**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington
      D.C. 20549**





**FORM
      10-KSB**


**x 
ANNUAL
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**


**For
      The Fiscal Year Ended: December 31, 2006**


**o 
TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**




**For
      the Transition Period From ______ to ______**





**Commission
      File No. 333-46114**





**China
      Finance, Inc.**


(Exact
      name of issuer in its charter)




**Utah**
            **87-0650976**(State
                of Incorporation)
            (I.R.S.
                Employer I.D. No.)








**111
      Pavonia Avenue, Suite 615,**


**Jersey
      City, NJ 07310**


**201-216-0880**


(Address
      and telephone number of principal executive offices)




SECURITIES
      REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: **None.**




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


Title
      of
      each class to be so registered: **Common
      Stock, par value $0.001 per share**




Check
      whether the Issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.


YES
o
      NO x




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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendments to this Form 10-KSB. o





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


YES
o
      NO x




The
      issuer’s revenues for the year ended December 31, 2006 were **$5,486,647** .




The
      aggregate market value of the common stock, par value $0.001 per share, held
      by
      non-affiliates of the issuer was approximately $80,740,441.60 based on the
      closing bid price of $1.40 per share of common share as reported by the OTC
      Bulletin Board on March 1, 2007. As of March 1, 2007, there were 57,671,744
      shares of the issuer’s common stock outstanding





The
      following documents are incorporated by reference: None.





Transitional
      Small Business Disclosure Format (check one) Yes o No x








**TABLE
      OF CONTENTS**




**Page**PART
                I
            1Item
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            12Item
                3.
            Legal
                Proceedings
            12Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            12PART
                II
            12Item
                5.
            Market
                for Common Equity and Related Stockholder Matters.
            12Item
                6.
            Management
                Discussion and Analysis or Plan of Operations
            13Item
                7.
            Financial
                Statements
            16Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            17ITEM
                8A.
            Controls
                and Procedures
            17ITEM
                8B.
            Other
                Information
            17PART
                III
            17Item
                9.
            Directors
                and Executive Officers of the Registrant
            17Item
                10.
            Executive
                Compensation
            18Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
            19Item
                12.
            Certain
                Relationships and Related Transactions
            21Item
                13.
            Exhibits
                and annual reports on Form 8-K
            21Item
                14.
            Principal
                Accountant Fees and Services
            23SIGNATURES
            24FINANCIAL
                STATEMENTS
            F-1











**PART
      I**




Certain
      statements made in this annual report on Form 10-KSB by China Finance, Inc.
      (the
“Company,” “we,” “us,” or “our”) may constitute “forward-looking statements” as
      defined under the Private Securities Litigation Reform Act of 1995, including
      statements made in this report and other filings with the Securities and
      Exchange Commission. Generally, the words “anticipate,” “believe,” “expect,”
“intend”, “estimate,” “project,” and similar expressions identify
      forward-looking statements, which generally are not historical in nature. All
      statements which address operating performance, events or developments that
      we
      expect or anticipate will occur in the future including growth in market share
      and statements expressing general optimism about future operating results are
      forward-looking statements. Forward-looking statements are subject to certain
      risks and uncertainties that could cause actual results to differ materially
      from the Company’s historical experience and the Company’s present expectations
      or projections. Caution should be taken not to place undue reliance on any
      such
      forward-looking statements since such statements speak only as of the date
      when
      made. The Company undertakes no obligation to publicly update or revise any
      forward-looking statements, whether as a result of new information, future
      events or otherwise. For a discussion of some of these risks and uncertainties,
      see the section of this report entitled “Risk Factors”.





**ITEM
      1. DESCRIPTION OF
      BUSINESS**




**Background
      and General**





The
      Company’s principal business is providing financial support and services -
      primarily in the form of surety guarantees or short-term loans - to privately
      owned small and medium sized enterprises in China (“SMEs”) when they seek access
      to capital or to be acquired by a United States reporting company. In a typical
      transaction, the Company provides surety guarantee services that seek to reduce
      or eliminate the financial risks associated with the substantial expenses an
      SME
      incurs in pursuing a merger or other transaction with a U.S. reporting company
      or otherwise seeking entry into the U.S. capital markets system.





The
      Company is a Utah corporation with its principal place of business in New
      Jersey; however, the Company provides its services through its wholly-owned
      subsidiary, Shenzhen Hua Yin Guaranty and Investment Limited Liability
      Corporation (“SHY”), which is located in the Shenzhen region of China. Shenzhen
      has been designated as one of the three high-tech development centers, along
      with Shanghai and Beijing, and, with a population of about 53 million, Shenzhen
      has become a manufacturing and exporting center in China, specializing in
      technology. We believe that SHY’s location in this fast growing region of China
      presents the Company with unique opportunities for the development of its
      business.





SMEs
      are
      becoming an important part of China’s economy, and the growth of SMEs has
      generated a demand for capital, which we believe provides us with a significant
      business opportunity. In the fiscal year ended December 31, 2006, the company
      provided its surety guarantee services for four reverse merger transactions
      and
      made one loan. The Company did not provide any loan guarantees in 2006. In
      the
      fiscal year ended December 31, 2006, as compensation for its services, the
      Company received 6,830,250 shares of its clients with an aggregate value of
      $5,849,550 and $4,222,760 of net income from making loans and surety guarantee
      services.





The
      financial guarantee industry in China is relatively new but has been growing
      due
      to the lack of a standardized, easily accessible credit system and increasing
      demand for capital from China’s SMEs. Recognizing the limited financial
      opportunities available to SMEs, the Chinese central government created a
      network of credit guarantee agencies in the late 1990s under the auspices of
      the
      SME Bureau of the State Economic and Trade Commission (“SETC”). The SETC
      maintains a listing of the types of companies that can apply for a guarantee.
      After checking a company’s financial background using data provided by the State
      Administration for Industry and Commerce and reviewing the proposed project,
      a
      Chinese guarantee agency uses the SETC’s money to guarantee the SME’s bank loan.





Under
      the
      SETC’s criteria, we believe that only a small number of China’s SMEs actually
      qualify for a guarantee. We believe that the difficulty of qualifying for
      support under the presently established SETC criteria creates an opportunity
      for
      private financial guarantee providers to better serve SMEs in this sector.


1




Until
      March 31, 2004, when we completed a transaction that resulted in a change of
      control of the Company, the Company operated a business consisting of a purchase
      overrun and distressed merchandise resale network when it was known as Kubla
      Khan, Inc.





Following
      the March 31, 2004 transaction, the Company completed additional transactions,
      culminating on October 8, 2004, that resulted in our acquisition of all of
      the
      outstanding shares of Value Global International Limited, a British Virgin
      Islands company (“Value Global”) and its wholly-owned subsidiary, SHY (the
“Acquisition”) in exchange for our issuance of shares of our common stock to
      each of the shareholders of Value Global (JuXiang Ruan, Top Interest
      International Limited, ZuHong Xu and ZaoZhen Fang). After the Acquisition,
      having abandoned its previous line of business, the Company determined to modify
      its business model to enter into the financial guarantee industry, and it is
      currently following that model in providing the surety guarantees, loan
      guarantees and loans to SMEs.




**Products
      and Services**




The
      financial guarantee and loan services that the Company provides through its
      wholly-owned subsidiary, SHY are described more fully below.




*Surety
      Guarantees* .
      The
      Company provides surety guarantee services to Chinese SMEs seeking to become
      publicly-traded companies in the United States by being acquired by a United
      States reporting company in a “reverse merger” or other M&A transaction. The
      surety guarantee business generates revenues through fees, which typically
      are
      based on a percentage of the transaction. Although the Company may be paid
      in
      cash for its surety guarantee services, the Company generally expects that
      it
      will receive compensation for its surety guarantee services in the form of
      stock
      from our client companies (“Payment Securities”). Our clients generally pay for
      our surety guarantee services with Payment Securities because they do not have
      sufficient cash flow at the time the services are rendered to pay for the surety
      guarantee services. To the extent that the Company receives Payment Securities
      as compensation, the Company generally allows the Payment Securities to mature
      in the market for a period of time (normally, about one year), then typically
      will strategically sell the Payment Securities taking into consideration the
      performance of the SME and whether the Payment Securities are accurately priced
      in the market. Some stock may be restricted for up to one year, so the Payment
      Securities that the company receives as compensation will rarely be sold before
      about two years from the date the Company acquires them.





*Loan
      Guarantees* .
      We also
      provide guarantees to SMEs and individuals obtaining loans from Chinese banks
      for their business operations and/or personal use. In exchange for the Company’s
      guarantee services, the borrower pays the Company a certain percentage of the
      loan amount as an upfront loan guarantee fee. Loan maturities for loans
      guaranteed by the Company generally range from one to five years, and are
      secured by various forms of collateral pledged by the borrower. Such collateral
      includes fixed assets, receivables, and inventory from corporate clients, as
      well as personal property from individual clients. If a borrower fails to
      fulfill its obligations to a lender, the Company generally has the right to
      require that the borrower liquidate its collateral before the Company is
      required to make payments to the lender pursuant to its guarantees. In addition,
      the Company’s risk control department periodically monitors the current value of
      the collateral that is pledged by its clients for material impairments to the
      collateral.





*Loans* .
      The
      Company may make Loans to SMEs from time to time. In general, the Company
      expects its loans will typically be made to SMEs to which it has provided or
      will provide surety guarantee services. Loans may be made to SMEs that the
      Company determines have been profitable in the past and have attractive
      prospects for future profitability, have experienced or are experiencing or
      projected to experience growth, and have an attractive credit profile. To the
      extent Loans are made to SMEs to which the Company provides guarantee services,
      the Loans may be made before or after the Reverse Merger Transactions are
      consummated. The Company evaluates the creditworthiness of the SMEs to which
      it
      considers making loans using a number of criteria related to the strength of
      the
      SMEs management, employees, financial status and overall
      performance.





**Marketing
      Strategy**




We
      have
      three main focuses in our marketing strategy: (1) our push strategy, (2) our
      pull strategy, and (3) business development.


2




*Push
      strategy* .
      We will
      continue to explore our management’s existing relationships to try to capture
      new business.




*Pull
      strategy* .
      We plan
      to increase brand penetration in major Chinese cities to position us as a
      well-capitalized and leading financial services company in China. In connection
      with this, we plan to (i) recruit and retain talented people in the financial
      services industry, (ii) broaden our search for potential clients by seeking
      companies with diverse backgrounds by taking advantage of our established social
      network to reach potential clients and satisfy their specific needs, (iii)
      develop a very flexible operation system which will empower our employees and
      provide them with enough freedom to take the necessary actions with respect
      to
      our clients on a day to day basis, and (iv) increase our use of advertising
      to
      build our brand.




*Business
      Development* .
      In our
      Shenzhen office, we launched a new division of our surety guarantee business
      to
      service the rapidly growing Internet services market in China. We believe that
      the success of several other Chinese companies in this sector has created
      opportunities for additional companies to expand their presence in the U.S.
      As a
      result, we have decided to strengthen our focus on this market by adding a
      division dedicated to growing our Internet services client base. We are
      expecting a high demand for our surety guarantee services from SMEs in the
      Internet services industry. Part of our business development strategy includes
      expanding our relationships with other U.S. service providers, such as legal
      counsel, accounting firms and investor relations, to provide proper referrals
      in
      the U.S. aftermarket.




**Payment
      Securities**





As
      of
      December 31, 2006, the Payment Securities of the Company consisted
      of shares the Company has received as payment for providing surety guarantee
      services to five SMEs including 2,956,795 shares of China 3C Group (“CHCG”),
      1,200,000 shares of Universal Travel Group (“UTVG”), 480,000 shares of Home
      System Group (“HSYT”), 1,669,500 shares of DiversiFax, Inc. (“DSFX”) and 3,480,750 shares
      of
      China Ivy School, Inc. (“CIVY”).





*China
      3C Group* .
      The
      2,956,795 shares of CHCG represent approximately a 6% interest in the current
      issued and outstanding common shares of CHCG. The CHCG shares were received
      as
      payment for surety guarantee services provided for CHCG’s December 21, 2005
      merger transaction with Capital
      Future Development Limited .
      The
      closing price of the CHCG shares was $0.10 per share on December 21, 2005.
      As of
      December 31, 2006, the closing price of shares of CHCG common stock was $3.46
      per share. Since the CHCG shares are reasonably expected to qualify for sale
      within one year, the securities are not considered restricted for the purposes
      of SFAS No. 115, and, accordingly, quoted market prices have been used to
      determine fair value.





*Universal
      Travel Group* .
      The
      1,200,000 shares of UTVG represent approximately a 6% interest in the current
      issued and outstanding common shares of UTVG. The UTVG shares were received
      as
      payment for surety guarantee services provided for UTVG’s July 12, 2006 merger
      transaction with Full
      Power Enterprise Global Limited. The closing price of
      the UTVG shares was $0.60 per share on July 12, 2006. As of December 31, 2006, the
      closing price of shares of UTVG common stock was $0.49 per share . Since
      the
      UTVG shares are reasonably expected to qualify for sale within one year, the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





*Home
      Systems Group* *.* The
      480,000 shares of HSYT represent approximately a 6% interest in the current
      issued and outstanding common shares of HSYT. The HSYT shares were received
      as
      payment for surety guarantee services provided for HSYT’s August 4, 2006 merger
      transaction with
      Oceanic International (Hong Kong) Limited .
      The
      closing price of the HSYT shares was $1.00 per share on August 4, 2006. As
      of
      December 31, 2006, the
      closing price of shares of HSYT common stock was $1.19 per share. Since
      the HSYT shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





*Diversifax* . **** The
      1,669,500, shares of DSFX represent approximately a 6% interest in the current
      issued and outstanding common shares of DSFX. The DSFX shares were received
      as
      payment for surety guarantee services provided for DSFX’s December 10, 2006
      merger transaction with
      Haoyuan Chemical Company Limited .
      The
      closing price of the DSFX shares was $1.10 per share on December 8, 2006. As
      of
      December 31, 2006, the
      closing price of shares of DSFX common stock was $1.35 per share. Since
      the DSFX shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.


3





*China
      Ivy School* *.* ****** The 3,480,750 shares
      of
      CIVY represent approximately a 6% interest in the current issued and outstanding
      common shares of CIVY. The CIVY shares were received as payment for surety
      guarantee services provided for CIVY’s October 12, 2006 share
      exchange transaction with Brighter
      International Limited (“BIL”). Pursuant to the share exchange agreement
      between CIVY and BIL shareholders, the BIL shareholders will receive 55,250,000
      newly issued common shares of the Company valued at approximately USD$27,625,000
      in exchange for surrendering all their ownership in BIL. Therefore, CIVY shares
      were valued as $0.50 per share on October 12, 2006 even though the closing
      price
      on that date was $1.50 per share. As of December 31, 2006, the
      closing price of shares of CIVY common
      stock was $0.70 per share. Since
      the CIVY shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





**Loans**





On
      June
      30, 2005, the Company entered into a loan agreement with Shengzhen YiJinLi
      Technology Development Ltd. (“YiJinLi”) pursuant to which the Company loaned
      YiJinLi $248,000 for a period of one year at the annual rate of
      5.58%. **** The
      former due date of the loan agreement with YiJinLi was accelerated from July
      30,
      2006 to May 1, 2006. The company was repaid in full on May 1, 2006.





