**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





(Mark
      One)





x QUARTERLY
      REPORT
      UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For
      the
      quarterly period ended  September
      30, 2006 .








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





For
      the
      transition period from ____ to
      _____.




Commission
      file number 000-28767





**China
      3C Group**


(Exact
      Name of Registrant as Specified in Its Charter)






**Nevada**
            **88-0403070**(State
                or other jurisdiction of  incorporation or
                organization)
            (I.R.S.
                Employer Identification No.)







**368
      HuShu Nan Road**


**HangZhou
      City, Zhejiang Province, China 310014**


_______________________________________________________________________


(Address
      of Principal Executive Offices)





**086-0571-88381700**


_______________________________________________________________________


(Issuer’s
      telephone number)





______________________________________________________________________


(Former
      name, former address and former fiscal year, if changed since last
      report)








Check
      whether the issuer (1) filed all reports required 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





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




As
      of
      November 6, 2006, the registrant had 49,765,828 shares of common stock
      outstanding.





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










**PART
                I. FINANCIAL INFORMATION**
            **Page(s)**Item
                1.Financial Statements:Balance
                Sheets as of September 30, 2006 (unaudited) and December 31,
                2005
            2Statements
                of Income for the Nine Months Ended September 30, 2006 and
              Three
                Months Ended September 30, 2006 (unaudited)
            3Statements
                of Cash Flows for the Nine Months ended September 30, 2006 and 2005
                (unaudited)
            4Statement
                of Stockholders’ Equity for the Ninemonths endedSeptember30,
                2006 and the
              year
                ended December 31, 2005 (unaudited)
            5Notes
                to Financial Statements
            6Item
                2. Management’s Discussion and Analysis Or Plan of
                Operations
            18Item
                3. Controls and Procedures
            22**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            23Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            23Item
                3. Defaults Upon Senior Securities
            23Item
                4. Submission of Matters to a Vote of Security Holders
            23Item
                5. Other Information
            23Item
                6. Exhibits
            23Signatures
            24




Exhibit
                  31.1
              Certification
                  by Zhenggang Wang, Chief Executive Officer, pursuantto
                  Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act
                  of1934
                  as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof
                  2002 for the quarterly period ended September 30, 2006.Exhibit
                  31.2
              Certification
                  by Jian Liu, Chief Financial Officer, pursuantto
                  Rule 13a-14(a) and 15d-14(a) of the Securities and Exchange Act
                  of1934
                  as adopted pursuant to Section 302 of the Sarbanes-Oxley Actof
                  2002 for the quarterly period ended September 30, 2006.Exhibit
                  32.1
              Certification
                  by Zhenggang Wang, Chief Executive Officer pursuant to18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of
                  theSarbanes-Oxley
                  Act of 2002 for the quarterly period ended September 30,
                  2006.Exhibit
                  32.2
              Certification
                  by Jian Liu, Chief Financial Officer pursuant to18
                  U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley
                  Act of 2002 for the quarterly period ended September 30, 2006.








**PART
      I. FINANCIAL INFORMATION** **** **** **** ****





**Item
      1.**  **Financial
      Statements**





***MORGENSTERN,
      SVOBODA & BAER, CPA’s, P.C.***




*CERTIFIED
      PUBLIC ACCOUNTANTS*


40
      Exchange Place, Suite 1820


New
      York,
      NY 10005


TEL:
      (212) 925-9490


FAX:
      (212) 226-9134


E-MAIL:
      MORGENCPA@CS.COM








Board
      of
      Directors and Stockholders of


China
      3C
      Group Inc. and Subsidiaries







We
      have
      reviewed the accompanying consolidated balance sheets of China 3C Group, Inc.
      and Subsidiaries as of September 30, 2006 and the consolidated condensed
      statements of income for the nine and three ended September 30, 2006 and
      consolidated statements of cash flows for the nine month then ended. These
      financial statements are the responsibility of the Company’s management.





We
      conducted our review in accordance with standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      information consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting matters. It is
      substantially less in scope than an audit conducted in accordance with standards
      of the Public Company Accounting Oversight Board (United States), the objective
      of which is the expression of an opinion regarding the financial statements
      taken as a whole. Accordingly, we do not express such an opinion.





Based
      on
      our reviews, we are not aware of any material modifications that should be
      made
      to the accompanying interim financial statements referred to above for them
      to
      be in conformity with accounting principles generally accepted in the United
      States of America.







Morgenstern,
      Svoboda & Baer CPA’s P.C.


**Certified
      Public Accountants**





New
      York,
      New York


November
      3, 2006









**CHINA
                3C GROUP INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****SEPTEMBER
                30, 2006 AND DECEMBER 31,
                2005**




**ASSETS**
            
            **2006**
            
            **2005****Current
                Assets**
            
            (Unaudited)
            
            (Audited)Cash
                and cash equivalents
            
            $
            4,916,409
            
            
            1,949,222Accounts
                receivable, net
            
            
            5,276,137
            
            
            913,215Inventory
            
            
            2,177,466
            
            
            602,974Advance
                to supplier
            
            
            1,986,608
            
            
            372,000Refundable
                Deposits
            
            
            6,090Prepaid
                expenses
            
            
            136,102
            
            
            139,193Total
                Current Assets
            
            
            14,498,812
            
            
            3,976,604**Property
                & equipment, net**
            
            
            56,606
            
            
            43,662Goodwill
            
            
            5,809,618**Total
                Assets**
            
            $
            20,365,036
            
            
            4,020,266**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                LiabilitiesAccounts
                payable and accrued expenses
            
            $
            1,561,024
            
            
            111,296Income
                tax payable
            
            
            1,710,372
            
            
            222,550Notes
                payable
            
            
            2,500,438
            
            
            7,769Total
                Current Liabilities
            
            
            5,771,834
            
            
            341,615**Stockholders'
                Equity**Common
                stock, $.001 par value, 100,000,000shares
                authorized, 49,765,828 and 39,870,077 issued and
                outstanding
            
            
            49,766
            
            
            39,870Shares
                to be issued, 8,980,000
            
            
            
            
            
            502,000Additional
                paid in capital
            
            
            6,355,414
            
            
            2,113,310Deferred
                consulting expense
            
            
            
