE Group. In addition, Luo
          Ken
          Yi and Ye
          Ning own approximately 77.0% and 2.5%, respectively, respectively, of KGE
          Group’s issued and outstanding shares. As a result of its holding, KGE Group
          has
          controlling influence in determining the outcome of any corporate transaction
          or
          other matters submitted to our shareholders for approval, including mergers, consolidations and the sale
          of all
          or substantially all of our assets, election of directors, and other significant
          corporate actions. KGE Group also has the power to prevent or cause a change
          in
          control. In addition, without the consent of KGE Group, we could be prevented
          from entering into transactions that could be beneficial to us. The interests
          of
          KGE Group, and its control persons, may differ from the interests of our shareholders.
  **We** **recognized a charge to our earnings as a result of the Share Exchange and
          also
          may not be able to achieve the benefits** **we** **expect
          to result from the Share Exchange.**
  On
          August
          21, 2006, we entered into the Exchange Agreement, as amended on October
          17,
          2006, with KGE Group, the sole shareholder of Full Art, pursuant to which
          we
          agreed to acquire 100% of the issued and outstanding securities of Full
          Art in
          exchange for shares of our common stock. On October 17, 2006, the Share
          Exchange
          closed, Full Art became our wholly-owned subsidiary, our sole business
          operations became that of Full Art, and the management and directors of
          Full Art
          became the management and directors of us.
 
 We
          may
          not realize the benefits that we hoped to receive as a result of the Share
          Exchange, which includes:
 
 ·
              access
                  to the capital markets of the United
                  States;  ·
              the
                  increased market liquidity expected to result from exchanging stock
                  in a
                  private company for securities of a public company that may eventually
                  be
                  traded;  ·
              the
                  ability to use registered securities to make acquisition of assets
                  or
                  businesses;  ·
              increased
                  visibility in the financial community;  ·
              enhanced
                  access to the capital markets;  ·
              improved
                  transparency of operations; and  ·
              perceived
                  credibility and enhanced corporate image of being a publicly traded
                  company.  There
          can
          be no assurance that any of the anticipated benefits of the Share Exchange
          will
          be realized in respect to our new business operations. In addition, the
          attention and effort devoted to achieving the benefits of the Share Exchange
          and
          attending to the obligations of being a public company, such as reporting
          requirements and securities regulations, could significantly divert management’s
          attention from other important issues, which could materially and adversely
          affect our operating results or stock price in the future.
  21
  In
          addition, we issued 2,000,000 shares of common stock to FirstAlliance Financial
          Group, Inc. upon closing of the Share Exchange, and the shares were accounted
          as
          a non-reoccurring general and administrative expense and, as a result,
          reduced
          our earnings for the quarter and year ended December 31, 2006. As a result
          of
          the reduction in earnings, our results of operation for the quarter and
          year
          ended December 31, 2006 suffered and the value of our common stock and
          your
          investment may fall.
 
 **If
          we fail to maintain effective internal controls over financial reporting,
          the
          price of our common stock may be adversely affected.**
 
 Our
          internal control over financial reporting may have weaknesses and conditions
          that need to be addressed, the disclosure of which may have an adverse
          impact on
          the price of our common stock. We are required to establish and maintain
          appropriate internal controls over financial reporting. Failure to establish
          those controls, or any failure of those controls once established, could
          adversely impact our public disclosures regarding our business, financial
          condition or results of operations. In addition, management’s assessment of
          internal controls over financial reporting may identify weaknesses and
          conditions that need to be addressed in our internal controls over financial
          reporting or other matters that may raise concerns for investors. 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.
 
 **Our
          officers and directors have no experience in public company reporting and
          limited experience in financial accounting, which could impair our ability
          to
          satisfy public company filing requirements and increase our securities
          compliance costs.**
 
 Our
          officers and directors do not have any prior 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.
 
 **Standards
          for compliance with Section 404 of the Sarbanes-Oxley Act Of 2002 are uncertain,
          and if we fail to comply in a timely manner, our business could be harmed
          and
          our stock price could decline.**
  Rules
          adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of
          2002
          require annual assessment of our internal control over financial reporting,
          and
          attestation of this assessment by our company’s independent registered public
          accountants. The SEC extended the compliance dates for non-accelerated
          filers,
          as defined by the SEC. Accordingly, we believe that the annual assessment
          of our
          internal controls requirement will first apply to our annual report for
          the 2007
          fiscal year and the attestation requirement of management’s assessment by our
          independent registered public accountants will first apply to our annual
          report
          for the 2008 fiscal year. The standards that must be met for management
          to
          assess the internal control over financial reporting as effective are new
          and
          complex, and require significant documentation, testing and possible remediation
          to meet the detailed standards. We may encounter problems or delays in
          completing activities necessary to make an assessment of our internal control
          over financial reporting. In addition, the attestation process by our
          independent registered public accountants is new and we may encounter problems
          or delays in completing the implementation of any requested improvements
          and
          receiving an attestation of our assessment by our independent registered
          public
          accountants. If we cannot assess our internal control over financial reporting
          as effective, or our independent registered public accountants are unable
          to
          provide an unqualified attestation report on such assessment, investor
          confidence and share value may be negatively impacted.
  22
  **Compliance
          with changing regulation of corporate governance and public disclosure
          will
          result in additional expenses.**
  Changing
          laws, regulations and standards relating to corporate governance and public
          disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
          regulations, have created uncertainty for public companies and significantly
          increased the costs and risks associated with accessing the public markets
          and
          public reporting. Our management team will need to invest significant management
          time and financial resources to comply with both existing and evolving
          standards
          for public companies, which will lead to increased general and administrative
          expenses and a diversion of management time and attention from revenue
          generating activities to compliance activities.
 
 **Our** **common
          stock may be considered a “penny stock,” and thereby be subject to additional
          sale and trading regulations that may make it more difficult to
          sell.**
  Our
          common stock, which is not currently listed or quoted for trading, may
          be
          considered to be a “penny stock” if it does not qualify for one of the
          exemptions from the definition of “penny stock” under Section 3a51-1 of the
          Securities Exchange Act of 1934, as amended (the “Exchange Act”) once, and
          if, it starts trading. Our common stock may be a “penny stock” if it meets one
          or more of the following conditions (i) the stock trades at a price less
          than
          $5.00 per share; (ii) it is NOT traded on a “recognized” national exchange;
          (iii) it is NOT quoted on the Nasdaq Capital Market, or even if so, has
          a price
          less than $5.00 per share; or (iv) is issued by a company that has been
          in
          business less than three years with net tangible assets less than $5
          million.
  The
          principal result or effect of being designated a “penny stock” is that
          securities broker-dealers participating in sales of our common stock will
          be
          subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
          promulgated under the Exchange Act. For example, Rule 15g-2 requires
          broker-dealers dealing in penny stocks to provide potential investors with
          a
          document disclosing the risks of penny stocks and to obtain a manually
          signed
          and dated written receipt of the document at least two business days before
          effecting any transaction in a penny stock for the investor’s account. Moreover,
          Rule 15g-9 requires broker-dealers in penny stocks to approve the account
          of any
          investor for transactions in such stocks before selling any penny stock
          to that
          investor. This procedure requires the broker-dealer to (i) obtain from
          the
          investor information concerning his or her financial situation, investment
          experience and investment objectives; (ii) reasonably determine, based
          on that
          information, that transactions in penny stocks are suitable for the investor
          and
          that the investor has sufficient knowledge and experience as to be reasonably
          capable of evaluating the risks of penny stock transactions; (iii) provide
          the
          investor with a written statement setting forth the basis on which the
          broker-dealer made the determination in (ii) above; and (iv) receive a
          signed
          and dated copy of such statement from the investor, confirming that it
          accurately reflects the investor’s financial situation, investment experience
          and investment objectives. Compliance with these requirements may make
          it more
          difficult and time consuming for holders of our common stock to resell
          their
          shares to third parties or to otherwise dispose of them in the market or
          otherwise.
 
 **The
          ability of our Chinese operating subsidiaries to pay dividends may be restricted
          due to** **foreign
          exchange control regulations of China.**
 
 The
          ability of our Chinese operating subsidiaries to pay dividends may be restricted
          due to the foreign exchange control policies and availability of cash balance
          of
          the Chinese operating subsidiaries. Because substantially all of our operations
          are conducted in China and a majority of our revenues are generated in
          China,
          all of our revenue being earned and currency received are denominated in
          Renminbi (RMB). RMB is subject to the exchange control regulation in China,
          and,
          as a result, we may unable to distribute any dividends outside of China
          due to
          PRC exchange control regulations that restrict our ability to convert RMB
          into
          US Dollars.
 
 **We** **do not foresee paying cash dividends in the foreseeable
          future.**
  We
          do not
          plan to declare or pay any cash dividends on our shares of common stock
          in the
          foreseeable future and we currently intend to retain any future earnings
          for
          funding growth. As a result, you should not rely on an investment in our
          securities if you require dividend income. Capital appreciation, if any,
          of our
          shares may be your sole source of gain for the foreseeable future. Moreover,
          you
          may not be able to resell your shares in our company at or above the price
          you
          paid for them.
 
 23
  **Item
          1B.  Unresolved Staff Comments**
 
 Not
          applicable.
 
 **Item
          2. Properties**
 
 We
          have
          offices and processing factories in six cities in China. All buildings
          and land
          are leased. The leases end around 2010, and we have the right to renew.
          The
          central office is in Zhuhai, where the majority of design and engineering
          staff
          are located. The Beijing and Shanghai offices have smaller design teams
          as well.
          All offices are sales centers for the area. The three factories are used
          for
          further processing certain curtain wall components before they are shipped
          to
          the construction site.
 
 *Zhuhai*Jiuzhou
                      Avenue, 105 West Baishi Road
                  
                  1,080
                      square meters (office)1,700
                      square meters (factory)*Beijing*Jianwei
                      Building Room 302 –
                      305, 66
                      South Lishi Road
                  
                  393
                      square meters (office)Caiyu
                      Economic Development Zone, East Part, Caiyu Town,
                    Daxing
                      District, Beijing
                  
                  3,380
                      Square meters (factory)*Shanghai*Room
                      701 –
                      702, Yataiqiye Building, Zhaojiabin Road No. 333
                  
                  451
                      square meters (office)Tairi
                      Town, Fengxian District, Shangha
                  
                  8,811
                      square meters (factory)*Nanjing*Dongpei
                      Building Room 1509, 199 Jianye Road
                  
                  149
                      square meters (office)*Guangzhou*Chengjian
                      Building, 10thFloor, West Tiyu Road
                  
                  231
                      square meters (office)*Hangzhou*Xiandai
                      Yayuan No. 21, Block 2, Room 204, Chaowang Road
                  
                  158
                      square meters (office)
  **Item
          3. Legal Proceedings**
 
 We
          are
          not a party to any material legal proceedings.
 
 **Item
          4. Submission of Matters to a Vote of Security Holders**
 
 No
          matters were submitted to the security holders to be voted on during the
          fourth
          quarter of 2006.
 
 24


**PART
      II.**





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





There
      has
      never been a public trading market for our common stock and our shares of common
      stock are not currently listed or quoted for trading on any national securities
      exchange or national quotation system. We are applying for the listing of our
      common stock on the American Stock Exchange. As of April 1,
      2007 ,
      we had
      71 registered shareholders.





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





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




·
            Our
                financial position and results of
                operations;




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




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




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




·
            The
                development of litigation against
                us;




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




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




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




·
            Changes
                in interest rates;




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




·
            Investor
                perceptions of our company; and




·
            General
                economic and other national
                conditions.




**Dividend
      Policy**





We
      do not
      expect to declare or pay any cash dividends on our common stock in the
      foreseeable future, and we currently intend to retain future earnings, if any,
      to finance the expansion of our business. The decision whether to pay cash
      dividends on our common stock will be made by our board of directors, in their
      discretion, and will depend on our financial condition, operating results,
      capital requirements and other factors that the board of directors considers
      significant. We paid cash dividends of $1,576,796, $2,571,396, and $4,108,226
      during the years ended December 31, 2006, 2005, and 2004, respectively.





25




**Recent
      sales of unregistered securities**





On
      October 17, 2006, pursuant to the terms of the Exchange Agreement entered into
      between us, Full Art International, Ltd. (“Full Art”) and the sole shareholder
      of Full Art (as described in Item 2.01 above), we issued 45,304,125 shares
      of
      common stock to the shareholder, which is KGE Group, Limited, and its designees
      in exchange for all of the issued and outstanding securities of Full Art. The
      securities were offered and issued to KGE Group and its designees in reliance
      upon exemptions from registration pursuant to Section 4(2) under the Securities
      Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of KGE Group
      and its designees qualified as an accredited investor (as defined by Rule 501
      under the Securities Act of 1933, as amended).





