- Quarterly Report (10-Q)

Share Name	Share Symbol	Market	Type
China Cgame, (MM)	NASDAQ:CCGM	NASDAQ	Common Stock

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission File Number

001-33709

CHINA CGAME, INC.

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

Delaware (State or other jurisdiction of incorporation or organization)		51-05021250 (I.R.S. Employer Identification No.)

Research Building, No.801 Wuzhong Road, Changzhou Science and Education Industrial Park , Wujin District, Changzhou, Jiangsu, People’s Republic of China (Address of principal executive offices)		213164 (Zip Code)

0086-519-86339908

(Registrant’s telephone number, including area code)

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

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

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

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

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

There were 20,039,825 shares outstanding of registrant’s common stock, par value $0.001 per share, as of June 30, 2011.

CHINA CGAME, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	1

	Consolidated Balance Sheet as of June 30, 2011 (unaudited) and December 31, 2010	2

	Unaudited Interim Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010	4

	Unaudited Interim Consolidated Statements of Cash Flows for the three and six months ended June 30, 2011 and 2010	5

	Unaudited Consolidated Statements of Stockholders’ Equity from January 1, 2010 to June 30, 2011	7

	Notes to the Unaudited Interim Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	31

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	42

ITEM 4.	CONTROLS AND PROCEDURES	42

PART II - OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	45

ITEM 1A.	RISK FACTORS	45

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	47

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	REMOVED AND RESERVED	47

ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	47

SIGNATURES		48

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited financial statements reflect all adjustments that, in the opinion of management, are considered necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. The accompanying unaudited financial statements should be read in conjunction with the audited financial statements of China CGame, Inc. as contained in its Annual Report for the fiscal year ended December 31, 2010 on Form 10-K, as filed with the Securities and Exchange Commission on April 15, 2011, and as amended by Amendment No. 1 on April 29, 2011.

CHINA CGAME, INC.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2011 AND DECEMBER 31, 2010

(Stated in US Dollars)

	Notes	June 30, 2011		December 31, 2010
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	2(i)	$	186,653	$	737,984
Restricted cash	2(j)		241,122		241,116
Contract receivables, net	2(h),(3)		43,820,498		43,812,422
Costs and earnings in excess of billings			3,279,765		3,009,487
Job disbursements advances			4,255		3,478
Other receivables, net	(4)		26,947,669		23,308,127
Inventories	2(g),(5)		30,808		30,117
Deferred income taxes, current	(12)		112,622		112,625
Other current assets			273,057		182,454
Current assets held for sale			43,008,476		46,688,400
Total current assets			117,904,925		118,126,210

Non-current assets
Plant and equipment, net	2(d),(6)		1,840,179		2,322,604
Intangible Assets	(7)		106,783		167,223
Goodwill	2(f)		23,771,636		23,771,636
Other non-current assets			421,865		414,980
Investments in associates			1,299,929		-
Long-term assets held for sale			638,452		598,580
			28,078,844		27,275,023
TOTAL ASSETS		$	145,983,769	$	145,401,233

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short-term bank loans	(8)	$	4,561,986	$	4,606,922
Convertible Bond Payable due within one year, net	(9)		23,322,000		22,687,021
Accounts payable			8,521,543		8,706,583
Billings over costs and estimated earnings			3,087,533		2,955,309
Amount due to shareholder	(17)		11,969,775		13,592,883
Other payables	(10)		8,863,635		2,777,422
Business and other taxes payable			149,994		146,627
Customers’ deposits			208,436		208,244
Other Accruals	(11)		9,126,338		6,476,946
Current liabilities associated with assets held for sale			36,140,217		40,483,030
Total current liabilities			105,951,457		102,640,987

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

CHINA CGAME, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

AS OF JUNE 30, 2011 AND DECEMBER 31, 2010

(Stated in US Dollars)

	Notes	June 30, 2011			December 31, 2010
		(Unaudited)
Non-current liabilities
Long term bank loans	(8)	$	38,415		$	32,013
Convertible bond payable, net	(9)		8,192,539			6,304,242
			8,230,954			6,336,255
TOTAL LIABILITIES		$	114,182,411		$	108,977,242

STOCKHOLDERS’ EQUITY
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2011 and December 31, 2010		$	-		$	-

Common stock, $0.001 par value, 100,000,000 shares authorized, 20,039,825 shares issued and outstanding at June 30, 2011 and December 31, 2010.			20,040			20,040
Additional paid in capital			43,880,995			43,880,995
Statutory reserves			3,040,595			3,040,595
Accumulated other comprehensive income	2(t)		5,052,648			1,572,840
Retained earnings			(18,380,107	)		(11,172,099	)
Total Company shareholders’ equity			33,614,171			37,342,371
Non-controlling interests			(1,812,813	)		(918,380	)
TOTAL SHAREHOLDERS’ EQUITY			31,801,358			36,423,991
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	145,983,769		$	145,401,233

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

CHINA CGAME, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Stated in US Dollars)

		Three months ended June 30,						Six months ended June 30,
	Note	2011			2010			2011			2010

Contract revenues earned	(12)	$	-		$	-		$	-		$	5,631,832
Cost of contract revenues earned			-			-			-			(961,937	)
Gross profit		$	-		$	-			-		$	4,669,895
Selling, general and administrative expenses			(1,584,351	)		(3,574,589	)		(3,187,519	)		(4,808,320	)
Loss from operations		$	(1,584,351	)	$	(3,574,589	)	$	(3,187,519	)	$	(138,425	)

Interest income			221			10			665			80
Interest expense			(1,862,829	)		(1,729,275	)		(3,929,408	)		(3,355,356	)
Other income			51			1,338			6,984			8,852
Other expenses			(249,942	)		(115	)		(381,251	)		(804	)
Loss before taxation on Continuing Operations		$	(3,696,850	)	$	(5,302,631	)	$	(7,490,529	)	$	(3,485,653	)
Income tax	(13)		-			-			-			9,575
Loss from Continuing Operations		$	(3,696,850	)	$	(5,302,631	)	$	(7,490,529	)	$	(3,495,228	)
Discontinued Operation Income (Loss), net of tax	(19)		326,608			1,970,744			(611,275	)		(3,357,938	)
Net Loss		$	(3,370,242	)	$	(3,331,887	)	$	(8,101,804	)	$	(6,853,166	)
Net loss attributable to non-controlling interest			491,627			1,551			893,796			2,946
Net Income Loss Attributable to the Company		$	(2,878,615	)	$	3,330,336		$	(7,208,008	)	$	(6,850,220	)

Earnings Per Share
Basic-Net Loss		$	(0.14	)	$	(0.24	)	$	(0.36	)	$	(0.50	)
-Loss from Continuing Operations			(0.16	)		(0.38	)		(0.33	)		(0.26	)
-Loss from non-controlling interest			(0.02	)		(0.00	)		(0.04	)		(0.00	)
-Income(Loss) from Discontinued Operations			0.02			0.14			(0.03	)		(0.24	)

Diluted- Net Loss		$	(0.14	)	$	(0.24	)	$	(0.36	)	$	(0.50	)
- Loss from Continuing Operations			(0.16	)		(0.38	)		(0.33	)		(0.26	)
-Loss from non-controlling interest			(0.02	)		(0.00	)		(0.04	)		(0.00	)
-Income(Loss) from Discontinued Operations			0.02			0.14			(0.03	)		(0.24	)
Weighted Average Shares Outstanding
-Basic			20,039,825			13,789,219			20,039,825			13,736,441
-Diluted			20,039,825			13,789,219			20,039,825			13,736,441

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

CHINA CGAME, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Stated in US Dollars)

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Cash flows from operating activities
Net Loss	$	(3,370,242	)	$	(3,331,887	)	$	(8,101,804	)	$	(6,853,166	)

Discontinued Operation Loss(Income), net of tax		(326,608	)		(1,970,744	)		611,275			3,357,938
Depreciation expense		226,276			-			455,215			200,784
Bad debt expense		-			18,667			-			212,420
Amortization expenses on intangible assets		8,224			-			16,727			9,612
Amortization expenses on convertible bond discount		1,168,917			1,094,048			2,561,691			2,005,054
Stock compensation and options expenses		-			7,464			-			1,971,928
Loss(Gain) on disposal of fixed assets		863			72,918			36,036			(4,004	)
Loss(Gain) on disposal of intangible assets		(1,992	)		(1,012	)		43,713			-
(Increase)/decrease in inventories		(500	)		(7,730	)		(691	)		557,423
(Increase)/decrease in deferred tax assets		(77	)		-			3			-
Decrease in receivables		(8,168,930	)		6,110,359			(7,751,425	)		9,712,555
Decrease in other assets		-			509,807			-			1,300,624
Increase/(decrease) in payables		8,882,991			(2,671,434	)		8,686,349			(5,539,741	)
Cash Provided by operating activities – continuing operations		(1,581,078	)		(169,544	)		(3,442,911	)		6,931,427
Cash Provided by operating activities – discontinued operations		2,672,625			2,315,091			1,501,018			2,111,356

Net cash provided by/(used in) operating activities	$	1,091,547		$	2,145,547		$	(1,941,893	)	$	9,042,783

Cash flows from investing activities
Decrease/(increase) in restricted cash	$	(172	)	$	5,507		$	(6	)	$	6,116
Purchases of fixed assets		(8,362	)		13,256			(8,826	)		13,256
Investments in associates		(1,299,929	)		-			(1,299,929	)		-
Cash Used in investing activities – continuing operations		(1,308,463	)		18,763			(1,308,761	)		19,372

Cash Used in investing activities – discontinued operations		(54,145	)		(1,098,865	)		(313,329	)		(90,174	)
Net cash provided/(used) in investing activities	$	(1,362,608	)	$	(1,080,102	)	$	(1,622,090	)	$	(70,802	)

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

CHINA CGAME, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Stated in US Dollars)

Cash flows from financing activities
Repayments of short-term loans	$	(41,682	)	$	(11,863	)	$	(44,937	)	$	(17,580	)
Repayments of long-term loans		(51,184	)		(19,435	)		(32,013	)		(38,824	)
Repayments of shareholder loan		1,473,080			474,240			1,056,143			(6,949,222	)
Cash provided by financing activities – continuing operations		1,380,214			442,942			979,193			(7,005,626	)
Cash provided by financing activities – discontinued operations		(1,911,990	)		(1,312,268	)		(1,797,551	)		(2,132,604	)
Net cash provided in financing activities	$	(531,776	)	$	(869,326	)	$	(818,358	)	$	(9,138,230	)

Net Increase/(Decrease) in Cash & Cash Equivalents for the Period – continuing operations	$	(1,509,327	)	$	292,161		$	(3,772,479	)	$	(54,827	)
Net Increase/(Decrease) in Cash & Cash Equivalents for the Period – discontinued operations		706,490			(96,042	)		(609,862	)		(111,422	)
Net decrease in cash and cash equivalents for the Period		(802,837	)		196,119			(4,382,341	)		(166,249	)

Effect of Currency Translation – continuing operations		261,173			(134,435	)		3,221,148			(18,151	)
Effect of Currency Translation – discontinued operations		2,146,454			72,412			258,660			75,719
		2,407,627			(62,023	)		3,479,808			57,568

Cash & Cash Equivalents at Beginning of Period - continuing operations		1,434,807			267,059			737,984			497,763
Cash & Cash Equivalents at Beginning of Period - discontinued operations		187,862			230,289			3,392,008			242,362
		1,622,669			497,348			4,129,992			740,125

Cash & Cash Equivalents at End of Period - continuing operations		186,653			424,785			186,653			424,785
Cash & Cash Equivalents at End of Period - discontinued operations		3,040,806			206,659			3,040,806			206,659
Cash & Cash Equivalents at End of Period	$	3,227,459		$	631,444		$	3,227,459		$	631,444

Other supplementary information:
Cash paid during the year for:
Interest paid	$	276		$	150,359		$	30,763		$	1,410,359
Income tax paid	$	5,121		$	9,575		$	7,719		$	9,575

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

CHINA CGAME, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

AS OF JUNE 30, 2011 AND DECEMBER 31 2010

(Amount Stated in US Dollars)