            
            
            (387,945
            )Subscription
                receivable
            
            
            (50,000
            )
            
            (50,000
            )Statutory
                reserve
            
            
            643,991
            
            
            402,030Other
                comprehensive income
            
            
            209,497
            
            
            74,950Retained
                earnings
            
            
            7,384,534
            
            
            984,436Total
                Stockholders' Equity
            
            
            14,593,202
            
            
            3,678,651Total
                Liabilities and Stockholders' Equity
            
            $
            20,365,036
            
            $
            4,020,266





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





2




**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF INCOME****(UNAUDITED)****FOR
                THE NINE AND THREE MONTHS ENDED SEPTEMBER 30,
                2006**




Nine
                Months
              Ended
              9/30/2006
            
            Three
                Months
              Ended
              9/30/2006Sales,
                net
            
            $
            84,642,865
            
            $
            42,573,920Cost
                of sales
            
            
            71,842,396
            
            
            35,974,772**Gross
                profit**
            
            
            12,800,469
            
            
            6,599,148General
                and administrative expenses
            
            
            3,061,268
            
            
            1,652,278**Income
                from operations**
            
            
            9,739,201
            
            
            4,946,870Other
                (Income) ExpenseInterest
                income
            
            
            (17,608
            )
            
            (9,261
            )Other
                expense
            
            
            29,364
            
            
            23,592Interest
                expense
            
            
            162
            
            
            22Total
                Other (Income) Expense
            
            
            11,918
            
            
            14,253**Income
                before income taxes**
            
            
            9,727,283
            
            
            4,932,517Provision
                for income taxes
            
            
            3,327,185
            
            
            1,708,663**Net
                income**
            
            $
            6,400,098
            
            $
            3,223,854**Net
                income per share:**Basic
                & diluted
            
            $
            0.14
            
            $
            0.07**Weighted
                average number of shares outstanding:**Basic
                & diluted
            
            
            44,817,953
            
            
            44,817,953




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





3





**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND THE YEAR ENDED DECEMBER
                31,
                2005**




2006
            
            
            2005Unaudited
            
            
            Audited**CASH
              FLOWS FROM OPERATING ACTIVITIES**Net
                Income
            
            $
            6,400,098
            
            $
            1,458,250Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
            
            
            13,125
            
            
            17,420Loss
                on asset disposition
            
            
            201Provision
                for bad debts
            
            
            (4,443
            )Issuance
                of shares for consultants
            
            
            
            
            
            225,680Amortization
                of deferred consulting expense
            
            
            300,000
            
            
            12,055Shares
                to be issued to consultants
            
            
            
            
            
            498,000(Increase)
                / decrease in assets:Accounts
                receivables
            
            
            (3,150,826
            )
            
            (286,498
            )Inventory
            
            
            (906,988
            )
            
            (421,658
            )Prepaid
                expense
            
            
            93,369
            
            
            (42,522
            )Advance
                to supplier
            
            
            (919,913
            )
            
            (372,000
            )Deposits
            
            
            (6,090
            )
            
            1,288Increase
                / (decrease) in current liabilities:Accounts
                payable and accrued expenses
            
            
            1.237,825
            
            
            (267,816
            )Income
                tax payable
            
            
            1,073,634
            
            
            122,067Total
                Adjustments
            
            
            (2,270,106
            )
            
            (513,984
            )**Net
                cash provided by operating activities**
            
            
            4,129,992
            
            
            944,266**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchase
                of property & equipment
            
            
            (25,676
            )
            
            (2,308
            )Goodwill
                purchased in acquisition
            
            
            (5,809,618
            )Net
                non-cash assets acquired in acquisition
            
            
            (1,660,621
            )Issuance
                of Shares for acquisition
            
            
            3,750,000Proceeds
                from asset sales
            
            
            372**Net
                cash used by Investing activities**
            
            
            (3,745,543
            )
            
            (2,308
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES**Capital
                contribution to subsidiary before acquisition
            
            
            
            
            
            1,210,000Dividends
                paid
            
            
            
            
            
            (529,140
            )Proceed
                on loan from related parties
            
            
            
            
            
            97,760Notes
                issued relating to acquisition
            
            
            5,000,000Payments
                on loan to related parties
            
            
            
            
            
            (250,877
            )Payments
                on note payable
            
            
            (2,507,331
            )
            
            (9,807
            )**Net
                cash provided by financing activities**
            
            
            2,492,669
            
            
            517,936Effect
                of exchange rate changes on cash and cash equivalents
            
            
            90,069
            
            
            19,670Net
                change in cash and cash equivalents
            
            
            2,967,187
            
            
            1,479,564**Cash
                and cash equivalents, beginning balance**
            
            
            1,949,222
            
            
            469,658**Cash
                and cash equivalents, ending balance**
            
            $
            4,916,409
            
            $
            1,949,222**SUPPLEMENTAL
                DISCLOSURES:**Cash
                paid during the year for:Income
                tax payments
            
            $
            1,839,363
            
            $
            965,354Interest
                payments
            
            $
            111
            
            $
            2,954




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




4





**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS' EQUITY****(UNAUDITED)****FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND DEPTEMBER 30,
                2005**




**Retained****Shares**
              
              
              **Additional**
              
              
              **Other**
              
              
              **Deferred**
              
              
              
              
              
              
              
              
              **Earnings**
              
              
              **Total****Common
                  Stock**
              
              
              **to
                  be**
              
              
              **Paid-In**
              
              
              **Comprehensive**
              
              
              **Consulting**
              
              
              **Subscription**
              
              
              **Statutory**
              
              
              **(Accumulated**
              
              
              **Stockholders'****Shares**
              
              
              **Amount**
              
              
              **issued**
              
              
              **Capital**
              
              
              **Income**
              
              
              **Expense**
              
              
              **Receivable**
              
              
              **Reserve**
              
              
              **Deficit)**
              
              
              **Equity/Deficit****Balance
                  December 31, 2004**
              
              
              35,000,000
              
              
              35,000
              
              
              
              
              
              267,500
              
              
              
              
              
              
              
              
              
              
              