On
      October 17, 2006, immediately following the closing of the Share Exchange,
      we
      received gross proceeds of $3,713,400 in a private placement transaction.
      Pursuant to subscription agreements entered into with the investors, we sold
      an
      aggregate of 2,320,875 shares of our common stock at a price of $1.60 per share.
      We agreed to file a registration statement covering the common stock sold in
      the
      private placement within 30 days of the closing of the Share Exchange pursuant
      to the subscription agreement with each investor. The securities were offered
      and sold to investors in reliance upon exemptions from registration pursuant
      to
      Section 4(2) under the Securities Act of 1933, as amended, and Rule 506
      promulgated thereunder. Each of the persons and/or entities receiving the our
      securities qualified as an accredited investor (as defined by Rule 501 under
      the
      Securities Act of 1933, as amended).





On
      October 17, 2006, at the closing of the Share Exchange, we issued to an investor
      relations firm 100,000 shares of our common stock and a five-year warrant to
      purchase 232,088 shares of our common stock at a per share exercise price of
      $1.60 for investor relations services. The securities were offered and sold
      to
      an investor relations firm in reliance upon exemptions from registration
      pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
      Rule
      506 promulgated thereunder. The investor relations firm qualified as an
      accredited investor (as defined by Rule 501 under the Securities Act of 1933,
      as
      amended).





**Transfer
      Agent**





The
      transfer agent and registrar for our common stock is U.S. Stock Transfer
      Corporation.





**Equity
      Compensation Plan Information**





As
      of
      December 31, 2006, we did not have an equity compensation plan.


#
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              #
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))Equity
                  compensation plans approved by security holders
              
              
              -
              
              
              -
              
              
              -Equity
                  compensation plans not approved by securities holders
              
              
              232,088
              (1)
              $
              1.60
              
              
              -Total
              
              
              232,088
              
              $
              1.60
              
              
              -
  (1)
        Upon the closing of the Share Exchange on October 17, 2006, we issued five-year
        warrants to purchase 232,088 shares of our common stock at a per share exercise
        price of $1.60 for services rendered by an investor relations firm.


**Additional
      Information**





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





26


**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, 2006 and the consolidated
      balance sheet data as of year-end for each of the years in the five-year period
      ended December 31, 2006 were derived from the audited consolidated financial
      statements, except for December 31, 2002. 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 Operations**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(unaudited)(in
                thousands, exepct share amounts and earnings
                per share)Contract
                revenues earned
            
            $
            64,032
            
            $
            49,978
            
            $
            28,816
            
            $
            22,480
            
            $
            16,554Cost
                of contract revenues earned
            
            
            (46,796
            )
            
            (36,368
            )
            
            (21,419
            )
            
            (14,730
            )
            
            (11,138
            )Gross
                profit
            
            
            17,235
            
            $
            13,610
            
            $
            7,397
            
            $
            7,750
            
            $
            5,416Selling
                and administrative expenses
            
            
            (5,989
            )
            
            (6,463
            )
            
            (4,636
            )
            
            (3,564
            )
            
            (1,844
            )Non-recurring
                general and administrative expenses
            
            
            (3,806
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Income
                from operations
            
            $
            7,440
            
            $
            7,147
            
            $
            2,761
            
            $
            4,186
            
            $
            3572Interest
                expenses, net
            
            
            -
            
            
            (117
            )
            
            (260
            )
            
            (116
            )
            
            (12
            )Other
                income, net
            
            
            28
            
            
            37
            
            
            199
            
            
            145
            
            
            2Income
                before taxes
            
            
            7,468
            
            $
            7,068
            
            $
            2,700
            
            $
            4,215
            
            $
            3,562Income
                tax
            
            
            (1,318
            )
            
            (1,157
            )
            
            (491
            )
            
            (739
            )
            
            (564
            )Net
                income
            
            $
            6,150
            
            $
            5,910
            
            $
            2,209
            
            $
            3,476
            
            $
            2,998


Basic
                and diluted net income per common share
            
            
            0.14
            
            
            0.14
            
            
            0.05
            
            
            0.08
            
            
            0.07Basic
                and diluted dividend paid per common share
            
            
            0.04
            
            
            0.06
            
            
            0.10
            
            
            0.02
            
            
            —Basic
                weighted average common shares outstanding
            
            
            44,679,990
            
            
            43,304,125
            
            
            43,304,125
            
            
            43,304,125
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            44,679,990
            
            
            43,304,125
            
            
            43,304,125
            
            
            43,304,125
            
            
            43,304,125




**December
                31,****Consolidated
                Balance Sheets**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**(unaudited)***(in
                thousands)***Current
                Assets
            
            $
            43,821
            
            $
            21,712
            
            $
            17,454
            
            $
            15,054
            
            $
            98,020Total
                Assets
            
            
            44,861
            
            
            22,320
            
            
            18,642
            
            
            15,394
            
            
            100,774Current
                Liabilities
            
            
            21,784
            
            
            14,016
            
            
            13,916
            
            
            8,774
            
            
            60,848Total
                Liabilities
            
            
            24,349
            
            
            14,016
            
            
            13,916
            
            
            8,774
            
            
            61,232Total
                Stockholders' Equity
            
            
            20,513
            
            
            8,304
            
            
            4,725
            
            
            6,621
            
            
            39,542




27




**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, 2007, we closed a share exchange transaction
      described below, pursuant to which we (i) became the 100% parent of Full Art
      International, Ltd., a Hong Kong Company (“Full Art”), which has four
      subsidiaries, including its wholly-owned subsidiary, Zhuhai King Glass
      Engineering Co., Ltd., a company formed under the laws of the People’s Republic
      of China (“PRC” or “China”), (ii) assumed the operations of Full Art and its
      subsidiaries and (iii) changed our name from SRKP 1, Inc. to China Architectural
      Engineering, Inc. Full Art was incorporated in Hong Kong on July 30, 1992 under
      the Companies Ordinance of Hong Kong.





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





Our
      work
      is performed under cost-plus-fee contracts, fixed-price contracts, and
      fixed-price contracts modified by incentive and penalty provisions. The length
      of our contracts varies but typically have a duration of approximately two
      years. Approximately 90% of our sales are from fixed price contracts, including
      one percent that are modified by incentive and penalty provisions. The remaining
      10% of our sales are originated from are cost-plus-fee contracts. Under
      cost-plus-fee contracts, which may be subject to contract ceiling amounts,
      we
      are reimbursed for allowable costs and fees, which may be fixed or
      performance-based. If our costs exceed the contract ceiling or are not allowable
      under the provisions of the contract or any applicable regulations, we may
      not
      be reimbursed for all our costs. Under fixed-price contracts, we receive a
      fixed
      price regardless of what our actual costs will be. Consequently, we realize
      a
      profit on fixed-price contracts only if we control our costs and prevent cost
      over-runs on the contracts. Under fixed-price contracts modified by incentive
      and penalty provisions, we are paid a fixed price that may be increased or
      decreased based on incentive and provisions in our contracts.





**Recent
      Events**





***Completion
      of the Share Exchange***





On
      August
      21, 2006, we entered into a share exchange agreement with KGE Group, Limited,
      a
      Hong Kong corporation and the sole shareholder of Full Art. On October 17,
      2006,
      we entered into Amendment No. 1 to the share exchange agreement. Pursuant to
      the
      share exchange agreement, as amended (the “Exchange Agreement”), we agreed to
      issue an aggregate of 45,304,125 shares of our common stock in exchange for
      all
      of the issued and outstanding securities of Full Art (the “Share Exchange”).
      Upon the closing of the Share Exchange on October 17, 2006, we issued an
      aggregate of 45,304,125 shares of our common stock to the sole shareholder
      of
      Full Art and its designees in exchange for all of the issued and outstanding
      securities of Full Art. Also at the closing of the Share Exchange, we issued
      100,000 shares of our common stock and a five-year warrant to purchase 232,088
      shares of our common stock at a per share exercise price of $1.60 for investor
      relations services (the “IR Securities”). In addition, immediately prior to the
      closing of the Share Exchange and the Private Placement, as described below,
      we
      and certain of our shareholders agreed to cancel an aggregate of 3,125,000
      shares of common stock such that there were 2,275,000 shares of common stock
      outstanding immediately prior to the Share Exchange and Private Placement.
      We
      issued no fractional shares in connection with the Share Exchange.




28




Immediately
      after the closing of the Share Exchange and Private Placement, we had 50,000,000
      outstanding shares of common stock and outstanding warrants to purchase 232,088
      shares of our common stock. Upon the closing of the Share Exchange, the sole
      shareholder of Full Art and its designees owned approximately 90.6% of our
      issued and outstanding common stock, the pre-existing shareholders of the
      Company owned 4.7% and investors in the Private Placement that closed
      concurrently with the Share Exchange, as described below, owned 4.6% of our
      outstanding common stock.





In
      connection with the Share Exchange, we agreed to register the IR Securities
      and
      1,312,675 shares held by our shareholders who were shareholders immediately
      prior to the Share Exchange in the registration statement that we filed to
      register the shares issued in the Private Placement, as described below. We
      also
      agreed to register shares of common stock in a subsequent registration statement
      that we agreed to file by May 23, 2007, which is six months and ten days after
      the date on which we first filed the registration statement to register the
      shares issued in the Private Placement, as follows: (i) 962,325 shares held
      affiliates of WestPark Capital, Inc. (“WestPark”) who were shareholders
      immediately prior to the Share Exchange, and (ii) 2,000,000 shares of common
      stock that were issued at the closing of the Share Exchange to FirstAlliance
      Financial Group, Inc. (“FirstAlliance”) as a designee of Full Art’s sole
      shareholder.





We
      agreed
      to a penalty provision with respect to our obligations to register the 962,325
      shares of common stock held by the WestPark affiliates and the 2,000,000 shares
      that were issued to FirstAlliance. We must use our reasonable best efforts
      to
      cause the registration statement to become effective within 120 days after
      the
      required filing date or the actual filing date, whichever is earlier, or 150
      days after the required filing date or the actual filing date, whichever is
      earlier, if the registration statement is subject to a full review by the SEC.
      In addition, we must use our reasonable best efforts to maintain the
      registration statement effective for a period of 24 months at our expense.
      If we
      fail to register these shares due to failure on our part, we must issue
      additional shares of our common stock to the respective shareholders in the
      amount of 0.0333% of their respective shares for each calendar day until the
      registration becomes effective. There is no maximum number of shares that we
      may
      be required to issue in connection with any potential failure to meet these
      registration obligations. There is no penalty associated with the IR
      Securities.





***The
      Private Placement***





On
      October 17, 2006, concurrently with the close of the Share Exchange, we received
      gross proceeds of $3,713,400 in a private placement transaction (the “Private
      Placement”). Pursuant to subscription agreements entered into with the
      investors, we sold an aggregate of 2,320,875 shares of common stock at $1.60
      per
      share. We were required to file a registration statement no later than 30 days
      after the closing of the Share Exchange, which we met, and we must use our
      reasonable best efforts to cause the registration statement to become effective
      within one hundred and 150 days after the closing or 180 days after the closing
      if the registration statement is subject to a full review by the SEC. We are
      also required to use our reasonable best efforts to maintain the registration
      statement effective for a period of 24 months at our expense. If we fail to
      register the shares, we are obligated to pay to the investors a cash payment
      equal to 0.0333% of the purchase price of their respective shares for each
      business day of the failure. There is no maximum potential consideration to
      be
      transferred in respect to the potential penalty.





The
      investors in the Private Placement also entered into a lock up agreement
      pursuant to which they agreed not to sell their shares until our common stock
      begins to be traded on the New York Stock Exchange, American Stock Exchange,
      NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after
      which their shares will automatically be released from the lock up on a monthly
      basis pro rata over a nine months period. After commissions and expenses, we
      received net proceeds of approximately $3,267,792 in the Private Placement.
      WestPark Capital, Inc. acted as placement agent in connection with the Private
      Placement. For its services as placement agent, WestPark received an aggregate
      fee of approximately $445,608, which consisted of a commission equal to 9.0%
      of
      the gross proceeds from the financing and a non-accountable fee of 3% of the
      gross proceeds. Some of the controlling shareholders and control persons of
      WestPark were also, prior to the completion of the Share Exchange, controlling
      shareholders and control persons of our company, including Richard Rappaport,
      who is the Chief Executive Officer of WestPark and was the President and a
      significant shareholder of our company prior to the Share Exchange, and Anthony
      C. Pintsopoulos, who is the Chief Financial Officer of WestPark and an officer
      and director our company prior to the Share Exchange. Each of Messrs. Rappaport
      and Pintsopoulos resigned from all of their executive and director positions
      with us upon the closing of the Share Exchange.





29




***Critical
      Accounting Policies and Estimates***





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





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





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





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





***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.





30




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





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





***Contract
      Receivable -*** Contract
      receivable represents billings to customers on the percentage of work completed
      and recognized to date based on contract price. An allowance is provided for
      doubtful collections which is based upon a review of outstanding receivables,
      historical collection information, and existing economic conditions. We record
      an allowance for doubtful collections for our outstanding contract receivable
      at
      the end of the period in accordance with generally accepted accounting
      principles in the Untied States, and we consider that allowance to be reasonable
      at December 31, 2006, December 31, 2005 and December 31, 2004.