The
      Company and Hong Kong TianYi Investment, Ltd. entered into a loan agreement
      on
      October 25, 2005. The original amount of the loan is $370,000 at the annual
      rate
      of 6% and the obligation unsecured had a term of one year, which was due on
      October 24, 2006. As of December 31, 2006, the loan had not been repaid;
      however, the full principal amount of the loan was subsequently paid in February
      2007.




On
      March
      31, 2006, the Company entered into a loan agreement with Shenzhen Kaibite Ltd.
      (“Kaibite”) pursuant to which the Company loaned Kaibite US$11,538,000
      (RMB$90,000,000) for a period of two years at the annual interest rate of 9%
      (the “March 2006 Loan”). The March 2006 Loan is due on March 31, 2008. The
      Company will be repaid the principal together with accrued interest upon the
      due
      date. A
      portion
      of the loan with Kaibite ($2,113,634) was repaid in advance.





**Client
      Selection Process**




As
      part
      of our surety and loan guarantee business, we conduct research and background
      investigations of our clients. We require that our clients’ agree to satisfy
      financial benchmarks established by the Company, and we follow formal internal
      control procedures for reviewing a client’s financial statements and operations.
      We believe this enables us to better screen clients and accept only those
      clients with qualified financial performance. We also require our clients to
      provide collateral, such as receivables or fixed assets, to guarantee their
      performance.





In
      addition, the Company adheres to our four-step examination/approval process,
      which consists of:





1. *Client
      application and project examination* .
      This is
      the initial phase of a project where we examine a potential client’s
      application, its business, and the industry in which it competes.





2. *Primary
      evaluation and due diligence* .
      Once a
      potential client passes the initial examination, t he
      Company, performs more extensive due diligence and evaluates a number of
      criteria including, without limitation, the potential client’s uniqueness and
      irreplaceability in such potential client’s industry and business area. The
      Company’s clients generally hold licenses to operate in their principal industry
      and business area required and issued by the Chinese government. Such licenses
      are given to only a limited number of companies in each industry, and the
      Company generally seeks SMEs that hold licenses in one or more business lines
      that are not up for renewal in the near future. The Company gets the information
      and data it uses to evaluate potential clients from a number of sources
      including, but not limited to, local governments in PRC, business forums and
      exhibitions, personal business contacts of Company management and personnel,
      and
      other sources. Information regarding the performance of an SME generally
      includes an audit of the potential client by an certified public accounting
      firm
      that analyzes the potential client’s financial situation and makes financial
      projections for the SME. .


4





The
      Company generally requires that these potential clients:





·
            have
                been profitable for the last two years, and are expected to be profitable
                in the future;


·
            are
                projected by the Company to have their total assets grow by more
                than 20%
                per year for the next 3-5 years as determined by the Company’s risk
                management team based on a review of information regarding the SME
                and its
                business;


·
            had
                sales of more than US$5 million during the SME’s most recent fiscal
                year;


·
            sell
                products and services that are used in more than one industry;
                and


·
            are
                often leaders in China in the industries and business areas in which
                they
                operate.




3. *Expert
      Evaluation and Consultation* .
      After
      the primary evaluation and due diligence phase, the Company requests that the
      selected clients be reviewed by the Company’s advisers, which typically include
      third-party accountants, lawyers and other experts in the financial guarantee
      business.





4. *Final
      Approval* .
      Once a
      potential client has been through the due diligence process, the final step
      is
      approval by our CEO and Chairman of the Board.





**Government
      Regulation**




We
      are
      subject to all applicable laws, policies and regulations that govern the
      financial guarantee industry in China, including those adopted by China’s
      central bank, the People’s Bank of China (“PBOC”), which sets monetary policy
      and, together with the State Administration of Foreign Exchange (“SAFE”),
      foreign-exchange policies. According to the 1995 Central Bank law, the State
      Council maintains oversight of PBOC policies.





Regulations
      were recently promulgated by State Development and Reform Commission, or SDRC,
      and SAFE, that require registration with, and approval from, PRC government
      authorities in connection with direct or indirect offshore investment activities
      by individuals who are PRC residents and PRC corporate entities. ****** These
      regulations may apply to the Company’s future offshore or cross-border
      acquisitions, as well as to the equity interests in offshore companies held
      by
      the Company’s PRC shareholders who are considered PRC residents. The Company
      intends to make all required applications and filings and will require the
      shareholders of the offshore entities in the Company’s corporate group who are
      considered PRC residents to make the application and filings as required under
      these regulations and under any implementing rules or approval practices that
      may be established under these regulations. However, because these regulations
      are relatively new and lacking implementing rules or reconciliation with other
      approval requirements, it remains uncertain how these regulations and any future
      legislation concerning offshore or cross-border transactions will be interpreted
      and implemented by the relevant government authorities.





The
      approval criteria by SDRC agencies for outbound investment by PRC residents
      are
      not provided under the relevant SDRC regulations. Also, the criteria for
      registration with SAFE agencies, and whether such registration procedure is
      discretionary, are still uncertain as the criteria, if any, are not provided
      for
      under relevant SDRC regulations. Furthermore, there is a lack of relevant
      registration precedents for us to determine the registration criteria in
      practice. Accordingly, the Company cannot provide any assurances that we will
      be
      able to comply with, qualify under or obtain any registration or approval as
      required by these regulations or other related legislations. Further, we cannot
      assure you that our shareholders would not be considered PRC residents, given
      uncertainties as to what constitutes a PRC resident for the purposes of the
      regulation, or that if they are deemed PRC residents, they would (or would
      be
      able to) comply with the requirements. Our failure or the failure of our PRC
      resident shareholders to obtain these approvals or registrations may restrict
      our ability to acquire a company outside of China or use our entities outside
      of
      China to acquire or establish companies inside of China, which could negatively
      affect our business and future prospects.




As
      a U.S.
      public company, we are also subject to Federal and state securities laws.




5


**Investment
      Company Act Considerations**





If
      the
      Company were to be deemed an investment company, the Company would become
      subject to registration under and compliance with the Investment Company Act
      of
      1940 (the “1940 Act”) unless an exclusion or safe harbor provision applied. As a
      consequence, the Company would be prohibited from engaging in certain activities
      including issuing securities as it has in the past and might be subject to
      civil
      and criminal penalties for noncompliance if it is not
      registered.





The
      Company has taken steps in the past in an effort to avoid being deemed an
“investment company” under the 1940 Act. Whether or not a company is in the
      business of investing, reinvesting, owning, holding, or trading in securities
      is
      primarily a facts and circumstances test. Among the factors considered in making
      this determination are: (i) the company's historical development, (ii) its
      public representations of policy, (iii) the activities of its officers and
      directors, (iv) the nature of its present assets, and (v) the sources of
      its present income. While the Company, after considering these factors, does
      not
      believe that its current business plan would cause it to be in the business
      of
      investing, reinvesting, owning, holding or trading in securities, the Company,
      due to the nature of its current assets and income, has determined to register
      as an “investment company” under the 1940 Act. Previously, the Company has taken
      affirmative steps to avoid being deemed to be an “investment company”. For
      example, the Company has been relying on Rule 3a-2 under the 1940 Act (the
      “Transient Investment Company Rule”) for a safe harbor exemption from the
      definition of “investment company” under the 1940 Act because appreciation in
      the value of the Company’s Payment Securities and the March 2006 Loan had caused
      the Company’s “investment securities” to exceed 40% of its total assets
      (excluding cash and government securities).  A company may rely on the
      Transient Investment Company Rule for a period of up to one year once during
      any
      three year period.





The
      Company’s management has been monitoring its business, the composition of its
      assets, sources of its income and its business prospects and has determined
      that
      it is in the best interests of the Company and its shareholders to register
      as
      an investment company under the 1940 Act. The Company may incur significant
      costs to the extent that it continues to take steps to avoid investment company
      status and may suffer other adverse consequences if it is deemed to be an
“investment company” under the 1940 Act and does not register. The Company’s
      securities holdings constitute “investment securities” under the 1940 Act. A
      company may be deemed to be an investment company if: (i) its “investments
      securities” exceed 40% of its total assets (excluding cash and government
      securities) and (ii) it is in the business of investing, reinvesting, owning,
      holding, or trading in securities.  Due to the value of the Company’s
      Payment Securities and the value of the March 2006 Loan, the Company’s
“investment securities” have exceeded 40% of its total assets (excluding
      cash and government securities) as of December 31, 2006. Therefore, the Company
      may be deemed to be an “investment company” if it is deemed to be in the
      business of investing, reinvesting, owning, holding, or trading in securities.
      Because the Company’s business plan may result in the continued receipt of
      securities as payment for its surety guarantee services, the Company’s assets
      and income are likely to cause it to be deemed to be an “investment company”,
      and it can no longer rely on the Transient Investment Company Rule.





The
      Company’s management has considered the implications of registering the Company
      under the 1940 Act and has determined that it is in the best interest of the
      Company and its shareholders to register. The Company is in the process of
      preparing to file a registration statement under the 1940 Act, which will
      subject the Company to additional regulation under the 1940 Act.





**Tax
      Implications of the Company’s Business**





Taxes
      on
      profits earned by our wholly owned subsidiary, SHY, are calculated in accordance
      with taxation principles currently effective in the PRC. We expect that the
      Chinese government will continue its stable financial policy, move forward
      with
      its reform of its tax system, and continue to emphasize financial and economic
      efficiency. The essential aim of the tax policy of China is to sustain current
      stable economic and social development pace. Specifically, in terms of the
      reform of the tax collection policy, the principles underlying such reform
      include simplifying the tax system, expanding the tax foundation, lowering
      the
      tax rate, and implementing a strict collection system. These principles are
      aimed at immediate and efficient economic development, the development of
      science and technology, and economic usage of energy and resources. We expect
      that the Add-Value Tax system will be continued in China.


6





We
      account for income taxes paid to tax authorities using the liability method.
      Taxes on profits earned by our wholly-owned subsidiary Value Global are
      calculated in accordance with taxation principles currently effective in the
      British Virgin Islands. Value Global is an International Business Company (IBC)
      registered in the British Virgin Islands and is exempt from all taxes and
      withholding taxes in the British Virgin Islands, paying only registration fees
      and annual license fees which amount to $1,300 per annum.





We
      account for income taxes payable on U.S. taxable income in accordance with
      SFAS
      No. 109, “Accounting for Income Taxes,” using the asset and liability approach,
      which requires recognition of deferred tax liabilities and assets for the
      expected future tax consequences of temporary differences between the carrying
      amounts and the tax basis of such assets and liabilities. This method utilizes
      enacted statutory tax rates in effect for the year in which the temporary
      differences are expected to reverse and gives immediate effect to changes in
      income tax rates upon enactment. Deferred tax assets are recognized, net of
      any
      valuation allowance, for temporary differences and net operating loss and tax
      credit carryforwards. Deferred income tax expense represents the change in
      net
      deferred assets and liability balances.





**Competition**




According
      to the management’s best information, there are currently a limited number of
      similar surety guarantee providers in the market, but, in the future, there
      might be other new players that enter into the surety guarantee business and
      compete with us, despite the intellectual and financial capital required. While
      there are over 200 guarantee agencies nationwide that use the SETC’s money to
      guarantee loans, these are primarily for the traditional loan guarantees of
      commercial and personal loans, not surety loan guarantees, for which there
      are
      fewer companies with which we compete in our market. However, our loan guarantee
      business does compete with several loan guarantee providers in the Shenzhen
      financial guarantee market, which are larger in size and have greater financial
      resources than we do. Our main competitors include the Shenzhen Small &
Medium Enterprise Credit Guarantee Center, Shenzhen Zhong Ke Zhi Guarantee
      Group, Shenzhen High-tech Investment, Ltd, Shenzhen MinQi Financing Guarantee,
      Ltd., Shenzhen Real Estate Guarantee Co., Ltd, and Guoxing Investment and Gaoxin
      Investment and Guarantee.




**Employees**




As
      of
      December 31, 2006, we had 48 employees, all of which were full time employees.
      Our employees are not represented by a labor union and are not covered by a
      collective bargaining agreement. We believe that our employee relations are
      good.




**Risk
      Factors**




In
      addition to the other information in this annual report, our business is subject
      to numerous risks which should be considered carefully in evaluating our
      business and prospects.





***Risks
      Associated with the Company’s Primary Business***




Limited
      Operating History.
      Until
      March 31, 2004, the Company operated a business consisting of a purchase overrun
      and distressed merchandise resale network. The Company abandoned this line
      of
      business in June of 2004 and on October 8, 2004, through the acquisition of
      Value Global and SHY, the Company entered the surety guarantee and loan
      guarantee business. Accordingly, there is a limited relevant operating history
      upon which an evaluation of the Company’s prospects and future performance can
      be based. There can be no assurance that the Company will be able to raise
      additional capital to develop its business plan, generate meaningful revenues
      or
      become a viable business. Because the Company’s markets are relatively new and
      constantly changing, the Company may need to change its business model
      frequently.





Risk
      of Payment of Guarantees .
      The
      Company may be obligated to pay on its surety guarantees if the underlying
      transactions fail to close. The Company may also be obligated to pay on its
      loan
      guarantees if a client fails to repay its loan to the bank. While the Company
      tries to minimize these risks by performing due diligence and financial
      assessments of its clients and by taking a security interest in the collateral
      of its clients, there can be no assurance that the Company will not have to
      pay
      on its guarantees. Furthermore, the Company cannot assure you that the
      collateral in which the Company has a security interest will be sufficient
      to
      cover all or a portion of the amount of the Company’s guarantees. If the
      Company’s clients fail to close the underlying transaction or default on their
      loans, the Company’s business could be materially adversely affected.


7





Risk
      of Non-Repayment of Loans .
      The
      financial status of the Company will be adversely affected if the debtor of
      the
      March 2006 Loan defaults on the loan or if any future debtor of any Loan made
      by
      the company defaults.