	Total Number of shares		Common stock		Additional paid in capital		Statutory reserves		Accumulated other comprehensive income			Retained earnings			Non-controlling Interest			Total
Balance, January 1, 2010		13,314,825	$	13,315	$	26,535,818	$	3,040,595	$	3,868,437		$	11,131,084		$	(26,389	)	$	44,562,860
Net Loss including non-controlling interests													(22,303,183	)		(891,991	)		(23,195,174	)
Additional Paid-in Capital from grant of employee stock options						19,902		-		-			-			-			19,902
Value of stocks grant to employees		475,000		475		1,956,525		-		-			-			-			1,957,000
Value of stocks to acquire New Crown		6,250,000		6,250		15,368,750		-		-			-			-			15,375,000
Foreign currency translation adjustment		-		-		-		-		(2,295,597	)		-			-			(2,295,597	)
Balance, December 31, 2010		20,039,825	$	20,040	$	43,880,995	$	3,040,595	$	1,572,840		$	(11,172,099	)	$	(918,380	)	$	36,423,991

Balance, January 1, 2011		20,039,825	$	20,040	$	43,880,995	$	3,040,595	$	1,572,840		$	(11,172,099	)	$	(918,380	)	$	36,423,991
Net loss including non-controlling interests		-		-		-		-		-			(7,208,008	)		(894,433	)		(8,102,441	)
Foreign currency translation adjustment		-		-		-		-		3,479,808			-			-			3,479,808
Balance, JUNE 30, 2011		20,039,825	$	20,040	$	43,880,995	$	3,040,595	$	5,052,648		$	(18,380,107	)	$	(1,812,813	)	$	31,801,358

	Comprehensive			Comprehensive
	Income for the Three Months			Income for the Year			Accumulated
	Ended June 30, 2011			Ended December 31, 2010			Total
Net Income	$	(7,208,008	)	$	(22,303,183	)	$	(29,511,191	)
Foreign Currency Translation Adjustment		3,479,808			(2,295,597	)		1,184,211
	$	(3,728,200	)	$	(24,598,780	)	$	(28,326,980	)

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

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

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

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

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

On August 18, 2010, pursuant to a stock purchase agreement that was entered into on August 11, 2010 by and among the Company, First Jet Investments Limited (“First Jet”), New Crown Technology Limited, First Jet’s wholly-owned subsidiary (“New Crown”) and Mr. Jun Tang, the principal of First Jet and New Crown, the Company completed an acquisition of 60% of the issued and outstanding shares of New Crown, which is the holder of 100% of the equity interests of Shanghai ConnGame Network Ltd. (“ConnGame”). In exchange for the 60% equity interest of New Crown, the Company issued 6,250,000 shares of the Company’s common stock, $0.001 par value per share, to First Jet. ConnGame is a company organized under the laws of the People’s Republic of China with a registered capital of RMB 10,000,000. ConnGame is a developer and publisher of MMORPG (Massively Multiplayer Online Role Playing Game). Since ConnGame has not launched any games, it has not generated any material revenue. In connection with the foregoing transaction, the Company transferred to New Crown 100% of the equity interests of China Architectural Engineering (Shenzhen) Co., Ltd., which had immaterial operations and assets at the time of transfer.

In August 2010, connection with the acquisition of ConnGame and the issuance of 6,250,000 shares of the Company's common stock, the Company increased its authorized shares of common stock from 100,000,000 to 150,000,000 shares of common stock.

Effective December 21, 2010, the Company conducted a 1-for-4 Reverse Stock Split of all issued and outstanding shares of its common stock, and reduced the number of the authorized shares of the common stock from 150,000,000 to 100,000,000. Upon the effect of the Reverse Stock Split, the Company’s issued and outstanding shares reduced from 80,156,874 to 20,039,825. Except as otherwise specified, all information in these financial statements and notes and all share and per share information has been retroactively adjusted to reflect the reverse stock split.

On March 25, 2011, the Company changed its name from China Architectural Engineering, Inc. to its current name China CGame, Inc. The Board of Directors approved the change of the corporate name to better reflect the operations of the Company’s focus on providing MMORPG in China. Pursuant to Section 253 of the Delaware General Corporation Law, the name change was effected by the merger of China CGame, Inc., a wholly-owned subsidiary of the Company, with and into the Company, with the Company being the surviving corporation. This merger had the effect of amending the Company’s Certificate of Incorporation to reflect the new legal name of the Company.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)

Method of accounting

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

(b)

Consolidation

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

As of June 30, 2011, detailed identities of the consolidating subsidiaries are as follows:

Name of Company	Place of Incorporation	Attributable Equity interest %
Full Art International Limited	Hong Kong	100
Zhuhai King Glass Engineering Co., Ltd.	PRC	100
Zhuhai King General Glass Engineering Technology Co., Ltd.	PRC	100
King General Engineering (HK) Limited	Hong Kong	100
KGE Building System Limited	Hong Kong	100
KGE Australia Pty Limited	Australia	55
Zhuhai Xiangzhou District Career Training School	PRC	72
Faith Mount International Limited	Hong Kong	100
Techwell Engineering Limited	Hong Kong	100
Techwell International Limited	Macau	100
Techwell Building System (Shenzhen) Co., Ltd.	PRC	100
CAE Building Systems, Inc.	USA	100
Techwell International S.E.A.	Singapore	100
China Architectural Engineering (Shenzhen) Co., Ltd.	PRC	60
CAE Building Systems (Singapore) Pte Ltd	Singapore	100
New Crown Technology Limited	Hong Kong	60
Shanghai ConnGame Network Ltd.	PRC	60

(c)

Use of estimates

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

(d)

Plant and equipment

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

Motor vehicle	5 years
Machinery and equipment	5 - 10 years
Furniture and office equipment	5 years
Building	20 years

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

(e)

Accounting for the impairment of long-lived assets

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

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

During the reporting periods, there was no impairment loss.

(f)

Goodwill and Intangible Assets

In accordance with ASC 350, “Goodwill and Other Intangible Assets.” the Company does not amortize goodwill or intangible assets with indefinite lives.

Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations.

The Company performs an analysis on its goodwill balances to test for impairment on an annual basis and whenever events occur that indicate an impairment could exist.

All of the goodwill presented as June 30, 2011 is attributable to the acquired subsidiaries with approximately $15.8 million attributable to ConnGame, which was acquired in August 2010, and approximately $8.0 million attributable to Techwell Engineering Limited. There are several instances that may cause the Company to further test its goodwill for impairment between the annual testing periods including: (i) continued deterioration of market and economic conditions that may adversely impact its ability to meet its projected results; (ii) declines in the Company’s stock price caused by continued volatility in the financial markets that may result in increases in its weighted-average cost of capital or other inputs to its goodwill assessment; (iii) the occurrence of events that may reduce the fair value of a reporting unit below its carrying amount, such as the sale of a significant portion of one or more of the Company’s reporting units. In the period ended June 30, 2011, the Company believes that no instance indicates that an impairment could exist in respect to Techwell and ConnGame.

Material assumptions the related to Techwell include: (1) The reporting unit continues to have the profitable operations for a period of next 10 years; (2) the revenue has the steady annual growth rate ranging from 5% to 8% as in line with the estimated growth rate of PRC economy; (3) costs of funds kept stable for the period of next 10 years resulting in a stable discount rate for the projection of estimated fair value; and (4) no material change in the prevailing payment terms of the construction industry that allowing the working capital requirement kept at a low level at 15%. Uncertainties include: (1) The ability of the reporting unit to continue as a profitable operation may be affected by changes in technologies and the market of the construction industry; (2) the growth of the PRC economy may not be as steady as projected that in turn affect the steady growth of the revenue of the reporting unit, (3) it is also uncertain about the capital market that affect the costs of fund of the company; and (4) the prevailing payment terms used in the construction industry may be changed as a result of changes in the business environment for the construction industry. Potential events include (1) the appreciation of the value of RMB that would slow down the export and in turn the economic development of China that in turn have negative effect of property development industry in China; and (2) the controlling policies towards the property market by the PRC government.

For other intangible assets, impairment tests are performed annually and more frequently whenever events or changes in circumstances indicate carrying values exceed estimated reporting unit fair values

(g)

Inventories

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

(h)

Contracts receivables

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

(i)

Cash and cash equivalents

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

(j)

Restricted cash

Restricted cash represents deposits in bank accounts to secure notes payables, bank loans, project performance bond and guarantee.

(k)

Earnings (Loss) per share

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

The calculation of diluted weighted average common shares outstanding for the period ended June 30, 2011 and 2010 is based on the estimate fair value of the Company’s common stock during such periods applied to warrants and options using the treasury stock method to determine if they are dilutive. The Convertible Bond is included on an “as converted “basis when these shares are dilutive. See also Note 18 – Earnings (Loss) Per Share.

(l)

Revenue and cost recognition

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

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

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.

Selling, general, and administrative costs are charged to expense as incurred.

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

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

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

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.

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.

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

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

(m)

Income taxes

The Company uses the accrual method of accounting to determine and report its taxable reduction of income taxes for the year in which they are available. The Company has implemented ASC 740-270, Accounting for Income Taxes.

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

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

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

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

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

Techwell Engineering Limited is subject to a Hong Kong profits tax rate of 16.5%. Techwell International Limited is a Macau registered company and therefore is subject to Macau profits tax rate of 12%. Techwell Building System (Shenzhen) Co. Limited is located in Shenzhen and is subject to PRC corporate income tax rate of 20% in 2009 that will be gradually increased to the uniform rate of 25% by 2012 as according to the new EIT law.

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

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

The Company, after a reverse-merger on October 17, 2006, revived to be an active business enterprise because of the operations with subsidiaries in the PRC and Hong Kong. [ Based on the consolidated net income for the six-month period ended June 30, 2011, the Company shall be taxed at the 34% tax rate.]

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

New Crown Technology Limited is subject to a Hong Kong profits tax rate of 16.5%.

Shanghai ConnGame Network Ltd. is located in Shanghai and is subject to a 25% income tax rate.

(n)

Advertising

The Company expensed all advertising costs as incurred. Advertising expenses included in selling expenses were $197,076, and $nil for the six-month periods ended June 30, 2011 and 2010, respectively.

(o)

Research and development

All research and development costs are expensed as incurred. Research and development costs included in general and administrative expenses were $1,818,781 and $nil for the six-month periods ended June 30, 2011 and 2010, respectively.

(p)

Retirement benefits

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

(q)

Selling, general and administrative expenses

Selling, general and administrative expenses including employee salaries, pension costs, marketing costs, insurance, rent, and depreciation, etc.

(r)

Foreign currency translation

The accompanying consolidated financial statements are presented in United States Dollars (US$). The Company’s functional currency is the US$, while certain domestic subsidiaries’ use the Renminbi (RMB) and Hong Kong and overseas subsidiaries use local currencies as their functional currency. The consolidated financial statements are translated into US$ from RMB, Hong Kong Dollars (HKD), United Arab Emirate Dirham (AED) and other local currencies at June 30, 2011 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.

	06/30/2011		03/31/2011		12/31/2010		06/30/2010		03/31/2010
Year/quarter end RMB : US$ exchange rate		6.4635		6.5701		6.6118		6.8086		6.8361
Average yearly/quarterly RMB : US$ exchange rate		6.5399		6.5894		6.7788		6.8335		6.8360

Year/quarter end HKD : US$ exchange rate		7.7834		7.7887		7.7832		7.7847		7.7647
Average yearly/quarterly HKD : US$ exchange rate		7.7824		7.7879		7.7695		7.7794		7.7639

Year/quarter end AED : US$ exchange rate		3.6732		3.6734		3.6737		3.6737		3.6739
Average yearly/quarterly AED : US$ exchange rate		3.6730		3.6736		3.6737		3.6737		3.6736

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.

(s)

Statutory reserves

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

(t)

Comprehensive income

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

(u)

Discontinued Operations

Certain amounts have been reclassified to present the Company’s Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School operations as discontinued operations. Unless otherwise indicated, information presented in the notes to the financial statements relates only to the Company’s continuing operations. Information related to discontinued operations is included in Note 19 and in some instances, where appropriate, is included as a separate disclosure within the individual footnotes.

(v)

Going Concern

These consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. As of June 30, 2011 and December 31, 2010, the Company has an accumulated deficit of $18,380,107 and $11,172,099, respectively, due to the fact that the Company continued to incur losses over the past few years. The Company has failed to make required principal and interest payments due under convertible bonds, which may be called by the bondholders at any time. Management is attempting to renegotiate the terms of the debts and is in the process of evaluating funding alternatives including seeking refinance of the debts and temporary loans from the major shareholder for the Company operations. As a result, the Company is dependent upon financial support of certain stockholders.

These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of the Company’s ability to continue as a going concern.