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





***Income
      Taxes*** *-* We
      use
      the accrual method of accounting to determine and report its taxable income
      and
      use the flow through method to account for tax credits, which are reflected
      as a
      reduction of income taxes for the year in which they are available. We have
      implemented *Statement
      of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.* Income
      tax liabilities computed according to the United States, People’s Republic of
      China (PRC) and Hong Kong SAR tax laws are provided for the tax effects of
      transactions reported in the financial statements and consists of taxes
      currently due plus deferred taxes related primarily to differences between
      the
      basis of fixed assets and intangible assets for financial and tax reporting.
      The
      deferred tax assets and liabilities represent the future tax return consequences
      of those differences, which will either be taxable or deductible when the assets
      and liabilities are recovered or settled. Deferred taxes also are recognized
      for
      operating losses that are available to offset future income taxes. A valuation
      allowance is created to evaluate deferred tax assets if it is more likely than
      not that these items will either expire before we are able to realize that
      tax
      benefit, or that future realization is uncertain.





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





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





***Retirement
      Benefits*** *-* We
      make
      monthly contributions to various employee retirement benefit plans organized
      by
      provincial governments in the PRC in accordance with rates prescribed by them.
      The provincial governments undertake to assume the retirement benefit
      obligations of all existing and future retired employees of our company.
      Contributions to these plans are charged to expense as incurred. The retirement
      expense for the years ended December 31, 2006, 2005, and 2004, were $118,856,
      $109,941, and $85,604, respectively.





***Plant
      and Equipment -*** Plant
      and
      equipment are carried at cost less accumulated depreciation. Depreciation is
      provided over their estimated useful lives, using the straight-line method.
      The
      cost and related accumulated depreciation of assets sold or otherwise retired
      are eliminated from the accounts and any gain or loss is included in the
      statement of income. The cost of maintenance and repairs is charged to income
      as
      incurred, whereas significant renewals and betterments are capitalized.





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





31




***Accounting
      for the Impairment of Long-Lived Assets -*** Long-lived
      assets are reviewed for impairment whenever events or changes in circumstances
      indicate that the carrying amount of assets may not be recoverable. It is
      reasonably possible that these assets could become impaired as a result of
      technology or other industry changes. Determination of recoverability of assets
      to be held and used is by comparing the carrying amount of an asset to future
      net undiscounted cash flows to be generated by the assets. If such assets are
      considered to be impaired, the impairment to be recognized is measured by the
      amount by which the carrying amount of the assets exceeds the fair value of
      the
      assets. Assets to be disposed of are reported at the lower of the carrying
      amount or fair value less costs to sell. During the reporting years, there
      was
      no impairment loss.





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





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





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





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





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





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





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




32


**Results
      of Operations**





The
      following table sets forth our statements of operations for the years ended
      December 31, 2006, 2005 and 2004 in U.S. dollars:




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004*****(in
                thousands, except share amounts and earnings per
                share)***Contract
                revenues earned
            
            $
            64,032
            
            $
            49,978
            
            $
            28,816Cost
                of contract revenues earned
            
            
            (46,796
            )
            
            (36,368
            )
            
            (21,419
            )Gross
                profit
            
            
            17,235
            
            $
            13,610
            
            $
            7,397Selling,
                administrative and other operating expenses
            
            
            (5,989
            )
            
            (6,463
            )
            
            (4,636
            )Non-recurring
                general and administrative expenses
            
            
            (3,806
            )
            
            —
            
            
            —Income
                from operations
            
            $
            7,440
            
            $
            7,147
            
            $
            2,761Interest
                expenses, net
            
            
            —
            
            
            (117
            )
            
            (260
            )Other
                income, net
            
            
            28
            
            
            37
            
            
            199Income
                before taxes
            
            $
            7,468
            
            $
            7,068
            
            $
            2,700Income
                tax
            
            
            (1,318
            )
            
            (1,157
            )
            
            (491
            )Net
                income
            
            $
            6,150
            
            $
            5,910
            
            $
            2,209Basic
                and diluted net income per common share
            
            
            0.14
            
            
            0.14
            
            
            0.05Basic
                and diluted dividend paid per common share
            
            
            0.04
            
            
            0.06
            
            
            0.10Basic
                weighted average common shares outstanding
            
            
            44,679,999
            
            
            43,304,125
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            44,679,999
            
            
            43,304,125
            
            
            43,304,125





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





Contract
      revenues earned for year ended December 31, 2006 were $64.0 million, an increase
      of $14.0 million, or 28.1%, from the contract revenues earned of $50.0 million
      for the year ended December 31, 2005. The primary reason for the increase in
      contract revenues earned was an increase in the number of projects for the
      year
      ended December 31, 2006. In addition, we also experienced a general increase
      in
      the amount of revenue generated per project in 2006 as compared to 2005.





Cost
      of
      contract revenues earned for the year ended December 31, 2006 was $46.8 million,
      an increase of $10.4 million, or 28.7%, from $36.4 million for the year ended
      December 31, 2005. The increase in costs of contract revenues earned was
      primarily due to the increased number of projects for the year ended December
      31, 2006. Gross profit for the year ended December 31, 2006 was $17.2 million,
      an increase of $3.6 million, or 26.6%, from $13.6 million for the year ended
      December 31, 2005. Our gross margin for the year ended December 31, 2006 was
      26.9% as compared with 27.2% for the year ended December 31, 2005.





33




Selling
      and administrative expenses were $6.0 million for the year ended December 31,
      2006, a decrease of approximately $0.5 million, or 7.3%, from $6.5 million
      for
      the year ended December 31, 2005. The decrease was primarily due to the
      implementation of internal controls on operating expenses during the year ended
      December 31, 2006, including stricter control on staff costs, entertainment
      expenses, and traveling expenses.





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





Income
      tax was $1.3 million for the year ended December 31, 2006, an effective tax
      rate
      of 17%, compared with $1.2 million taxes for the year ended December 31, 2005,
      an effective tax rate of 16%. The primary reason for the increase in the dollar
      amount of the tax was due to the increase in income before taxes. Through two
      of
      our subsidiaries, Zhuhai King Glass Engineering Co., Ltd and Zhuhai King General
      Glass Engineering Technology Co., Ltd, we are generally subject to a PRC income
      tax rate of 33%; however, in accordance with the relevant tax laws and
      regulations of PRC, the corporation income tax rate is currently 15%. In
      addition, we and two of our subsidiaries are subject to Hong Kong profits tax
      rate of 17.5%.





Net
      income for the year ended December 31, 2006 was $6.2 million, an increase of
      $0.3 million, or 4.1%, from $5.9 million for the comparable period in 2005.





**Years
      Ended December 31, 2005 and 2004**





Contract
      revenues earned for year ended December 31, 2005 were $50.0 million, an increase
      of $21.2 million, or 73.4%, from the contract revenues earned of $28.8 million
      for the year ended December 31, 2004. The primary reason for the increase in
      contract revenues earned was an increase in the number of projects for the
      year
      ended December 31, 2005. In addition, we also experienced a general increase
      in
      the amount of revenue generated per project in 2005 as compared to 2004.





Cost
      of
      contract revenues earned for the year ended December 31, 2005 was $36.4 million,
      an increase of $15.0 million, or 69.8%, from $21.4 million for the year ended
      December 31, 2004. The increase in costs of contract revenues earned was
      primarily due to the increased number of projects for the year ended December
      31, 2005. Gross profit for the year ended December 31, 2005 was $13.6 million,
      an increase of $6.2 million, or 84.0%, from $7.4 million for the year ended
      December 31, 2004. Our gross margin for the year ended December 31, 2005 was
      27.2% as compared with 25.7% for the year ended December 31, 2004.





Selling
      and administrative expenses were $6.5 million for the year ended December 31,
      2005, an increase of approximately $1.8, or 39.4%, from $4.6 million for the
      year ended December 31, 2004. The increase was primarily due to growth in
      operations and related increases in staff costs and project-related expenses,
      such as insurance, professional fees, and general expenses of onsite
      offices.





There
      were no non-recurring general and administrative expenses for the years ended
      December 31, 2005 and 2004.





Income
      tax was $1.2 million for the year ended December 31, 2005, an effective tax
      rate
      of 16%, compared with $491,000 taxes for the year ended December 31, 2004,
      an
      effective tax rate of 18%. The primary reason for the increase in the dollar
      amount of the tax was due to the increase in income before taxes.





Net
      income for the year ended December 31, 2005 was $5.9 million, an increase of
      $3.7 million, or 167.5%, from $2.2 million for the comparable period in 2004.





**Liquidity
      and Capital Resources**





At
      December 31, 2006, we had cash and cash equivalents of $2,115,966. Prior to
      October 17, 2006, we have historically financed our business operations through
      short-term bank loans, cash provided by operations, and credit provided by
      suppliers.




34




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





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





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





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





Net
      cash
      used in operating activities for the year ended December 31, 2006 was $3.0
      million, as compared to $3.5 million provided by operating activities in the
      same period in 2005. The decrease in cash provided from operating activities
      is
      primarily the result of a significant increase in receivables from $6.6 million
      to $18.3 million, partially offset by an increase in net income and payables
      during the year ended December 31, 2006, both of which was the result of an
      increase in sales. We experienced an increase of revenue of $14.1 million for
      the year ended December 31, 2006 compared to an increase of $20.7 million for
      the same period in 2005. Contracts receivables as of December 31, 2006 was
      $7.6
      million, an increase of $3.3 million, or 76.1%, over contracts receivables
      of
      $4.3 million as of December 31, 2005. The increase in contracts receivables
      reflected an increase in contract revenue earned. We received eight new projects
      of total contract sum of approximately $12.4 million in the year ended December
      31, 2005, which account for approximately $6.3 million contract receivables
      for
      such period.





Net
      cash
      used by investing activities was $2.9 million for the year ended December 31,
      2006, as compared to net cash provided by investing activities of $1.0 million
      for the year ended December 31, 2005. The change was primarily a result of
      an
      increase in restricted cash from $0.6 million in 2005 as compared to $2.2
      million in 2006. The increase in restricted cash resulted from our deposit
      of
      such amount on fixed deposit terms with the Hong Kong branch of Bank of East
      Asia to facilitate a line of credit facility in the same amount from the Zhuhai
      branch of Bank of East Asia. We established and borrowed the full amount
      available under the line of credit to replace a 2005 short term loan from
      another bank that was expiring.





35




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





As
      of
      December 31, 2006, contracts receivables were $7.6 million, an increase of
      $3.3
      million, or 76.1%, over contracts receivables of $4.3 million as of December
      31,
      2005. The increase in contracts receivable reflected an increase in contract
      revenue earned. In addition, the increase in contracts receivable reflects
      not
      only the increase in sales but also the long collection period because the
      collection period typically runs from three months to one year before we receive
      full payment for our services and products. Since we require an average of
      one
      to two months to receive products we order from the date of our order, we have
      been increasing our inventories in order to enable us to meet anticipated
      increases in sales. In addition, our payment cycle is considerably shorter
      than
      our receivable cycle, since we typically pay our suppliers all or a portion
      of
      the purchase price in advance and for some suppliers we must maintain a deposit
      for future orders. We are currently involved in three lawsuits in which we
      are
      suing other parties for overdue payments. The total amount involved is
      $1,292,520. We
      obtained judgment in our favor on one of the lawsuits and anticipate full
      payment on all of the overdue amounts in the near future.





At
      December 31, 2006, we had no material commitments for capital expenditures
      other
      than for those expenditures incurred in the ordinary course of business. During
      the 2007, we intend to expend approximately $65 to $70 million to purchase
      materials and serve as deposits for performance bonds for new projects that
      we
      have obtained. Additional capital for this objective would be required that
      is
      in excess of our liquidity, requiring us to raise additional capital through
      an
      equity offering or secured or unsecured debt financing. The availability of
      additional capital resources will depend on prevailing market conditions,
      interest rates, and our existing financial position and results of
      operations.





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




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




**Off-Balance
      Sheet Arrangements**




None.





**Change
      in Accountants**





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





36




We
      engaged Samuel H. Wong & Co., LLP, Certified Public Accountants, as our
      independent registered public accounting firm as of October 17, 2006. Samuel
      H.
      Wong & Co., LLP, Certified Public Accountants, served as Full Art’s
      independent registered certified public accountants for the fiscal years ended
      December 31, 2005 and 2004.




**New
      Accounting Pronouncements**





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





We
      do not
      anticipate that the adoption of this standard will have a material impact on
      these consolidated financial statements.




37




**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 collectibility
      of contract receivables by assessing, among other factors, the customer’s
      willingness or ability to pay, repayment history, general economic conditions
      and our ongoing relationship with the customers. We are currently involved
      in
      three lawsuits in which we are suing other parties for overdue payments. The
      total amount involved is $1,292,520.