Competition . **** Although
      the Company currently has few competitors, the Company expects competition
      to
      intensify in the future. The Company’s current competitors have greater
      capabilities and resources than the Company has. Similarly, there can be no
      assurance that additional competitors with greater resources than that of the
      Company will not enter our market in the future. The State Economic and Trade
      Commission (SETC) SME Bureau in China may expand their existing services to
      SMEs
      and become the Company’s competitor. If and when the Chinese government allows
      foreign financial institutions to enter into the financial guarantee industry
      in
      China, they may also become competitors of the Company. In the future,
      competitive pressures from competitors could cause the Company’s services to
      lose market acceptance or result in significant price erosion, which would
      have
      a material adverse effect upon the Company’s business, results of operations, or
      financial condition.





Dependence
      on Key Personnel .
      The
      Company is highly dependent on the services of Zhiyong Xu, the Company’s
      Chairman and Chief Executive Officer, as well as other principal members of
      the
      Company’s management team. The Company’s executives not only manage the
      Company’s day to day business operations but are essential to the Company’s
      ability to establish and maintain relationships with its customers. The Company
      has no “key man” life insurance policies, although it may purchase such policies
      in the future. Continued growth and profitability will depend upon the Company’s
      ability to maintain its current leadership infrastructure and recruit and retain
      qualified and experienced executive personnel. Competition in the Company’s
      industry for executive-level personnel is strong and there can be no assurance
      that the Company will be able to hire, motivate and retain highly effective
      executive employees. If the Company fails to attract, integrate and retain
      the
      necessary personnel, its ability to maintain and build its business could suffer
      significantly.





Limited
      Public Market for the Company’s Common Stock .
      There
      is currently a limited public market for the shares of the Company’s common
      stock. There can be no assurances that such limited market will continue or
      that
      any shares of the Company’s common stock may be sold without incurring a loss.
      The market price of the Company’s common stock may not necessarily bear any
      relationship to the Company’s book value, assets, past operating results,
      financial condition or any other established criteria of value, and may not
      be
      indicative of the market price for its common stock in the future. Further,
      the
      market price for the Company’s common stock may be volatile depending on a
      number of factors, including business performance, industry dynamics, news
      announcements or changes in general economic conditions.





Low-Priced
      Stocks .
      The
      Company’s common stock is currently listed for trading on the OTC Bulletin
      Board, which is generally considered to be a less efficient market than markets
      such as NASDAQ or other national exchanges, and which make it more difficult
      for
      the Company’s shareholders to conduct trades. It may also make it more difficult
      for the Company to obtain future financing. Further, the Company’s securities
      are subject to the “penny stock rules” adopted pursuant to Section 15 (g) of the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”). The penny
      stock rules apply to non-NASDAQ companies whose common stock trades at less
      than
      $5.00 per share or which have tangible net worth of less than $5,000,000
      ($2,000,000 if the company has been operating for three or more years). Such
      rules require, among other things, that brokers who trade “penny stock” to
      persons other than “established customers” complete certain documentation, make
      suitability inquiries of investors and provide investors with certain
      information concerning trading in the security, including a risk disclosure
      document and quote information under certain circumstances. Many brokers have
      decided not to trade “penny stocks” because of the requirements of the penny
      stock rules and, as a result, the number of broker-dealers willing to act as
      market makers in such securities is limited. In the event that the Company
      remains subject to the “penny stock rules” for any significant period, there may
      develop an adverse impact on the market, if any, for the Company’s securities.
      Because the Company’s securities are subject to the “penny stock rules”,
      investors will find it more difficult to dispose of the Company’s securities.
      Further, for companies whose securities are traded in the over-the-counter
      market, it is more difficult to obtain accurate quotations and to obtain
      coverage for significant news events because major wire services, such as the
      Dow Jones News Service, generally do not publish press releases about such
      companies.


8





No
      Dividends .
      The
      Company has not paid any dividends on its common stock to date and there are
      no
      plans for paying dividends on its common stock in the foreseeable future. The
      Company intends to retain earnings, if any, to provide funds for the execution
      of its business plan. The Company does not intend to declare or pay any
      dividends in the foreseeable future. Therefore, there can be no assurance that
      holders of common stock will receive any additional cash, stock or other
      dividends on their shares of common stock until the Company has funds, which
      our
      board of directors determines can be allocated to dividends.





PRC
      laws
      and our corporate structure may restrict our ability to receive dividends and
      payments from, and transfer funds to, our PRC operating company, which may
      negatively affect our results of operations and restrict our ability to act
      in
      response to changing market conditions. Substantially all of our operations
      are
      conducted through our PRC operating company, SHY. The ability of our PRC
      operating company to make dividend and other payments to us may be restricted
      by
      factors such as changes in applicable foreign exchange and other laws and
      regulations. For example, under the SAFE regulations discussed above, the
      foreign exchange activities of our present or prospective PRC subsidiaries
      are
      conditioned upon the compliance with the SAFE registration requirements by
      the
      shareholders of our offshore entities who are PRC residents. Failure to comply
      with these SAFE registration requirements may substantially restrict or prohibit
      the foreign exchange inflow to and outflow from our PRC subsidiaries, including,
      remittance of dividends and foreign currency denominated borrowings by these
      PRC
      subsidiaries. In addition, our PRC operating company is required, where
      applicable, to allocate a portion of its net profit to certain funds before
      distributing dividends, including at least 10% of its net profit to certain
      reserve funds until the balance of such fund has reached 50% of its registered
      capital. These reserves can only be used for specific purposes, including
      making-up cumulative losses of previous years, conversion to equity capital,
      and
      application to business expansion, and are not distributable as dividends.
      Our
      PRC operating company is also required, where applicable, to allocate an
      additional 5% to 10% of its net profits to a statutory common welfare fund.
      The
      net profit available for distribution from our PRC operating company is
      determined in accordance with generally accepted accounting principles in China,
      which may materially differ from a determination performed in accordance with
      U.S. GAAP. As a result, we may not receive sufficient distributions or other
      payments from this entities to enable us to make dividend distributions to
      our
      shareholders in the future, even if our U.S. GAAP financial statements indicate
      that our operations have been profitable.





Risks
      Associated With Doing Business In China . **** Changes
      in the political and overall economic conditions of China, which are outside
      the
      control of management, could have a material adverse effect on the Company’s
      business, operating results and financial condition. The Company has
      historically conducted transactions with customers outside the United States
      in
      United States dollars. Payroll and other costs of foreign operations are payable
      in foreign currencies, primarily Hong Kong dollars and Chinese Renminbi. To
      the
      extent future revenue is denominated in foreign currencies, the Company would
      be
      subject to increased risks relating to foreign currency exchange rate
      fluctuations that could have a material adverse affect on the Company’s
      business, financial condition and operating results. To date, we have not
      engaged in any hedging transactions in connection with our international
      operations.





Risks
      Associated with China’s Economic, Political and Social
      Conditions . ** Substantially
      all of the Company’s operations and assets are located in China, and
      substantially all of its net revenue is derived from its operations in China.
      Accordingly, the Company’s results of operations and future prospects are
      subject to economic, political and social developments in China. In particular,
      the Company’s results of operations may be adversely affected by:




·
            Changes
                in China’s political, economic and social
                conditions;


·
            changes
                in policies of the government or changes in laws and regulations,
                or the
                interpretation of laws and
                regulations;


·
            changes
                in foreign exchange regulations;


·
            measures
                that may be introduced to control inflation, such as interest rate
                increases; and


·
            changes
                in the rate or method of taxation.





9





The
      PRC’s
      economy has historically been a planned economy. The majority of productive
      assets in China are still owned by various levels of the PRC government. In
      recent years the government has implemented economic reform measures emphasizing
      decentralization, utilization of market forces in the development of the economy
      and a high level of management autonomy. Such economic reform measures may
      be
      inconsistent or ineffectual, and the Company may not benefit from all such
      reforms. Furthermore, these measures may be adjusted or modified, possibly
      resulting in such economic liberalization measures being applied inconsistently
      from industry to industry, or across different regions of the country.




In
      the
      past twenty years, China has been one of the world’s fastest growing economies
      in terms of gross domestic product, or GDP. This growth may not be sustainable.
      Moreover, a slowdown in the economies of the United States, the European Union
      and certain Asian countries may adversely affect economic growth in China which
      depends on exports to those countries. The Company’s financial condition and
      results of operations, as well as its future prospects, would be materially
      and
      adversely affected by an economic downturn in China.





The
      legal
      system in China has inherent uncertainties that may limit the legal protections
      available to you as an investor or to us in the event of any claims or disputes
      with third parties. The legal system in China is based on written statutes.
      Prior court decisions may be cited for reference but have limited precedential
      value. Since 1979, the central government has promulgated laws and regulations
      dealing with economic matters such as foreign investment, corporate organization
      and governance, commerce, taxation and trade. As China’s foreign investment laws
      and regulations are relatively new and the legal system is still evolving,
      the
      interpretation of many laws, regulations and rules is not always uniform and
      enforcement of these laws, regulations and rules involve uncertainties, which
      may limit the remedies available to our shareholders and to us in the event
      of
      any claims or disputes with third parties. In addition, any litigation in China
      may be protracted and result in substantial costs and diversion of resources
      and
      management attention.





Internal
      political risks .
      Changes
      in laws and regulations, or their interpretation, or the imposition of
      confiscatory taxation, restrictions on currency conversion, imports and sources
      of supply, devaluations of currency or the nationalization or other
      expropriation of private enterprises could have a material adverse effect on
      the
      Company’s business, results of operations and financial condition. Under its
      current leadership, the Chinese government has been pursuing economic reform
      policies that encourage private economic activity and greater economic
      decentralization. There is no assurance, however, that the Chinese government
      will continue to pursue these policies, or that it will not significantly alter
      these policies from time to time without notice. In addition, the Chinese
      government could enact laws which restrict or prohibit the Company from
      conducting its surety and loan guarantees.





Risks
      Associated with Effecting Service of Legal Process and Enforcing Judgments
      Against Us and Our Management . ****** Substantially
      all of our operations and assets are located in China. In addition, most of
      our
      directors and executive officers named in this document reside within China,
      and
      many of the assets of these persons are also located within China. As a result,
      it may not be possible to effect service of process within the United States
      or
      elsewhere outside China upon these directors or executive officers or some
      of
      the experts named in this document, including with respect to matters arising
      under U.S. federal securities laws or applicable state securities laws.
      Moreover, management has been advised by the company’s PRC legal counsel that
      China does not have treaties with the United States or many other countries
      providing for the reciprocal recognition and enforcement of court judgments.
      As
      a result, recognition and enforcement in China of judgments of a court of the
      United States or any other jurisdiction, including judgments against us or
      our
      directors or executive officers, may be difficult or impossible.





Risks
      Related to Limitations on the Liability of our Directors to our
      Shareholders .
      Our
      articles of incorporation provide, as permitted by governing Utah law, that
      our
      directors shall not be personally liable to our stockholders for monetary
      damages for breach of fiduciary duty as a director, with certain exceptions.
      Our
      bylaws require us to provide mandatory indemnification of directors to the
      fullest extent permitted by Utah law, except for matters arising under the
      securities laws of the United States. Further, we may elect to adopt forms
      of
      indemnification agreements to cover directors and officers. These provisions
      and
      agreements may discourage shareholders from bringing suit against a director
      for
      breach of fiduciary duty and may reduce the likelihood of derivative litigation
      brought by shareholders on behalf of us against a director.





10


***Risks
      Associated with Payment Securities*** .





To
      the
      extent the Company receives Payment Securities as payment for the performance
      of
      surety guarantee services, the financial status of the Company will be affected
      by the volatility of these securities for as long as they are held by the
      Company. You may lose money on your investment in the Company if the value
      of
      the Payment Securities declines. The risks affecting the value of the Payment
      Securities are described below:





Market
      risk . Stock
      prices are volatile. Market
      risk refers to the risk that the value of Payment Securities in the Company’s
      portfolio may decline due to daily fluctuations in the securities markets
      generally. The Company’s financial performance will change periodically based on
      many factors that may generally affect the stock market, including fluctuation
      in interest rates, national and international economic conditions and general
      equity market conditions. In
      a
      declining stock market, stock prices for all companies (including those in
      the
      Company’s portfolio) may decline, regardless of their long-term
      prospects .





Geographic
      concentration in China .
      The
      Chinese economy is generally considered an emerging and volatile
      market . Prices for Payment
      Securities  may be very sensitive to adverse political, economic, or regulatory developments in China
      and other Asian countries, and may experience significant losses in such
      conditions .
      China’s
      central government has historically exercised substantial control over the
      Chinese economy through administrative regulation and/or state ownership.
      Despite economic reforms that have resulted in less direct central and local
      government control over Chinese businesses, actions of the Chinese central
      and
      local government authorities continue to have a substantial effect on economic
      conditions in China. These activities, which may include central planning,
      partial state ownership of or government actions designed to substantially
      influence certain Chinese industries, market sectors or particular Chinese
      companies, may adversely affect the companies whose securities the Company
      holds. Government actions may also affect the economic prospects for, and the
      market prices and liquidity of, the Payment Securities. In addition, currency fluctuations,
      monetary policies ,  competition,
      social instability or political unrest may adversely affect economic growth in China. The Chinese economy and Chinese
      companies may
      also be  adversely
      affected by regional security threats, including those from
      Taiwan and North Korea ,
      as well
      as adverse developments in Chinese trade policies, or in trade policies toward
      China by countries that are trading partners with China .





Government
      relationships risk . **** While
      companies in China may be subject to limitations on their business relationships
      under Chinese law, these laws may not be consistent with certain political
      and
      security concerns of the U.S. As a result, Chinese companies may have material
      direct or indirect business relationships with governments that are considered
      state sponsors of terrorism by the U.S. government, or governments that
      otherwise have policies in conflict with the U.S. government (an “Adverse
      Government”). If the clients of the Company whose Payment Securities the Company
      holds have or develop a material business relationship with an Adverse
      Government, then the Company will be subject to the risk that these companies’
reputation and price in the market will be adversely affected.





Risk
      of Loss of Chinese Business License .
      As
      mentioned above in “Overview of the Company’s Business - Investment Objectives
      and Policies”, the SMEs that the Company selects as clients for its surety
      guarantee services and, therefore, the SMEs whose Payment Securities the Company
      holds, are generally leaders in their respective industries. One factor in
      this
      industry leadership is the fact that the Chinese government only issues a
      limited number of business licenses in any given industry, so, as long as the
      SME maintains its license, it is likely to remain near the top of the industry.
      However, business licenses are only valid for a limited term, and it is up
      to
      the discretion of the Chinese government to renew a license. Licenses may not
      be
      renewed for any reason or no reason; therefore, there is a risk that an SME
      will
      lose its license in the future, which would prevent the SME from carrying on
      its
      business and cause it to lose money or even dissolve. As a result, the loss
      of a
      business license would have a significant adverse effect on the value of the
      Payment Securities held by the Company of such an SME.