3.	CONTRACT RECEIVABLES

As of June 30, 2011	Continuing			Discontinued
	Operations			Operations
Contract receivables	$	43,821,101		$	39,565,273
Less: Allowance for doubtful accounts		(603	)		(5,658,879	)
Net	$	43,820,498		$	33,906,394

Allowance for Doubtful Accounts	Continuing		Discontinued
	Operations		Operations
Beginning balance	$	-	$	5,531,953
Add: Allowance created		603		126,926
Less: Written off against allowance		-		-
Ending balance	$	603	$	5,658,879

As of December 31, 2010	Continuing		Discontinued
	Operations		Operations
Contract receivables	$	43,812,422	$	43,159,743
Less: Allowance for doubtful accounts		-		(5,531,953	)
Net	$	43,812,422	$	37,627,790

Allowance for Doubtful Accounts	Continuing		Discontinued
	Operations		Operations
Beginning balance	$	-	$	6,642,386
Add: Allowance created		-		5,973,576
Less: Written off against allowance		-		(7,084,009	)
Ending balance	$	-	$	5,531,953

4.	OTHER RECEIVABLES

Other receivables consisted of the following:

As of June 30, 2011	Continuing Operations		Discontinued Operations
Due from sellers of Techwell, the subsidiary (1)	$	11,437,945	$	-
Due from Kangbao Electrical Company Limited (Kangbao) , a related party (2)		-		614,119
Drawdown of advance payment and performance bonds by client of the projects in Dubai (3)		9,380,167		-
Other related parties receivables		4,569,244		58,870
Deposits for site operations of projects in PRC		-		2,484,177
Other		1,560,313		1,177,798

Total	$	26,947,669	$	4,334,964

As of December 31, 2010	Continuing Operations		Discontinued Operations
Due from sellers of Techwell, the subsidiary (1)	$	11,362,494	$	-
Due from Kangbao Electrical Company Limited (Kangbao) , a related party (2)		1,169,876		-
Drawdown of advance payment and performance bonds by client of the projects in Dubai (3)		9,380,408		-
Other related parties receivables		703,539		-
Deposits for site operations of projects in PRC		-		3,049,100
Other		691,810		-

Total	$	23,308,127	$	3,049,100

(1)

On November 6, 2007, the Company, through Full Art International, Ltd. (“Full Art”), acquired all of the issued and outstanding shares in the capital of Techwell Engineering Limited, a limited liability company incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement (the “Agreement”) dated November 6, 2007, entered into by and among Ng Chi Sum and Yam Mei Ling (each a “Shareholder” and collectively, the “Shareholders”), the Company and Full Art. Pursuant to the terms and conditions of the Agreement, the Shareholders agreed that each of them would pay any and all accounts receivables of Techwell if not paid by the customers within 24 months of the acquisition date. The 24 month period had expired. The amount due and payable from the Shareholders is included in the other receivable due from sellers of Techwell.

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

(3)

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

5.	INVENTORIES

As of June 30, 2011		Continuing Operations				Discontinued Operations
Raw materials at sites		$	30,808			$	232,380

As of December 31, 2010		Continuing Operations				Discontinued Operations
Raw materials at sites		$	30,117			$	-

6.	PROPERTY, PLANT AND EQUIPMENT

Property, Plant and equipment consist of the following as of: -

As of June 30, 2011	Continuing Operations		Discontinued Operations

At cost
Motor vehicle	$	593,963	$	334,018
Machinery and equipment		1,187,063		1,338,076
Furniture, software and office		-		-
Equipment		1,224,816		1,040,479
Leasehold improvement		1,024,306		-
	$	4,030,148	$	2,712,573

Less: Accumulated depreciation
Motor vehicle	$	441,959	$	344,362
Machinery and equipment		729,041		1,047,631
Furniture, software, and office equipment		586,201		695,552
Leasehold improvement		432,768		-
	$	2,189,969	$	2,087,545

	$	1,840,179	$	625,028

As of December 31, 2010	Continuing Operations		Discontinued Operations

At cost
Motor vehicle	$	623,192	$	271,792
Machinery and equipment		1,160,438		1,304,176
Furniture, software and office
Equipment		1,305,000		1,069,777
Leasehold improvement		1,004,538		-
	$	4,093,168	$	2,645,745

Less: Accumulated depreciation
Motor vehicle	$	398,449	$	344,637
Machinery and equipment		654,680		995,126
Furniture, software, and office equipment		488,492		707,992
Leasehold improvement		228,943		-
	$	1,770,564	$	2,047,755

	$	2,322,604	$	597,990

Depreciation expenses included in the selling and administrative expenses for periods ended June 30, 2011 and 2010 were $ 455,215 and $200,784 respectively.

7.	INTANGIBLE ASSETS

As of June 30, 2011	Continuing Operations		Discontinued Operations

At cost
Intangible Assets	$	161,933	$	1,207
Less: Accumulated amortization		55,150		1,207
	$	106,783	$	-

As of December 31, 2010	Continuing Operations		Discontinued Operations

At cost
Intangible Assets	$	250,786	$	1,180
Less: Accumulated amortization		83,563		590
	$	167,223	$	590

LOANS

SHORT-TERM BANK LOANS

As of June 30, 2011	Continuing Operations		Discontinued Operations

ABN Amro N.V. Overdraft in Current Account at interest rate at 6.5% per annum		-		1,712,677

ABN Amro N.V. Temporary Loan for the drawing of performance and advance payment bonds at interest rate at Bank's Cost of Fund + 6%		4,529,974		-

Automobile capital lease obligation (hire purchase),amount due within one year, last installment due November 9, 2012		32,012		-

	$	4,561,986	$	1,712,677

As of December 31, 2010	Continuing Operations		Discontinued Operations

ABN Amro N.V. Overdraft in Current Account at interest rate at 6.5% per annum		-		1,674,263

ABN Amro N.V. Temporary Loan for the drawing of performance and advance payment bonds at interest rate at Bank's Cost of Fund + 6%		4,530,090		-

Automobile capital lease obligation (hire purchase),amount due within one year, last installment due November 9, 2012		76,832		-

	$	4,606,922	$	1,674,263

LONG-TERM BANK LOANS

Continuing Operations	June 30, 2011		December 31, 2010

Automobile capital lease obligation (hire purchase),amount due to DBS Bank, last installment due November 9, 2012		38,415		32,013

	$	38,415	$	32,013

9.	CONVERTIBLE BONDS AND BOND WARRANTS

(a)

$10,000,000 Variable Rate Convertible Bonds due in 2012

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

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

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

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

(b)

$20,000,000 12% Convertible Bonds due in 2011

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

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

The Convertible Bonds Payable, net consists of the following:

Continuing Operations	June 30, 2011			December 31, 2010

Convertible Bonds Payable	$	28,000,000		$	28,000,000
Less: Interest discount – Warrants		(3,305,938	)		(3,305,938	)
Less: Interest discount – Beneficial conversion feature		(1,882,404	)		(1,882,404	)
Less: Bond discount		(760,069	)		(760,069	)
Accretion of interest discount		9,462,950			6,939,674

Total Convertible Bonds Payable, Net	$	31,514,539		$	28,991,263

Continuing Operations	June 30, 2011		December 31, 2010

Convertible Bonds Payable – current portion	$	23,322,000	$	22,687,021
Convertible Bonds Payable – non-current portion		8,192,539		6,304,242
Total Convertible Bonds Payable, Net	$	31,514,539	$	28,991,263

Failure to Comply with the Terms and Conditions of the Convertible Bonds

On July 13, 2010, the Company and the holders of the Company’s outstanding Variable Rate Convertible Bonds due 2012 (the “2007 Bonds”), 12% Convertible Bonds due 2011 (the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”) and warrants to purchase 300,000 shares of common stock of the Company expiring 2013 (the “2008 Warrants”) entered a new Waiver Agreement (the “Waiver”) , which has a three month term subject to the terms and conditions contained therein. Pursuant to Waiver, the bondholders and warrant holder agreed to waive their right to a reduction in the conversion price of the Bonds and exercise price of the 2008 Warrants due to the Company’s proposed sale of the shares pursuant to the Purchase Agreement at a price per share less than the current conversion prices of the Bonds and exercise price of the 2008 Warrants.

The waivers contained in the Waiver Agreement are subject to numerous conditions. Under the Waiver Agreement, the Company agreed to pay the Bondholders the interest on the Bonds in the amount of approximately $3.84 million on scheduled dates, of which the Company made a payment of approximately $1.26 million on March 31, 2010 and $1.32 million on April 15, 2010. Under the terms of the waiver, the Company agreed that the Company would pay to the bondholders all outstanding interests in arrears on the Bonds, plus all other applicable interest up until the payment date, within 30 days after the closing of the issuance of the shares to acquired ConnGame, but which in any event, would not be later than September 30, 2010.

The Company also agreed to repay an overdraft facility in the amount of approximately $4.91 million on three scheduled dates. The Company made payment of approximately one-half of this amount and agreed to pay all unsettled amounts, which include all outstanding principal and interest amounts, within 30 days after the closing of the issuance of the Shares, but which in any event, would not be later than September 30, 2010.

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

As of June 30, 2011, the Company has failed to comply with the terms and conditions of the Bonds and Waiver Agreement, including, but not limited to, failing to make the payments scheduled under the waivers and was negotiating with the Bondholders for extension of the date of the scheduled payments. The Company was communicating with the Bondholders for the extension for the payment and adjustment of the conversion price under the terms of the Waiver Agreement. By the date of this report, the Bondholders have not demanded payment on the Bonds or adjustment of the conversion price.

If the Company is unable to successfully to obtain an extension for the payment dates, then all rights of the holders of the Bonds and 2008 Warrants waived under the Waiver to or to be waived under the Waiver, shall not be waived and will be reinstated, and any previous waivers will be null and void. In such case, appropriate adjustments will be made to the conversion prices of the Bonds and the exercise price of the 2008 Warrants and an event of default under the terms and conditions of the trust deed governing the 2008 Bonds shall exist, making the 2008 Bonds immediately due and payable.

Since the Company was unable to comply with the payment terms of the Waiver and unless the Company is able to successfully negotiate an extension of the scheduled payment dates, the issuance of the Shares could result in an adjustment of the conversion price of the Bonds and the 2008 Warrants pursuant to the governing Trust Deeds and warrant agreement, respectively, which could result in substantial dilution to the Company's shareholders. The 2007 Bonds are currently convertible at a per share price of $9.80 per share and the 2008 Bonds and 2008 Warrants are convertible and exercisable, respectively, at $25.40 per share (taking into account the 1 for 4 share reverse stock split that occurred on December 21, 2010). If the Company is not able to obtain an extension for payment under the terms of the Waiver Agreement, an adjustment to the conversion and exercise prices could be adjustable downward to the value of the assets that the Company received for the issuance of the Shares, as calculated in accordance with the provisions of the Trust Deeds and the warrant agreement.

On April 15, 2011, the 2008 Bonds matured. The payables amount to $23.3 million. The Company did not redeem the Bonds and was under negotiation with the Bondholders for the repayment schedule.

10.	OTHER PAYABLES

Other payables consisted of the following:

As June 30, 2011	Continuing Operations		Discontinued Operations
Advances received from clients of construction projects	$	99,110	$	5,377,169
Advances received from clients other than construction projects		-		-
Staff and disbursement payable		5,952,187		123,328
Others		2,812,338		160,419
Total	$	8,863,635	$	5,660,916

As December 31, 2010	Continuing Operations		Discontinued Operations
Advances received from clients of construction projects	$	-	$	8,032,690
Advances received from clients other than construction projects		2,184,418		-
Staff and disbursement payable		178,370		151,245
Others		414,634		1,035
Total	$	2,777,422	$	8,184,970

11.	OTHER ACCRUALS

Other accruals consisted of the following:

As of June 30,2011	Continuing Operations		Discontinued Operations
Accruals for interests on convertible bonds	$	4,455,464	$	-
Accruals for interests on short-term bank loan		524,977		-
Accruals for materials costs of projects in Dubai		2,105,579		-
Others		2,040,318		446,259
Total	$	9,126,338	$	446,259

As of December 31,2010	Continuing Operations		Discontinued Operations
Accruals for interests on convertible bonds	$	3,145,768	$	-
Accruals for interests on short-term bank loan		-		342,614
Accruals for materials costs of projects in Dubai		2,025,311		-
Others		1,305,867		-
Total	$	6,476,946	$	342,614

12.	CONTRACT REVENUES EARNED

The contract revenues earned for the three and six months ended June 30, 2011 and 2010 consist of the following: -

Continuing Operations	Three months ended June,				Six months ended June 30,
	2011		2010		2011		2010

Billed	$	-	$	-	$	-	$	5,012,659
Unbilled		-		-		-		619,173
	$	-	$	-	$	-	$	5,631,832

Discontinued operation	Three months ended June,				Six months ended June 30,
	2011		2010		2011		2010

Billed	$	-	$	5,587,098	$	6,867,898	$	11,400,303
Unbilled		8,705,881		121,319		10,669,248		148,405
	$	8,705,881	$	5,708,417	$	17,537,146	$	11,548,708

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

13.	INCOME TAXES

On October 17, 2006, income from the Company’s foreign subsidiaries became subject to U.S. income tax liability; however, this tax is deferred until foreign source income is repatriated to the Company, which has not yet occurred.