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




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





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





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





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





Not
      Applicable





**Item
      9A. Controls and Procedures**





*(a)
      Evaluation of disclosure controls and procedures*




As
      of
      December 31, 2006, our management, with the participation of our Chief Executive
      Officer, or “CEO,” and Chief Financial Officer, or “CFO,” performed an
      evaluation of the effectiveness and the operation of our disclosure controls
      and
      procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities
      Exchange Act of 1934, as amended, or the “Exchange Act.” Based on that
      evaluation, the CEO and CFO concluded that our disclosure controls and
      procedures were effective as of December 31, 2006.





38


*(b)
        Changes in internal control over financial reporting*
  On
        August
        21, 2006, we entered into a share exchange agreement with KGE Group, Limited,
        a
        Hong Kong corporation (“KGE Group”) and the sole shareholder of Full Art
        International, Ltd., a Hong Kong Company (“Full Art”). On October 17, 2006, we
        entered into Amendment No. 1 to the share exchange agreement. Pursuant to
        the
        share exchange agreement, as amended (the “Exchange Agreement”), we agreed to
        issue an aggregate of 45,304,125 shares of our common stock in exchange for
        all
        of the issued and outstanding securities of Full Art (the “Share Exchange”). The
        Share Exchange closed on October 17, 2006. Following the Share Exchange,
        the
        sole business conducted by our company is the business conducted by Full
        Art
        prior to the Share Exchange, and all of the officers and directors of Full
        Art
        became the officers and directors of our company. Also, as a result of the
        Share
        Exchange, the internal control over financial reporting utilized by Full
        Art
        prior to the Share Exchange became the internal control over financial reporting
        of our company.


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




**Item
      9B. Other Information**





None.




39


**PART
      III**




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




**Executive
      Officers, Directors and Key Employees**





The
      following individuals constitute our board of directors and executive
      management:





Name
            
            Age
            
            PositionLuo
                Ken Yi
            
            49
            
            Chief
                Executive Officer, Chief Operating Officer and Chairman of the
                BoardTang
                Nianzhong
            
            43
            
            Vice
                General Manager and DirectorYe
                Ning
            
            49
            
            Vice
                General Manager and DirectorLi
                Guoxing
            
            32
            
            Vice
                General Manager of DesignBai
                Fei
            
            34
            
            Vice
                General Manager of MarketingWang
                Zairong
            
            53
            
            Chief
                Technology Officer and General EngineerFeng
                Shu
            
            69
            
            Research
                and Development SupervisorWang
                Xin
            
            44
            
            Chief
                Financial Officer





***Luo
      Ken Yi*** has
      been
      Chief Executive Officer, Chief Operating Officer and Chairman of the Board
      since
      1992. Luo Ken Yi studied Medicine, Mechanical Engineering and Engineering
      Management in China (1978 to 1983), the U.S (1986 to 1988), Australia
      (1996-1998) and Hong Kong and obtained a Master’s Degree 1997. He served as
      Project Manager and Production Manager at P.X. Engineering, Inc. in the U.S
      from
      1989 to 1991, Mr. Luo founded the Kangbao Electronics Co., Ltd. in 1988 in
      Shunde, Guangdong, China, where he served as Chief Engineer, Technical Manager,
      Vice Manager General and Deputy President from 1986 to 1989. Mr. Luo founded
      us
      in 1992 and served as Chief Managing Director. Later, he studied steel supported
      glass curtain wall design in the U.S. and Europe 1992 to 1994. He was appointed
      Vice President of the Architectural Glass and Metal Structure Institute of
      Qinghua University in 1999. In 2000 he was appointed by the Chinese Ministry
      of
      Construction to head the committee on creating national standards for the glass
      curtain wall industry. Mr. Luo owns over thirty patents related to point fixed
      glass technology. He was honored as one of the “Ten Great Leaders in Technology”
and has published numerous books and articles.




***Tang
      Nianzhong*** has been
      Vice General Manager and a Director since 1995. Tang Nianzhong graduated from
      the Guangzhou University of Chinese Medicine, Department of Medicine, in 1986.
      In 1999 he received his MBA from Murdoch University in Australia. From 1986
      to
      1994, he worked in the bone surgery department of the Nanhai People’s Hospital
      in Foshan. From 1994 to 1995 he was Vice General Manager of Foshan Xinhua
      Advertising Co., Ltd. In 1995 he joined us, where he has served as Production
      Manager, Sales Manager, Project Manager, Administration Manager and Vice General
      Manager.





***Ye
      Ning*** has been
      Vice General Manager and a Director since 1995. Ye Ning graduated from the
      Guangzhou University of Chinese Medicine, Department of Medicine in 1983. From
      1983 to 1988 he served on the staff of the Guangzhou Institute of Physical
      Education. From 1988 to 1993 he worked in the orthopedics department of the
      Nanhai People’s Hospital in Foshan. In 1993 he joined us, where he has served as
      Project Manager, Operations Manager, Purchasing Manager and Vice General
      Manager.





***Li
      Guoxing*** has been
      Vice General Manager of Design since 2001. Li Guoxing graduated from Guizhou
      Technology University, Department of Construction, in 1996. In 2003 he received
      his MBA from the Royal Canadian College. From 1996 to 1998 he was a designer
      at
      the Guizhou Chemical Design Institute. In 1998 he joined us, where he has worked
      and served as Designer, Chief Engineer, Leader of the Design Institute and
      Vice
      General Manager of Design.





***Bai
      Fei*** has been
      Vice General Manager of Marketing since 2004. Bai Fei graduated from Guizhou
      Broadcasting and Television University with a major in construction in 1994.
      In
      1994 he worked briefly as a designer for the Guizhou Institute of Architectural
      Science and Research before moving on to work as a Manager of Decoration and
      Construction in the Aerospace department of the Liyang Group Decorated Project
      Company until 1995. In 1995 he joined us, where he has served as Technical
      Department Manager prior to becoming Vice General Manager of Marketing in
      2004.





40




***Wang
      Zairong*** has been
      Chief Technology Officer and General Engineer since 2004. Wang Zairong graduated
      from the Qinghua University School of Mechanical Engineering in 1977. From
      1977
      to 1979 he was a mechanical designer at Xi’an Research Institute of Mechanical
      Engineering. From 1980 to 1982 he was a mechanical designer at Xi’an Physics and
      Space Research Institute. From 1982 to 1993 Mr. Wang was a System Structure
      Designer at the Xi’an Aerospace Ministry. From 1993 to 1997 he was Senior
      Engineer and Vice General Manager of Technology at Yuantongqiao (Huizhou)
      Industrial Co., Ltd. In 1997 he joined us, where he has served as Marketing
      Manager, Production Manager, General Engineer prior to becoming Chief Technology
      Officer in 2004.





***Feng
      Shu*** has been
      Research and Development Supervisor since 2000. She graduated from the Civil
      Engineering Department of National Qinghua University in 1960. She is a member
      of the Construction Glass and Metal Structure Research Committee of National
      Qinghua University and is a professor at the Civil Engineering Academy of
      Nanchang University. Feng Shu joined us in 1998, where she has served as
      Supervisor of Research and Development. She is also Administrative Director
      and
      Secretary General of Jiangxi Mechanics Academy and Vice Superintendent of
      Jiangxi Huajie Architecture Design Co., Ltd.





***Wang
      Xin*** has been
      Chief Financial Officer since 2001. Wang Xin graduated from the Yunnan Finance
      and Economics University, Finance Department in 1984. From 1984 to 1988 she
      was
      Vice Section Chief at the Yunnan Province Finance Bureau. From 1988 to 1995
      she
      was an instructor at Yunnan Economics and Management College, where she taught
      industrial accounting, financial management and other business courses. From
      1995 to 2000 she was a Financial Manager at Zhuhai Advertising and Trade
      Exhibition Company. From 2000 to 2001 she was Financial Manager at Zhuhai Jingyu
      Science and Technology Equipment Company. She joined us in 2001, where she
      has
      served as Chief Financial Officer.





**Family
      Relationships**





None





**The
      Board of Directors and Committees**





Our
      Board
      of Directors does not maintain a separate audit, nominating or compensation
      committee. Functions customarily performed by such committees are performed
      by
      our Board of Directors as a whole. We are not required to maintain such
      committees under the rules applicable to companies that do not have securities
      listed or quoted on a national securities exchange or national quotation system.
      We intend to create board committees, including an independent audit committee,
      in the near future. We also are not currently required to maintain independent
      members of our Board of Directors. If we are successful in listing our common
      stock on the American Stock Exchange, we would be required to have, prior to
      listing, an independent audit committee formed, in compliance with the
      requirements for listing on the American Stock Exchange and in compliance with
      Rule 10A-3 of the Securities Exchange Act of 1934.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Our
      securities are not currently registered under Section 12 of the Securities
      Exchange Act of 1934, as amended. As a result, and pursuant to Rule 16a-2,
      our
      directors and officers and holders of 10% or more of our common stock are not
      currently required to file statements of beneficial ownership with regards
      to
      their ownership of our equity securities under Sections 13 or 16 of the Exchange
      Act. At such time as our shares are registered under Section 12 of the Exchange
      Act, our officers, directors and 10% or more stockholders will be required
      to
      file such statements of beneficial ownership.





**Code
      of Ethics**





Prior
      to
      the Share Exchange in October 2006, we had a Code Of Ethics For Principal
      Executive and Financial Officers. Subsequent
      to the Share Exchange, after which we began our current operations, we have
      not
      yet adopted a code of business conduct and ethics that applies to our principal
      executive officer, principal financial officer, principal accounting officer
      or
      controller, or persons performing similar functions. We intend to adopt a code
      in the near future.




41




**Item
      11.   Executive Compensation**




**Compensation
      Discussion and Analysis**





Prior
      to
      the Share Exchange on October 17, 2006, we were a “blank check” shell company
      that was formed to investigate and acquire a target company or business seeking
      the perceived advantages of being a publicly held corporation.  The
      officers and directors of our company prior to the Share Exchange are no longer
      employed by or affiliated with our company.  Richard Rappaport and Anthony
      Pintsopolous, our President and Chief Financial Officer, respectively, during
      2006 prior to Share Exchange, received no compensation or other perquisites
      for
      serving in such capacity.





Our
      Chief
      Executive Officer, Chief Operating Officer and Chairman of the Board, Luo Ken
      Yi, determined the compensation for our current executive officers that was
      earned and paid in fiscal 2006 and our Board of Directors approved the
      compensation.  Compensation for our current executive officers, which
      currently consists of Luo Ken Yi, Wang Xin, Ye Ning and Tang Nianzhong, is
      determined with the goal of attracting and retaining high quality executive
      officers and encouraging them to work as effectively as possible on our
      behalf.  Key areas of corporate performance taken into account in setting
      compensation policies and decisions are growth of sales, cost control,
      profitability, and innovation.  The key factors may vary depending on which
      area of business a particular executive officer’s work is focused on. 
Compensation is designed to reward executive officers for successfully meeting
      their individual functional objectives and for their contributions to our
      overall development.  For these reasons, the elements of compensation of
      our executive officers are salary and bonus.  Salary is paid to cover an
      appropriate level of living expenses for the executive officers and the bonus
      is
      paid to reward the executive officer for individual and company achievement.
      With respect to the amount of a bonus, Luo Ken Yi evaluates our company’s
      achievements for the fiscal year based on performance factors and results of
      operations such as revenues generated, cost of revenues, net income, and whether
      we obtain significant contracts. Luo Ken Yi also conducts a monthly and annual
      evaluation of the achievement level of an executive based on individual
      performance measurements, such as contribution to the achievement of the
      company’s goals and individual performance metrics based on their positions and
      responsibilities. Bonus are paid at the end of each fiscal year.





We
      believe that the salaries paid to our executive officers during 2006, 2005,
      and
      2004 are indicative of the objectives of our compensation program and reflect
      the fair value of the services provided to our company, as measured by the
      local
      market in China.  We determine market rate by conducting a comparison with
      the local geographic area averages and industry averages in China.  
Currently, we have no specific plans to provide raises after we have become
      a
      company with securities publicly traded in the United States.  Although no
      specific plans have yet been discussed, we may adopt such a plan to provide
      raises to our executive officers in the future.  Adopting higher
      compensation in the future may be based on the increased amount of
      responsibilities to be assumed by each of the executive officers after we become
      a publicly listed company.  Executive compensation for 2007 will follow the
      same evaluation methods as were used for 2006. If we successfully
      complete our proposed listing on the American Stock Exchange and offering
      in 2007, we may adjust our bonus evaluations upwards, but, in such case, we
      do
      not intend to increase it by more than 10%. That determination would likely
      be
      made towards the end of the fiscal year. We may also expand the scope of our
      compensation, such as the possibility of granting options to executive officers
      and tying compensation to predetermined performance goals.





Our
      board
      of directors does not currently have a compensation committee. We anticipate
      that our board of directors will establish a compensation committee in fiscal
      2007 that will be comprised of non-employee members of our board of directors.
      Our current expectation is that the compensation committee of our board of
      directors will perform, at least annually, a strategic review of the
      compensation program for our executive officers to determine whether it provides
      adequate incentives and motivation to our executive officers and whether it
      adequately compensates our executive officers relative to comparable officers
      in
      other companies with which we compete for executives. Those companies may or
      may
      not be public companies or companies located in the PRC or even, in all cases,
      companies in a similar business.