Small
      company risk .
      The
      Company may hold Payment Securities of smaller companies. Stocks of smaller
      companies may have more risks than those of larger companies. In general,
      smaller companies have less experienced management teams, serve smaller markets,
      and find it more difficult to obtain financing for growth or potential
      development than larger companies. Due to these and other factors, small
      companies may be more susceptible to market downturns, and their stock prices
      may be more volatile than those of larger companies.






11




Business
      and sector risk . From
      time
      to time, a particular set of circumstances may affect a particular industry
      or
      certain companies within an industry, while having little or no impact on other
      industries or other companies within the industry. For instance, economic or
      market factors; regulation or deregulation; and technological or other
      developments may negatively impact all companies in a particular industry.
      To
      the extent the Company invests heavily in a particular industry that experiences
      such a negative impact, the Company’s portfolio will be adversely affected.





Interest
      rate risk . Increases
      in interest rates typically lower the present value of a company’s future
      earnings stream. Since the market price of a stock changes continuously based
      upon investors’ collective perceptions of future earnings, stock prices will
      generally decline when investors anticipate or experience rising interest
      rates.





Issuer
      risk .
      The
      value of an individual security or particular type of security can be more
      volatile than the market as a whole and can perform differently from the value
      of the market as a whole.





Private
      investments risk . **** The
      Company’s involvement in the reverse merger transactions will be subject to a
      number of risks because the Payment Securities will often be illiquid securities
      for which there is no public market. Illiquid securities are subject to risks
      of
      potential delays in resale and uncertainty in valuation. The Company values
      illiquid securities using its fair value procedures (described below) but there
      can be no assurance that (i) the Company will determine fair value for a
      private investment accurately; (ii) that the Company will be able to sell
      private securities for the fair value determined by the Company; or
      (iii) that the Company will be able to sell such securities at
      all.





**ITEM
      2. DESCRIPTION OF
      PROPERTY**




We
      rent
      office space under three operating leases, which the Company believes are
      sufficient to meet its needs. Two leases are related to SHY. Beginning in
      May 1, 2004, we leased office space located at Shenzhen Central Business
      Tower 1506-1508 and 1509, Fuhua Yi Road, Futian, Shenzhen City, PRC under two
      leases for a total of $2,435 (equivalent to RMB20, 121.20) per
      month. These two leases had a term of three years from May 1, 2004 to April
      30, 2007; however, these two leases were terminated in February 2006 when we
      changed office space.  In February 2006, SHY entered into two new
      three year lease agreements, under which its monthly lease payments will be
      $7,799 (RMB60,832) and $6,915 (RMB53,942). The term of the new leases are
      January 1, 2006 through January 1, 2009 and April 1, 2006 through March 31,
      2009, respectively.  The new office space is located at Anlian Building,
      Suite A-15, 2222 Jintian Road, Futian District, Shenzhen City, PRC.




The
      third
      lease is for our office in the United States located at 111 Pavonia Avenue,
      Suite 615, Jersey City, New Jersey 07310. This is a one year lease with a rent
      of $4,263 per month. The lease is renewable every year. Rent expenses for the
      years ended December 31, 2006 and 2005 was approximately $198,000 and $84,202,
      respectively for all three leases combined.





**ITEM
      3. LEGAL
      PROCEEDINGS**




We
      are
      not currently a party to any pending legal proceeding.




**ITEM
      4. SUBMISSION OF MATTERS
      TO A VOTE OF SECURITY HOLDERS**




During
      the quarter ended December 31, 2006, no matters were submitted to a vote of
      our
      security holders.




**PART
      II**




**ITEM
      5. MARKET FOR COMMON
      EQUITY AND RELATED STOCKHOLDER MATTERS** .




As
      of
      December 31, 2006, our authorized capital stock consisted of 100,000,000 shares
      of common stock, par value $0.001 per share, 57,671,744 shares of common stock
      were issued and outstanding and there were 58 record holders of our common
      stock. Our transfer agent is Colonial Stock Transfer Company, 66 Exchange Place,
      Salt Lake City, Utah, 84111.




Our
      common stock is traded on the OTC Bulletin Board under the symbol “CHFI.OB.” The
      following table sets forth, for the periods indicated, the high and low bid
      price for our common stock as reported on such quotation system, which
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not represent actual transactions.


12











**Quarter**
              **Ending:**
            
            **High**
            
            **Low****2005**March
                31, 2005
            
            $
                2.50
            
            $
                0.95June
                30, 2005
            
            $
                1.01
            
            $
                0.30September
                30, 2005
            
            $
                0.45
            
            $
                0.3December
                30, 2005
            
            $
                0.51
            
            $
                0.33**2006**March
                31, 2006
            
            $
                1.01
            
            $
                0.35June
                30, 2006
            
            $
                0.90
            
            $
                0.90September
                30, 2006
            
            $
                0.75
            
            $
                0.51December
                31, 2006
            
            $
                0.98
            
            $
                0.98**2007**March
              31, 2007
            
            $1.15
            
            $1.12




We
      have
      not declared or paid dividends on our common stock to date and intend to retain
      future earnings, if any, for use in our business for the foreseeable
      future.




**Equity
      Compensation Plan Information**




See
“Item
      11. Security Ownership of Certain Beneficial Owners and Management” for the
      aggregate information regarding our equity compensation plans in effect on
      December 31, 2006.




**Recent
      Issuances of Unregistered Securities**




None.





**ITEM
      6.  MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**General
      and Trend Information**





The
      Company’s revenues are generated primarily from two guarantee services: surety
      guarantees and loan guarantees. The Company’s revenue for the year ended
      December 31, 2006 and 2005 were $5,486,647 and $397,110, respectively. There
      are
      several principal factors affecting the revenue and financial status of the
      Company:





1. The
      Company’s
      overall financial status and revenue will be affected by the ability of the
      Company to find suitable candidates for its surety guarantee and loan guarantee
      services.





2. The
      overall
      financial status and revenue of the Company will be adversely **** affected
      if its clients default on loans guaranteed by the Company, or if the
      transactions guaranteed by the Company pursuant to its surety services fail
      to
      be completed.


13





3. The
      financial
      status of the Company will be adversely affected if the debtor of the March
      2006
      Loan defaults on the loan.





4. To
      the extent
      the Company receives securities as payment for the performance of surety
      guarantee services, the financial status of the Company will be affected by
      the
      volatility of these securities for as long as they are held by the
      Company.





With
      the
      increasing difficulty of obtaining both indirect and direct financing in China,
      an increasing number of Chinese SMEs, especially private enterprises, opt to
      go
      overseas to become publicly-traded companies. If this trend holds true, the
      Company may experience an increase in the number of surety guarantee clients
      it
      serves, and, subsequently, a growth in its revenues and income from its surety
      guarantee business.





As
      discussed above, there are currently a limited number of similar surety
      guarantee providers in the market, but, in the future, there might be other
      new
      players that enter into the surety guarantee business and compete with us
      despite the high intellectual and financial capital required. Currently, our
      loan guarantee business does compete with several loan guarantee providers
      in
      the Shenzhen financial guarantee market, which are larger in size and have
      greater financial resources than we do. In order to better compete, the Company
      has determined to allocate additional resources toward evaluating additional
      loan guarantee customers and expanding the loan guarantee business.





As
      discussed above, the Company’s management is monitoring and evaluating the
      Company’s status under the 1940 Act, and the Company is in the process of
      preparing to register under the 1940 Act.





**Net
      Revenue**





The
      revenue for the periods were derived primarily from making loans and our loan
      guarantees and surety guarantee transactions. The difference in revenues between
      the two periods is attributable to an increase in the surety guarantee business
      (i.e. the UTVG, HSYT, CIVY, DSFX transactions). The company recognized
      $4,799,025 of revenue from these four surety guarantee transactions. This surety
      guarantee revenue is unrealized revenue and is based on the value of the Payment
      Securities, which are thinly traded. The selection of the SMEs to which we
      provide our surety guarantee services is the principal factor affecting the
      Company’s revenue, especially when the value of the SME is
      underestimated.




**Operating
      Expenses**





Selling,
      general and administrative expenses (“SG&A”) consist primarily of
      administrative fees, professional fees, payroll costs and travel expenses.
      SG&A was $1,259,908 the year ended December 31, 2006 as compared to $764,077
      the year ended December 31, 2005. The Company incurred these SG&A in
      connection with executing our business plan. The Company is subject to all
      of
      the risks, expenses, delays, problems and difficulties frequently encountered
      in
      the establishment of a new business. The causes of the increase in SG&A
      include advertising expenses, leasehold improvements, amortization increases
      and
      the depreciation of the Company’s automobile.





The
      Company may incur significant costs to the extent that it continues to take
      steps to avoid investment company status and may suffer other adverse
      consequences if it is deemed to be an “investment company” under the 1940 Act
      and does not register. The Company’s management has determined that it is in the
      best interests of the Company and its shareholders to register as an investment
      company under the 1940 Act, and the Company is in the process of preparing
      to
      register under the 1940 Act.




**Net
      Income (loss)**





Net
      income for the year ended December 31, 2006 and 2005 were $4,222,760 and
      ($4,149,379), respectively. The increase in net income in 2006 is attributable
      to an increase in revenue from the surety guarantee business (i.e. the UTVG,
      HSYT, CIVY, DSFX transactions).




14


**Liquidity
      and Capital Resources**





As
      of
      December 31, 2006, we had cash and cash equivalents of $53,674 as compared
      to
      $11,331,650 as of December 31, 2005. Cash flow from operating activities was
      (9,484,384) for the year ended December 31, 2006 as compared to ($888,773)
      for
      the same period in 2005.





We
      expect
      that our cash and cash equivalents will be sufficient to satisfy our cash
      requirements for the next twelve months because
      (i) we anticipate being able to sell our CHCG Payment Securities; (ii) we plan
      to collect on the March 2006 Loan; and (iii) if needed, we could obtain a line
      of credit from a bank.In
      the long run, our liquidity will be dependent on our successful execution of
      our
      business plan, receipt of revenues, and additional infusions of capital through
      equity and debt financing. Any funds raised from an offering of our equity
      or
      debt will be used to continue to develop and execute our business plan. However,
      there can be no assurance that we will be able to obtain additional equity
      or
      debt financing on terms acceptable to us, if at all.





There
      are
      several factors affecting the Company’s cash flows:





1. The
      number
      and total value of (a) loans for which the Company provides guarantee services,
      and (b) reverse merger and M&A transactions for which the Company provides
      surety services.





2. The
      amount of
      time it takes to complete the reverse merger and M&A transactions for which
      the Company provides surety guarantees.





3. The
      amount of
      time it takes for the Company to dispose of any securities received by the
      Company as compensation for its surety services, which may depend, in part,
      on
      the growth and development of the companies to which we provide surety guarantee
      services and the market for their common shares.





**Critical
      Accounting Policies**





The
      discussion and analysis of our financial condition and results of operations
      in
      this report are based upon our consolidated financial statements, which have
      been prepared in accordance with generally accepted accounting principles in
      the
      United States (“GAAP”). The preparation of financial statements requires
      management to make estimates and judgments that affect the reported amounts
      of
      assets and liabilities, revenues and expense and disclosures as of the date
      of
      the financial statements. On an on-going basis, we evaluate our estimates,
      including, but not limited to, those related to revenue recognition, accounts
      receivables, inventories, and impairment of property and equipment and of
      intangibles. We use authoritative pronouncements, historical experience and
      other assumptions as the basis for making estimates. Actual results could differ
      from those estimates.





We
      recognize revenue in accordance with Staff Accounting Bulletin No. 101, “Revenue
      Recognition in Financial Statements”. We will recognize revenue when realized or
      realizable and earned, which is when the following criteria are met: persuasive
      evidence of arrangement exists; delivery has occurred; the sales price is fixed
      and determinable; and the ability to collect is reasonably assured.





The
      recently adopted SEC Release No. 33-8098 requires us to identify accounting
      estimates we make in applying our accounting policies and any accounting policy
      that we adopt that has a material impact on our financial presentation. Under
      the first part of the proposals, we would have to identify the accounting
      estimates reflected in its financial statements that required us to make
      assumptions about matters that were highly uncertain at the time of estimation.
      Disclosure about those estimates would then be required if different estimates
      that we reasonably could have used in the current period, or changes in the
      accounting estimate that are reasonably likely to occur from period to period,
      would have a material impact on the presentation of the Company's financial
      condition, changes in financial condition or results of operations. Our
      disclosure about these critical accounting estimates would include a discussion
      of: the methodology and assumptions underlying them; the effect the accounting
      estimates have on our financial presentation; and the effect of changes in
      the
      estimates. Under the second part of the proposals, if we were to adopt an
      accounting policy that would materially impact our financial disclosures, we
      would have to disclose certain information with respect to such newly adopted
      accounting policy, including: the accounting principle adopted and method of
      applying it; the reasons giving rise to the adoption; the impact of the
      adoption; and the choices of accounting principles that the Company examined.


15





In
      June
      1977, the FASB issued Statement No. 15, “Accounting by Debtors and Creditors for
      Troubled Debt Restructurings” (“FAS 15”). FAS 15 establishes standards of
      financial accounting and reporting by both the debtor and creditor in a troubled
      debt restructuring. FAS 15 requires adjustments in payment terms from a troubled
      debt restructuring, generally, to be considered adjustments of the yield
      (effective interest rate) of the loan. To the extent that the aggregate payments
      (both principal and interest) to be received by the creditor are not less than
      the creditor's carrying amount of the loan, the creditor recognizes no loss,
      only a lower yield over the term of the restructured debt. Similarly, the debtor
      recognizes no gain unless the aggregate future payments (including amounts
      contingently payable) are less than the debtor's recorded liability.





In
      November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting
      and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
      Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the existing disclosure
      requirements for most guarantees, including loan guarantees such as standby
      letters of credit. FIN 45 also clarifies that at the time a company issues
      a
      guarantee, the Company must recognize an initial liability of the fair market
      value of the obligations it has assumed under that guarantee and must disclose
      that information in its interim and annual financial statements. The initial
      recognition and measurement provisions of FIN 45 apply on a prospective basis
      to
      guarantees issued or modified after December 31, 2002.





**Off-Balance
      Sheet Arrangements**





In
      the
      ordinary course of business, we enter into arrangements to facilitate our
      business purpose of providing surety and loan guarantees to small- and
      medium-sized enterprises. We structure transactions to meet the financial needs
      of our clients, manage credit, market or liquidity risks or to optimize our
      capital.





We
      may
      enter into these arrangements which, under GAAP, may not be recorded on our
      balance sheet or which may be recorded in amounts different from the full
      contract or notional amount of the transaction. Our off-balance sheet
      arrangements would result, primarily, from our providing surety and loan
      guaranties in which we would provide contractual assurance of the completion
      of
      a transaction or guaranty the timely re-payment of principal and interest of
      our
      client to a third party, all in exchange for a guaranty fee. In these
      transactions, we would have both a non-contingent obligation, related to the
      compensation received for assuming the credit risk, and a contingent obligation,
      related to the guaranty of payment in the event the underlying loan to the
      borrower goes into default, or in the event that the parties fail to perform
      under the surety guarantee contract.