The Company has also retained an U.S. tax-preparer firm to aide in preparation of its U.S. income tax returns in order to maintain a high level of compliance with U.S. tax laws.

Income before taxes and the provision for taxes for the six-month period ended June 30,2011 and 2010 consists of the following:

	June 30, 2011			June 30, 2010
Continuing income before taxes:
-U.S.	$	(4,363,568	)	$	(6,394,768	)
-Singapore		(64	)		(7,977	)
-China		(2,595,741	)		(260,849	)
-Australia		(7,613	)		(6,548	)
-Hong Kong		(399,802	)		3,123,890
-Dubai		(121,620	)		62,877
-Macau		(2,122	)		(2,278	)
Total continuing income (loss) before taxes		(7,490,529	)		(3,485,653	)

Discontinued Operation Income (Loss)		(604,194	)		(3,357,938	)
Total income(loss) before taxes		(8,094,723	)		(6,843,591	)
Provision for taxes expense/(benefit):
Current:

-U.S. Federal		-			-
-U.S. State	$	-		$	9,575
Provision for taxes from continuing operations		-			9,575

Provision for taxes from discontinued operations		-			-

Currency effect	$	-			-
				$	9,575

Deferred:
-U.S. Federal		-			9,575
-Hong Kong		-			-
-Currency Effect		-

Total provision for taxes	$	-		$	9,575
Effective tax rate		0.00	%		(0.14	)%

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets and liabilities as of June 30, 2011 and 2010 are as follows:

Continuing Operations	June 30, 2011			June 30, 2010

Deferred tax assets
Net operating loss		$	112,622		$	112,603
			112,622			112,603
Valuation allowance						-
Total deferred tax assets			112,622			112,603
Deferred tax liabilities
Total deferred tax liabilities			-			-
Net deferred tax assets			112,622			112,603
Reported as:
Current deferred tax assets			112,622			112,603
Non-current deferred tax assets			-			-
Non-current deferred tax liabilities			-			-
Net deferred taxes		$	112,622		$	112,603

Current deferred tax assets represents net operating loss of a subsidiary Techwell Engineering Limited in Hong Kong. The losses can be carried forward to set-off future assessable profits in Hong Kong without expiry date. The differences between the U.S. federal statutory income tax rates and the Company’s effective tax rate for the six-month periods ended June 31, 2011, and 2010 are shown in the following table:

	June 30, 2011			June 30, 2010
U.S. federal statutory income tax rate		34.00	%		34.00	%
Lower rates in PRC, net		-10.00	%		-10.00	%
Accruals in foreign jurisdictions		-0.00	%		-0.14	%
Effect operation losses		-25.00	%		-25.00	%
		-0.25	%		-0.29	%

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 (see tax rates discussed above) before tax for the six-month periods ended June 30, 2011, and 2010:

Continuing Operations	June 30, 2011			June 30, 2010
Income/(loss) before tax	$	(7,490,529	)	$	(3,495,229	)
Taxes at the applicable income tax rates		-			9,575
Miscellaneous non taxable income and non-deductible expenses		-			-

Current income tax expense	$	-		$	9,575

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

14.	QUARTERLY INFORMATION

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

As of June 30,2011	Continuing Operations			Discontinued Operations
Contract revenues earned	$	-		$	17,537
Income / (loss) from operations		(7,491	)		(612	)
Net earnings (loss)		(7,208	)		(612	)
Net earnings / (loss) per share:
Basic and Diluted	$	(0.36	)	$	(0.03	)

As of June 30,2010	Continuing Operations			Discontinued Operations
Contract revenues earned	$	5,632		$	11,549
Income / (loss) from operations		(3,486	)		(3,358	)
Net earnings (loss)		(3,492	)		(3,358	)
Net earnings / (loss) per share:
Basic and Diluted	$	(0.50	)	$	(0.24	)

15.	SEGMENT INFORMATION

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

Results of Operations	Continuing Operations												Discontinued Operations
For the six months ended
June 30, 2011	Asia			Middle East			United States			Total
Sales	$	-		$	-		$	-		$	-		$	17,537
Cost of Sales		-			-			-			-			16,959
Gross Profit														578

Operating Expenses		2,613			122			453			3,188			1,168

Other Income (Expenses)		(346	)		-			(3,957	)		(4,303	)		(14	)

Earnings before Taxes		(2,959	)		(122	)		(4,410	)		(7,491	)		(604	)

Taxes		-			-			-			-			8

Net Income	$	(2,959	)		(122	)		(4,410	)		(7,491	)	$	(611	)

Financial Position	Continuing Operations									Discontinued Operations
At
June 30, 2011	Asia		Middle East		United States			Total
Current Assets	$	33,250	$	40,130	$	1,516		$	74,896	$	43,008
Non Current Assets		26,966		413		62			27,441		638
Total Assets		60,216		40,543		1,578			102,337		43,646

Current Liabilities		31,997		9,136		28,679			69,812		36,140
Total Long Term Liabilities		38		-		8,193			8,231		-
Total Liabilities		32,035		9,136		36,872			78,043		36,140

Net Assets		28,181		31,407		(35,294	)		24,294		7,506

Total Liabilities & Net Assets		60,216		40,543		1,578			102,337		43,646

Results of Operations	Continuing Operations										Discontinued Operations
For the six months ended
June 30, 2010	Asia		Middle East		United States			Total
Sales	$	5,266	$	365	$	-		$	5,631		$	11,549
Cost of Sales		856		106		-			962			14,320
Gross Profit		4,410		259		-			4,669			(2,771	)

Operating Expenses		4,154		197		457			4,808			1,260

Other Income (Expenses)		2,017		1		(5,365	)		(3,347	)		674

Earnings before Taxes		2,273		63		(5,822	)		(3,486	)		(3,357	)

Taxes		10		-		-			10			-

Net Income	$	2,263		63		(5,822	)		(3,496	)	$	(3,357	)

Financial Position	Continuing Operations									Discontinued Operations
At
December 31, 2010	Asia		Middle East		United States			Total
Current Assets	$	27,940	$	42,254	$	1,244		$	71,438	$	46,688
Non Current Assets		26,128		465		83			26,676		599
Total Assets		54,068		42,719		1,327			98,114		47,287

Current Liabilities		24,963		9,630		27,566			62,159		40,483
Total Long Term Liabilities		-		-		6,336			6,336		-
Total Liabilities		24,963		9,630		33,902			68,495		40,483

Net Assets(liabilities)		29,105		33,089		(32,575	)		29,619		6,804

Total Liabilities & Net Assets		54,068		42,719		1,327			98,114		47,287

16.	COMMITMENTS AND CONTINGENCIES

A. OPERATING LEASE COMMITMENTS

The Company leases certain administrative and production facilities from third parties. Accordingly, for the six-month periods ended June 30, 2011 and June 30, 2010, the Company incurred rental expenses of $463,628 and $381,665 respectively.

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

For the years ended December 31,	Continuing Operations
2011		138,562
2012		265,577
2013		-
	$	404,139

B. PENDING LITIGATION

Techwell Litigation

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

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

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

The Company, Mr. Ng, and Miss Yam are in discussions and negotiations to settle the all disputesbetween the parties. However, there is no guarantee that the parties will reach an agreement to settle the dispute, in which case the Company intends to vigorously defend against the lawsuit. There can be no assurance that the lawsuit will be resolved in the Company’s favor. Even if the Company successfully defends the lawsuit, the Company may incur substantial costs defending or settling the lawsuit, in addition to a possible diversion of the time and attention of the Company’s management from its business. If the Company is unsuccessful in defending the lawsuit, its may be required to pay a significant amount of damages and/or it may potentially lose ownership of Techwell, which will have a material adverse effect on the Company’s business, financial condition or results of operations. In the last quarter of 2009, Mr. Ng made a settlement proposal to the Company for consideration and the Company is still under negotiation of the settlement agreement with Mr. Ng as of June 30, 2011. The management intends to take further legal action in the event no settlement agreement could be reached by end of June 2011.

Dubai Metro Rail Project Dispute

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

In July 2010, the Company met with the master contractor, and the master contractor agreed to arrange a further meeting to explore the possibility of settlement. No such meeting was arranged as of date. The Company’s counsel in Dubai was preparing the legal documents for the claims as of September 30, 2010. On November 8, 2010 the Company issued a notice informing the master contractor that the Company would seek resolution through arbitration with 56 day waiting period for the master contractor to respond. In April 2011, the master contractor reiterated that it does not believe that it is obligated to pay to the Company any of the amounts that the Company believes it is due. The Company intends to file for arbitration in the Courts of Dubai in second or third quarter of 2011.

17.	RELATED PARTY TRANSACTIONS

The amount due to shareholder at June 30, 2011 and December 31, 2010 were $11,969,775 and $13,592,883 respectively. The payables balance was mainly loans from the two largest shareholders, with such loans being interest-free, fee-free and due upon demand.

During the six-month period ended June 30, 2011, no material amount of materials were purchased from Canbo or Kangbao. As of June 30, 2011, the Company’s balances with Canbo were payable of $0.9 million for the purpose of future supplies of materials.

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

18.	EARNINGS (LOSS) PER SHARE

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

	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010

Basic Earnings Per Share Numerator

Net Loss	$	(3,370,242	)		(3,331,887	)		(8,101,804	)		(6,853,166	)
Net loss attributable to non-controlling interest		(491,627	)		(1,551	)		(893,796	)		(2,946	)
Loss from owner of the Company		(2,878,615	)		(3,330,336	)		(7,208,008	)		(6,850,220	)
Income (Loss) from Discontinued Operations		326,608			1,970,744			(611,275	)		(3,357,938	)
Less:
Preferred Dividends		-			-			-			-

Loss Available to owner of the Company		(2,878,615	)		(3,330,336	)		(7,208,008	)		(6,850,220	)
Loss from Continuing Operations Available to owner of the Company		(3,205,223	)		(5,301,080	)		(6,596,733	)		(3,492,282	)
Loss from Continuing Operations Available to non-controlling interest		(491,627	)		(1,551	)		(893,796	)		(2,946	)
Income(Loss) from Discontinued Operations Available to owner of the Company		326,608			1,970,744			(611,275	)		(3,357,938	)

Diluted Earnings Per Share Numerator

Loss Available to owner of the Company Stockholders		(2,878,615	)		(3,330,336	)		(7,208,008	)		(6,850,222	)
Loss from Continuing Operations Available to owner of the Company		(3,205,223	)		(5,301,080	)		(6,596,733	)		(3,492,282	)
Loss from Continuing Operations Available to non-controlling interest		(491,627	)		(1,551	)		(893,796	)		(2,946	)
Income(Loss) from Discontinued Operations Available to owner of the Company		326,608			1,970,744			(611,275	)		(3,357,938	)

Add:
Preferred Dividends		-			-			-			-
Loss Available to owner of the Company on Converted Basis		(2,878,615	)		(3,330,336	)		(7,208,008	)		(6,850,222	)
Loss from Continuing Operations Available to owner of the Company on Converted Basis		(3,205,223	)		(5,301,080	)		(6,596,733	)		(3,492,282	)
Loss from Continuing Operations Available to non-controlling interest on Converted Basis		(491,627	)		(1,551	)		(893,796	)		(2,946	)
Income (Loss) from Discontinued Operations Available to Common Stockholders on Converted Basis		326,608			1,970,744			(611,275	)		(3,357,938	)

Original Shares:		20,039,825			13,789,219			20,039,825			13,736,411
Additions from Actual Events
Issuance of Common Stock		-			-			-			-
Basic Weighted Average Shares Outstanding		20,039,825			13,789,219			20,039,825			13,736,411

Dilutive Shares:
Additions from Potential Events
Conversion of Preferred Stock		-			-			-			-
Diluted Weighted Average Shares Outstanding:		20,039,825			13,789,219			20,039,825			13,736,411

Earnings Per Share
Basic-Net (Loss)	$	(0.14	)	$	(0.24	)	$	(0.36	)	$	(0.50	)
-Loss from Continuing Operations		(0.16	)		(0.38	)		(0.33	)		(0.26	)
-Loss from non-controlling interest		(0.02	)		(0.00	)		(0.04	)		(0.00	)
-Income(Loss) from Discontinued Operations		0.02			0.14			(0.03	)		(0.24	)

Diluted- Net Income/(Loss)	$	(0.14	)	$	(0.24	)	$	(0.36	)	$	(0.50	)
- Loss from Continuing Operations		(0.16	)		(0.38	)		(0.33	)		(0.26	)
-Loss from non-controlling interest		(0.02	)		(0.00	)		(0.04	)		(0.00	)
-Income(Loss) from Discontinued Operations		0.02			0.14			(0.03	)		(0.24	)
Weighted Average Shares Outstanding
-Basic		20,039,825			13,789,219			20,039,825			13,736,441
-Diluted		20,039,825			13,789,219			20,039,825			13,736,441

19.	DISCONTINUED OPERATIONS

In order to improve its cash flows from operations and working capital, the Company decided to redeploy its capital to meet requirements of its business plan. On June 30, 2011, the Company classified its subsidiaries, Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School, as a discontinued operation. Accordingly, Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School’s operations have been classified as discontinued operations in the consolidated statements of income and cash flows and the assets and associated liabilities have been classified as held for sale in the consolidated balance sheets. The Company reviewed its Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School assets and plans to sell these assets before 2012. Proceeds from the sales of Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School assets will be used for working capital for the Company and potentially purchasing of equipment.