Until
      such time as a formal compensation program and committee is established, which
      we expect will occur in 2007, Ken Luo Yi will structure compensation and bonus
      levels and our board of directors will approve the structure. After the
      compensation committee is formed, it will determine the structure. Our board
      has
      established a compensation program for executive officers for 2007 that is
      designed to attract, as needed, individuals with the skills necessary for us
      achieve our business plan, to motivate those individuals, to reward those
      individuals fairly over time, and to retain those individuals who continue
      to
      perform at or above the levels that we expect.  For 2007, bonuses for
      executive officers will be based on company and individual factors, as described
      above, and will be set up formulaically such that the amount of the bonus will
      be equal to the lower of a preset dollar amount or a percentage of revenues
      and
      net income. Luo Ken Yi’s bonus will be determined on overall company
      performance, business development, sales, and strategy, and the amount of his
      bonus will be the lower of $220,000 or 0.1% of sales plus 2.5% of net income.
      Bonus determination for Ye Ning and Tang Nianzhong is based on individual
      measurements for them and will be in an amount that is the lower of $120,000
      or
      0.1% of sales plus 1.0% of net income.





42




**Summary
      Compensation Tables**





The
      following table sets forth information concerning the compensation for the
      three
      fiscal years ended December 31, 2006, 2005, and 2004 of the principal executive
      officer, principal financial officer, in addition to our three most highly
      compensated officers whose annual compensation exceeded $100,000, and up to
      two
      additional individuals for whom disclosure would have been required but for
      the
      fact that the individual was not serving as an executive officer of the
      registrant at the end of the last fiscal year.





**Name
                and Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Total**Luo
                Ken Yi
            
            
            2006
            
            $
            53,786
            
            $
            159,245
            
            $
            213,031Chief
                Executive Officer, Chief Operating Officer
            
            
            2005
            
            
            52,500
            
            
            24,783
            
            
            77,283and
                Chairman of the Board
            
            
            2004
            
            
            36,231
            
            
            24,154
            
            
            60,385Wang
                Xin
            
            
            2006
            
            
            11,679
            
            
            8,743
            
            
            20,422Chief
                Financial Officer
            
            
            2005
            
            
            11,301
            
            
            6,196
            
            
            17,4972004
            
            
            7,971
            
            
            6,039
            
            
            14,010Ye
                Ning
            
            
            2006
            
            
            46,102
            
            
            72,354
            
            
            118,456Vice
                General Manager and Director
            
            
            2005
            
            
            22,305
            
            
            9,193
            
            
            31,4982004
            
            
            14,493
            
            
            9,662
            
            
            24,153Tang
                Nianzhong
            
            
            2006
            
            
            38,418
            
            
            79,402
            
            
            117,820Vice
                General Manager and Director
            
            
            2005
            
            
            22,305
            
            
            12,392
            
            
            34,6972004
            
            
            21,793
            
            
            9,662
            
            
            31,455Richard
                Rappaport(1)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —Former
                Chief Executive Officer and Former Director
            
            
            2005
            
            
            —
            
            
            —
            
            
            —2004
            
            
            —
            
            
            —
            
            
            —Anthony
                Pintsopoulos(1)
            
            
            2006
            
            
            —
            
            
            —
            
            
            —Former
                Chief Financial Officer and Former Director
            
            
            2005
            
            
            —
            
            
            —
            
            
            —2004
            
            
            —
            
            
            —
            
            
            —







(1)
            Messrs.
                Rappaport and Pintsopoulos resigned from all positions with the Company
                upon the close of the Share Exchange on October 17,
                2006.





**Grants
      of Plan-Based Awards in 2006**





There
      were no option grants in 2006.





**Outstanding
      Equity Awards at 2006 Fiscal Year-End**





There
      were no option exercises or options outstanding in 2006.





**Option
      Exercises and Stock Vested in Fiscal 2006**





There
      were no option exercises or stock vested in 2006.





43




**Employment
      Agreements**





We
      have
      employment agreements with the following persons and terms:





·
            Luo
                Ken Yi is paid $52,500 annually pursuant to a three-year agreement
                that
                expires on December 31, 2009;





·
            Tang
                Nianzhong is paid $41,250 annually pursuant to a three-year agreement
                that
                expires on December 31, 2009;





·
            Ye
                Ning is paid $41,250 annually pursuant to a five-year agreement that
                expires on December 31, 2009;





·
            Li
                Guoxing is paid $37,500 annually pursuant to a three-year agreement
                that
                expires on January 1, 2009;





·
            Bai
                Fei is paid $22,500 annually pursuant to a five-year agreement that
                expires on December 31, 2009;





·
            Wang
                Zairong is paid $10,500 annually pursuant to a one-year agreement
                that
                expires on December 31, 2007;





·
            Feng
                Shu is paid $11,400 annually pursuant to a three-year agreement that
                expires on December 31, 2008; and





·
            Wang
                Xin is paid $11,400 annually pursuant to a one-year agreement that
                expires
                on December 31, 2007.





None
      of
      the agreements provide for severance upon termination.





**Director
      Compensation**




Name
            
            Fees
                Earned or Paid in Cash
              ($)
            
            Stock
                Awards
              ($)
            
            Option
              Awards
                ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Change
                in Pension Value and Nonqualified Deferred Compensation Earnings
            
            All
                Other Compensation
              ($)
            
            Total
              ($)All
                Directors (total of 3 persons)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




For
      the
      year ended December 31, 2006, none of the members of our Board of Directors
      received compensation for his or her service as a director. We do not currently
      have an established policy to provide compensation to members of our Board
      of
      Directors for their services in that capacity. We intend to develop such a
      policy in the near future.




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





Beneficial
      ownership is determined in accordance with the rules of the SEC. In computing
      the number of shares beneficially owned by a person and the percentage of
      ownership of that person, shares of common stock subject to options and warrants
      held by that person that are currently exercisable or become exercisable within
      60 days of April 1, 2007 are deemed outstanding even if they have not actually
      been exercised. Those shares, however, are not deemed outstanding for the
      purpose of computing the percentage ownership of any other person.





The
      following table sets forth as of April 1, 2007 certain information with respect
      to beneficial ownership of our common stock based on 50,000,000 issued and
      outstanding shares of common stock, by:





·
            Each
                person known to be the beneficial owner of 5% or more of the outstanding
                common stock of our company;




·
            Each
                executive officer;




·
            Each
                director; and




44




·
            All
                of the executive officers and directors as a
                group.




Unless
      otherwise indicated, the persons and entities named in the table have sole
      voting and sole investment power with respect to the shares set forth opposite
      the stockholder’s name, subject to community property laws, where applicable.
      Unless otherwise indicated, the address of each stockholder listed in the table
      is c/o China Architectural Engineering, Inc., 105 Baishi Road, Jiuzhou West
      Avenue, Zhuhai, 519070, People’s Republic of China.




**Name
                and Address**
              **of
                Beneficial Owner**
            
            **Title**
            
            **Beneficially**
              **Owned**
              **Prior
                to and**
              **After
                the**
              **Offering**
            
            **Percent
                of**
              **Class**
              **Beneficially**
              **Owned**Luo
                Ken Yi
            
            Chief
                Executive Officer, Chief Operating Officer and Chairman of the
                Board
            
            37,736,452
            (1)
            75.5
            %Bai
                Fei
            
            Vice
                General Manager of Marketing
            
            —
            
            —Tang
                Nianzhong
            
            Vice
                General Manager and Director
            
            37,736,452
            (1)
            75.5Ye
                Ning
            
            Vice
                General Manager and Director
            
            37,736,452
            (1)
            75.5Li
                Guoxing
            
            Vice
                General Manager of Design
            
            —
            
            —Wang
                Zairong
            
            Chief
                Technology Officer and General Engineer
            
            —
            
            —Feng
                Shu
            
            Research
                and Development Supervisor
            
            —
            
            —Wang
                Xin
            
            Chief
                Financial Officer
            
            —Officers
                and Directors as a Group (total of 7 persons)
            
            
            
            37,736,452
            (1)
            75.5KGE
                Group Limited
            
            
            
            37,736,452
            (1)
            75.5







(1)
            Represents
                shares of common stock in our company held by KGE Group, Limited,
                a Hong
                Kong corporation, of which Luo Ken Yi and Ye Ning are directors and
                may be
                deemed to have voting and investment control over the shares owned
                by KGE
                Group, Limited. In addition, Luo Ken Yi and Ye Ning own approximately
                77.0% and 2.5%, respectively, of KGE Group, Limited’s issued and
                outstanding shares. In addition, KGE Holding Limited owns approximately
                18.0% of the issued and outstanding shares of KGE Group, Limited.
                KGE
                Holding Limited is owned by Luo Ken Yi, 32.5%, Tang Nianzhong, 30.5%,
                and
                Ye Ning, 30.5%. As a result, Tang Nianzhong may bee deemed to be
                a
                beneficial owner of the shares held by KGE Group Limited. Each of
                the
                foregoing persons disclaims beneficial ownership of the shares held
                by KGE
                Group Limited except to the extent of his pecuniary
                interest.




45




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




**Full
      Art International, Ltd.**





Full
      Art
      International, Ltd. (“Full Art”) is our wholly-owned subsidiary and has
      interlocking executive and director positions with China Architectural
      Engineering, Inc.





**October
      2006 Share Exchange**





On
      October 17, 2006, we completed the Share Exchange pursuant to the share exchange
      agreement entered into with Full Art and KGE Group, Limited, which was the
      sole
      shareholder of Full Art. At the closing, Full Art became our wholly-owned
      subsidiary and 100% of the issued and outstanding securities of Full Art were
      exchanged for shares of our common stock. An aggregate of 45,304,125 shares
      of
      our common stock were issued to KGE Group and its designees. KGE Group owns
      37,736,452 shares, which is approximately 75.5% of our issued and outstanding
      stock. Luo Ken Yi, who is our Chief Executive Officer, Chief Operating Officer
      and Chairman of the Board, and Ye Ning, who is our Vice General Manager and
      director, are directors of KGE Group. In addition, Luo Ken Yi and Ye Ning own
      approximately 77.0% and 2.5%, respectively, respectively, of KGE Group’s issued
      and outstanding shares. Moreover, concurrent with the closing of the Share
      Exchange, our board appointed Luo Ken Yi as Chief Executive Officer and Chief
      Operating Officer, Wang Zairong as Chief Technology Officer and General
      Engineer, and Wang Xin as Chief Financial Officer. Luo Ken Yi, Tang Nianzhong,
      Ye Ning, Wang Zairong and Wang Xin are officers and/or directors of Full Art
      and
      Zhuhai, and were also appointed as our executive officers and/or directors
      upon
      closing of the Share Exchange.





**WestPark
      Capital, Inc.**





WestPark
      Capital, Inc. was the placement agent for the $3,713,400 equity financing
      conducted by us on the close of the Share Exchange. For its services as
      placement agent, WestPark received an aggregate fee of approximately $445,608,
      which consisted of a commission equal to 9.0% of the gross proceeds from the
      financing and a non-accountable fee of 3% of the gross proceeds. Richard
      Rappaport, our President and one of our controlling stockholders prior to the
      Share Exchange, indirectly holds a 100% interest in WestPark Capital, Inc.,
      an
      NASD member. Anthony C. Pintsopoulos, an officer and director prior to the
      Share
      Exchange, is the Chief Financial Officer of WestPark Capital, Inc. Debbie
      Schwartzberg, one of our controlling stockholders prior to the Share Exchange,
      is a noteholder of the parent company of WestPark Capital, Inc.; her note
      entitles her to a 1.5% interest in the net profits of the parent company of
      WestPark Capital, Inc. Each of Messrs. Rappaport and Pintsopoulos resigned
      from
      all of their executive and director positions with us upon the closing of the
      Share Exchange.





**Loans
      to and from Insiders**





We
      have
      made loans to one of our officers. Advances from KGE Group Limited to us for
      the
      years ended December 31, 2006, 2005 and 2004 were $1,735, $420,556, and
      $205,095, respectively. Advances to Luo Ken Yi by us for the years ended
      December 31, 2006, 2005, and 2004 were $nil, $nil, and $1,889,091, respectively.
      All amounts due by Mr. Luo were repaid prior to completion of the transactions
      contemplated by the Share Exchange Agreement. All of the advances were
      unsecured, interest free, and have no fixed repayment terms.





**Director
      Independence**





See
      Item
      10 “Directors, Officers and Corporate Governance” for a discussion of board
      member independence.





**Policy
      for Approval of Related Party Transactions**





We
      do not
      currently have a formal related party approval policy for review and approval
      of
      transactions required to be disclosed pursuant to Item 404 (a) of Regulation
      S-K. We intend to adopt such a policy once we establish an audit committee,
      which we anticipate occurring in 2007.