Arrangements
      such as those described above would require accounting treatment under FIN
      45,
      pursuant to which we would be required to recognize: (i) the fair value of
      guarantees issued or modified after December 31, 2002 for non-contingent
      guaranty obligations, and (ii) a liability for contingent guaranty obligations
      based on the probability that the guaranteed party will not perform under the
      contractual terms of the guaranty agreement.





We
      did
      not have any non-contingent or contingent guaranty obligations as of December
      31, 2006 requiring recognition or disclosure under FIN 45. As of December 31,
      2006, we have guaranteed the timely re-payment of principal and interest by
      one
      of our clients to a bank, in exchange for a fee, whereby we have placed cash
      on
      deposit with the bank equal to the full amount of the loan outstanding to the
      borrower. The maximum amount of exposure to us is recorded on our balance sheet
      as "Loans Receivable" in the accompanying financial statements.





**ITEM
      7.** **FINANCIAL
      STATEMENTS**




The
      following financial statements and the footnotes thereto are included in the
      section beginning on page F-1.




(1) Report
      of
      Independent Registered Public Accounting Firm




(2) Consolidated Balance
      Sheets




(3) Consolidated Statements
      of Operations and Comprehensive Income




(4) Consolidated Statements
      of Changes in Stockholders’ Equity




(5) Consolidated
      Statements of Cash Flows




(6) 
Notes
      to
      Consolidated Financial Statements


16





**ITEM
      8. CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




Not
      applicable.




**ITEM
      8A.        CONTROLS AND
      PROCEDURES**




Our
      management has evaluated, with the participation of our principal executive
      and
      financial officers, the effectiveness of our disclosure controls and procedures
      (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of
      the
      period covered by this report. Based on this evaluation, these officers have
      concluded that, as of December 31, 2006, our disclosure controls and procedures
      are effective to provide reasonable assurance that information required to
      be
      disclosed by our company in reports that it files or submits under the Exchange
      Act is accumulated and communicated to our management, including our principal
      executive and principal financial officers, or persons performing similar
      functions, as appropriate to allow timely decisions regarding required
      disclosure.




**ITEM
      8B.        Other
      Information**




Not
      applicable.




**PART
      III**




**ITEM
      9.  DIRECTORS AND
      EXECUTIVE OFFICERS OF THE REGISTRANT**




The
      following table sets forth certain information regarding our directors and
      executive officers as of December 31, 2006:




**Name**
            
            **Age**
            
            **Position**Zhiyong
                Xu
            
            31
            
            Chairman,
                Chief Executive Officer and DirectorLiang
                Liao
            
            30
            
            Chief
                Financial Officer and DirectorZhongping
                Wang
            
            37
            
            Director




There
      are
      no family relationships among the officers and directors.




Zhiyong
      Xu became the Company’s Chief Executive Officer and Chairman of the Board in
      October 2004. From February 2003 to September 2004, Mr. Xu was a Director and
      Secretary of Industries International, Inc. Mr. Xu served as a Vice President
      of
      Shenzhen Wonderland Telecommunication Technology Co., a telecommunications
      company and an affiliate of Industries International, from November 2002 to
      February 2003.  From November 2000 to November 2002, he served as the
      General Manager of Shenzhen Chuang Li Xing Power Company Limited, a battery
      manufacturer. From November 1998 to November 2000, Mr. Xu served as the Deputy
      General Manager of Hubei Ezhou Yixiang Chemical and Engineering Co., Ltd.,
      a
      chemical manufacturer.




Liang
      Liao became the Company’s Chief Financial Officer in March 2005. Mr. Liao was
      the Chief Financial Officer of Shenzhen Mingtai Industrial Development Co,
      Ltd.,
      an electronics distributor, from December 2003 to March 2005. Mr. Liao was
      the
      Senior Auditing Manager of Shenzhen Meishi Power Industries Co. Ltd., a provider
      of electric power, from September 2002 to November 2003. From March 2000 to
      August 2002, he served as the Finance Manager of Shenzhen Xieli Paper Co.,
      Ltd.,
      a paper manufacturer. From October 1998 to February 2000, he served as the
      Controller of Ganzhou Tongtianyan Tourism Development Co., Ltd., a tourism
      development company. Mr. Liao is a Member of the Institute of Certificated
      Accountants of China and holds a Bachelor’s Degree in Business from Jiangxi
      Gannan Normal University. ****


17




Zhongping
      Wang became a member of the Company’s board of directors in October, 2004. From
      March 2004 to October 2004, he served as the Company’s Secretary. From December
      2002 through December 2003, Mr. Wang served as a consultant to Shenzhen Gaoyi
      Electronics Co. Ltd., an electronic device manufacturer. From March 1991 through
      December 2002, Mr. Wang was a sales manager of Shenzhen Wonderland
      Telecommunication Technology Co., a telecommunications company. From March
      1988
      through February 1991, he served as a sales manager in Huangshi Textile Co.
      Ltd., a textile company.




None
      of
      our board members serve as board members of any other public companies. Mr.
      Liao
      and Mr. Wang plan to resign as directors of the company prior to the anticipated
      registration of the Company as an investment company but intend to remain
      officers of the Company. Mr. Xu as well as two new directors that are not
“interested persons” as defined under the 1940 Act will be elected at the next
      annual meeting of our shareholders. Officers hold their positions at the
      pleasure of the Board of Directors.




**Board
      Committees and Designated Directors**




We
      adopted an Audit Committee charter (the “Charter”) on March 31, 2004. As of
      December 31, 2006, we do not have a separately-designated audit committee or
      a
      committee performing similar functions. The entire board of directors is acting
      as our audit committee. Accordingly, we do not have an audit committee financial
      expert.




The
      Company is currently listed on the OTC Bulletin Board and is therefore not
      required to have a nominating committee or a compensation committee. The Company
      will evaluate establishing such committees in the future.




**Compliance
      with Section 16(a) of Exchange Act**




Section
      16(a) of the Securities Exchange Act requires our directors, executive officers
      and persons who own more than 10% of our common stock to file reports of
      ownership and changes in ownership of our common stock with the Securities
      and
      Exchange Commission. Directors, executive officers and persons who own more
      than
      10% of our common stock are required by Securities and Exchange Commission
      regulations to furnish to us copies of all Section 16(a) forms they
      file.





**Code
      of Ethics**




In
      April
      2004, we adopted a Code of Ethics that applies to our principal executive
      officer, principal financial officer, principal accounting officer or controller
      or persons performing similar functions. A copy of the Code of Ethics will
      be
      made available to any shareholder, free of charge, upon written request to
      us at
      our principal executive offices at 111 Pavonia Avenue, Suite 615, Jersey City,
      New Jersey 07310.




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**




**Summary
      Compensation Table**




The
      following table sets forth all cash compensation paid or to be paid by the
      Company, as well as certain other compensation paid or accrued, during each
      of
      the Company’s last three fiscal years to each named executive officer.





Name/Principal
              Position
            
            Fiscal
              Year
            
            Salary
              ($)
            
            Total
              Comp.
                ($)Zhiyong
                Xu, CEO
            
            2006
            
            $90,000
            
            $90,0002005
            
            $72,000
            
            $72,000Liang
                Liao, CFO
            
            2006
            
            $48,000
            
            $48,0002005
            
            $48,000
            
            $48,000


___________________




18





**Option/SAR
      Granted During the Last Fiscal Year**




None.




**Aggregated
      Option Exercises In Last Fiscal Year and Fiscal Year-End Option
      Values**




None.




**Executive
      and Director Compensation**




The
      current members of the Board of Directors are not paid for their services as
      a
      director. Directors are reimbursed for certain approved expenses incurred in
      connection with Company business and for certain approved expenses incurred
      in
      connection with attendance at non-telephonic Board meetings and non-telephonic
      committee meetings.




In
      connection with their positions as officers, on October 12, 2004 and March
      17,
      2005, respectively, each of Messrs. Xu and Liao entered into at-will employment
      agreements which provide for an annual salary of $72,000 for Mr. Xu and $48,000
      for Mr. Liao, subject to increase from time to time. Messrs. Xu’s and Liao’s
      employment agreements are for a term of three years, each subject to earlier
      termination. In the event either of Mr. Xu, or Mr. Liao is terminated for good
      cause or an involuntary termination, which includes the officer resigning and
      a
      change-in-control of the Company, such officer's employment agreement
      terminates, and he is not entitled to any other compensation or
      benefits.




In
      connection with entering into their respective employment agreements, each
      of
      Messrs. Xu and Liao also entered into Noncompetition, Nonsolicitation and
      Nondisclosure Agreements, which, among other things, restricts their ability
      to
      accept employment at a competitor of the Company and requires them not to
      disclose any confidential information of the Company except under prescribed
      circumstances.




**ITEM
      11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




The
      following table sets forth, as of March 9, 2007, information regarding the
      beneficial ownership of our common stock with respect to each of our executive
      officers, each of our directors, each person known by us to own beneficially
      more than 5% of the common stock, and all of our directors and executive
      officers as a group.





**Name**
            
            **Number
                of Shares**
            
            **Percentage
                of Shares**Juxiang
                Ruan
              Xinglian
                Industrial Park
              Pingxin
                Road
              Pinhu
                Town, LongGang District
              Shenzhen,
                Guangdong 518112, P.R. China
            
            *16,709,480*
            
            *29.0%*Zuhong
                Xu (1)
              c/o
                China Finance, Inc.
              Shenzhen
                Central Business Tower
              1706-1709
                Fuhua Yi Road
              Futian,
                Shenzhen, Guangdong 51800, P.R. China
            
            *8,667,800*
            
            *15.0%*Top
                Interest International Limited
              21/F
                CitiGroup Tower
              No.33
                Huayuan Shiqiao Road
              Pudong,
                Shanghai, P.R. China
            
            *7,742,250(1)*
            
            *13.4%*


19





China
                U.S. Bridge Capital Limited
              16/F
                UNIT05B Convention Plaza Office Tower 1
              Harbor
                Road Wan Chai HongKong, P.R. China.
            
            *5,700,000(2)*
            
            *9.88%*Shenzhen
                Li Gao Fa Electronics Limited
              16/F
                UNIT05B Convention Plaza Office Tower 1
              Harbor
                Road Wan Chai HongKong, P.R. China
            
            *5,180,000(3)*
            
            *9.0%*Cede
                & Co.
              c/o
                The Depository Trust Company
              55
                Water Street 2SL
              New
                York, New York 10041
            
            *3,412,420*
            
            *5.92%*Xuemei
                Fang
              202C
                Yu Luan Wanke City Garden
              Ziang
                Mei Rd
              Shenzhen,
                Guangdong 518034, P.R. China
            
            *3,000,000*
            
            *5.2%*Officers
                and Directors as a Group
            
            None
            
            None





(1)
      Top
      Interest International Limited has sole voting and dispositive power over
      7,742,250 shares of our common stock. Top Interest International Limited owns
      a
      controlling interest (51%) of Shenzhen Li Gao Fa Electronics Limited and is
      deemed the beneficial owner of 5,180,000 shares held by Shenzhen Li Gao Fa
      Electronics Limited. Zuda Xu is the sole director and shareholder of Top
      Interest International Limited and is deemed the beneficial owner of the shares
      held by Top Interest.




(2)
      China
      U.S. Bridge Capital Limited has sole voting and dispositive power over 5,700,000
      shares of our common stock. China U.S. Bridge Limited owns a controlling
      interest (49%) of Shenzhen Li Gao Fa Electronics Limited and has shared voting
      and dispositive power over the 5,180,000 shares held by Shenzhen Li Gao Fa
      Electronics Limited. By virtue of being the Chief Executive Officer, Manager
      and
      controlling member of, and holder of a 1% interest in, China U.S. Bridge Capital
      Limited, Guoqing Yu is deemed the beneficial owner of the shares held by China
      U.S. Bridge Capital Limited.




(3)
      Shenzhen Li Gao Fa Electronics Limited has shared voting and dispositive power
      over the shares held by it.








**Equity
      Compensation Plan Information**




The
      following table sets forth aggregate information regarding the Kubla Khan,
      Inc.
      2004 Equity Incentive Plan, which is our only equity compensation plans in
      effect as of the date hereof:


**Plan
                category**
            **Number
                of**
              **securities
                to be**
              **issued
                upon**
              **exercise
                of**
              **outstanding**
              **options/warrants**
            **Weighted-**
              **average
                exercise**
              **price
                of**
              **outstanding**
              **options/warrants**
            **Number
                of securities**
              **remaining
                available**
              **for
                future issuance**
              **under
                equity**
              **compensation
                plans**Equity
                compensation plans approved by security holders
            -
            -
            -Equity
                compensation plans not approved by security holders
            5,070,000
            $0.10
            -Total
            5,070,000
            $0.10
            -




20





**ITEM
      12.  CERTAIN RELATIONSHIPS
      AND RELATED TRANSACTIONS**




None.




**ITEM
      13.  EXHIBITS AND ANNUAL
      REPORTS ON FORM 8-K**




(a)
              Financial
                  Statements (included in Part II of this annual
                  report):




(1) Report
      of
      Independent Registered Public Accounting Firm




(2) Consolidated
      Balance Sheets




(3) Consolidated
      Statements of Operations and Comprehensive Income




(4) Consolidated
      Statements of Changes in Stockholders’ Equity




(5) Consolidated
      Statements of Cash Flows




(6) Notes
      to
      Consolidated Financial Statements




(b)
              Exhibits




2.1
            Agreement
                for the Sale and Purchase of Shares in Value Global International
                Limited,
                dated as of August 5, 2004, between Kubla Khan, Incorporated and
                Juxiang
                Ruan, Top Interest International Limited, Zuhong Xu, and Zaozhen
                Fang, the
                shareholders of Value Global International Limited, Value Global
                International Limited and Qian Fan and Huan Ya Tong Investment Development
                Co., Limited. (Incorporated herein by reference to Exhibit 2.1 to
                the
                Registrant’s Current Report on Form 8-K, filed with the SEC on August 20,
                2004).3.1.1
            Articles
                of Incorporation (Incorporated herein by reference to Exhibit 3.1.1
                to the
                Registrant’s Registration Statement on Form SB-2, filed with the SEC on
                September 19, 2000)3.1.2
            Amendment
                Articles of Incorporation (Incorporated herein by reference to Exhibit
                3.1.2 to the Registrant’s Registration Statement on Form SB-2, filed with
                the SEC on September 19, 2000)3.2
            Bylaws
                (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s
                Registration Statement on Form SB-2, filed with the SEC on September
                19,
                2000)4.1*
            Kubla
                Khan, Inc. 2004 Equity Incentive Plan (Incorporated herein by reference
                to
                Exhibit 4.1 to the Registrant’s Registration Statement on Form S-8, filed
                with the SEC on June 10, 2004).10.1
            Strategic
                Partnership Agreement, dated as of December 15, 2004, between Onanma
                Services Limited and China Finance, Inc. (Incorporated herein by
                reference
                to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-KSB, filed
                with the SEC on March 28, 2005).10.2*
            Employment
                Agreement, dated as of October 12, 2004, between China Finance, Inc.
                and
                Zhiyong Xu (Incorporated herein by reference to Exhibit 10.2 to the
                Registrant’s Current Report on Form 8-K/A, filed with the SEC on November
                8, 2004).10.3
            Noncompetition,
                Nonsolicitation and Nondisclosure Agreement dated as of October 12,
                2004,
                between China Finance, Inc. and Zhiyong Xu (Incorporated herein by
                reference to Exhibit 10.3 to the Registrant’s Current Report on Form
                8-K/A, filed with the SEC on November 8, 2004).10.4*
            Employment
                Agreement, dated as of October 12, 2004, between China Finance, Inc.
                and
                Alex Hu (Incorporated herein by reference to Exhibit 10.4 to the
                Registrant’s Current Report on Form 8-K/A, filed with the SEC on November
                8, 2004).