In accordance with SFAS No. 144 (ASC 360-10), “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS 144”), the results of Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School operations have been excluded from continuing operations and reported as discontinued operations for the current and prior periods. Furthermore, the assets of Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School have been reclassified as held for sale in the Balance Sheet for prior periods. On June 30, 2011, the Company assessed its long-lived assets in Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School based on the best estimation per the revenue guidance and determined that no write-down is necessary because undiscounted cash flow is more than the carrying values of the assets.

The following table summarizes the amounts included in income/(loss) from discontinued operations for all periods presented. These revenues and expenses were historically reported under Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School operating segment, and are now reported in discontinued operations:

Discontinued Operations	6/30/2011			6/30/2010
For the period ended

Sales	$	17,537,146		$	11,548,708
Cost of Sales		16,959,132			14,320,048
Gross Profit ( Loss)		578,014			(2,771,340	)

Operating Expenses		1,168,440			1,260,253
Other Income (Expenses)		(13,768	)		673,512

Earnings before Taxes		(604,194	)		(146,837	)

Taxes		7,719			-

Net Loss including non-controlling interest		(611,912	)		(3,358,081	)
Net Loss attributable to non-controlling interest		637			144

Net Income	$	(611,275	)	$	(3,357,937	)

The following table summarizes the amounts included in financial position from discontinued operations for all periods presented. These amounts included in financial position were historically reported under Zhuhai King Glass Engineering Co., Ltd. and Zhuhai Xiangzhou District Career Training School operating segment, and are now reported in discontinued operations:

Financial Position	June 30, 2011		December 31, 2010
At

Current Assets	$	43,008,476	$	46,688,400
Non Current Assets		638,452		598,580
Total Assets		43,646,928		47,286,980

Current Liabilities		36,140,217		40,483,030
Total Long Term Liabilities		-		-
Total Liabilities		36,140,217		40,483,030

Net Assets		7,506,711		6,803,950

Total Liabilities & Net Assets		43,646,928		47,286,980

20.	SUBSEQUENT EVENTS

The Company evaluated all events or transactions that occurred after June 30, 2011 up through the date the Company issued these financial statements. During this period the Company did not have any material recognizable subsequent events.

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

The following discussion relates to a discussion of the financial condition and results of operations of China CGame, Inc.(the “Company” or “ CCGM”) and its direct and indirect wholly- and partially-owned subsidiaries, including but not limited to Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”) in Zhuhai, PRC, Full Art International, Ltd. (“Full Art”) in Hong Kong, Techwell Engineering Limited (“Techwell”) with operations in Dubai, CAE Building Systems Inc. (“CAE BS”) in United States and Shanghai ConnGame Network Ltd. (“ConnGame”) in Shanghai, PRC. We acquired ConnGame on August 18, 2010.

Forward-Looking Statements

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission on April 15, 2011, and as amended by Amendment No. 1 on April 29, 2011. This Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our 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 acquisition of a majority ownership interest in Shanghai ConnGame Network Co. Ltd. in August 2010;

Our ability to successfully complete and commercialize online games under development;

Our ability to compete in the highly competitive online interactive entertainment industry;

Our ability to incur the substantial up-front expenditures needed for development of MMORPG products requires.

Our ability to integrate and maintain internal controls after our acquisition of ConnGame;

Our dependence on government contracts and government sponsored contracts;

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

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

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

Adverse capital and credit market conditions;

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

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

Increasing provisions for bad debt related to our accounts receivable;

Our dependence on the steel and aluminum markets;

Exposure to product liability and defect claims;

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

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

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

Our actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated, should one or more of these risks or uncertainties occur, or any of the risks or uncertainties described below in this Quarterly Report or in the “Risk Factors” section of our 2010 Annual Report occur. Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance of the actual results or developments. 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.

Overview

CCGM (formerly CAEI), founded in 1992, has traditionally specialized in the design, engineering, fabrication and installation of high-end curtain wall systems (including glass, stone and metal curtain walls), roofing systems, steel construction systems and eco-energy saving building conservation systems and related products, for public works and commercial real estate projects throughout China, Australia, Southeast Asia, the Middle East, and the United States. We provide timely, high quality, reliable, fully integrated and cost-effective service solutions to our clients using specialized technical expertise in the design, engineering, fabrication, installation and construction of structural exterior cladding systems. We compete on the strength of our reputation, relationships with government and commercial clients, and our ability to give expression to the vision of leading architects. By focusing on innovation while outsourcing commoditized manufacturing work, we believe we are able to add artistic and technological value to projects at cost-effective price points.

Revenues and earnings recognition on many construction contracts are measured based on progress achieved as a percentage of the total project effort or upon the completion of milestones or performance criteria rather than evenly or linearly over the period of performance. Our work is performed under cost-plus-fee contracts and fixed-price contracts. The length of our contracts varies but typically has a duration of approximately one to two years. Approximately 95% of our sales are from-fixed price contracts. The remaining sales are from cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price. Consequently, we realize a profit on fixed-price contracts only if we control our costs and prevent cost over-runs on the contracts. Approximately 70% of contracts are modified after they begin, usually to accommodate requests from clients to increase project size and scope. In cases where fixed-price contracts are modified, the fixed price is renegotiated and adjusted upwards accordingly. Under cost-plus-fee contracts, which may be subject to contract ceiling amounts, we are reimbursed for allowable costs and fees, which may be fixed or performance-based. If our costs exceed the contract ceiling or are not allowable under the provisions of the contract or any applicable regulations, we may not be reimbursed for all our costs.

The recent trends in the global economy have had a significant adverse impact on our results of operations and on the commercial construction industry as a whole. The competitive environment in which we operate has become more competitive, increasing the number of re-bid construction projects and amount of time between bidding and award of a project, reducing selling prices, and causing competitors to modify the scope and type of projects on which they bid.

International Projects

In 2009 and 2010, the spread of the global recession and reduction in the nature and scope of international construction projects have led us to primarily focus our attention on domestic projects in China. Dubai, Doha, Kuwait and other Middle East region have suffered greatly under the impact of the global financial crisis. Our projects have suffered significantly as well. Beginning in 2009, we experienced a significant decrease in the project turnover and an increase in costs and delays in customer payments. This negative trend has continued during the first six months of 2011. Our results of operations have also suffered. For instance, we have experienced significant difficulties with respect to our Dubai and Project, as discussed below under, "Dubai Metro Rail Project".

We do not believe that the international economy will experience a recovery in the near future and therefore its negative impact on construction industry still exists and will exist in the near future. As a result, we ended the orders of the construction of international projects in 2009, moved to refocus our resources to projects in the mainland China and shifted the focus of our business to design and professional consulting services. To develop projects and generate revenue, we have sought to join new projects in the position of design and project consultant and the role of material supplier. No new international project was taken in 2010 or during the first two quarters of 2011.

Domestic Projects

The domestic environment in which we are operating has become more competitive, increasing the number of re-bid construction projects and amount of time between bidding and award of a project, reducing selling prices, and causing us to reduce the scope and size of projects. The domestic projects operations have been experiencing losses since the second quarter of 2010, in order to improve cash flows from operations and working capital, the company decided to redeploy its capital to meet requirements of its latest business plan and classified its operations in Zhuhai as a discontinued operations and held for sale.

Operations after Acquisition of ConnGame

As noted below, we acquired a 60% equity interest in ConnGame on August 18, 2010. We believe that our acquisition of ConnGame will permit us to refocus our core capabilities and facilitate our planned transformation into a high-end architectural design consultant and service provider, as we intend to leverage ConnGame’s design engines and virtual applications to broaden our service capabilities and scope of architectural collaborations.

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

We believe that our acquisition will also enable us to enter China's large online game market, with ConnGame’s two to-be-released MMORPG games. We believe that the online game industry and its related business model will be a growing market in China, and we believe that the focus of our business operations will eventually shift to the online game industry. We will seek to divide our business services into the following:

Online Games —ConnGame expects to launch its first game in Q3 2011 and another game in Q4 2011, subject to successful testing

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

Construction consulting —We intend to continue to conduct our construction consultancy services within China.

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

ConnGame

Overview

ConnGame, a company formed under the laws of the People’s Republic of China, develops MMORPG (Massively Multiplayer Online Role Playing Game) for operation in China. While utilizing its game engines, scalable development platforms, and production teams, ConnGame focuses on self-developed MMORPGs game titles that are based on China's iconic characters and nostalgic epochs.

ConnGame owns two self-developed game engines, "Turbo" and "Apocalypse". ConnGame's online game-engines were created and developed independently by its research and development team. Apocalypse provides a solution for development of MMORPG games and can be applied to game content development and enhancement of the standardization process. The Turbo engine tool set is designed to facilitate the development of three dimensional MMORPG games, in conjunction with development of online role-playing games. Turbo encompasses all parts of the client programming, including management of server and client-side resources.

Warring State Online is developed based on the Turbo engine. We completed numerous closed beta tests for our first planned MMORPG game entitled "Warring State", a realistic MMORPG based on China's iconic characters and nostalgic epochs, featuring recreations of historically popular heroes and warlords set in dramatic backdrops and varied according to the four seasons. ConnGame conducted the fourth closed beta testing of Warring State in November 2010. During testing, thousands of players explored the game for three days to test their experience and performance of the game. The beta testing was viewed by our management as successful milestone. The management expects that, after one to two additional closed beta testing, "Warring State Online" could be launched to the marketing in the fourth quarter of 2011.

In Jun 2011, ConnGame launched the second closed beta testing for "Revolution". 350, 000 players registered for this testing and 26,9505 players have participated in this testing. We set the PCU (Peak Concurrent Users) goal at 15,000 for this testing and it has been achieved. It is anticipated that the open beta would occur in the third quarter of 2011and there will be incoming of “Revolution” in or after Oct.

In mid of Sept 2011, ConnGame is anticipated to have the first closed beta testing for “Warring State” and this game is anticipated to be launched at the end of this year.

ConnGame is a start-up, development-stage company and has not yet generated or realized material revenues from its business operations. We expect to incur significant expenses from ConnGame's operations primarily due to its continued research and development activities, the operations and marketing of its products. Operations expenses related to ConnGame's operations for the three months ended Jun 30, 2011 and for year ended December 31, 2010 totaled approximately $2.2 million and $3.6 million, respectively, with a substantial majority of this amount relating to research and development expenses. ConnGame anticipates that during the next 12 months, it will incur additional expenses towards the operations and marketing of the products.

ConnGame anticipates that initial revenue, if any, from its MMORPG games will likely be generated through subscription fees paid by players of its MMORPG games and software licensing to third-party companies. The revenue model of ConnGame’s MMORPG business is based on the item-based revenue model, meaning game players can play our games for free, but may choose to pay for virtual items, which are non-physical items that game players can purchase and use within an MMORPG. Such items include gems, pets, fashion items, magic medicine, riding animals, hierograms, skill books and fireworks, all designed to enhance the game-playing experience. ConnGame intends to sell prepaid game cards to a range of regional distributors throughout China, who in turn sub-distribute them to numerous retail outlets, including Internet cafés and various Websites, newsstands, software stores, book stores and retail stores. ConnGame also intends to directly sell game points to players through our online sales platform. ConnGame’s ability to generate revenue and attain profitability depends upon its ability to develop quality products and the acceptance and popularity of its products by the end consumer.