              70,379
              
              
              383,297
              
              
              756,176Changes
                  due to recapitalization
              
              
              2,613,282
              
              
              2,613
              
              
              
              
              
              1,226,387
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,229,000Shares
                  issued for consulting fees
              
              
              
              
              
              
              
              
              498,000
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              498,000Warrants
                  issued for deferred consulting fees
              
              
              
              
              
              
              
              
              
              
              
              400,000
              
              
              
              
              
              (387,945
              )
              
              
              
              
              
              
              
              
              
              
              12,055Stock
                  issued for guarantee fee
              
              
              2,256,795
              
              
              2,257
              
              
              
              
              
              223,423
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              225,680Warrants
                  exercised
              
              
              
              
              
              
              
              
              4,000
              
              
              (4,000
              )Stock
                  subscription receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (50,000
              )
              
              
              
              
              
              
              
              (50,000
              )Dividend
                  paid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (525,460
              )
              
              (525,460
              )F
                  Foreign currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              74,950
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              74,950Transfer
                  to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              331,651
              
              
              (331,651
              )Net
                  income for the year ended December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,458,250
              
              
              1,458,250**Balance
                  December 31, 2005**
              
              
              39,870,077
              
              $
              39,870
              
              $
              502,000
              
              $
              2,113,310
              
              $
              74,950
              
              $
              (387,945
              )
              $
              (50,000
              )
              $
              402,030
              
              $
              984,436
              
              $
              3,678.651Stock
                  Issued
              
              
              8,980,000
              
              
              8,980
              
              
              (502,000
              )
              
              493,020Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              90,069
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              90,069income
                  for the nine Months ended September 30, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              6,400,098
              
              
              6,400,098Purchase
                  Acquisition
              
              
              915,751
              
              
              916
              
              
              
              
              
              3,,749,084
              
              
              44,478
              
              
              
              
              
              
              
              
              241,961
              
              
              
              
              
              4,036,439Transferred
                  To prepaid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              387,945
              
              
              
              
              
              
              
              
              
              
              
              387,945**Balance
                  September 30, 2006**
              
              
              49,765,828
              
              $
              49,766
              
              
              
              
              $
              6,355,414
              
              $
              209,497
              
              
              
              
              $
              (50,000
              )
              $
              643,991
              
              $
              7,384,534
              
              $
              14,593,202


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




5




**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      1 -** **ORGANIZATION**





China
      3C
      Group was incorporated on August, 20, 1998 under the laws of the State of
      Nevada. Capital Future Developments Limited - BVI (“Capital”) was incorporated
      on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong
      Xin
      Digital Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd.
      (“Yiwu”), Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), and Hangzhou Sanhe
      Electronic Technology, Limited (“Sanhe”) were incorporated under the laws of
      Peoples Republic of China on July 11, 2005, July 18, 1997, March, 30, 1998,
      and
      April 12, 2004 respectively. China 3C Group owns 100% of Capital and Capital
      owns 100% of the capital stock of Sanhe and Zhejiang. Zhejiang owns 90% and
      Yiwu
      owns 10% of Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu.
      Collectively the five corporations are referred to herein as the “Company.”





On
      December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
      through a reverse merger. China 3C Group acquired all of the issued and
      outstanding capital stock of Capital pursuant to a Merger Agreement dated at
      December 21, 2005 by and among China 3C Group, XY Acquisition Corporation,
      Capital and the shareholders of Capital (the “Merger Agreement”). Pursuant to
      the Merger Agreement, Capital became a wholly owned subsidiary of China 3C
      Group
      and, in exchange for the Capital shares, China 3C Group issued 35,000,000 shares
      of its common stock to the shareholders of Capital, representing 93% of the
      issued and outstanding capital stock of China 3C Group at that time and a cash
      consideration of $500,000.





The
      Company is now engaged in the business of mobile phone, facsimile machines,
      DVD
      players, stereo’s, and speaker distribution.





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





Basis
      of Presentation





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America.
      The Company's functional currency is the Chinese Renminbi; however the
      accompanying consolidated financial statements have been translated and
      presented in United States Dollars.





Translation
      Adjustment





As
      of
      September 30, 2006 and December 31, 2005, the accounts of Zhejiang, Wang Da,
      Yiwu, and Sanhe were maintained, and its financial statements were expressed,
      in
      Chinese Yuan Renminbi (“CNY”). Such financial statements were translated into
      U.S. Dollars (“USD”) in accordance with Statement of Financial Accounts
      Standards (“SFAS”) No. 52, “Foreign Currency Translation,” with the CNY as the
      functional currency. According to the Statement, all assets and liabilities
      were
      translated at the current exchange rate, stockholders equity are translated
      at
      the historical rates and income statement items are translated at the average
      exchange rate for the period. The resulting translation adjustments are reported
      under other comprehensive income in accordance with SFAS No. 130, Reporting
      Comprehensive Income ̈ as a component of shareholders equity. Transaction gains
      and losses are reflected in the income statement.





6





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**




**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





Use
      of
      Estimates





The
      preparation of financial statements in conformity with generally accepted
      accounting principles 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 period.
      Actual results could differ from those estimates.





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of China 3C Group and
      its
      wholly owned subsidiaries Capital, Zhejiang, Wang Da, Yiwu, and Sanhe,
      collectively referred to within as the Company. All material intercompany
      accounts, transactions and profits have been eliminated in
      consolidation.





Risks
      and Uncertainties





The
      Company is subject to substantial risks from, among other things, intense
      competition associated with the industry in general, other risks associated
      with
      financing, liquidity requirements, rapidly changing customer requirements,
      limited operating history, foreign currency exchange rates and the volatility
      of
      public markets.





Contingencies





Certain
      conditions may exist as of the date the financial statements are issued, which
      may result in a loss to the Company but which will only be resolved when one
      or
      more future events occur or fail to occur. The Company’s management and legal
      counsel assess such contingent liabilities, and such assessment inherently
      involves an exercise of judgment. In assessing loss contingencies related to
      legal proceedings that are pending against the Company or unasserted claims
      that
      may result in such proceedings, the Company’s legal counsel evaluates the
      perceived merits of any legal proceedings or unasserted claims as well as the
      perceived merits of the amount of relief sought or expected to be
      sought.