21


10.5
                Noncompetition,
                    Nonsolicitation and Nondisclosure Agreement dated as of October
                    12, 2004,
                    between China Finance, Inc. and Alex Hu (Incorporated herein
                    by reference
                    to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K/A, filed
                    with the SEC on November 8, 2004).10.6*
                Employment
                    Agreement, dated as of October 12, 2004, between China Finance,
                    Inc. and
                    Charles Wang (Incorporated herein by reference to Exhibit 10.6
                    to the
                    Registrant’s Current Report on Form 8-K/A, filed with the SEC on November
                    8, 2004)10.7
                Noncompetition,
                    Nonsolicitation and Nondisclosure Agreement dated as of October
                    12, 2004,
                    between China Finance, Inc. and Charles Wang (Incorporated herein
                    by
                    reference to Exhibit 10.7 to the Registrant’s Current Report on Form
                    8-K/A, filed with the SEC on November 8, 2004)10.8
                Resignation
                    letter of Xiaohin Liu dated October 11, 2004 (Incorporated herein
                    by
                    reference to Exhibit 10.10to the Registrant’s Current Report on Form
                    8-K/A, filed with the SEC on November 8, 2004)10.9
                Resignation
                    letter of ZhongPing Wang dated October 11, 2004 (Incorporated
                    herein by
                    reference to Exhibit 10.11 to the Registrant’s Current Report on Form
                    8-K/A, filed with the SEC on November 8, 2004)10.10*
                Employment
                    Agreement and Noncompetition, Nonsolicitation and Nondisclosure
                    Agreement,
                    dated as of March 17, 2005, between the Registrant and Liang
                    Liao
                    (Incorporated herein by reference to Exhibit 10.12 to the Registrant’s
                    Current Report on Form 8-K, filed with the SEC on March 17,
                    2005).10.11*
                Employment
                    Agreement and Noncompetition, Nonsolicitation and Nondisclosure
                    Agreement,
                    dated as of March 17, 2005, between the Registrant and Li Guo
                    (Incorporated herein by reference to Exhibit 10.13 to the Registrant’s
                    Current Report on Form 8-K, filed with the SEC on March 17,
                    2005).10.12
                Stock
                    Sales Agreement dated as of October 5, 2005, between Value Global
                    International Ltd and Galaxy View International Ltd. (Incorporated
                    herein
                    by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form
                    10-QSB, filed with the SEC on November 14, 2005).14.1
                Code
                    of Ethics (Incorporated herein by reference to Exhibit 14.1 to
                    the
                    Registrant’s Annual Report on Form 10-KSB filed with the SEC on April 13,
                    2004).16.1
                Letter
                    of Randy Simpson, CPA, P.C. (Incorporated herein by reference
                    to Exhibit
                    16.1 to the Registrant’s Annual Report on Form 10-KSB/A filed with the SEC
                    on June 7, 2004).16.2
                Letter
                    of Moores Rowland Mazars (Incorporated herein by reference to
                    Exhibit 16.1
                    to the Registrant’s Current Report on Form 8-K filed with the SEC on July
                    20, 2004).16.3
                Letter
                    of Weinberg & Company, P.A. (Incorporated herein by reference to
                    Exhibit 16.1 to the Registrant’s Current Report on Form 8-K/A, filed with
                    the SEC on January 5, 2005)17.1
                Resignation
                    letter of YaLi Xu dated October 11, 2004 (Incorporated herein
                    by reference
                    to Exhibit 10.8 to the Registrant’s Current Report on Form 8-K/A, filed
                    with the SEC on November 8, 2004).17.2
                Resignation
                    letter of Zhongnan Xu dated October 11, 2004(Incorporated herein
                    by
                    reference to Exhibit 10.9 to the Registrant’s Current Report on Form
                    8-K/A, filed with the SEC on November 8, 2004).17.3
                Resignation
                    letter of Chunlei (Charles) Wang dated March 17, 2005 (Incorporated
                    herein
                    by reference to Exhibit 10.14 to the Registrant’s Current Report on Form
                    8-K, filed with the SEC on March 17, 2005).21.1†
                Subsidiaries
                    of Registrant






22





23.1†
            Consent
                of Rotenberg & Company, LLP.31.1†
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 200231.2†
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.32†
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes-Oxley Act of
                2002.




____________________________




† Filed
      herewith.




* Represents
      a management contract or compensatory plan or arrangement.





**ITEM
      14.  PRINCIPAL ACCOUNTANT
      FEES AND SERVICES**





**Audit
      Fees**




Rotenberg
      & Co., LLP billed us $33,000 and $19,750, in the aggregate, for professional
      services rendered by it for the fiscal years ended December 31, 2006 and
      December 31, 2005, respectively, which was for the audit of our annual financial
      statements for each of these fiscal years and the review of the interim
      financial statements included in our Form 10-QSBs.




**Audit-Related
      Fees**




There
      are
      no other aggregate fees billed in either of the last two fiscal years for other
      audit related services.




**Tax
      Fees**




T he
      aggregate fees for professional services rendered by the principal accountant
      for tax compliance, tax advice, and tax planning were $2,000, which was paid
      to  Rotenberg
      & Co., LLP during the fiscal year ended December 31, 2006. The Company did
      not pay any fees to Rotenberg & Co., LLP for professional services related
      to tax compliance and tax advice during the fiscal year ended December 31,
      2005.





**All
      Other Fees**




Rotenberg
      & Co., LLP did not provide any products or render any professional services
      other than those covered above under “Audit Fees”, “Audit-Related Fees” and “Tax
      Fees” during the fiscal years ended December 31, 2006 or December 31, 2005.




As
      described above, our board of directors performs the duties of an audit
      committee. Our board of directors will evaluate and approve, in advance, the
      scope and cost of the engagement of an auditor before the auditor renders audit
      and non-audit services. We do not rely on pre-approval policies and procedures.
      During the fiscal year ended December 31, 2006, 100% of all audit,
      audit-related, tax and other services performed by Rotenberg & Co., LLP were
      approved, in advance, by our entire board of directors acting as our audit
      committee. Rotenberg & Co., LLP was our principal auditor and no work was
      performed by persons outside of this firm.





23







SIGNATURES




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






CHINA
                FINANCE, INC.
              (Registrant)Date: April
                10, 2007
            By:/s/
                Zhiyong
                Xu
              Name:  
                Zhiyong Xu
              Title:   
                Chief Executive Officer and Chairman of the Board
              (Principal
                Executive Officer)Date: April
                10, 2007
            By:/s/
                Liang
                Liao
              Name:  
                Liang Liao
              Title:   
                Chief Financial Officer (Principal Financial
                Officer)




















24











**CHINA
      FINANCE, INC. AND SUBSIDIARIES**


**Jersey
      City, New Jersey**





CONSOLIDATED
                FINANCIAL STATEMENTSATDECEMBER
                31, 2006



























**CHINA
      FINANCE, INC. AND SUBSIDIARIES**


**Jersey
      City, New Jersey**











**TABLE
                OF CONTENTS**Report
                  of Independent Registered Public Accounting Firm
              F-2Consolidated
                  Balance Sheets
              F-3Consolidated
                  Statements of Operations and Comprehensive Income
              F-4Consolidated
                  Statements of Changes in Stockholders’ Equity
              F-5Consolidated
                  Statements of Cash Flows
              F-6Notes
                  to Consolidated Financial Statements
              F-7-15





F-1








REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











To
      the
      Board of Directors and Stockholders


China
      Finance, Inc. and Subsidiaries


(A
      Utah
      Corporation)


Jersey
      City, New Jersey








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





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





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



















/s/ **Rotenberg
      & Co., LLP**








Rotenberg
      & Co., LLP


Rochester,
      New York


April
      10,
      2007





F-2








**CHINA
                FINANCE, INC. AND SUBSIDIARIES****Jersey
                City, New Jersey****CONSOLIDATED
                BALANCE SHEETS**December
                31,
            
            **2006**
            
            2005**ASSETS****Current
                Assets**Cash
                and Cash Equivalents
            
            **$**
            **53,674**
            
            $
            11,331,650Marketable
                Securities
            
            
            **16,080,061**
            
            
            295,680Receivable
                from sale of marketable securities
            
            
            **—**
            
            
            580,481Loans
                Receivable - Current Portion
            
            
            **396,336**
            
            
            622,136Prepaid
                Expenses
            
            
            **53,398**
            
            
            133**Total
                Current Assets**
            
            
            **16,583,469**
            
            
            12,830,080**Property,
                Plant and Equipment - Net**
            
            
            **479,328**
            
            
            8,751**Loans
                Receivable - Long Term**
            
            
            **10,094,596**
            
            
            —**Real
                Estate Held for Investment**
            
            
            **1,350,799**
            
            
            —**Other
                Assets**
            
            
            **29,428**
            
            
            —**Total
                Assets**
            
            **$**
            **28,537,620**
            
            $
            12,838,831**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                Liabilities**Accrued
                Expenses
            
            **$**
            **71,164**
            
            $
            35,638Other
                payable
            
            
            **16,436**
            
            
            —**Total
                Current Liabilities**
            
            
            **87,600**
            
            
            35,638**Stockholders’
                Equity**Common
                Stock - 100,000,000 Shares Authorized; Par Value $.001;57,671,744
                Issued and Outstanding in December, 31, 2006 and 2005
            
            
            **57,672**
            
            
            57,672Additional
                Paid-In Capital
            
            
            **13,078,373**
            
            
            13,078,373Retained
                Earnings (Accumulated Deficit)
            
            
            **3,579,182**
            
            
            (643,578
            )Accumulated
                Other Comprehensive Income
            
            
            **11,734,793**
            
            
            310,726**Total
                Stockholders’ Equity**
            
            
            **28,450,020**
            
            
            12,803,193**Total
                Liabilities and Stockholders’ Equity**
            
            **$**
            **28,537,620**
            
            $
            12,838,831







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


F-3





**CHINA
                FINANCE, INC. AND SUBSIDIARIES****Jersey
                City, New Jersey****CONSOLIDATED
                STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME****For
                the year ended December 31,**
            
            
            **2006**
            
            
            2005**Revenue**
            
            **$**
            **5,486,647**
            
            $
            397,110**Operating
                Expenses**General
                and Administrative
            
            
            **1,259,908**
            
            
            639,077Professional
                Fees
            
            
            **—**
            
            
            125,000**Total
                Operating Expenses**
            
            
            **1,259,908**
            
            
            764,077**Operating
                Income (Loss)**
            
            
            **4,226,739**
            
            
            (366,967
            )**Other
                Income (Loss)**Loss
                on the sale of Marketable Securities
            
            
            **—**
            
            
            (3,782,412
            )Loss
                on the sale of Property, Plant and Equipment
            
            
            **(3,979**
            **)**
            
            —**Net
                Income (Loss) Before Provision for Income Taxes**
            
            
            **4,222,760**
            
            
            (4,149,379
            )Provision
                for Income Taxes
            
            
            **—**
            
            
            —**Net
                Income (Loss)**
            
            
            **4,222,760**
            
            
            (4,149,379
            )**Other
                Comprehensive Income (Loss)**Unrealized
                Gains on Marketable Securities
            
            
            **11,007,556**
            
            
            —Reclassification
                adjustment for loss included in Accumulated OtherComprehensive
                Income-CHID
            
            
            **—**
            
            
            1,129,402Foreign
                Currency Translation
            
            
            **416,511**
            
            
            310,726**Comprehensive
                Income**
            
            **$**
            **15,646,82**7
            
            $
            (2,709,251
            )**Earnings
                Per Share**Basic
                and Diluted
            
            **$**
            **0.07**
            
            $
            (0.07
            )**Weighted
                Average Shares Outstanding**Basic
                and Diluted
            
            
            **57,671,744**
            
            
            57,671,744








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





F-4











**CHINA
                FINANCE, INC. AND SUBSIDIARIES****Jersey
                City, New Jersey****CONSOLIDATED
                STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER
                31, 2006 AND 2005**Retained
            
            AccumulatedNumber
                of
            
            
            
            Additional
            
            Earnings
            
            Other
            
            TotalCommon
            
            Common
            
            Paid-In
            
            (Accumulated
            
            Comprehensive
            
            Stockholders’Shares
            
            Stock
            
            Capital
            
            Deficit)
            
            Income
                (Loss)
            
            EquityBalance
                - December 31, 2004
            
            
            57,671,744
            
            $
            57,672
            
            $
            13,078,373
            
            $
            3,505,801
            
            $
            (1,129,402
            )
            $
            15,512,444Net
                Loss for the Year
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,149,379
            )
            
            —
            
            
            (4,149,379
            )Other
                Comprehensive Income:
              Reclassification
                adjustment for Loss Included in Accumulated Other Comprehensive
                Income—CHID
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,129,402
            
            
            1,129,402Foreign
                Currency Translation Adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            310,726
            
            
            310,726Balance
                - December 31, 2005
            
            
            57,671,744
            
            $
            57,672
            
            $
            13,078,373
            
            $
            (643,578
            )
            $
            310,726
            
            $
            12,803,193Net
                income for the Year
            
            
            —
            
            
            —
            
            
            —
            
            
            4,222,760
            
            
            —
            
            
            4,222,760Other
                Comprehensive Income:
              Unrealized
                Gains on Marketable Securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            11,007,556
            
            
            11,007,556Foreign
                Currency Translation Adjustments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            416,511
            