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




During
      the fiscal years ended December 31, 2006 and 2005, we retained Samuel H.
      Wong & Co., LLP, Certified Public Accountants to provide services as
      follows:





**Fees
                for the Year Ended December 31****Services**
            
            **2006**
            
            **2005**Audit
                fees(1)
            
            $
            55,000
            
            $
            55,000Audit-related
                fees
            
            
            -
            
            
            -Tax
                fees
            
            
            -
            
            
            -All
                other fees
            
            
            -
            
            
            -Total
                audit and non-audit fees
            
            $
            55,000
            
            $
            55,000







(1)
            These
                are fees for professional services performed by Samuel H. Wong & Co.,
                LLP, Certified Public Accountants for the audit of our annual financial
                statements, review of our quarterly reports, and review of our
                Registration Statement on
                Form S-1.





46




**Pre-Approval
      Policy**





We
      do not
      currently maintain an audit committee. Our Board as a whole pre-approves all
      services provided by Samuel
      H.
      Wong & Co., LLP and has
      concluded that such services are compatible with Samuel
      H.
      Wong & Co., LLP 's
      independence as our auditors.




**PART
      IV**




**Item
      15. Exhibits and 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 “Index to Exhibits” 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, 2006, 2005 and
                        2004




Allowance
                for Doubtful Accounts:
            
            Balance
                at the Beginning of the Year
            
            Charge
                to Cost and Expenses
            
            Deductions
            
            Balance
                at the End of the YearYear
                ended December 31, 2004
            
            $
            143,014
            
            $
            284,654
            
            $
            -
            
            $
            427,668Year
                ended December 31, 2005
            
            
            427,668
            
            
            -
            
            
            (24,073
            )
            
            403,595Year
                ended December 31, 2006
            
            
            403,595
            
            
            14,053
            
            
            -
            
            
            417,648




47




**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 April 17, 2007.




**China
                Architectural Engineering, Inc.**/s/
                Luo Ken YiLuo
                Ken YiChief
              Executive Officer, Chief Operating Officerand  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, Chief Operating Officer
            
            April
                17, 2007Luo
                Ken Yi
            
            and Chairman
              of the
              Board (Principal Executive Officer)/s/
                Wang Xin
            
            Chief
                Financial Officer (Principal Financial
            
            April
                17, 2007Wang
                Xin
            
            and
                Accounting Officer)/s/
                Tang Nianzhong
            
            Vice
                General Manager and Director
            
            April
                17, 2007Tang
                Nianzhong/s/
                Ye Ning
            
            Vice
                General Manager and Director
            
            April
                17, 2007Ye
                Ning




48





**Exhibit
      Index**





2.1
            
            Share
                Exchange Agreement, dated as of August 21, 2006, by and among the
                Registrant, KGE Group, Limited, and Full Art International, Ltd.
                (incorporated by reference from Exhibit 2.1 to Current Report on
                Form 8-K
                filed with the Securities and Exchange Commission on October 20,
                2006).2.1(a)
            
            Amendment
                No. 1 to the Share Exchange Agreement, dated as of October 17, 2006,
                by
                and among the Registrant, KGE Group, Limited, and Full Art International,
                Ltd. (incorporated by reference from Exhibit 2.1(a) to Current Report
                on
                Form 8-K filed with the Securities and Exchange Commission on October
                20,
                2006).3.1
            
            Certificate
                of Incorporation of China Architectural Engineering, Inc. (incorporated
                by
                reference from Exhibit 3.1 to Registration Statement on Form SB-2
                filed
                with the Securities and Exchange Commission on April 20,
                2004).3.1(a)
            
            Certificate
                of Amendment of Certificate of Incorporation dated July 8, 2005
                (incorporated by reference to Registrant's Quarterly Report on Form
                10-QSB
                filed August 11, 2005)3.2
            
            Bylaws
                of the Registrant (incorporated by reference from Exhibit 3.2 to
                Registration Statement on Form SB-2 filed with the Securities and
                Exchange
                Commission on April 20, 2004, and incorporated herein by reference).3.3
            
            Articles
                of Merger Effecting Name Change (incorporated by reference from Exhibit
                3.3 to Current Report on Form 8-K filed with the Securities and Exchange
                Commission on October 20, 2006).4.1
            
            Specimen
                Certificate of Common Stock (incorporated by reference to Exhibit
                4. 1 of
                the Registrant's Registration Statement on Form SB-2 filed August
                20,
                2004).4.2
            
            Form
                of Escrow Agreement dated July 30, 2004 (incorporated by reference
                to
                Exhibit 4.2 of the Registrant's Registration Statement on Form SB-2
                filed
                August 20, 2004).4.3
            
            Form
                of Registration Rights Agreement dated July 23, 2004 (incorporated
                by
                reference to Exhibit 4.3 of the Registrant's Annual Report on Form
                10-KSB
                filed March 30, 2005).10.1
            
            Form
                of Subscription Agreement dated October 17, 2006 (incorporated by
                reference to Exhibit 1.1 of Amendment No. 1 to the Registrant’s
                Registration Statement on Form S-1 (File No. 333-138603) filed February
                5,
                2007).10.2
            
            Form
                of Subscription Agreement dated October 2004 (incorporated by reference
                to
                Exhibit 10.2 of the Registrant's Registration Statement on Form SB-2
                filed
                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 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 of Amendment No. 1 to the Registrant’s Registration Statement on Form
                S-1 (File No. 333-138603) filed 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 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
                of Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
                (File No. 333-138603) filed 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
                of
                Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
                (File No. 333-138603) filed 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
                of Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
                filed (File No. 333-138603) February 5, 2007).




49






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 of
                Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
                (File No. 333-138603) filed 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 of
                Amendment No. 1 to the Registrant’s Registration Statement on Form S-1
                (File No. 333-138603) filed February 5, 2007).10.11
            
            Office
                and Factory Lease Agreement dated July 13, 2005 by and between the
                Registrant and Zhuhai Yuping Kitchen Equipment Co., Ltd. (translated
                to
                English) (incorporated by reference to Exhibit 10.11 of Amendment
                No. 1 to
                the Registrant’s Registration Statement on Form S-1 (File No. 333-138603)
                filed February 5, 2007).10.12
            
            Lease
                Agreement by and between the Registrant and Beijing Aoxingyabo Technology
                Development Co., Ltd (translated to English) (incorporated by reference
                to
                Exhibit 10.12 of Amendment No. 1 to the Registrant’s Registration
                Statement on Form S-1 (File No. 333-138603) filed February 5,
                2007).10.13
            
            Property
                Rental Contract by and between the Registrant and Shanghai Sandi
                CNC
                equipment Ltd. Co (translated to English) (incorporated by reference
                to
                Exhibit 10.13 of Amendment No. 1 to the Registrant’s Registration
                Statement on Form S-1 (File No. 333-138603) filed February 5,
                2007).16.1
            
            Letter
                from AJ. Robbins, PC to the Securities and Exchange Commission dated
                October 18, 2006 (incorporated by reference from Exhibit 16.1 to
                Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                October 20, 2006).21.1
            
            List
                of Subsidiaries (incorporated by reference from Exhibit 21.1 to Current
                Report on Form 8-K filed with the Securities and Exchange Commission
                on
                October 20, 2006).31.1
            
            Certification
                of Chief Executive Officer pursuant to Item 601(b)(31) of
                Regulation S-K, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Item 601(b)(31) of
                Regulation S-K, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1*
            
            Certifications
                of Chief Executive Officer and Chief Financial Officer pursuant to
                18
                U.S.C. Section 1350 as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.







*
            This
                exhibit shall not be deemed "filed" for purposes of Section 18 of
                the
                Securities Exchange Act of 1934 or otherwise subject to the liabilities
                of
                that section, nor shall it be deemed incorporated by reference in
                any
                filing under the Securities Act of 1933 or the Securities Exchange
                Act of
                1934, whether made before or after the date hereof and irrespective
                of any
                general incorporation language in any
                filings.




50




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**FINANCIAL
      STATEMENTS**


**DECEMBER
      31, 2006, 2005, AND 2004**


**(Stated
      in US dollars)**


CONTENTS
              
              PAGESREPORT
                  OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM
              
              F-2CONSOLIDATED
                  BALANCE SHEETS
              
              F-3
                  to F-4CONSOLIDATED
                  STATEMENTS OF INCOME
              
              F-5CONSOLIDATED
                  STATEMENTS OF STOCKHOLDERS’ EQUITY
              
              F-6CONSOLIDATED
                  STATEMENTS OF CASH FLOWS
              
              F-7NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS
              
              F-8
                  to F-21





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, 2006, 2005, and 2004 and the related
      consolidated statements of income, stockholders' equity and cash flows for
      the
      years then ended. 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 audit 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, 2006, 2005, and 2004 and the results of
      its
      operations and its cash flows for the years then ended in conformity with
      accounting principles generally accepted in the United States of
      America.


South
                  San Francisco, California
              Samuel
                  H. Wong & Co., LLPMarch
                  9, 2007
              Certified
                  Public Accountants




South
                San Francisco Head Office:
              400
                Oyster Point Boulevard,
              Suite
                122
              So.
                San Francisco, CA 94080, U.S.A.
              Tel:
                (415) 732-1288
              Fax:
                (415) 397-9028
            
            Shanghai
                Representative Office:
              1266
                Nan Jing West Road,
              39/F.,
                Plaza 66, Shanghai,
              PRC
                200040
              Tel:
                (8621) 6288-0058
              Fax:
                (8621) 6288-0058
            
            Hong
                Kong Office:
              Room
                703, 7thFloor,
              Nan
                Dao Commercial Building,
              359-361
                Queen’s Road Central, H.K.
              Tel:
                (852) 2526-9262
              Fax:
                (852) 2511-3538




Internet:
      http://www.swongcpa.com





F-2





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                BALANCE SHEETS****AT
                DECEMBER 31, 2006, 2005 AND 2004****(Stated
                in US Dollars)**





Note
            
            **2006**
            
            **2005**
            
            **2004****ASSETS**Current
                assetsCash
                and cash equivalents
            
            
            
            
            $
            2,115,966
            
            $
            511,817
            
            $
            2,988,271Restricted
                cash
            
            
            
            
            
            2,743,142
            
            
            518,359
            
            
            1,118,606Contract
                receivables
            
            
            3
            
            
            7,573,913
            
            
            4,300,672
            
            
            2,373,783Costs
                and earnings in excess of billings
            
            
            
            
            
            22,487,792
            
            
            13,557,127
            
            
            5,514,924Job
                disbursements advances
            
            
            
            
            
            5,236,327
            
            
            516,914
            
            
            504,478Tender
                and other site deposits
            
            
            
            
            
            3,427,490
            
            
            2,235,752
            
            
            3,049,942Other
                receivables
            
            
            
            
            
            213,257
            
            
            48,397
            
            
            866Advances
                to a Director
            
            
            
            
            
            
            
            
            
            
            
            1,889,091Inventories
            
            
            5
            
            
            23,108
            
            
            23,389
            
            
            15,023**Total
                current assets**
            
            
            
            
            $
            43,820,995
            
            $
            21,712,427
            
            $
            17,454,984Plant
                and equipment, net
            
            
            6
            
            
            474,498
            
            
            607,672
            
            
            503,805Security
                deposit
            
            
            
            
            
            565,795
            
            
            -
            
            
            -Land
                Use Rights
            
            
            7
            
            
            -
            
            
            -
            
            
            682,721**TOTAL
                ASSETS**
            
            
            
            
            $
            44,861,288
            
            $
            22,320,099
            
            $
            18,641,510**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilitiesShort-term
                bank loan
            
            
            8
            
            $
            -
            
            $
            743,742
            
            $
            4,838,992Notes
                Payable
            
            
            9
            
            
            -
            
            
            -
            
            
            700,488Accounts
                payable
            
            
            
            
            
            15,202,029
            
            
            6,365,517
            
            
            2,721,503Advances
                from shareholder
            
            
            4
            
            
            1,735
            
            
            420,556
            
            
            205,095Other
                payables
            
            
            
            
            
            1,091,382
            
            
            16,155
            
            
            4,344Income
                tax payable
            
            
            
            
            
            1,263,491
            
            
            744,258
            
            
            33,837Business
                and other taxes payable
            
            
            
            
            
            2,058,327
            
            
            1,454,644
            
            
            591,551Customers’
                deposits
            
            
            
            
            
            1,272,312
            
            
            3,879,246
            
            
            4,489,722Job
                disbursements payable
            
            
            
            
            
            -
            
            
            75,880
            
            
            98,848Accruals
            
            
            
            
            
            894,329
            
            
            315,547
            
            
            231,813**Total
                current liabilities**
            
            
            
            
            $
            21,783,605
            
            $
            14,015,545
            
            $
            13,916,193Long-term
                bank loan
            
            
            10
            
            
            2,564,979
            
            
            -**TOTAL
                LIABILITIES**
            
            
            
            
            $
            24,348,584
            
            $
            14,015,545
            
            $
            13,916,193





See
      notes
      to consolidated financial statements


F-3





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                BALANCE SHEETS****AT
                DECEMBER 31, 2006, 2005, AND 2004****(Stated
                in US Dollars)**