If
      the
      assessment of a contingency indicates that it is probable that a material loss
      has been incurred and the amount of the liability can be estimated, then the
      estimated liability would be accrued in the Company’s financial statements. If
      the assessment indicates that a potential material loss contingency is not
      probable but is reasonably possible, or is probable but cannot be estimated,
      then the nature of the contingent liability, together with an estimate of the
      range of possible loss if determinable and material would be disclosed.





Loss
      contingencies considered to be remote by management are generally not disclosed
      unless they involve guarantees, in which case the guarantee would be
      disclosed.





7





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents include cash in hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.





Accounts
      Receivable





The
      Company maintains reserves for potential credit losses on accounts receivable.
      Management reviews the composition of accounts receivable and analyzes
      historical bad debts, customer concentrations, customer credit worthiness,
      current economic trends and changes in customer payment patterns to evaluate
      the
      adequacy of these reserves. Terms of the sales vary. Reserves are recorded
      primarily on a specific identification basis. Allowance for doubtful debts
      amounted to $13,383 as at September 30, 2006.





Inventories





Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      market. Management compares the cost of inventories with the market value and
      allowance is made for writing down their inventories to market value, if lower.
      As of September 30, 2006 and December 31, 2005 inventory consisted of finished
      goods valued at $ 2,177,466 and $602,974 respectively.





Property,
      Plant & Equipment




Property
      and equipment are stated at cost. Expenditures for maintenance and repairs
      are
      charged to earnings as incurred; additions, renewals and betterments are
      capitalized. When property and equipment are retired or otherwise disposed
      of,
      the related cost and accumulated depreciation are removed from the respective
      accounts, and any gain or loss is included in operations. Depreciation of
      property and equipment is provided using the straight-line method for
      substantially all assets with estimated lives of:





Furniture
                and Fixtures
            5
                yearsAutomobile
            10
                yearsComputer
                Hardware and Software
            5
                years




As
      of
      September 30, 2006 Property, Plant & Equipment consist of the
      following:





Automobile
            
            $
            95,360Office
                equipment
            
            
            65,735161,095Accumulated
                depreciation
            
            
            (104,489
            )$
            56,606




8





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**




**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**





Long-Lived
      Assets




Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
      144”), which addresses financial accounting and reporting for the impairment or
      disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,”
and the accounting and reporting provisions of APB Opinion No. 30, “Reporting
      the Results of Operations for a Disposal of a Segment of a Business.” The
      Company periodically evaluates the carrying value of long-lived assets to be
      held and used in accordance with SFAS 144. SFAS 144 requires impairment losses
      to be recorded on long-lived assets used in operations when indicators of
      impairment are present and the undiscounted cash flows estimated to be generated
      by those assets are less than the assets carrying amounts. In that event, a
      loss
      is recognized based on the amount by which the carrying amount exceeds the
      fair
      market value of the long-lived assets. Loss on long-lived assets to be disposed
      of is determined in a similar manner, except that fair market values are reduced
      for the cost of disposal. Based on its review, the Company believes that, as
      of
      September 30, 2006 there were no significant impairments of its long-lived
      assets.




Fair
      Value of Financial Instruments




Statement
      of financial accounting standard No. 107, “Disclosures about fair value of
      financial instruments”, requires that the Company disclose estimated fair values
      of financial instruments. The carrying amounts reported in the statements of
      financial position for current assets and current liabilities qualifying as
      financial instruments are a reasonable estimate of fair value.





Revenue
      Recognition





The
      Company’s revenue recognition policies are in compliance with Staff accounting
      bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectability is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue.




Stock-Based
      Compensation




In
      October 1995, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      123, “Accounting for Stock-Based Compensation.” SFAS No. 123 prescribes
      accounting and reporting standards for all stock-based compensation plans,
      including employee stock options, restricted stock, employee stock purchase
      plans and stock appreciation rights. SFAS No. 123 requires compensation expense
      to be recorded (i) using the new fair value method, or (ii) using the existing
      accounting rules prescribed by Accounting Principles Board Opinion No. 25,
      “Accounting for stock issued to employees” (“APB 25”) and related
      interpretations with proforma disclosure of what net income and earnings per
      share would have been had the Company adopted the new fair value method. The
      Company uses the intrinsic value method prescribed by APB 25 and has opted
      for
      the disclosure provisions of SFAS No.123.




9


**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**




**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**





Advertising





Advertising
      expenses consist primarily of costs of promotion for corporate image and product
      marketing and costs of direct advertising. The Company expenses all advertising
      costs as incurred.




Income
      Taxes




The
      Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
      recognition of deferred tax assets and liabilities for the expected future
      tax
      consequences of events that have been included in the financial statements
      or
      tax returns. Under this method, deferred income taxes are recognized for the
      tax
      consequences in future years of differences between the tax bases of assets
      and
      liabilities and their financial reporting amounts at each period end based
      on
      enacted tax laws and statutory tax rates applicable to the periods in which
      the
      differences are expected to affect taxable income. Valuation allowances are
      established, when necessary, to reduce deferred tax assets to the amount
      expected to be realized.




Basic
      and Diluted Earnings per Share




Earnings
      per share are calculated in accordance with the Statement of financial
      accounting standards No. 128 (“SFAS No. 128”), “Earnings per share.” SFAS No.
      128 superseded Accounting Principles Board Opinion No.15 (“APB 15”). Net loss
      per share for all periods presented has been restated to reflect the adoption
      of
      SFAS No. 128. Basic net loss per share is based upon the weighted average number
      of common shares outstanding. Diluted net loss per share is based on the
      assumption that all dilutive convertible shares and stock options were converted
      or exercised. Dilution is computed by applying the treasury stock method. Under
      this method, options and warrants are assumed to be exercised at the beginning
      of the period (or at the time of issuance, if later), and as if funds obtained
      thereby were used to purchase common stock at the average market price during
      the period.





Statement
      of Cash Flows




In
      accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
      Company’s operations is based upon the local currencies. As a result, amounts
      related to assets and liabilities reported on the statement of cash flows will
      not necessarily agree with changes in the corresponding balances on the balance
      sheet.