ConnGame plans to continue to improve its product quality through a various testing series to attain player feedback. If feedback of players indicates consumer desire for further improvement to game content and quality, it will take additional development efforts and the cost of research and development will increase, in addition to lengthening the time for ConnGame to generate revenue.

Failure to Comply with the Terms and Conditions of the Convertible Bonds

On February 24, 2010, we entered into an Amendment and Waiver Agreement (the “Waiver Agreement”) with the holders of our outstanding Variable Rate Convertible Bonds due 2012 (the “2007 Bonds”) and 12% Convertible Bonds due 2011 (the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”) and warrants to purchase 300,000 shares of our common stock expiring 2013 (the “2008 Warrants”). Pursuant to the Waiver Agreement, the holders of the Bonds and the 2008 Warrants agreed to waive their right to a reduction in the conversion price of the Bonds and the exercise price of the 2008 Warrants upon our anticipated issuance of up to 6,250,000 shares for the acquisition of a 60% ownership interest in ConnGame. Additionally, the holders of the 2008 Bonds agreed to waive any default under the terms and conditions of the trust deed governing the 2008 Bonds relating to the requirement that KGE Group Limited, our largest shareholder, own at least 45% of our issued and outstanding common stock. The waiver had a term of three months and expired on May 24, 2010. The parties entered into a new waiver on July 13, 2010, which has a three month term subject to the terms and conditions contained therein. As indicated above, we closed the ConnGame acquisition during the three-month period.

The waivers contained in the Waiver Agreement are subject to numerous conditions.

Under the Waiver Agreement, we agreed to pay the Bondholders the interest on the Bonds in the amount of approximately $3.84 million on scheduled dates, of which we made a payment of approximately $1.26 million on March 31, 2010 and $1.32 million on April 15, 2010. Under the terms of the waiver, we agreed that we would pay to the bondholders all outstanding interests in arrears on the Bonds, plus all other applicable interest up until the payment date, within 30 days after the closing of the issuance of the shares to acquire ConnGame, but which in any event, would not be later than September 30, 2010.

We also agreed to repay an overdraft facility in the amount of approximately $4.91 million on three scheduled dates. We made payment of approximately one-half of this amount and agreed to pay all unsettled amounts, which include all outstanding principal and interest amounts, within 30 days after the closing of the issuance of the Shares, but which in any event, would not be later than September 30, 2010.

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

As of the date of this Quarterly Report, we did not pay make the payments required under the Waiver and we were negotiating with the Bondholders for extension of the scheduled payments dates. There has also been noncompliance with other provisions of the Waiver. Since we were unable to comply with the payment terms of the Waiver and unless we are able to successfully negotiate an extension of the scheduled payment dates, all rights of the holders of the Bonds and 2008 Warrants waived under the Waiver to or to be waived under the Waiver, will not be waived and will be reinstated in full, and any previous waivers will be null and void and the issuance of the Shares could result in an adjustment of the conversion price of the Bonds downward to the value of the assets that we received for the issuance of the Shares, as calculated in accordance with the provisions of the Trust Deeds and the warrant agreement, which could result in substantial dilution to our shareholders. The 2007 Bonds are currently convertible at a per share price of $9.80 per share and the 2008 Bonds and 2008 Warrants are convertible and exercisable, respectively, at $25.40 per share (taking into account the 1 for 4 share reverse stock split that occurred on December 21, 2010).

Dubai Metro Rail Project Dispute

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

With the use of “percentage-of-completion” method, the revenue to be recognized for each period will included both (1) the revenue earned for the current period and (2) the adjustment to previously recognized revenue that is required because of the changes in estimated total revenue, costs and profitability of projects from which the previous revenue had been recognized. The changes in the estimates may be the result of, for example, increased costs or overhead expenses of the projects, changes of the scope of the works of the contract as well as the changes of technologies used which in turn affect the costs of the project. Under these circumstances, the estimated revenue and costs can change and as a result the estimated profitability of the project can change, which affects the profit elements in the revenue previously recognized and may be required to be revised accordingly. The “adjustments” or “revisions” are made via adjustment to the current period revenue because it is the changes in estimates that are requiring the revisions and not a restatement of the previous period figures.

With respect to the Dubai Metro Rail Project, which was the primary focus of Techwell, an adjustment under the percentage-of-completion method described above may be required if, for example, the Company and the Company’s claim consultant modifies its evaluation of the Company’s claims such that the Company is not likely to recover its claims as currently anticipated, if the Company encounters any unexpected difficulties in the claiming process which making the increase of claiming costs, and if a commercial settlement between the parties is reached on a amounts different from current value estimates. In such scenarios, the final project revenue or estimated costs may be changed to affect the revenue recognition of the project. However, neither of the situations is considered to exist at the moment of the reporting that affects the accounting estimates of revenue and costs used for the period. As such, the Company believes that the revenue recognized to date is appropriate as there were periodic reviews of the estimates of the project revenue and costs by the Company to reflect the latest profitability of the project for revenue recognition.

One of the primarily reasons that the aging of Company’s contract receivables have increased is the delay in payment by client of the Dubai projects since April 2009. The underlying receivable as of June 30, 2011 from the Dubai projects was approximately $42.2 million, which represented 96% of the total contract receivables of continuing operations as of such date. The Company has employed a claim consultant, Hill International, to facilitate the Company’s claim for the back payment. The Company currently expects that there will be progress and payments will be received. However, due to the ongoing dispute, there is no guarantee that the Company will collect all or a portion of the contract receivable. For receivables related to the Dubai Project, the client delayed payment to us since April 2009 by refusing to issue the Certificates for Value of Work Done. No Certificates have been issued since April 2009. The Certificates are pre-requisites to proceed with payment to the Company. The client paid for all work for Certificates for Value of Work Done issued in or before April 2009. Such payments were made prior to December 31, 2009. As a result, no account receivables at March 31, 2011 represent work for the above-referenced Certificates issued in or before April 2009. The receivables as of June 30, 2011 were recognized in accordance with the Percentage of Completion Method and the Company’s estimated final value of work done that the Company completed as of June 30, 2011.

The Company has not recorded an allowance for doubtful accounts related to the Dubai project. The Company has engaged a construction claims consultant to facilitate resolution of the dispute. The Company and its construction claims consultant, based on a review of the facts, documents, and materials available, believe that the Company has a reasonable opportunity to collect the amounts due to Techwell from the master contractor, less appropriate credits as its final amount due for work performed through September 2009. The Company, with the assistance of its claims consultant, have been continuously evaluating the dispute and probability of success on this dispute going forward and make the appropriate adjustments; however, no assurance can be given that the dispute will be resolved in the Company’s and Techwell’s favor. In the report of the claim consultant, there are the high and low estimates for the final total value of work done for the Dubai project. The Company started with the low estimates with prudence and adjusted such amounts with the amounts that the claim consultant’s expressed that there was an excellent opportunity for the Company to be recovered. Furthermore, as the client of the projects being the joint venture of two reputable Japanese corporations and one Turkish corporation with long operating histories, the Company believes that the possibility of default in payment is considered not likely to occur. Based on these supporting documents and analysis, the Company believes that the receivables will be collected and no allowance is required. However, the Company will be required to account for doubtful collection of the receivables related to the Dubai Project in the event it concludes that it is not likely that the Company will be able to collect the receivables.

In July 2010, the Company met the master contractor and the master contractor agreed to arrange a further meeting to explore the possibility of settlement. On November 8, 2010 the Company issued a notice informing the master contractor that the Company would seek resolution through arbitration with 56 day waiting period for the master contractor to respond. In April 2011, the master contractor reiterated that it does not believe that it is obligated to pay to the Company any of the amounts that the Company believes it is due. The Company intends to file for arbitration in the Courts of Dubai in third quarter of 2011.

Loan to Support Daily Operation

In order to file for arbitration in the Courts of Dubai and support the daily operation of the company, we have approached the bondholders since May to seek approval of a new conditional loan from an external lender. Before getting approval of the new loan, we are maintaining the company at lowest operational level.

Techwell Litigation

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

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

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

As of the date of this Quarterly Report, the Company, Mr. Ng, and Miss Yam, after several counter proposals among the parties, are still in discussions and negotiations to settle all disputes. However, there is no guarantee that the parties will reach an agreement to settle the dispute, in which case the Company intends to vigorously defend itself against the lawsuit. There can be no assurance that the lawsuit will be resolved in the Company’s favor. Even if the Company successfully defends the lawsuit, the Company may incur substantial costs defending or settling the lawsuit, in addition to a possible diversion of the time and attention of the Company’s management away from its business. If the Company is unsuccessful in defending the lawsuit, its may be required to pay a significant amount of damages and/or it may potentially lose ownership of Techwell, which will have a material adverse effect on the Company’s business, financial condition or results of operations. In the event we lose ownership of Techwell, we will lose the approximately $20.3 million of profit contribution since the acquisition of Techwell.

In the last quarter of 2009, Mr. Ng made a settlement proposal to the Company for consideration and the Company is still under negotiation of the settlement agreement with Mr. Ng as of Jun 30 , 2011. The Company’s management intends to take further legal action in the event no settlement agreement could be reached by end of September 2011.

Results of Operations

The following table sets forth statements of operations for the three and six months ended June 30, 2011 and 2010 in U.S. dollars (unaudited):

	For Three Months Ended June 30,						For Six Months Ended June 30,
	2011			2010			2011			2010
	(in thousands, except for share and per share amounts)

Contract revenues earned	$	-		$	-		$	-		$	5,631
Cost of contract revenues earned		-			-			-			(961	)

Gross profit	$	-		$	-		$	-		$	4,670

Selling, general and administrative expenses		(1,584	)		(3,575	)		(3,188	)		(4,808	)

Loss from operations	$	(1,584	)	$	(3,575	)	$	(3,188	)	$	(138	)

Interest income		-			-			1			-

Interest expenses		(1,863	)		(1,729	)		(3,930	)		(3,355	)
		-
Other expenses		(250	)		-			(381	)		(1	)

Other income		-			1			7			9

Loss before taxes on Continuing Operations	$	(3,697	)	$	(5,303	)	$	(7,491	)	$	(3,485	)

Income tax		-			-			-			(10	)

Loss from Continuing Operations		(3,697	)		(5,303	)		(7,491	)		(3,495	)
Discontinued Operation Income (Loss),net of tax		327			1,971			(611	)		(3,358	)

Net Loss		(3,370	)		(3,332	)		(8,102	)		(6,853	)
Net loss attributable to non-controlling interests		492			2			894			3

Net loss attributable to the Company	$	(2,878	)	$	(3,330	)	$	(7,208	)	$	(6,850	)

Earnings / (Loss) per share:
Basic-Net Loss	$	(0.14	)	$	(0.24	)	$	(0.36	)	$	(0.05	)
-Loss from Continuing Operations	$	(0.16	)	$	(0.38	)	$	(0.33	)	$	(0.26	)
- loss attributable to non-controlling interests	$	(0.02	)	$	(0.00	)	$	(0.04	)	$	(0.00	)
-Income(Loss) form Discontinued Operations	$	0.02		$	0.14		$	(0.03	)	$	(0.24	)

Diluted-Net Loss	$	(0.14	)	$	(0.24	)	$	(0.36	)	$	(0.05	)
-Loss from Continuing Operations	$	(0.16	)	$	(0.38	)	$	(0.33	)	$	(0.26	)
- loss attributable to non-controlling interests	$	(0.02	)	$	(0.00	)	$	(0.04	)	$	(0.00	)
-Income(Loss) form Discontinued Operations	$	0.02		$	0.14		$	(0.03	)	$	(0.24	)

Weighted average shares outstanding:
Basic		20,039,825			13,789,219			20,039,825			13,736,441
Diluted		20,039,825			13,789,219			20,039,825			13,736,441

Three Months Ended Jun 30, 2011 and 2010

Contract revenues earned for the three months ended June 30, 2011 and 2010 was nil, the reason for these was due to the classification of the projects operations in Zhuhai as discontinued operations which was the only source of contract revenues of the periods. Other than the contract revenues, nil revenue was generated from operations through ConnGame for the periods.