Note
            
            **2006**
            
            **2005**
            
            **2004****STOCKHOLDERS’
                EQUITY**Preferred
                stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued
                and
                outstanding at December 31, 2006;Common
                stock, $0.001 par value, 100,000,000 shares authorized, 50,000,000
                shares
                issued and outstanding at December 31, 2006, and 43,304,125 shares
                issued
                and outstanding at December 31, 2005 and 2004
            
            
            11
            
            $
            50,000
            
            $
            43,304
            
            $
            43,304Additional
                paid in capital
            
            
            
            
            
            7,106,561
            
            
            -
            
            
            -Statutory
                reserves
            
            
            
            
            
            1,437,223
            
            
            1,403,699
            
            
            1,299,156Accumulated
                other comprehensive income
            
            
            
            
            
            469,964
            
            
            (51,957
            )
            
            (292,312
            )Retained
                earnings
            
            
            
            
            
            11,448,956
            
            
            6,909,508
            
            
            3,675,169$
            20,512,704
            
            $
            8,304,554
            
            $
            4,725,317**TOTAL
                LIABILITIES AND****STOCKHOLDERS’
                EQUITY**
            
            
            
            
            $
            44,861,288
            
            $
            22,320,099
            
            $
            18,641,510





See
      notes
      to consolidated financial statements





F-4




**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF INCOME****FOR
                THE YEARS ENDED DECEMBER 31, 2006, 2005 AND
                2004****(Stated
                in US Dollars)**





Note
            
            **2006**
            
            **2005**
            
            **2004**Contract
                revenues earned
            
            
            12
            
            $
            64,031,788
            
            $
            49,978,301
            
            $
            28,815,687Cost
                of contract revenues earned
            
            
            
            
            
            (46,796,419
            )
            
            (36,368,231
            )
            
            (21,418,751
            )Gross
                profit
            
            
            
            
            $
            17,235,369
            
            $
            13,610,070
            
            $
            7,396,936Selling
                and administrative expenses
            
            
            
            
            
            (5,989,328
            )
            
            (6,463,252
            )
            
            (4,635,605
            )Non-recurring
                general and administrative expenses
            
            
            13
            
            
            (3,805,608
            )
            
            -
            
            
            -Income
                from operations
            
            
            
            
            $
            7,440,433
            
            $
            7,146,818
            
            $
            2,761,331Interest
                expenses
            
            
            
            
            
            -
            
            
            (116,750
            )
            
            (260,271
            )Other
                income
            
            
            14
            
            
            27,556
            
            
            37,481
            
            
            199,198Income
                before taxation
            
            
            
            
            $
            7,467,989
            
            $
            7,067,549
            
            $
            2,700,258Income
                tax
            
            
            15
            
            
            (1,318,221
            )
            
            (1,157,271
            )
            
            (490,957
            )Net
                income
            
            
            
            
            $
            6,149,768
            
            $
            5,910,278
            
            $
            2,209,301Basic
                net income per common share
            
            
            
            
            $
            0.14
            
            $
            0.14
            
            $
            0.05Diluted
                net income per common share
            
            
            
            
            $
            0.14
            
            $
            0.14
            
            $
            0.05Basic
                weighted average common shares outstanding
            
            
            
            
            
            44,679,990
            
            
            43,304,125
            
            
            43,304,125Diluted
                weighted average common shares outstanding
            
            
            
            
            
            44,679,990
            
            
            43,304,125
            
            
            43,304,125




See
      notes
      to consolidated financial statements


F-5





**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF STOCKHOLDERS’ EQUITY****FOR
                THE YEARS ENDED DECEMBER 31, 2006, 2005, AND
                2004****(Stated
                in US Dollars)**


**Total
                  number of shares**
              
              **Common
                  stock**
              
              **Additional
                  paid in capital**
              
              **Statutory
                  reserves**
              
              **Accumulated
                  other comprehensive income**
              
              **Retained
                  earnings**
              
              **Total**Balance,
                  January 1, 2004
              
              
              43,304,125
              
              $
              43,304
              
              
              -
              
              
              896,563
              
              
              (295,941
              )
              
              5,976,687
              
              
              6,620,613Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,209,301
              
              
              2,209,301Dividend
                  paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,108,226
              )
              
              (4,108,226
              )Appropriations
                  to statutory revenue reserves
              
              
              
              
              
              
              
              
              
              
              
              402,593
              
              
              
              
              
              (402,593
              )
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,629
              
              
              
              
              
              3,629Balance,
                  December 31, 2004
              
              
              43,304,125
              
              $
              43,304
              
              
              -
              
              
              1,299,156
              
              
              (292,312
              )
              
              3,675,169
              
              
              4,725,317Balance,
                  January 1, 2005
              
              
              43,304,125
              
              $
              43,304
              
              
              -
              
              
              1,299,156
              
              
              (292,312
              )
              
              3,675,169
              
              
              4,725,317Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              5,910,278
              
              
              5,910,278Dividend
                  paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,571,396
              )
              
              (2,571,396
              )Appropriations
                  to statutory revenue reserves
              
              
              
              
              
              
              
              
              
              
              
              104,543
              
              
              
              
              
              (104,543
              )
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              240,355
              
              
              
              
              
              240,355Balance,
                  December 31, 2005
              
              
              43,304,125
              
              $
              43,304
              
              
              -
              
              
              1,403,699
              
              
              (51,957
              )
              
              6,909,508
              
              
              8,304,554Balance,
                  January 1, 2006
              
              
              43,304,125
              
              $
              43,304
              
              
              -
              
              
              1,403,699
              
              
              (51,957
              )
              
              6,909,508
              
              
              8,304,554Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,149,768
              
              
              6,149,768Dividend
                  paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,576,796
              )
              
              (1,576,796
              )Issuance
                  of Common Stock
              
              
              6,695,875
              
              
              6,696
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,696Additional
                  paid in capital from issuance of common stock in cash
              
              
              
              
              
              
              
              
              7,106,561
              
              
              
              
              
              
              
              
              
              
              
              7,106,561Appropriations
                  to statutory revenue reserves
              
              
              
              
              
              
              
              
              
              
              
              33,524
              
              
              
              
              
              (33,524
              )
              
              -Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              521,921
              
              
              
              
              
              521,921Balance,
                  December 31, 2006
              
              
              50,000,000
              
              $
              50,000
              
              
              7,106,561
              
              
              1,437,223
              
              
              469,964
              
              
              11,448,956
              
              
              20,512,704




See
      notes
      to consolidated financial statements





F-6




**CHINA
                ARCHITECTURAL ENGINEERING, INC.****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE YEARS ENDED DECEMBER 31, 2006, 2005, AND
                2004****(Stated
                in US Dollars)**




**2006**
            
            **2005**
            
            **2004*****Cash
                flows from operating activities***Net
                income
            
            $
            6,149,768
            
            $
            5,910,278
            
            $
            2,209,301Depreciation
            
            
            222,424
            
            
            200,793
            
            
            220,954Profit
                on disposal of land use rights
            
            
            -
            
            
            (15,248
            )
            
            -(Increase)/decrease
                in inventories
            
            
            281
            
            
            (8,366
            )
            
            (854
            )Increase
                in receivables
            
            
            (18,279,917
            )
            
            (6,631,038
            )
            
            (1,642,306
            )Increase/(decrease)
                in payables
            
            
            8,930,623
            
            
            4,059,391
            
            
            3,057,684Net
                cash provided by operating activities
            
            $
            (2,976,821
            )
            $
            3,515,810
            
            $
            3,844,779***Cash
                flows from investing activities***Disposals/(purchases)
                of land use rights
            
            $
            -
            
            $
            694,946
            
            $
            (672,842
            )Decrease/(increase)
                in restricted cash
            
            
            (2,224,783
            )
            
            600,247
            
            
            (965,146
            )Increase
                in security deposit
            
            
            (565,795
            )
            
            -
            
            
            -Purchases
                of plant and equipment
            
            
            (89,250
            )
            
            (304,659
            )
            
            (375,958
            )Net
                cash provided by investing activities
            
            $
            (2,879,828
            )
            $
            990,534
            
            $
            (2,013,946
            )***Cash
                flows from financing activities***Net
                (repayment)/proceeds fromshort-term
                loans
            
            $
            (743,742
            )
            $
            (4,795,738
            )
            $
            1,814,767Proceeds
                from long-term loan
            
            
            2,564,979
            
            
            -
            
            
            -Amount
                due to shareholder
            
            
            (418,821
            )
            
            132,570
            
            
            205,095Issuance
                of common stock
            
            
            6,696
            
            
            -
            
            
            -Increase
                in additional paid in capital
              from
                issuance of common stock
            
            
            7,106,561
            
            
            -
            
            
            -Dividends
                paid
            
            
            (1,576,796
            )
            
            (2,571,395
            )
            
            (4,108,226
            )Net
                cash used in financing activities
            
            $
            6,938,877
            
            $
            (7,234,563
            )
            $
            (2,088,364
            )Net
                (decrease)/increase in cash and cashEquivalents
            
            $
            1,082,228
            
            $
            (2,728,219
            )
            $
            (257,531
            )Effect
                of foreign currency translation on cash and cash
                equivalents
            
            
            521,921
            
            
            251,765
            
            
            33,619Cash
                and cash equivalents - beginning of year
            
            
            511,817
            
            
            2,988,271
            
            
            3,212,183Cash
                and cash equivalents - end of year
            
            $
            2,115,966
            
            $
            511,817
            
            $
            2,988,271Other
                supplementary informationInterest
                paid
            
            $
            71,656
            
            $
            116,750
            
            $
            232,330Income
                tax paid
            
            $
            798,988
            
            $
            446,850
            
            $
            -





See
      notes
      to consolidated financial statements


F-7


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(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.





On
      October 17, 2006, the Company underwent a reverse-merger with Full Art
      International Ltd. (a Hong Kong company) and its four wholly-owned subsidiaries
      as detailed in 2(b) *Consolidation* below,
      involving an exchange of shares whereby the Company issued an aggregate of
      43,304,125 shares of common stock in exchange for all of the issued and
      outstanding shares of Full Art. For financial reporting purposes, this
      transaction is classified as a recapitalization of China Architectural
      Engineering, Inc. and the historical financial statements of Full Art. The
      accompanying audited consolidated financial statements, the share, and per
      share
      amounts were retroactively adjusted to reflect the effects of the
      recapitalization.





The
      Company, through its subsidiaries, conducts its principal business activity
      in
      the People’s Republic of China, the Middle East, and the United States as glass
      wall contractors, specifically specializing in the design, manufacturing,
      installation and maintenance of structural glass and other light structure
      building systems.





The
      Company's work is performed under cost-plus-fee contracts, fixed-price
      contracts, and fixed-price contracts modified by incentive and penalty
      provisions. These contracts are undertaken by the company or its wholly owned
      subsidiary. The lengths of the company’s contracts vary, but they are typically
      about 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 China Architectural
      Engineering, Inc. (the Company) and its wholly-owned subsidiaries. Significant
      inter-company transactions have been eliminated in consolidation.





The
      Company is the 100% owner of Full Art International Ltd, which owned the four
      subsidiaries found in the following table for the entire reporting periods
      ended
      December 31, 2006, 2005, and 2004.




F-8





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(b)*
            *Consolidation
                (Cont’d)*





**Name
                of company**
            
            **Place
                of**
              **incorporation**
            
            **Attributable
                equity interest %**Zhuhai
                King Glass Engineering Co., Ltd
            
            
            PRC
            
            
            100Zhuhai
                King General Glass Engineering Technology Co., Ltd.
            
            
            PRC
            
            
            100King
                General Engineering (HK) Ltd.
            
            
            Hong
                Kong
            
            
            100KGE
                Building System Ltd.
            
            
            Hong
                Kong
            
            
            100





*(c)*
            *Use
                of estimates*





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





*(d)*
            *Economic
                and political risks*





The
      Company’s operations are conducted in the PRC. Accordingly, the Company’s
      business, financial condition, and results of operations may be influenced
      by
      the political, economic, and legal environment in the PRC, and by the general
      state of the PRC economy.




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





*(e)*
            *Plant
                and equipment*





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




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




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




F-9


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(f)*
            *Land
                use rights*





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





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





The
      long-lived assets held and used by the 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 years, there was no impairment loss.





*(h)*
            *Inventories*





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





*(i)*
            Contracts
                receivable





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





*(j)*
            *Advances
                to suppliers*





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





*(k)*
            *Cash
                and cash equivalents*





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





*(l)*
            *Restricted
                cash*





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




F-10


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(m)*
            *Revenue
                and cost recognition*





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





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





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





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





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





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





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





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





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





Change
      orders are common for the changes in specifications or design 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-11





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(n)*
            *Income
                taxes*





The
      Company uses the accrual method of accounting to determine and report its
      taxable income and uses the flow through method to account for tax credits,
      which are reflected as a reduction of income taxes for the year in which they
      are available. The Company has implemented *Statement
      of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
      Taxes.*





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





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





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





·
            Full
                Art International Limited, King General Engineering (HK) Ltd, and
                KGE
                Building System Ltd are subject to Hong Kong profits tax rate of
                17.5%.
                Currently, Full Art has around US$360,000 tax losses carried forward.
                KGE
                Building System has around US$33,000 tax losses carried forward.
                And for
                KGE (HK), it does not have any material tax
                losses.