Concentration
      of Credit Risk




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk are cash, accounts receivable and other receivables arising from its normal
      business activities. The Company places its cash in what it believes to be
      credit-worthy financial institutions. The Company has a diversified customer
      base, most of which are in China. The Company controls credit risk related
      to
      accounts receivable through credit approvals, credit limits and monitoring
      procedures. The Company routinely assesses the financial strength of its
      customers and, based upon factors surrounding the credit risk, establishes
      an
      allowance, if required, for uncollectible accounts and, as a consequence,
      believes that its accounts receivable credit risk exposure beyond such allowance
      is limited.





10





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**




Segment
      Reporting





Statement
      of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about
      Segments of an Enterprise and Related Information” requires use of the
      management approach model for segment reporting. The management approach model
      is based on the way a company’s management organizes segments within the company
      for making operating decisions and assessing performance. Reportable segments
      are based on products and services, geography, legal structure, management
      structure, or any other manner in which management disaggregates a company.





Recent
      accounting pronouncements





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
      requires retrospective application to prior periods’ financial statements of
      changes in accounting principle, unless this would be impracticable. This
      statement also makes a distinction between “retrospective application” of an
      accounting principle and the “restatement” of financial statements to reflect
      the correction of an error. This statement is effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005.





In
      February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
      Financial Instruments.” SFAS No. 155 amends SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
      financial instrument that contains an embedded derivative that otherwise would
      require bifurcation, clarifies which interest-only strips and principal-only
      strips are not subject to the requirements of SFAS No. 133, establishes a
      requirement to evaluate interest in securitized financial assets to identify
      interests that are freestanding derivatives or that are hybrid financial
      instruments that contain an embedded derivative requiring bifurcation, clarifies
      that concentrations of credit risk in the form of subordination are not embedded
      derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
      qualifying special-purpose entity from holding a derivative financial instrument
      that pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for all financial instruments acquired
      or issued after the beginning of the Company’s first fiscal year that begins
      after September 15, 2006.





In
      December 2004, the FASB issued FASB Statement No. 123R, “Share-Based Payment, an
      Amendment of FASB Statement No. 123” (“FAS No. 123R”). FAS No. 123R requires
      companies to recognize in the statement of operations the grant-date fair value
      of stock options and other equity-based compensation issued to employees. FAS
      No. 123R is effective beginning in the Company’s first quarter of fiscal 2006.





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, “Determining the
      Amortization Period for Leasehold Improvements” (“EITF 05-6”). EITF 05-6
      provides guidance on determining the amortization period for leasehold
      improvements acquired in a business combination or acquired subsequent to lease
      inception. The guidance in EITF 05-6 will be applied prospectively and is
      effective for periods beginning after June 29, 2005. EITF 05-6 is not expected
      to have a material effect on our consolidated financial position or results
      of
      operations.





11


**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





In
      June 2005, the FASB Staff issued FASB Staff Position 150-5 (“FSP 150-5”),
“Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants
      and Other Similar Instruments on Shares that are Redeemable.” FSP 150-5
      addresses whether freestanding warrants and other similar instruments on shares
      that are redeemable, either puttable or mandatorily redeemable, would be subject
      to the requirements of FASB Statement No. 150, “Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and Equity,”
regardless of the timing or the redemption feature or the redemption price.
      The
      FSP is effective after June 30, 2005.





On
      February 16, 2006 FASB issued SFAS 155, “Accounting for Certain Hybrid
      Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
      Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
      instruments that have embedded derivatives to be accounted for as a whole
      (eliminating the need to bifurcate the derivative from its host) if the holder
      elects to account for the whole instrument on a fair value basis. SFAS 155
      also
      clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
      statement is effective for all financial instruments acquired or issued in
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





In
      March
      2006, the FASB issued FASB Statement No. 156, “Accounting for Servicing of
      Financial Assets - an amendment to FASB Statement No. 140.” Statement 156
      requires that an entity recognize a servicing asset or servicing liability
      each
      time it undertakes an obligation to service a financial asset by entering into
      a
      service contract under certain situations. The new standard is effective for
      fiscal years beginning after September 15, 2006. The Company does not
      expect its adoption of this new standard to have a material impact on its
      financial position, results of operations or cash flows.





The
      Company believes that the adoption of these standards will have no material
      impact on its financial statements.





**Note
      3 -** **ADVANCE
      TO SUPPLIER**




Advance
      to suppliers represents payments to suppliers for payments of finished goods.
      As
      of September 30, 2006 and December 31, 2005 the Company had paid $1,986,608
      and
      $372,000, respectively as advances to suppliers.





12




**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**




**Note
      4-** **NOTES
      PAYABLE**





At
      September 30, 2006, the Company had borrowings outstanding in the aggregate
      amount of $438. Notes Payable was as follows on September 30, 2006:





**Description**Secured
                note payable to a bank in China, interest at 4.941% per
                annum,due
                on October 20, 2006
            
            $
            438Total
            
            $
            438




Notes
      Payable - Former Shareholders Hangzhou Sanhe Electronic Technology Ltd. As
      consideration for acquisition shares. Due six months after closing as evidenced
      by a promissory note.




$
            2,500,000




**Note
      5 -** **COMMON
      STOCK**




On
      December 20, 2005, the Company completed a private offering of 1,000,000 shares
      of its common stock at a per share price of $0.10 to unaffiliated individuals,
      resulting in gross proceeds to the Company of $100,000. The proceeds were to
      be
      used for the Company’s proposed plan to identify and complete a merger or
      acquisition with private entities.





On
      December 20, 2005, the Company issued a warrant to purchase 4,000,000
      shares of its common stock to two individuals at $0.10 per share, which was
      the
      fair value of the shares at the date of issuance. The warrant was issued as
      consideration for financial consulting services to be provided from December
      20,
      2005 to December 19, 2006. The warrants were exercised on December 30, 2005.
      The
      shares were issued subsequently in 2006.





On
      December 21, 2005, the Company agreed to purchase all of the issued and
      outstanding shares of Capital from its shareholders for approximately $500,000
      in cash and 35,000,000 shares of the Company’s common stock, or approximately
      93% of the total issued and outstanding shares.