            
            416,511Balance
                - December 31, 2006
            
            
            57,671,744
            
            $
            57,672
            
            $
            13,078,373
            
            $
            3,579,182
            
            $
            11,734,793
            
            $
            28,450,020







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


F-5





**CHINA
                FINANCE, INC. AND SUBSIDIARIES****Jersey
                City, New Jersey****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****For
                the year ended December 31,**
            
            **2006**
            
            2005**Cash
                Flows from Operating Activities**Net
                Income (Loss)
            
            **$**
            **4,222,760**
            
            $
            (4,149,379
            )**Non-Cash
                Revenue and Expenses**Receipt
                of Marketable Securities for Services Rendered
            
            
            **(4,776,825**
            **)**
            
            (295,680
            )Depreciation
                and Amortization
            
            
            **68,105**
            
            
            11,492Foreign
                Exchange Transaction Loss
            
            
            **—**
            
            
            11,000Loss
                on Sale of Marketable Securities
            
            
            **—**
            
            
            3,782,412Loss
                on Sale of Property, Plant and Equipment
            
            
            **3,979**
            
            
            —**Changes
                in Operating Assets and Liabilities**Loans
                Receivable
            
            
            **(9,553,060**
            **)**
            
            (374,136
            )Other
                Receivable
            
            
            **580,481**
            
            
            —Prepaid
                Expenses
            
            
            **(80,426**
            **)**
            
            1,426Deferred
                Compensation
            
            
            **—**
            
            
            125,000Accounts
                Payable
            
            
            **—**
            
            
            (1,815
            )Accrued
                Expense
            
            
            **34,446**
            
            
            6,611Deferred
                Revenue
            
            
            **—**
            
            
            (5,704
            )Other
                Payable
            
            
            **16,156**
            
            
            —**Net
                Cash Flows from Operating Activities**
            
            
            **(9,484,384**
            **)**
            
            (888,773
            )**Cash
                Flows from Investing Activities**Proceeds
                from Sale of Marketable Securities
            
            
            **—**
            
            
            414,752Proceeds
                from Sale of Property, Plant and Equipment
            
            
            **50,932**
            
            
            —Purchase
                of real estate
            
            
            **(1,316,661**
            **)**
            
            —Leasehold
                improvement
            
            
            **(198,909**
            **)**
            
            —Acquisition
                of Property, Plant and Equipment
            
            
            **(383,774**
            **)**
            
            —**Net
                Cash Flows from Investing Activities**
            
            
            **(1,848,412**
            **)**
            
            414,752**Cash
                Flows from Financing Activities**
            
            
            **—**
            
            
            —**Effect
                on Change of Exchange Rate**
            
            
            **54,820**
            
            
            292,684Change
                in Cash and Cash Equivalents
            
            
            **(11,277,976**
            **)**
            
            (181,337
            )Cash
                and Cash Equivalents - Beginning of Year
            
            
            **11,331,650**
            
            
            11,512,987**Cash
                and Cash Equivalents - End of Year**
            
            **$**
            **53,674**
            
            $
            11,331,650**Supplementary
                Cash Flow Disclosures:**Interest
                Paid
            
            **$**
            **—**
            
            $
            —Taxes
                Paid
            
            **$**
            **—**
            
            $
            —**Supplemental
                Disclosures of Non-cash Investing and Financing
                Activities:**Sale
                of Marketable Securities
            
            **$**
            **—**
            
            $
            580,481







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


F-6








**CHINA
      FINANCE, INC. AND SUBSIDIARIES**


**Jersey
      City, New Jersey**








**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**








**Note
              A -**
            **Organization
                and Principal Activities**





China
      Finance, Inc. (the “Company”) was incorporated on March 28, 2000 in the
      state of Utah, and its principal office is in Jersey City, New Jersey.





The
      Company’s principal business, which is primarily conducted through its
      wholly-owned subsidiary Shenzhen Hua Yin Guaranty and Investment Limited
      Liability Corporation (“SHY”), is (i) providing surety guarantees for
      privately-owned small and medium enterprises (“SMEs”) in the People’s Republic
      of China’s (“PRC” or “China”) entering into transactions whereby the SME will be
      acquired by a publicly-traded United States reporting company in a “reverse
      merger” or other merger and acquisition (“M&A”) transaction; (ii) providing
      loan guarantees to assist SMEs and individuals in the PRC in obtaining loans
      from Chinese banks for business operations and/or personal use; and (iii) making
      direct loans to SMEs for business operations.




**Note
              B -**
            **Summary
                of Significant Accounting
                Policies**





**Principals
      of Consolidation**


The
      consolidated financial statements include the accounts of China Finance, Inc.
      and its wholly owned subsidiaries Value Global International Limited (“Value
      Global”) and SHY. All significant intercompany accounts have been
      eliminated.





**Cash
      and Cash Equivalents**


For
      financial reporting purpose, the Company considers all highly liquid investments
      purchased with original maturity of three months or less to be cash equivalents.
      The majority of the cash balances are held in financial institutions in
      PRC.





**Marketable
      Securities**


Marketable
      Securities are classified as available for sale. Such securities are reported
      at
      fair market value based on quoted market prices in an active market or the
      most
      clearly identifiable value in the absence of active trading market, with net
      unrealized gains and losses excluded from net income and reported as a component
      of accumulated other comprehensive income in stockholders’ equity until sold.
      There may be risks associated with holding securities traded in the over the
      counter markets. There are no guarantees that the Company will ultimately be
      able to realize the prices quoted by the OTC marketplace.





**Loans
      Receivable**


Loans
      receivable primarily consists of two types of transactions, direct lending
      to a
      borrower or secondary guarantee lending with the third party financial
      institutions. Under direct lending transactions, the Company loans a party
      a
      specified amount and is repaid the principal together with interest at the
      specified due dates. Interest is accrued as revenue by the Company over the
      term
      of the loan.





Under
      secondary guarantee lending transactions, the Company will place funds on
      deposit with the primary lender to guaranty repayment by the borrower to the
      primary lender. Fees received in connection with secondary guarantee lending
      transactions are accrued as revenue over the term of the loan on a straight
      line
      basis. Net fees and costs incurred by the Company are deferred and amortized
      as
      a charge to income over the term of the loan on a straight line basis. Interest
      is accrued as revenue by the Company over the term of the loan.





**Property,
      Plant and Equipment**


Property,
      plant and equipment are carried at cost. The cost of repairs and maintenance
      is
      expensed as incurred; major replacements and improvements are capitalized.





F-7











When
      assets are retired or disposed of, the cost and accumulated depreciation are
      removed from the accounts, and any resulting gains or losses are included in
      income in the year of disposition.





Depreciation
      is calculated on a straight-line basis over the lesser of the estimated useful
      life of the assets and lease terms. The estimated useful lives are:





Electronic
                Equipment
            5
                YearsFurniture
                and Fixtures
            5
                YearsAutomobile
            10
                YearsLeasehold
                Improvements
            Term
                of Lease or Useful Life





**Fair
      Value of Financial Instruments**


The
      Company's financial instruments include cash, receivable from sale of marketable
      securities, loans receivables, and accrued expenses at December 31, 2006 and
      2005. The carrying values of the financial instruments approximate their fair
      value due to their relatively short-term nature.





**Income
      Taxes**


Taxes
      on
      profits earned by its wholly owned subsidiary, SHY, are calculated in accordance
      with taxation principles currently effective in the PRC. The Company accounts
      for income taxes using the liability method. Deferred tax assets and liabilities
      are recognized for the future tax consequences attributable to differences
      between the financial statement carrying amounts of existing assets and
      liabilities and their respective tax bases. Deferred tax assets and liabilities
      are measured using enacted tax rates expected to apply to taxable income in
      the
      years in which those temporary differences are expected to be recovered or
      settled. The effect on deferred tax assets and liabilities of a change in tax
      rates is recognized in income in the period that includes the enactment date.
      A
      valuation allowance is provided for the amount of deferred tax assets that,
      based on available evidence, are not expected to be realized.




Taxes
      on
      profits earned by its wholly owned subsidiary Value Global are calculated in
      accordance with taxation principles currently effective in the British Virgin
      Islands. Value Global is an International Business Company (IBC) registered
      in
      the British Virgin Islands that is exempt from all taxes and withholding taxes
      in the British Virgin Islands and pay only Registration Fees and Annual License
      Fees which amount to US$300 per annum unless authorized capital is higher than
      US$50,000. In this situation, the fee rises to US$1,000.




Profits
      from the surety guarantee transactions are deemed to have been earned by Value
      Global and, accordingly, are subject to tax under the British Virgin Islands
      taxation principles. However, if profits from this subsidiary are transferred
      to
      the U.S. parent corporation, those profits may become subject to U.S. taxation.




Under
      the
      U.S. federal income tax law, the income of SHY is generally not taxed in the
      U.S. until those profits are repatriated to the U.S. through dividends.
      Dividends paid by SHY to the Company are taxable in the U.S. in the year paid.
      The Company may be entitled to a foreign tax credit against its U.S. income
      tax
      liability in an amount equal to the foreign taxes paid by SHY, subject to
      certain limitations contained in the Code.




The
      company accounts for income taxes in accordance with SFAS No.109, “Accounting
      for Income Taxes,” for taxes on U.S. taxable income using the asset and
      liability approach, which requires recognition of deferred tax liabilities
      and
      assets for the expected future tax consequences of temporary differences between
      the carrying amounts and the tax basis of such assets and liabilities. This
      method utilizes enacted statutory tax rates in effect for the year in which
      the
      temporary differences are expected to reverse and gives immediate effect to
      changes in income tax rates upon enactment. Deferred tax assets are recognized,
      net of any valuation allowance, for temporary differences and net operating
      loss
      and tax credit carryforwards. Deferred income tax expense represents the change
      in net deferred assets and liability balances.





Effective
      tax rates in each jurisdiction are as follows:





United
                States
            15%-35%People’s
                Republic of China
            15%-33%








F-8








**Advertising
      Cost**


The
      advertising cost was expensed when incurred and included in the General and
      Administrative expenses. The Company incurred about $123,000 and $0 advertising
      expenses in 2006 and 2005, respectively.





**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 should be reported in a financial statement
      that is presented with the same prominence as other financial statements. The
      components that makeup the Company’s comprehensive income are unrealized gains
      on marketable securities, reclassification adjustments for losses included
      in
      net income and foreign currency translation adjustments.





**Net
      Income (Loss) Per Common Share**


Net
      income (loss) per common share is computed in accordance with SFAS No. 128,
      “Earnings Per Share”. Basic earnings per common share is calculated by dividing
      income available to common shareholders by the weighted-average number of common
      shares outstanding for each period. Diluted earnings per common share is
      calculated by adjusting the weighted-average shares outstanding assuming
      conversion of all potentially dilutive stock options, warrants and convertible
      securities (common stock equivalents). Diluted earnings per share is the same
      as
      basic earnings per share for all of the periods presented as there were no
      common stock equivalents.




**Foreign
      Currency Translation and Transaction**


The
      accompanying financial statements are presented in the United States dollars
      (US$). The functional currency of SHY is the Renminbi (RMB). The financial
      statements are translated into the United States dollars from the RMB at
      year-end exchange rate as to assets and liabilities and weighted average
      exchange rate as to revenues and expenses. Foreign currency cash flows are
      translated at the weighted average exchange rate in effect during the period
      due
      to the minimal fluctuation in the currency exchange rates during the period.
      Management believed that substantially the same results would be derived if
      foreign cash flows were translated at the rates in effect at the time of the
      cash flows. Capital accounts are translated at their historical exchange rate
      when the capital transactions occurred. Foreign currency translation gains
      and
      losses, if any, are included in the Consolidated Statements of Operations and
      Comprehensive Income as a component of other comprehensive income.





Foreign
      currency transaction losses resulting from exchange rate fluctuations
      denominated in a currency other than the functional currency totaled
      approximately $22,700 and $11,000 for the years ended December 31, 2006 and
      2005, respectively, and are included in General and Administrative Expenses
      in
      the accompanying consolidated statements of operations and Comprehensive
      Income.





December
                31,
            
            **2006**
            2005Year
                End 1
            US Dollar =
            **7.800
                RMB**
            8.065
                RMBWeighted
                Average
            1
              US
              Dollar =
            **7.964
                RMB**
            8.181
                RMB





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 the
      US
      Dollars at the rates used in translation.





**Economic
      and Political Risks**


The
      Company faces a number of risks and challenges since its operation is in the
      PRC
      and its primary market is in the PRC. The Company's operations in the PRC are
      subject to special considerations and significant risks not typically associated
      with companies in North America and Western Europe. The Company's results may
      be
      adversely affected by changes in the political and social conditions in the
      PRC,
      and by changes in governmental policies with respect to laws and regulations,
      anti-inflationary measures, currency conversion and remittance abroad, and
      rates
      and methods of taxation, among other things








F-9





**Concentration
      Risks**


During
      the year ended December 31, 2006, a substantial portion of the Company’s
      guarantee service revenue was provided to four customers─ Universal Travel Group
      (“UTVG”), Home System Group (“HSYT”), DiversiFax, Inc. (“DSFX”) and China Ivy School, Inc. (“CIVY”).





During
      the year ended December 31, 2006, a substantial portion of the Company’s loans
      receivable was from Shenzhen Kaibite Ltd. (about $10 million).





**Use
      of Estimates**


The
      preparation of the 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 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.





**Revenue
      Recognition**


The
      Company operates in two primary business segments:





Surety
      Guarantees


The
      Company provides surety guarantee services to Chinese SMEs seeking to become
      publicly-traded companies in the United States by being acquired by a United
      States reporting company in a “reverse merger” or other M&A transaction. The Company
      provides contractual guarantees which help to ensure the successful fulfillment
      of the reverse merger or other M&A transaction. The
      surety guarantee business generates revenues through fees, which typically
      are
      based on a percentage of the transaction. Although the Company may be paid
      in
      cash for its surety guarantee services, the Company generally expects that
      it
      will receive compensation for its surety guarantee services in the form of
      stock
      from our client companies (“Payment Securities”). To the extent that the Company
      receives Payment Securities as compensation, the Company generally allows the
      Payment Securities to mature in the market for a period of time (normally,
      about
      one year), then typically will strategically sell the Payment Securities taking
      into consideration the performance of the SME and whether the Payment Securities
      are accurately priced in the market. Some stock may be restricted for up to
      one
      year, so the Payment Securities that the company receives as compensation will
      rarely be sold before about two years from the date the Company acquires them.





The
      Company determines the surety guarantee revenue by multiplication of the Payment
      Securities and the fair market value per share. Also the Company recognizes
      the
      surety guarantee revenue when the service has been performed and payment can
      be
      reasonably estimated.