Cost of contract revenues earned for the three months ended June 30, 2011 and 2010 was nil, the reason for these was same as those of contract revenues earned. Cost of contract revenues earned consists of the raw materials, labor and other operating costs related to manufacturing. Cost of contract revenues decreased in dollar amount due to the decrease in number of projects and revenue. As a percentage of contract revenues, costs of contract revenues increased primarily due to the increases in raw material, labor and administrative costs in our domestic market of China as well as the adjustments in accordance to the percentage-completion method for accounting of projects revenue. Provisions for estimated losses on uncompleted contracts are charged to cost of contract revenues earned 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. Cost of revenues related to our MMORPG gaming operations were nil for the periods as no revenue was generated.

Gross profit or loss for the three months ended June 30, 2011 and 2010 was nil, the reason for these was same as those of contract revenues earned.

Selling, general and administrative (“SG&A”) expenses were $1.6 million for the three months ended June 30, 2011, a decrease of approximately $1.0 million, or 27%, from approximately $3.6 million for the comparable period in 2010. The decrease was due to the company downsizing and overheads expenses cutting in 2011. Rental expenses and depreciation expenses accounted for 7.3% and 9.9%, respectively, of the SG&A expenses.

Interest expenses were $1.9 million for the three months ended June 30, 2011, an increase of $0.2 million, from approximately $1.7 million for the comparable period in 2010. The increase was primarily due to the acceleration of interest discount amortization expenses on convertible bonds.

Income tax expenses was $nil for the three months ended June 30, 2011 and 2010. The primary reason for these was due to losses incurred by the continuing operations of the Company.

Net loss for the three months ended June 30, 2011 was $2.9 million, an increase of $0.4 million, or 12.1%, from net loss of $3.3 million for the comparable period in 2010.

Six Months Ended June 30, 2011 and 2010

Contract revenues earned for the six months ended June 30, 2011 was nil, the reason was due to the classification of the projects operations in Zhuhai as discontinued operations which was the only source of contract revenues of the group for the first two quarters of 2011. Other than the contract revenues, nil revenue was generated from operations through ConnGame for the same period.

Cost of contract revenues earned for the six months ended June 30, 2011 was nil, the reason was same as those of contract revenues earned.

Provisions for estimated losses on uncompleted contracts are charged to cost of contract revenues earned 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.

Gross profit or loss for the three months ended June 30, 2011 and 2010 was nil, the reason for these was same as those of contract revenues earned.

Selling, general and administrative expenses were $3.2 million for the six months ended June 30, 2011, a decrease of approximately $1.6 million, or 33%, from approximately $4.8 million for the comparable period in 2010. The decrease was due to the company downsizing and overheads expenses cutting in 2011. Rental expenses and depreciation expenses accounted for 11.9% and 6.9%, respectively, of the SG&A expenses.

Interest expenses and finance expenses were $3.9 million for the six months ended June 30, 2011, an increase of $0.5 million, from approximately $3.4 million for the comparable period in 2010. The increase was primarily due to the acceleration of interest discount amortization expenses on convertible bonds.

Income tax expenses were nil and $9,575 for the six months ended June 30, 2011 and 2010. The primary reason was losses incurred by the continuing operations of the Company.

Net loss for the six months ended June 30, 2011 was $7.2 million, a decrease in income of $0.3 million, or 4.3%, from $6.9 million for the comparable period in 2010.

Liquidity and Capital Resources

At June 30, 2011, we had cash and cash equivalents of $3.2 million.

Prior to October 17, 2006, we financed our business operations through short-term bank loans, cash provided by operations, and credit provided by suppliers. On October 17, 2006, concurrently with the close of our Share Exchange, we received gross proceeds of $3.7 million in a private placement transaction. In October 2007, we completed an initial public offering consisting of 847,550 shares of our common stock. Our sale of common stock resulted in net proceeds of approximately $2.0 million.

We have also financed our operations through the issuance of convertible bonds. On April 12, 2007, we completed a financing transaction pursuant to which we issued the 2007 Bonds in the principal amount of $10 million. The 2007 Bonds bear cash interest at the rate of 6% per annum for the first year after April 12, 2007 and 3% per annum thereafter, of the principal amount of the 2007 Bonds. Each 2007 Bond is convertible at an initial conversion price of $14.00 per share (adjusted for the December 2010 reverse stock split). At any time after April 12, 2010, holders of the 2007 Bonds can require us to redeem the 2007 Bonds at 126.51% of the principal amount. We are required to redeem any outstanding 2007 Bonds at 150.87% of its principal amount on April 4, 2012. In September 2008, $2 million worth of bonds were converted into shares of common stock pursuant to which we issued 571,428 shares of common stock.

On April 15, 2008, we completed a financing transaction pursuant to which we issued the 2008 Bonds in the principal amount of $20 million. The 2008 Bonds bear cash interest at the rate of 12% per annum. Interest is payable semi-annually in arrears on April 15 and October 15 of each year (each an “Interest Payment Date”). On any Interest Payment Date on or after April 15, 2010, the holders of the Bonds can require us to redeem the Bonds at 116.61% of the principal amount. We are required to redeem any outstanding Bonds at 116.61% of its principal amount on April 15, 2011.

On July 13, 2010, we entered into the Waiver Agreement with the holders of our 2007 Bonds and 2008 Bonds and 2008 Warrants. Under the Waiver Agreement, we agreed to pay the Bondholders the interest on the Bonds in the amount of approximately $3.84 million on scheduled dates, of which we made a payment of approximately $1.26 million on March 31, 2010 and $1.32 million on April 15, 2010. Under the terms of the waiver, we agreed that we would pay to the bondholders all outstanding interests in arrears on the Bonds, plus all other applicable interest up until the payment date, within 30 days after the closing of the issuance of the shares to acquire ConnGame, but which in any event, would not be later than September 30, 2010. We also agreed to repay an overdraft facility in the amount of approximately $4.91 million on three scheduled dates. We made payment of approximately one-half of this amount and agreed to pay all unsettled amounts, which include all outstanding principal and interest amounts, within 30 days after the closing of the issuance of the Shares, but which in any event, would not be later than September 30, 2010. We also agreed that we will not repay or prepay any debt prior to its currently scheduled due date until we make all of the payments specified in the Waiver and the Bonds have been redeemed in full and that any new indebtedness incurred by us for the purpose of repaying the overdraft facility shall (i) not exceed the outstanding amount due and payable under the overdraft facility and (ii) be subordinated to all amount owed under the Bonds. The closing of the ConnGame acquisition was completed on August 18, 2010.

As of June 30, 2011, we did not pay make the required payments scheduled under the waivers and was negotiating with the Bondholders for extension of the date of the scheduled payments. If we are required to repurchase all or a portion of the outstanding amount of $28.0 million in bonds and we do not have sufficient cash to make the repurchase, we will be required to obtain third party financing to do so, and there can be no assurances that we will be able to secure financing in a timely manner and on favorable terms, which could have a material adverse effect on our financial performance, results of operations and stock price.

As indicated above, on April 15, 2011, the 2008 Bonds were matured. The payables amount to $23.3 million. The Company did not redeem the Bonds and was under negotiation with the Bondholders for the repayment schedule.

On February 19, 2008, we and Techwell Engineering Limited were granted a bond facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount was $10,000,000, at a tenor of up to one year with 2% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. ABN AMRO required guarantees as follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai King Glass Engineering Co. Limited and (ii) share charge over the shares of us for a minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On May 2, 2008, the facility was increased to $12,000,000 with additional cash collateral of $2,000,000, which is also the total amount of cash collateral for the facility. All cash collateral was then fully used to off-set a portion of the calling of the bonds for projects in Dubai by the beneficiary. As of June 30, 2011, the facility was converted into the temporary loan of $4.5 million resulted from the calling of performance and advance payment bonds at interest rate at Bank's Cost of Fund + 6%.

On March 28, 2008, we, Full Art and Techwell Engineering Limited were granted a bonding facility by the Hong Kong Branch of HSBC. The facility amount was $10,000,000, at a tenor of up to one year with 1% flat interest rate on the issued amount of bonds such as bank guarantees, performance bonds, advanced payment bonds and standby letters of credit. HSBC required guarantees as follows: (i) an unlimited guarantee among CHINA CGAME, INC., Full Art International Limited and Techwell Engineering Limited; and (ii) an “all monies” securities deposits with 15% margin. On August 18, 2008, the facility was increased to $20,000,000 with additional cash collateral of $1,500,000 that increased the total amount of cash collateral to $3,000,000. In September 2009, $2,818,440 of the cash collateral was used to off-set of the calling of the bonds for projects in Dubai by the beneficiary. As of June 30, 2011, the facility amount was reduced to $0.9 million and was fully utilized.

On July 19, 2008, Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai KGE”), our wholly-owned subsidiary was granted a Bank Accepted Draft facility by the Shenzhen Branch of ABN AMRO Bank N.V. The facility amount is RMB70,000,000 (US$10,218,978). On September 30, 2009, the facility was amended to allow Open Account Financing – Accounts Receivable against invoices from acceptable buyers up to RMB21,000,000 and Open Account Financing and Overdraft in Current Account up to RMB16,800,000. ABN AMRO requires irrevocable and unconditional guarantee from us and cash collateral of 20% of bank’s acceptance bill issued and Open Account Financing. As of June 30, 2011, Zhuhai KGE utilized RMB Nil (US $Nil) of Bank Accepted Draft and RMB11.1 million (US$1.7 million) of Overdraft in Current Account.

In September 2009, the beneficiary of a performance bond and advance payment bonds for the projects in Dubai demanded the drawing of approximately $9.4 million in total from the two issuing banks, ABN AMRO Bank NV and HSBC. The calling of the bonds was based on the beneficiary’s belief that it had paid in excess of the construction work performed. We do not believe that the beneficiary had the proper basis for calling the bonds and intend to vigorously defend all of their rights and remedies related to the dispute. As of June 30, 2011, after an offset against collateral accounts that we held with the banks, there was approximately $4.5 million in a shortfall amount due to ABN AMRO Bank NV by us that was not paid off. Such amount is currently outstanding as the temporary loan from the bank at the interest rate at the bank’s cost of funds plus 6%.

Working capital management, including prompt and diligent billing and collection, is an important factor in our results of operations and liquidity. When we are awarded construction project, we work according to the percentage-of-completion method which matches the revenue streams with the relevant cost of construction based on the percentage-of-completion of project as determined based on certain criteria, such as, among other things, actual cost of raw material used compared to the total budgeted cost of raw material and work certified by customers. There is no guarantee that the cash inflow from these contracts is being accounted for in parallel with the cash outflow being incurred in the performance of such contract. In addition, a construction project is usually deemed to be completed once we prepare a final project account, the account is agreed upon by our customers, and all amounts related to the contract must be settled according to the account within three months to a year from the customer’s agreement on the final project account. As there may be different time intervals to reach a consensus on the amount as being accounted for in the projects before the project finalization account is being mutually agreed by each other. We experience an average accounts settlement period ranging from three months to as high as one year from the time we provide services to the time we receive payment from our customers. Below is a summary of typical steps in our processing of accounts:

It takes approximately one month for our client to collect the payment application from contractors for the contract work completed.

Thereafter, it takes approximately one to two months for the verification, agreement and certification of work completed, with timing to largely depend on whether there is disagreement in the calculation of certified value between the parties.

Moreover, if it is the case that the application is to finalize the project account, it may take up to three months.

Additionally, in the event that the client is not the owner of the project, it normally requires an additional one to two months for processing and obtaining the funds from the owner.

One to two months the client to pay the contractors.

In contrast to collection times, 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.

The collection period typically runs from two months to one year, the long aging of receivables reflects the long collection period. In addition, our payment cycle is considerably shorter than our receivable cycle, since we typically pay our suppliers all or a portion of the purchase price in advance and for some suppliers we must maintain a deposit for future orders.

Among the $43.8 million contract receivables as of June 30, 2011, $43.5 million (99%) was outstanding over 365 days which includes $42.2 million (96%) receivables for projects in Dubai for which the company is going for arbitration.The Company periodically prepares the aging of the receivables information and reviews the balances with consideration of the background of each client for assessing the realizable value of the balances and would make provision when appropriate. The Company notes that its account receivables that are 365 and 720 days old are primarily related to the Company’s PRC operations, and the payment cycle in the PRC commonly entails a receivable being outstanding for over one to two years before collection. Such situations are particularly common in the construction market and with the clients from government. Since the Company’s older outstanding receivables are mainly of government projects, the final accounts and payments are required to be processed through a lengthy bureaucratic process in the PRC government.