On
      December 21, 2005, the Company announced a plan named the “China 3C Group 2005
      Equity Incentive Plan” (“Plan”) for providing incentives to attract, retain and
      motivate eligible persons whose presence and potential contributions are
      important to the success of the Company. 5,000,000 shares of common stock were
      allocated to the Plan.





On
      December 21, 2005, the Company agreed to issue 4,980,000 shares under the
      Plan to a number of consultants who were engaged to provide various services
      to
      the Company during the period from January 1, 2005 to December 20, 2005. These
      shares were valued at $0.10 per share, or $498,000, and were expensed as
      consulting fees in the statements of operations. The shares were issued
      subsequently in 2006.




13


**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      5 -** **COMMON
      STOCK (Continued)**





On
      December 21, 2005, the Company issued 2,256,795 shares of the Company’s common
      stock to a company for guarantee fees related to the acquisition of Capital.
      The
      guarantee was valued at $225,680, which was the fair value of the shares issued
      at the date of the transaction and was expensed as consulting fees in the
      statement of operations.





Pursuant
      to share exchange agreement, dated August 3, 2006, the Company issued 915,751
      shares of restricted common stock, to the former shareholders of Hangzhou Sanhe
      Electronic Technology Ltd. The shares were valued at $3,750,000, which was
      the
      fair value of the shares at the date of exchange agreement. This amount is
      included in the cost of net assets and goodwill purchased.





**Note
      6 -** **STOCK
      WARRANT**





On
      December 20, 2005, the Company issued a warrant for 4,000,000 shares to two
      individuals with an exercise price of $0.10. The warrants were issued for
      consulting services to be provided from December 20, 2005 to December 19, 2006.
      The warrant was exercisable immediately and was exercised on December 30,
      2005.




The
      Company is amortizing the fair value of the warrants, $400,000, over the period
      of the agreement. The fair value of the warrants was calculated assuming 293%
      volatility, term of the warrant of 3 years ,
      risk
      free rate of 4% and dividend yield of 0%. For the nine months ended September
      30, 2006 and September 30, 2005, $000,000 and $00,055 of consulting fee was
      expensed relating to the warrants, respectively.





**Note
      7 -** **STOCK** ****** **EXCHANGE
      AGREEMENT**





On
      December 21, 2005 Capital Future Developments Ltd - BVI became a wholly owned
      subsidiary of China 3C Group through a reverse merger. China 3C Group acquired
      all of the issued and outstanding capital stock of Capital Future Developments
      Ltd. - BVI pursuant to a Merger Agreement dated at December 21, 2005 by and
      among China 3C Group, XY Acquisition Corporation, Capital Future Developments
      Ltd. - BVI and the shareholders of Capital Future Developments Ltd - BVI (the
      “Merger Agreement”). Pursuant to the Merger Agreement, Capital Future
      Developments Ltd. - BVI became a wholly owned subsidiary of China 3C Group
      and,
      in exchange for the Capital Future Developments Ltd. - BVI shares, China 3C
      Group issued 35,000,000 shares of its common stock to the shareholders of
      Capital Future Developments Ltd. - BVI, representing 93% of the issued and
      outstanding capital stock of China 3C Group at that time and a cash
      consideration of $500,000.





As
      a
      result of the exchange agreement, the reorganization was treated as an
      acquisition by the accounting acquirer that is being accounted for as a
      recapitalization and as a reverse merger by the legal acquirer for accounting
      purposes. Pursuant to the recapitalization, all capital stock shares and amounts
      and per share data have been retroactively restated. Accordingly, the financial
      statements include the following:





(1)
      The
      balance sheet consists of the net assets of the accounting acquirer at
      historical cost and the net assets of the legal acquirer at historical
      cost.





(2)
      The
      statements of operations include the operations of the accounting acquirer
      for
      the period presented and the operations of the legal acquirer from the date
      of
      the merger.




14


**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      8 -** **COMPENSATED
      ABSENCES**




Regulation
      45 of local PRC labor law entitles employees to annual vacation leave after
      one
      year of service. In general all leave must be utilized annually, with proper
      notification, any unutilized leave is cancelled.





**Note
      9 -** **INCOME
      TAXES**





The
      Company through its subsidiaries, Zhejiang, Wang Da, Sanhe, and Yiwu, is
      governed by the Income Tax Laws of the PRC. Operations in the United States
      of
      America have incurred net accumulated operating losses of $1,400,000 as of
      September 30, 2006 for income tax purposes. However, a hundred percent allowance
      has been created on the deferred tax asset of $575,000 due to uncertainty of
      its
      realization.




Pursuant
      to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory
      rate of 33%, which is comprised of 30% national income tax and 3% local income
      tax.





The
                following is a reconciliation of income tax expense:9/30/2006
            
            U.S.
            
            State
            
            International
            
            TotalCurrent
            
            $
            
            
            $
            
            
            $
            3,327,185
            
            $
            3,327,185DeferredTotal
            
            $
            0
            
            $
            0
            
            $
            3,327,185
            
            $
            3,327,18512/31/2005
            
            
            U.S.
            
            
            State
            
            
            International
            
            
            TotalCurrent
            
            $
            
            
            $
            800
            
            $
            1,087,221
            
            $
            1,088,021DeferredTotal
            
            $
            0
            
            $
            800
            
            $
            1,087,221
            
            $
            1,088,021




Reconciliation
                of the differences between the statutory U.S. Federal income tax
                rate and
                the effective rate is as follows:




9/30/2006
            
            
            12/31/2005US
                statutory tax rate
            
            
            34
            %
            
            34
            %Foreign
                income not recognized in US
            
            
            -34
            %
            
            -34
            %PRC
                income tax
            
            
            33
            %
            
            33
            %Effective
                rate
            
            
            33
            %
            
            33
            %





15




**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      10 -** **COMMITTMENTS**




The
      Company leases various office facilities under operating leases that terminate
      thru 2008. The Company also has management agreements that terminate in 2007.
      The future minimum obligations under these agreements are as
      follows:





2007
            
            $
            96,3392008
            
            $
            7,3132009
            
            $
            3,720





**Note
      11 -** **STATUTORY
      RESERVE**





In
      accordance with the laws and regulations of the PRC, a wholly-owned Foreign
      Invested Enterprises income, after the payment of the PRC income taxes, shall
      be
      allocated to the statutory surplus reserves and statutory public welfare fund.
      Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
      of the profit after tax to the surplus reserve fund and additional 5-10 percent
      to the public affair fund. The public welfare fund reserve was limited to 50
      percent of the registered capital. Effective January 1, 2006, there is now
      only
      one fund requirement. The reserve is 10 percent of income after tax, not to
      exceed 50 percent of registered capital.