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





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




F-12




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





*(n)*
            *Income
                Taxes (cont’d)*





The
      Company, after a reverse-merger on October 17, 2006, revived to be an active
      business enterprise because of the operations of its subsidiaries in China
      and
      Hong Kong. Based on the consolidated net income of 2006, the Company shall
      be
      taxed at the 34% tax rate. Please refer to Note 13 for provision of United
      States and PRC Income Taxes.





*(o)*
            *Advertising*





The
      Company expensed all advertising costs as incurred. Advertising expenses
      included in selling expenses were $151,821 and $114,731 for the years ended
      December 31, 2006 and 2005, respectively.





*(p)*
            *Research
                and development*





All
      research and development costs are expensed as incurred. Research and
      development costs included in general and administrative expenses were $50,117,
      $58,865, and $nil for the years ended December 31, 2006, 2005, and 2004,
      respectively.





*(q)*
            *Retirement
                benefits*





Retirement
      benefits in the form of contributions under defined contribution retirement
      plans to the relevant authorities are charged to the statements of income as
      incurred. The retirement expense for the years ended December 31, 2006, 2005,
      and 2004, were $118,856, $109,941, and $85,604, respectively.





*(r)*
            *Foreign
                currency translation*





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







**2006**
            
            **2005**
            
            **2004**Year
                end HKD : US$ exchange rate
            
            
            7.7794
            
            
            7.7535
            
            
            7.7760Average
                yearly HKD : US$ exchange rate
            
            
            7.7690
            
            
            7.7779
            
            
            7.7893




**2006**
            
            **2005**
            
            **2004**Year
                end RMB : US$ exchange rate
            
            
            7.8175
            
            
            8.0734
            
            
            8.2865Average
                yearly RMB : US$ exchange rate
            
            
            7.9819
            
            
            8.2033
            
            
            8.2872




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-13




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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




*(s)*
            *Statutory
                reserves*





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





*(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.





*(u)*
            *Recent
                accounting pronouncements*





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





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




F-14





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





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





**2006**
            
            **2005**
            
            **2004**Contract
                receivables
            
            $
            7,991,561
            
            $
            4,704,267
            
            $
            2,801,451*Less**:*Allowance
                for doubtful accounts
            
            
            (417,648
            )
            
            (403,595
            )
            
            (427,668
            )Net
            
            $
            7,573,913
            
            $
            4,300,672
            
            $
            2,373,783




**4.**
            **ADVANCES
                FROM SHAREHOLDER**





All
      advances from shareholder are unsecured, interest free, and without fixed
      repayment terms. Advances from/to employee are related to for business traveling
      and sundry purchasing.





**5.**
            **INVENTORIES**





**2006**
            
            **2005**
            
            **2004**Raw
                materials
            
            $
            23,108
            
            $
            23,389
            
            $
            15,023





F-15





**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**6.**
            **PLANT
                AND EQUIPMENT**




Plant
      and
      equipment consist of the following as of December 31:




**2006**
            
            
            **2005**
            
            
            **2004**At
                costMotor
                vehicle
            
            $
            453,917
            
            $
            453,281
            
            $
            442,042Machinery
                and equipment
            
            
            1,417,256
            
            
            1,326,559
            
            
            1,227,552Furniture
                and officeEquipment
            
            
            669,480
            
            
            605,297
            
            
            410,914$
            2,540,653
            
            $
            2,385,137
            
            $
            2,080,478*Less**:*Accumulated
                depreciationMotor
                vehicle
            
            $
            401,862
            
            $
            338,663
            
            $
            250,279Machinery
                and equipment
            
            
            1,190,795
            
            
            1,141,698
            
            
            1,130,467Furniture
                and officeEquipment
            
            
            473,498
            
            
            297,104
            
            
            195,927$
            2,066,155
            
            $
            1,777,465
            
            $
            1,576,673$
            474,498
            
            $
            607,672
            
            $
            503,805




Depreciation
      expenses included in the selling and administrative expenses for the years
      ended
      2006, 2005 and 2004 were $222,424, $159,641 and $144,305,
      respectively.





**7.**  **LAND
      USE RIGHTS**




**2005**
            
            **2005**
            
            **2004**Cost
                of land use rights
            
            $
            -
            
            $
            -
            
            $
            696,654*Less**:*Accumulated amortization
            
            
            -
            
            
            -
            
            
            (13,933
            )Land
                use rights, net
            
            $
            -
            
            $
            -
            
            $
            682,721





Amortization
      expenses included in selling and administrative expenses for the years ended
      2006, 2005, and 2004 were nil, nil, and $13,948, respectively.





The
      entire land use right was disposed of during the year ended December 31, 2005.
      Gain in disposal, included in other income for the year ended December 31,
      2005
      amounted to $15,248.




F-16


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**8.**
            **SHORT-TERM
                BANK LOANS**




**2006**
            
            **2005**
            
            **2004***Loan
                from China Ever Bright Bank, interest rate at**5.04%
                per annum*Due
                February 27, 2004
            
            $
            -
            
            $
            -
            
            $
            -Due
                May 21, 2005
            
            
            -
            
            
            -
            
            
            3,629,244$
            -
            
            $
            -
            
            $
            3,629,244*Loan
                from Industrial Bank Co., Ltd, interest rate at 6.7860%, 6.1065%,
                and
                5.8410% respectively per annum*Due
                August 12, 2004
            
            $
            -
            
            $
            -
            
            $
            -Due
                August 20, 2005
            
            
            -
            
            
            -
            
            
            1,209,748Due
                June 6, 2006
            
            
            -
            
            
            743,742
            
            
            -$
            -
            
            $
            743,742
            
            $
            1,209,748$
            -
            
            $
            743,742
            
            $
            4,838,992





All
      of
      the short-term bank loans due in 2006 and in 2005 were paid on their due dates.
      Interest expense was nil, $116,750 and $260,271 in 2006, 2005, and 2004,
      respectively. The principal amounts of the short-term bank loans are paid at
      the
      due dates.




**9.**
            **NOTES
                PAYABLE**




**2006**
            
            **2005**
            
            **2004**Notes
                to China Everbright Bank,Due
                March 13, 2005
            
            $
            -
            
            $
            -
            
            $
            195,929Due
                March 20, 2005
            
            
            -
            
            
            -
            
            
            96,779Due
                March 24, 2005
            
            
            -
            
            
            -
            
            
            48,390Due
                March 29, 2005
            
            
            -
            
            
            -
            
            
            224,276Due
                June 13, 2005
            
            
            -
            
            
            -
            
            
            96,780Due
                June 16, 2005
            
            
            -
            
            
            -
            
            
            38,334$
            -
            
            $
            -
            
            $
            700,488





All
      of
      the notes due in 2005 were paid on their due date.


F-17




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**10.**
            **LONG-TERM
                BANK LOAN**




**2006**
            
            
            **2005**
            
            
            **2004***Line
                of Credit from Bank of East Asia Ltd. at an interest rate at 5.508%
                subject to variation every 6 months (RMB 20,000,000)*Due
                October 25, 2011
            
            $
            2,564,979
            
            $
            -
            
            $
            -




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





Interest
      expense was $ 18,678 for 2006.





**11.**
            **COMMON
                STOCK AND ADDITIONAL PAID IN
                CAPITAL**





As
      a
      result of the reverse-merger on October 17, 2006 involving an exchange of shares
      between China Architectural Engineering, Inc. and its subsidiaries led by Full
      Art International Limited as well as issuance of shares to entities involved
      in
      the deal, total capitalization of the Company by common stock and related
      additional paid-in capital at December 31, 2006 is depicted in the following
      table: -





**December
                31, 2006**
            
            **December
                31, 2005 & 2004***Name
                of Shareholder*
            
            *Number
                of Shares*
            
            *Common
                Stock Capital*
            
            *Additional
                Paid-in Capital*
            
            *%
                of Equity Holdings*
            
            *Common
                Stock Capital*
            
            *%
                of Equity Holdings*KGE
                Group Ltd.
            
            
            43,304,125
            
            
            43,304
            
            
            -
            
            
            86.61
            %
            
            43,304
            
            
            100.00
            %Investor
                Relations Firm
            
            
            100,000
            
            
            100
            
            
            159,900
            
            
            0.20
            %First
                Alliance Financial Group
            
            
            2,000,000
            
            
            2,000
            
            
            3,198,000
            
            
            4.00
            %Former
                CAEI shareholders
            
            
            2,275,000
            
            
            2,275
            
            
            -
            
            
            4.55
            %Various
                private investors
            
            
            2,320,875
            
            
            2,321
            
            
            3,711,079
            
            
            4.64
            %Conversion
                of original capital from Full Art International, Ltd. to additional
                paid-in capital
            
            
            
            
            
            
            
            
            37,58250,000,000
            
            
            50,000
            
            $
            7,106,561
            
            
            100.00
            %
            
            43,304
            
            
            100.00
            %





On
      March
      12, 2007, the Company filed a registration statement with the SEC to register
      300,000 shares of Common Stock at a price between US$3.00 and US$4.00 per
      share.




F-18




**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**




**12.**
            **CONTRACT
                REVENUES EARNED**





**2006**
            
            **2005**
            
            **2004**Billed
            
            $
            41,906,743
            
            $
            37,825,662
            
            $
            26,408,726Unbilled
            
            
            22,125,045
            
            
            12,152,639
            
            
            2,406,961$
            64,031,788
            
            $
            49,978,301
            
            $
            28,815,687





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 needs 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.





**13.**
            **NON-RECURRING
                GENERAL AND ADMINISTRATIVE
                EXPENSE**





These
      expenses are related to the following service providers that rendered valuable
      services to the Company in consummating the reverse-merger plan:
      -


(1)
              First
                  Alliance Financial Group for financing services by issuance of
                  2,000,000
                  shares at $1.60 per share
              
              $
              3,200,000(2)
              Brokers
                  to sell 2,320,875 shares to investors by private placement at $
                  1.60 per
                  share, compensated by cash
              
              
              445,608(3)
              Investors
                  Relations Firm for investor relationship services by issuance of
                  100,000
                  shares at $ 1.60 per share
              
              
              160,000$
              3,805,608





F-19


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**14.**
            **OTHER
                INCOME**




**2006**
            
            **2005**
            
            **2004**Net
                exchange gains
            
            
            2,209
            
            
            1,501
            
            
            -Interest
                income
            
            
            25,347
            
            
            20,732
            
            
            63,108Profit
                on disposal of land use rights
            
            
            -
            
            
            15,248
            
            
            -Tax
                refund from reinvestment of earnings in a subsidiary
            
            
            -
            
            
            -
            
            
            136,090$
            27,556
            
            $
            37,481
            
            $
            199,198




**15.**
            **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 year ended December 31, 2006 and
      2005:





**2006**
            
            **2005**
            
            **2004**Income
                before tax
            
            $
            7,467,989
            
            $
            7,067,549
            
            $
            2,700,258Tax
                at the domestic income tax rate
            
            $
            2,464,436
            
            $
            2,332,291
            
            $
            891,085Effect
                of government grants
            
            
            (1,146,215
            )
            
            (1,175,020
            )
            
            (400,128
            )Current
                income tax expense for PRC
            
            $
            1,318,221
            
            $
            1,157,271
            
            $
            490,957Hong
                Kong income tax provision
            
            
            -
            
            
            -
            
            
            -U.S.
                income tax provision
            
            
            -
            
            
            -
            
            
            -$
            1,318,221
            
            $
            1,157,271
            
            $
            490,957




F-20


**CHINA
      ARCHITECTURAL ENGINEERING, INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Stated
      in US Dollars)**





**16.**
            **COMMITMENTS**





The
      Company leases certain administrative and production facilities from third
      parties. Accordingly, for the year ended December 31, 2006, 2005 and 2004,
      the
      Company incurred rental expenses of $385,386, $411,468, and $399,053
      respectively.





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





**Commitments
                Due**
            
            **2006**
            
            **2005**
            
            **2004**Less
                than 1 year
            
            $
            282,795
            
            $
            384,985
            
            $
            243,860Between
                1 and 3 years
            
            
            300,026
            
            
            2,406,586
            
            
            53,571Greater
                than 3 years
            
            
            -
            
            
            72,527
            
            
            -$
            582,821
            
            $
            2,864,098
            
            $
            297,431





**17.**  **RELATED
      PARTIES TRANSACTIONS**





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





The
      advances to/(from) Luo Yi, the director for the years ended December 31, 2006,
      2005, and 2004 were nil, nil, and $1,889,091, respectively.





The
      advances from KGE Group Limited, the holding company for the years ended
      December 31, 2006, 2005, and 2004 were $1,735, $420,556, $205,095 respectively.





All
      of
      the above amounts due with a director and the holding company are unsecured,
      interest free, and have no fixed repayment terms.





F-21