We provide for bad debts principally based upon the aging of accounts receivable, in addition to collectability of specific customer accounts, our history of bad debts, and the general condition of the industry. We believed our current reserve for doubtful accounts is commensurate to cover the associated credit risk in the portfolio of our construction contract related receivables. Due to the difficulty in assessing future trends, we could be required to further increase our provisions for doubtful accounts. As our accounts receivable age and become uncollectible, our cash flow and results of operations are negatively impacted.

In addition to the foregoing, we had a provision for contracts receivables that was reclassified as “Other receivable” in the amount of approximately $11.4 million that represented account receivables of a subsidiary, Techwell Engineering Ltd. (Techwell). The receivables were acquired through our acquisition of the Techwell in 2007 and have been outstanding since acquisition. The receivables are guaranteed by previous shareholders of Techwell if not paid within 24 months of the acquisition. Accordingly, the provision was made and the receivable amount was transferred to amount due from the shareholders under other receivable balances.

We have also funded our operations through loans made to us by our two largest shareholders. All of these loans are interest-free, fee-free and due upon demand. As of June 30, 2011, the balance of these loans was approximately $12.0 million, as compared to $13.9 million as of June 30, 2010.

At June 30, 2011, we had no material commitments for capital expenditures other than for those expenditures incurred in the ordinary course of business.

Net cash used in operating activities for the six months ended June 30, 2011 was approximately $1.9 million, as compared to $9.0 million provided by the same period in 2010. The change is primarily due to differences in changes in receivables of $17.5 million, payables of $(14.2) million and discontinued operation loss of $3.4 million.

Net cash used in investing activities was approximately $1.6 million for the six months ended June 30, 2011 compared to approximately $0.1 million for the same period in 2010. The change was mainly a result of the difference in change of investments in associates of $1.3 million.

Net cash used in financing activities was $0.8 million for the six months ended June 30, 2011 compared to $9.1 million for the same period in 2010. The change was primarily due to differences in changes in shareholder loan of $8.0 million.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues, expenses and allocated charges during the reporting period. Actual results could differ from those estimates.

We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K as of and for the year ended December 31, 2010. We discuss our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K as of and for the year ended December 31, 2010. Other than as indicated in this Quarterly Report, there have been no material revisions to the critical accounting policies as filed in our Annual Report for the fiscal year ended December 31, 2010 on Form 10-K, as filed with the Securities and Exchange Commission on April 15, 2011, and as amended by Amendment No. 1 on April 29, 2011.

Recent Accounting Pronouncements

There have been no material updates to the recent accounting pronouncements as disclosed in our Annual Report for the fiscal year ended December 31, 2010 on Form 10-K, as filed with the Securities and Exchange Commission on April 15, 2011, and as amended by Amendment No. 1 on April 29, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

These material weaknesses primarily related (i) our restatements that we conducted in May 2010 and (ii) one of our material operating subsidiaries, Techwell Engineering Limited. (“Techwell”) that we acquired in November 2007.

Restatements

In May 2010, we discovered that certain of our previously filed quarterly and annual reports contained errors that required correction and restatement. The errors related to the timing of the interest expense related to the Company’s outstanding $8,000,000 Variable Rate Convertible Bonds due 2012 and $20,000,000 12% Convertible Bonds due 2011 that resulted in overstatements and understatements of the interest expenses related to the bonds during various quarters before the second quarter of 2008. Due to the accounting errors, the interest expense was overstated by approximately $0.3 million, $0.5 million, and $0.7 million for the second, third, and fourth quarters of fiscal year 2007, respectively, for a total overstatement of approximately $1.5 million for fiscal 2007. The interest expense was overstated by approximately $0.1 million in the first quarter of 2008 and all the overstatements, approximately $1.6 million, were reversed in the second quarter of 2008. For the year ended December 31, 2009, there was an overstatement of the interest expense of $8,000 in the second quarter and an understatement of $6,000 during the third quarter, for a total of overstatement of $2,000 for fiscal year 2009. The net bonds payable amounts were presented correctly in the Company’s financial statements as of December 31, 2008 and 2009, and it was only the components of the Convertible Bonds that were restated, while the net payable amounts as of December 31, 2007 was stated with correction of errors.

Additionally, a correction was needed for the addition of an equity compensation charge in the amount of $4,976 related to a portion of options granted in October 2009 that the Company inadvertently omitted in the original Form 10-K filing. Together with the overstatement of interest expenses of $2,000, the loss for the year ended December 31, 2009 was understated by 2,983 and the retained earnings as of December 31, 2009 was overstated by 2,983. Additionally, $1.5 million of consolidation exchange loss resulted from the inter-company investments elimination was incorrectly included in the additional paid in capital instead of the accumulated comprehensive income presented in the Stockholders’ Statement of Equity and Comprehensive Income for the year ended December 31, 2009.

We believe that the accounting errors were caused by lack of personnel with expertise in US generally accepted accounting principles and SEC rules and regulations, in addition to inadequate staffing and supervision that lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. We intend to take action to remediate these deficiencies going forward.

Techwell

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

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

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

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

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

Remediation Efforts

We are in the process of developing and implementing remediation plans to address our material weaknesses.

Restatements

We have taken and intend to take the following actions to address the material weaknesses and improve our internal controls over financial reporting:

We are seeking to improve supervision, education, and training of our accounting staff. We are also considering engaging third-party financial consultants to review and analyze our financial statements and assist us in improving our reporting of financial information.

Management intends to hire additional personnel with technical knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting and U.S. GAAP requirements.

We will continue to monitor the effectiveness of these improvements. We are also considering working with outside consultants in assessing and improving our internal controls and procedures when necessary.

An internal SOX 404 task force was set up in order to help the company strengthening its controls and procedures on the financial reporting.

In September 2009, we hired a new Vice President of Finance who was later appointed as our Acting Chief Financial Officer in November 2009. This person served as the sensible financial officer of our company until his resignation in September 2010.

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

The remediation and implementation plan is being carried out which including the drafting up of the details internal control documents for SOX compliance. With the additions of new subsidiaries recently, the company currently is considering to further develop the internal controls and procedures in responses to the new group structure.

Techwell

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

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

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

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

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

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

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

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

In December 2009, our Acting Chief Financial Officer lead an extensive review of the controls and procedures of our company and developed a detailed remediation and implementation plan for Sarbanes-Oxley Act of 2002 Section 404 compliance to be carried out starting in 2010, which is currently underway. With the additions of new subsidiaries recently, the company currently is considering to further develop the internal controls and procedures in responses to the new group structure.

Changes in internal control over financial reporting

Based on the evaluation of our management as required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act, we believe that there were 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. The changes include the integration of ConnGame, which was acquired in August 2010, in addition to such other actions as described above under “Remediation Efforts.”

PART II-OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See Note 15(B) of the accompanying unaudited interim consolidated financial statements included in this Form 10-Q for a discussion of our current legal proceedings.

ITEM 1A.

RISK FACTORS

Any investment in our common stock involves a high degree of risk. Investors should carefully consider the risks described in our Annual Report for the fiscal year ended December 31, 2010 on Form 10-K, as filed with the Securities and Exchange Commission on April 15, 2011, and as amended by Amendment No. 1 on April 29, 2011, and all of the information contained in our public filings before deciding whether to purchase our common stock.

Other than as set forth below, there have been no material revisions to the “Risk Factors” as set forth in our Annual Report, as amended.

On April 15, 2011, our 2008 convertible bonds of a principal amount of $20 million matured per the terms and conditions of the bonds and we did not and are not able to make payment. In addition, our 2007 bonds with an outstanding principal amount of $8 million may be called by its bondholders for immediate repayment. Exercise of the bondholders' rights to require payment of the Bonds and interest would have a substantial material adverse effect on our liquidity and cash resources and may prevent us from continuing operations.

We issued $10,000,000 Variable Rate Convertible Bonds due in 2012 in April 2007 (the “2007 Bonds”) and $20,000,000 12% Convertible Bonds that matured on April 15, 2011 in April 2008 (the “2008 Bonds,” and collectively with the 2007 Bonds, the “Bonds”). A total of $2 million of the 2007 Bonds have been converted, and a remaining $28 million of principal of Bonds remain. If we are required to redeem all or any portion of the $8 million and $20 million outstanding Bonds, this would have a substantially adverse effect on our liquidity and cash resources, and would prevent our ability to continue to operate if we are unable to find financing in order to make payment on such demand.

Pursuant to the terms of the Bonds, at any time after April 12, 2010, each holder of the 2007 Bonds can require us to redeem the 2007 Bonds at 126.51% of the principal amount of the 2007 Bonds and we are required to redeem any outstanding 2007 Bonds at 150.87% of its principal amount on April 4, 2012. Also, on April 15 and October 15 of each year on or after April 15, 2010, the holders of the 2008 Bonds may require us to redeem the 2008 Bonds at 116.61% of their principal amount. We are required to redeem any outstanding 2008 Bonds at 116.61% of its principal amount on April 15, 2011. If a triggering event occurs and we are requested by the holders to repurchase all or a portion of the 2007 or 2008 Bonds, we will be required to pay cash to redeem all or a portion of the Bonds.

Pursuant to the Waiver that we entered into with the Bondholders, upon our timely payment of all of the required payments under the Waiver, the bondholders have agreed to commence negotiations in good faith with us to waive their rights under the trust deed governing the 2007 Bonds to require us to redeem the 2007 Bonds at 126.51% of the principal amount, plus all accrued but unpaid interest, at any time after April 12, 2010, and their rights under the trust deed governing the 2008 Bonds to require us to redeem the 2008 Bonds at 116.61% of the principal amount of the Bonds redeemed, plus all accrued but unpaid interest, on any Interest Payment Date on or after April 15, 2010. However, we have failed to comply with the terms and conditions of the Waiver, including failing to make payments required under such Waiver, and there can be no guarantee that we will be able to reach an agreement with the bondholders for their waiver of such rights. We are currently discussing options with the bondholders. If we are required to repurchase all or a portion of the Bonds and do not have sufficient cash to make the repurchase, which we currently do not, we will be required to obtain third- or related- party financing to do so, and there can be no assurances that we will be able to secure financing at all or in a timely manner or on favorable terms. As a result, this would have a substantially adverse effect on our liquidity and cash resources, and would prevent us from continuing to operate if we are unable to secure such financing.

Techniques employed by manipulative short sellers in Chinese small cap stocks may drive down the market price of our common stock.

Short selling is the practice of selling securities that the seller does not own but rather has, supposedly, borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is therefore in the short seller’s best interests for the price of the stock to decline, many short sellers (sometime known as “disclosed shorts”) publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short.

While traditionally these disclosed shorts were limited in their ability to access mainstream business media or to otherwise create negative market rumors, the rise of the Internet and technological advancements regarding document creation, videotaping and publication by weblog (“blogging”) have allowed many disclosed shorts to publicly attack a company’s credibility, strategy and veracity by means of so-called research reports that mimic the type of investment analysis performed by large Wall Street firm and independent research analysts. These short attacks have, in the past, led to selling of shares in the market, on occasion in large scale and broad base. Issuers with business operations based in China and that have limited trading volumes are susceptible to higher volatility levels than U.S. domestic large-cap stocks, and can be particularly vulnerable to such short attacks.

These short seller publications are not regulated by any governmental, self-regulatory organization or other official authority in the U.S., are not subject to the certification requirements imposed by the Securities and Exchange Commission in Regulation AC (Regulation Analyst Certification) and, accordingly, the opinions they express may be based on distortions of actual facts or, in some cases, fabrications of facts. In light of the limited risks involved in publishing such information, and the significant profit that can be made from publishing a successful short attack, unless the short sellers become subject to significant penalties, it is more likely than not that disclosed shorts will continue to issue such reports.

We believe that we may be subject to such short attacks, and while we intend to strongly defend our public filings against any such short seller attacks, oftentimes we are constrained, either by principles of freedom of speech, applicable state law (often called “Anti-SLAPP statutes”), or issues of commercial confidentiality, in the manner in which we can proceed against the relevant short seller. You should be aware that in light of the relative freedom to operate that such persons enjoy, should we be targeted again for such an attack, our stock will likely suffer from a temporary, or possibly long term, decline in market price should the rumors created not be dismissed by market participants.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

REMOVED AND RESERVED

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

31.1	Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

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

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CHINA CGAME, INC. (Registrant)

Aug 19, 2011	By:	/s/ Zhixin (Steven) Xing
		Zhixin (Steven) Xing
		Chief Executive Officer

Aug 19, 2011	By:	/s/ Qin (Andy) Lu
		Qin (Andy) Lu
		Acting Chief Financial Officer

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