Statutory
      Reserve funds are restricted for set off against losses, expansion of production
      and operation or increase in register capital of the respective company.
      Statutory public welfare fund is restricted to the capital expenditures for
      the
      collective welfare of employees. These reserves are not transferable to the
      Company in the form of cash dividends, loans or advances. These reserves are
      therefore not available for distribution except in liquidation. As of September
      30, 2006, the Company had allocated $643,991 to these non-distributable reserve
      funds.





**Note
      12 -** **OTHER
      COMPREHENSIVE INCOME**





Balances
      of related after-tax components comprising accumulated other comprehensive
      income (loss), included in stockholders equity, at September 30, 2006 and
      December 31, 2005 are as follows:





*Foreign
                Currency Translation Adjustment*
            
            *Accumulated
                Other Comprehensive Income*Balance
                at December 31, 2004
            
            $
            
            
            $Change
                for 2005
            
            
            74,950
            
            
            74,950Balance
                at December 31, 2005
            
            $
            74,950
            
            $
            74,950Change
                9 months endedSeptember
                30,
                2006
            
            
            134,547
            
            
            134,547Balance
                atSeptember
                30,
                2006
            
            $
            209,497
            
            $
            209,497





16





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2006**





**Note
      13**  **-** **CURRENT
      VULNERABILITY DUE TO CERTAIN RISK FACTORS**





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





**Note
      14 -** **MAJOR
      CUSTOMERS AND CREDIT RISK**





During
      the period ended September 30, 2006, no customer accounted for more than 10%.
      No
      one customer accounted for more than 10.00% of the company’s accounts receivable
      at September 30, 2006.





17


**Forward
      Looking Statements**





We
      have
      included and from time to time may make in our public filings, press releases
      or
      other public statements, certain statements, including, without limitation,
      those under “Management’s Discussion and Analysis or Plan of Operations” in Item
      2. In some cases these statements are identifiable through the use of words
      such
      as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,”
“target,” “can,” “could,” “may,” “should,” “will,” “would” and similar
      expressions. You are cautioned not to place undue reliance on these
      forward-looking statements. In addition, our management may make forward-looking
      statements to analysts, investors, representatives of the media and others.
      These forward-looking statements are not historical facts and represent only
      our
      beliefs regarding future events, many of which, by their nature, are inherently
      uncertain and beyond our control.





**Item
      2.**  **Management’s
      Discussion and Analysis or Plan of Operation** **.**





The
      following discussion should be read in conjunction with the Consolidated
      Financial Statements and Notes thereto appearing elsewhere in this Form 10-QSB.
      The following discussion contains forward-looking statements. Our actual results
      may differ significantly from those projected in the forward-looking statements.
      Factors that may cause future results to differ materially from those projected
      in the forward-looking statements include, but are not limited to, those
      discussed in “Risk Factors” and elsewhere in this Form 10-QSB.




**Overview**




China
      3C
      Group was incorporated on August, 20, 1998 under the laws of the State of
      Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
      22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
      Technology Co., Ltd. (“ZYXD”), Yiwu Yong Xin Communication Ltd. (“YYXC”),
      Hangzhou Wandga Electronics Co., Ltd. (“HWDA”), and Hangzhou Sanhe Electronic
      Technology, Limited (HSET), were incorporated under the laws of Peoples Republic
      of China on July 11, 2005, July 18, 1997, March, 30, 1998, and April 12, 2004
      respectively. China 3C Group owns 100% of CFDL and CFDL owns 100% of the capital
      stock of ZYXD. ZYXD owns 90% and YYXC owns 10% of HWDA. ZYXD owns 90% and HWDA
      owns 10% of YYXC. Collectively the five corporations are referred to herein
      as
      the Company.





On
      December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group
      through a reverse merger. China 3C Group acquired all of the issued and
      outstanding capital stock of CFDL pursuant to a Merger Agreement dated at
      December 21, 2005 by and among China 3C Group, XY Acquisition Corporation,
      CFDL
      and the shareholders of CFDL (the “Merger Agreement”). Pursuant to the Merger
      Agreement, CFDL became a wholly owned subsidiary of China 3C Group and, in
      exchange for the CFDL shares, China 3C Group issued 35,000,000 shares of its
      common stock to the shareholders of CFDL, representing 93% of the issued and
      outstanding capital stock of China 3C Group at that time and a cash
      consideration of $500,000.





18





As
      a
      result of the Merger Agreement, the reorganization was treated as an acquisition
      by the accounting acquiree that is being accounted for as a recapitalization
      and
      as a reverse merger by the legal acquirer for accounting purposes. Pursuant
      to
      the recapitalization, all capital stock shares and amounts and per share data
      have been retroactively restated. Accordingly, the financial statements include
      the following:





(1)
      The
      balance sheet consists of the net assets of the accounting acquirer at
      historical cost and the net assets of the legal acquirer at historical
      cost.





(2)
      The
      statements of operations include the operations of the accounting acquirer
      for
      the period presented and the operations of the legal acquirer from the date
      of
      the merger.





The
      Company is now engaged in the business of mobile phone, facsimile machines,
      DVD
      players, stereos, and speaker distribution.





During
      the quarter ending September 30, 2006 the Company completed the acquisition
      of a
      new subsidiary, Sanhe Electronic Technology, Limited. Under the terms of the
      share exchange agreement the company issued 915,971 shares of restricted common
      stock, valued at $3,750,000 and notes totaling $5,000,000. All financial
      information includes Sanhe at September 30, 2006 and for the three months then
      ended.