Loan
      Guarantees and Loans





The
      Company also provides guarantees to SMEs and individuals obtaining loans from
      Chinese banks for their business operations and/or personal use. In exchange
      for
      the Company’s guarantee services, the borrower pays the Company a certain
      percentage of the loan amount as an upfront loan guarantee fee. Loan maturities
      for loans guaranteed by the Company generally range from one to five years,
      and
      are secured by various forms of collateral pledged by the borrower. Fees
      received are accrued as revenue over the term of the loan on a straight line
      basis. Net fees and costs incurred by the Company are deferred and amortized
      as
      a charge to income over the term of the loan on a straight line basis. Interest
      is accrued as revenue by the Company over the term of the loan.





The
      Company may make Loans to SMEs directly from time to time. Loans may be made
      to
      SMEs that the Company determines have been profitable in the past and have
      attractive prospects for future profitability, have experienced or are
      experiencing or projected to experience growth, and have an attractive credit
      profile. The Company evaluates the creditworthiness of the SMEs to which it
      considers making loans using a number of criteria related to the strength of
      the
      SMEs management, employees, financial status and overall performance. Interest
      is accrued as revenue by the Company over the term of the loan.





F-10











**Recent
      Pronouncements**





In
      March
      2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
      Financial Accounting Standard (“SFAS”) No. 156, "Accounting for Servicing of
      Financial Assets - an amendment of FASB Statement No. 140" (“SFAS 156”). SFAS
      156 amends FASB Statement No. 140 with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. SFAS 156 requires all
      separately recognized servicing assets and servicing liabilities to be initially
      measured at fair value, if practical. SFAS 156 is effective as of the beginning
      of the first fiscal year that begins after September 15, 2006. As such, the
      Company is required to adopt these provisions at the beginning of the fiscal
      year ended December 31, 2007. The Company is currently evaluating the impact
      of
      SFAS 156 on its consolidated financial statements.





In
      June
      2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109. This interpretation clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements. This interpretation prescribes a recognition threshold
      and
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken in a tax return. This
      Interpretation also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure, and transition. FIN
      48
      is effective for fiscal years beginning after December 15, 2006. As such, the
      Company is required to adopt these provisions at the beginning of the fiscal
      year ended December 31, 2007. The Company is currently evaluating the impact
      of
      adopting FIN 48 on its consolidated financial statements.





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 157, "Fair Value
      Measurements”. SFAS 157 defines fair value, establishes a framework for
      measuring fair value, and expands disclosures about fair value measurements.
      SFAS 157 is effective as of the beginning of the first fiscal year that begins
      after November 15, 2007. As such, the Company is required to adopt these
      provisions at the beginning of the fiscal year ended December 31, 2008. The
      Company is currently evaluating the impact of SFAS 157 on its consolidated
      financial statements.





In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 159, "The Fair Value
      Option for Financial Assets and Financial Liabilities, including an amendment
      of
      FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many
      financial instruments and certain other items at fair value at specified
      election dates. This Statement applies to all entities, including not-for-profit
      organizations. SFAS 159 is effective as of the beginning of an entity’s first
      fiscal year that begins after November 15, 2007. As such, the Company is
      required to adopt these provisions at the beginning of the fiscal year ended
      December 31, 2008. The Company is currently evaluating the impact of SFAS 159
      on
      its consolidated financial statements.





**Note
              C -**
            **Marketable
                Securities**




As
      of
      December 31, 2006, the Payment Securities of the Company consisted
      of shares the Company has received as payment for providing surety guarantee
      services to five SMEs including 2,956,795 shares of China 3C Group (“CHCG”),
      1,200,000 shares of Universal Travel Group (“UTVG”), 480,000 shares of Home
      System Group (“HSYT”), 1,669,500 shares of DiversiFax, Inc. (“DSFX”) and 3,480,750 shares
      of
      China Ivy School, Inc. (“CIVY”).





*China
      3C Group* .
      The
      2,956,795 shares of CHCG represent approximately a 6% interest in the current
      issued and outstanding common shares of CHCG. The CHCG shares were received
      as
      payment for surety guarantee services provided for CHCG’s December 21, 2005
      merger transaction with Capital
      Future Development Limited .
      The
      closing price of the CHCG shares was $0.10 per share on December 21, 2005.
      As of
      December 31, 2006, the closing price of shares of CHCG common stock was $3.46
      per share. Since the CHCG shares are reasonably expected to qualify for sale
      within one year, the securities are not considered restricted for the purposes
      of SFAS No. 115, and, accordingly, quoted market prices have been used to
      determine fair value.





F-11








*Universal
      Travel Group* .
      The
      1,200,000 shares of UTVG represent approximately a 6% interest in the current
      issued and outstanding common shares of UTVG. The UTVG shares were received
      as
      payment for surety guarantee services provided for UTVG’s July 12, 2006 merger
      transaction with Full
      Power Enterprise Global Limited. The closing price of
      the UTVG shares was $0.60 per share on July 12, 2006. As of December 31, 2006, the
      closing price of shares of UTVG common stock was $0.49 per share .
      Since
      the UTVG shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





*Home
      Systems Group.* The
      480,000 shares of HSYT represent approximately a 6% interest in the current
      issued and outstanding common shares of HSYT. The HSYT shares were received
      as
      payment for surety guarantee services provided for HSYT’s August 4, 2006 merger
      transaction with
      Oceanic International (Hong Kong) Limited .
      The
      closing price of the HSYT shares was $1.00 per share on August 4, 2006. As
      of
      December 31, 2006, the
      closing price of shares of HSYT common stock was $1.19 per share. Since
      the HSYT shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





*Diversifax* . **** The
      1,669,500, shares of DSFX represent approximately a 6% interest in the current
      issued and outstanding common shares of DSFX. The DSFX shares were received
      as
      payment for surety guarantee services provided for DSFX’s December 10, 2006
      merger transaction with
      Haoyuan Chemical Company Limited .
      The
      closing price of the DSFX shares was $1.10 per share on December 8, 2006. As
      of
      December 31, 2006, the
      closing price of shares of DSFX common stock was $1.35 per share. Since
      the DSFX shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





*China
      Ivy School.* ****** The 3,480,750 shares
      of
      CIVY represent approximately a 6% interest in the current issued and outstanding
      common shares of CIVY. The CIVY shares were received as payment for surety
      guarantee services provided for CIVY’s October 12, 2006 share
      exchange transaction with Brighter
      International Limited (“BIL”). Pursuant to the share exchange agreement
      between CIVY and BIL shareholders, the BIL shareholders will receive 55,250,000
      newly issued common shares of CIVY valued at approximately
      USD$27,625,000 in exchange for surrendering all their ownership in BIL.
      Therefore, CIVY shares were valued as $0.50 per share on October 12, 2006 even
      though the closing price on that date was $1.50 per share. As of December 31,
      2006, the
      closing price of shares of CIVY common
      stock was $0.70 per share. Since
      the CIVY shares are reasonably expected to qualify for sale within one year,
      the
      securities are not considered restricted for the purposes of SFAS No. 115,
      and,
      accordingly, quoted market prices have been used to determine fair
      value.





The basis
      and fair market value of marketable securities as of December 31, 2006 and
      2005
      consisted of the following:





December
                  31,
              
              
              2006
              
              
              2005Basis:            
                  CHCG
              
              $
              295,680
              
              $
              295,680HSYT
              
              
              480,000
              
              
              **—**UTVG
              
              
              720,000
              
              
              **—**CIVY
              
              
              1,740,375
              
              
              **—**DSFX
              
              
              1,836,450
              
              
              **—**Add:
                  Unrealized Gain
              
              
              11,007,556
              
              
              **—**Fair
                  Market Value
              
              $
              16,080,061
              
              $
              295,680





**Note
                D -**
              **Loan
                  Receivable**





On
      June
      30, 2005, the Company entered into a loan agreement with Shengzhen YiJinLi
      Technology Development Ltd. (“YiJinLi”) pursuant to which the Company loaned
      YiJinLi $248,000 for a period of one year at the annual rate of
      5.58%. **** The
      former due date of the loan agreement with YiJinLi was accelerated from July
      30,
      2006 to May 1, 2006. The company was repaid in full on May 1, 2006.





F-12











The
      Company and Hong Kong TianYi investment, Ltd. entered into a loan agreement
      on
      October 25, 2005. The original amount of the loan is $370,000 at the annual
      rate
      of 6% and the obligation unsecured has a term of one year, which is due on
      October 24, 2006. As of December 31, 2006, the loan had not been repaid;
      however, the full principal amount of the loan was subsequently paid in February
      2007.




On
      March
      31, 2006, the Company entered into a loan agreement with Shenzhen Kaibite Ltd.
      (“Kaibite”) pursuant to which the Company loaned Kaibite US$11,538,000
      (RMB$90,000,000) for a period of two years at the annual interest rate of 9%
      (the “March 2006 Loan”). The March 2006 Loan is due on March 31, 2008. The
      Company will be repaid the principal together with accrued interest upon the
      due
      date. A
      portion
      of the loan with Kaibite ($2,113,634) was repaid in advance.





**Note
              E -**
            **Property,
                Plant and Equipment**





Property,
      plant and equipment consisted of the following at December 31, 2006 and
      2005:





December
                31,
            
            2006
            
            2005Cost:Electronic
                Equipment and Office Furniture
            
            $
            54,998
            
            $
            9,663Automobile
            
            
            288,194
            
            
            **—**Leasehold
                Improvement
            
            
            217,521
            
            
            13,271$
            560,713
            
            $
            22,934Less:
                Accumulated Depreciation and Amortization
            
            
            (81,385
            )
            
            (14,183
            )Net
                Property, Plant and Equipment
            
            $
            479,328
            
            $
            8,751





Depreciation
      and Amortization expenses relating to property, plant and equipment was $68,105
      and $11,492 for the years ended December 31, 2006 and 2005,
      respectively.





**Note
              F -**
            **Real
                Estate Held for Investment**





The
      Company purchased real estate for investment purposes in the amount of
      $1,350,799 (RMB10,536,656) in May 2006. The price paid for the real estate
      was
      for the cost of the construction of a building and is expected to be completed
      by March 28, 2007.





**Note
              G -**
            **Prepaid
                Expenses**





The
      total
      prepaid expenses were $53,398 and $133 for the years ended December 31, 2006
      and
      2005, respectively.





The
      Company signed an advertising agreement with Shenzhen DaoYi Advertisement
      Company in June 2006. The contract is a 2-year contract for RMB1.9 million
      (approximately $244,000). Through December 31, 2006, the Company paid RMB760,000
      (approximately $97,000), of which RMB554,167 (approximately $71,000) has been
      recorded as advertisement expenses; the remainder is included in the prepaid
      expenses mentioned above.





The
      company has paid $27,000 legal fees in 2006, which should be expensed in
      2007.





**Note
              H -**
            **Accrued
                Expenses**





The
      accrued expenses was $71,164 for the year ended December 31, 2006 including
      approximately $33,500 accrued sales taxes, $24,900 accrued payroll and other
      accrued expenses.








F-13





**Note
              I -**
            **Earnings
                Per Share**





The
      following is a reconciliation of the numerators and the denominators of the
      basic and diluted earnings per share (EPS) computation at December 31,
      2006.






**2006****Income**
              **(Numerator)**
            
            
            **Shares**
              **(Denominator)**
            
            
            **Per Share**
              **Amount****Basic
                EPS**Net
                income available to common shareholders
            
            $
            4,222,760
            
            
            57,671,744
            
            $
            0.0732**Diluted
                EPS**Net
                income available to common stockholders plus assumed
                conversions
            
            $
            4,222,760
            
            
            57,671,744
            
            $
            0.0732








**Note
      J -**  **Information
      about Operating Segments**





The
      Company’s reportable segments have been determined based upon the nature of the
      services offered, availability of discreet internal financial information and
      other factors:





December
                31, 2006
            Surety
                Guarantees
            Loan
                Guarantees and Loans
            General
                Unallocated
            Consolidated**$**
            **$**
            **$**
            **$**Revenue
            4,799,025
            687,622
            ―
            5,486,647Operating
                Expenses
            (25)
            916,351
            343,582
            1,259,908Net
                Income(Loss)
            4,799,050
            (232,708)
            (343,582)
            4,222,760Total
                Assets
            16,486,463
            11,988,443
            62,714
            28,537,620








December
                31, 2005
            Surety
                Guarantees
            Loan
                Guarantees and Loans
            General
                Unallocated
            Consolidated**$**
            **$**
            **$**
            **$**Revenue
            300,394
            96,716
            ―
            397,110Operating
                Expenses
            ―
            311,110
            452,967
            764,077Net
                Income(Loss)
            (3,482,018)
            (214,394)
            (452,967)
            (4,149,379)Total
                Assets
            1,260,338
            11,552,429
            26,064
            12,838,831








F-14





All
      of
      the Company’s revenues were generated from the PRC for the years ended December
      31, 2006 and 2005. Revenues are attributed to countries based on location of
      the
      customers. All long-term assets are located in the PRC.





**Note
              K -**
            **Commitments**





The
      Company rents office space under three operating leases. Two leases are for
      office space for SHY. Previously, the Company had two leases for a term of
      3
      years expiring April 2007. However, they were terminated in February 2006 due
      to
      a change of office space. For the new office space, the Company entered into
      two
      new lease agreements, effective from January 1, 2006 to January 1, 2009 and
      from
      April 1, 2006 to March 31, 2009, respectively (the “New Leases”). The third
      lease is for office space for China Finance, Inc. The lease is renewed annually.
      For 2007, the minimum lease payment is $51,156. Minimum lease payments
      for the two current SHY leases for the next three years are as follows:





2007
            2008
            2009$
                176,568
            $
                176,568
            $
                20,746





Rent
      expenses for the years ended December 31, 2006 and 2005 were $198,000 and
      $84,202, respectively.





**Note
              L -**
            **Other
                Matters**





The
      Company has historically accepted shares of stock from its client corporations
      as payment for surety guarantee services in lieu of cash. The value of the
      Payment Securities in relation to the Company’s total assets is a factor in
      whether or not the Company would become subject to the Investment Company Act
      of
      1940, as amended (the “1940 Act”). The 1940 Act generally defines “investment
      companies” as those companies (i) whose investments and other securities exceed
      40% of total assets (excluding cash and government securities) and (ii) who
      are
      in the business of investing, reinvesting, owning, holding, or trading in
      securities. Companies that meet the definition of “investment company” under the
      1940 Act are required to register as such under the 1940 Act, and to conduct
      their business pursuant to the regulations of the 1940 Act. Due to the growth
      in
      the value of the Payment Securities and, therefore, a growth in income from
      the
      Payment Securities, the percentage of the value of the Company’s assets and
      income that is a result of the Payment Securities has increased and may
      continue, from time to time, to exceed the limits set by the 1940 Act. The
      Company has, therefore, determined that it is in the best interests of the
      Company and shareholders to register as an investment company and is in the
      process of doing so.
















F-15