**Results
      of Operations**




The
      following table presents certain consolidated statement of operations
      information stated as a percentage of total revenues. All financial information
      is presented for the nine months ended September 30, 2006 and the three months,
      ended September 30, 2006. As the reverse merger took place on December 31,
      2005,
      no comparative figures are available for September 30, 2005.




**Nine
                Months**
            
            
            **Three
                Months****2006**
            
            
            **2006**Sales,
                net
            
            $
            84,642,865
            
            $
            42,573,920Cost
                of sales
            
            
            71,842,396
            
            
            35,974,772General
                and Administrative Expense
            
            
            3,061,268
            
            
            1,652,278Income
                from Operations
            
            $
            9,739,201
            
            $
            4,946,870





**Net
      sales**





Net
      sales
      for the three months ended September 30, 2006 totaled $42,573,920 compared
      to
      $28,618,196 for the three months ended June 30, 2006. The increase was due
      to
      increased sales volume from new products and existing products during the three
      months ended September 30, 2006 and the inclusion of a newly acquired subsidiary
      (Sanhe).




**Cost
      of Sales**




Cost
      of
      sales for the three months ended September 30, 2006 totaled $35,974,772 or
      approximately 84.50% of net sales compared to $24,347,343 or approximately
      85.08% for the three months ended June 30, 2006. The cost of sales as a
      percentage remains stable during the three months ended June 30, 2006 even
      after
      the inclusion of the newly acquired subsidiary.




19




**Gross
      Profit Margin**





Gross
      profit margin for the three months ended September 30, 2006 was 15.50% compared
      to 14.92% for the 3 months ended June 30, 2006. The gross profit margin remains
      stable during the three months ended September 30, 2006 even after the inclusion
      of newly acquired subsidiary.





**Operating
      Expense**





General
      and administrative expense for the three months ended September 30, 2006 totaled
      $1,652,278 or approximately 3.88% of net sales, compared to $903,938 or
      approximately 3.16% for the three months ended June 30, 2006. The increase
      of
      0.72% was due to the inclusion of the newly acquired subsidiary, Sanhe, during
      the quarter.





**Income
      from Operations**





Income
      from operations for the three months ended September 30, 2006 was $4,946,870
      or
      11.62% of net Sales as compared to income from operations of $3,366,915 for
      the
      three months ended June 30, 2006 or 12.12% of net Sales. The increase was due
      to
      both Costs of Sales and Selling and Administrative costs and the inclusion
      of
      the newly acquired subsidiary.





**Interest
      Expense**





Interest
      expense for the three months ended September 30, 2006 totaled $22 compared
      to
      $54 for the three months ended June 30, 2006. By October 2006 the Company will
      have completely paid off existing notes payable.





**Net
      Income**





Net
      income was $3,223,854 or 7.57% of net Sales for the three months ended September
      30, 2006 compared to $2,262,695 or 7.91% of net Sales for the three months
      ended
      June 30, 2006. The increase in percentage was due to slight increase in gross
      profit margin, decrease in cost, and the inclusion of the newly acquired
      subsidiary.




20




**Segment
      Performance**


Hangzhou
                Sanhe
            
            Yiwu
                Yong Xin
            
            Hangzhou
                Wang
            
            China
                3cChina
                3C Group Segment Reporting
            
            DVD
                Players
            
            Hi
                Fi System
            
            Speakers
            
            Fittings
            
            Total
            
            Fax
                machine
            
            Telephone
            
            Total
            
            Mobile
                phone
            
            Total
                CompanyThree
                Months Ending
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$September
                30, 2006OPERATING
                REVENUES
            
            
            5,423,936.82
            
            
            1,645,761.63
            
            
            2,169,311.65
            
            
            6,390.63
            
            
            9,245,400.73
            
            
            12,246,783.97
            
            
            2,327,463.64
            
            
            14,574,247.62
            
            
            18,754,271.65
            
            
            42,573,920.00COST
                OF OPERATING REVENUES
            
            
            -4,423,587.70
            
            
            -1,292,025.01
            
            
            -1,759,658.09
            
            
            -4,293.74
            
            
            -7,479,564.54
            
            
            -10,414,001.42
            
            
            -2,019,302.41
            
            
            -12,433,303.83
            
            
            -16,061,903.63
            
            
            -35,974,772.00GROSS
                PROFIT
            
            
            1,000,349.12
            
            
            353,736.63
            
            
            409,653.56
            
            
            2,096.89
            
            
            1,765,836.20
            
            
            1,832,782.56
            
            
            308,161.23
            
            
            2,140,943.79
            
            
            2,692,368.02
            
            
            6,599,148.00OPERATING
                EXPENSESSelling
                General & administrative
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -809,635.99
            
            
            
            
            
            
            
            
            -378,543.20
            
            
            -464,098.82
            
            
            -1,652,278.00Total
                operating expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -809,635.99
            
            
            
            
            
            
            
            
            -378,543.20
            
            
            -464,098.82
            
            
            -1,652,278.00INCOME
                FROM OPERATIONS
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            956,200.21
            
            
            
            
            
            
            
            
            1,762,400.59
            
            
            2,228,269.20
            
            
            4,946,870.00NON-OPERATING
                INCOME:Interest
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,379.31
            
            
            
            
            
            
            
            
            3,016.51
            
            
            2,865.18
            
            
            9,261.00Total
                non-operating income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,379.31
            
            
            
            
            
            
            
            
            3,016.51
            
            
            2,865.18
            
            
            9,261.00NON-OPERATING
                EXPENSES:Others
                & ( Bad Debt)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -23,320.72
            
            
            
            
            
            
            
            
            
            
            
            -271.29
            
            
            -23,592.00Interest
                expense on obligation under finance leases
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0.00
            
            
            
            
            
            
            
            
            -5.74
            
            
            -16.26
            
            
            -22.00Total
                non-operating expenses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -23,320.72
            
            
            
            
            
            
            
            
            -5.74
            
            
            -287.55
            
            
            -23,614.00INCOME
                BEFORE INCOME TAX
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            936,258.81
            
            
            
            
            
            
            
            
            1,765,411.36
            
            
            2,230,846.83
            
            
            4,932,517.00INCOME
                TAX
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            367,928.66
            
            
            
            
            
            
            
            
            608,396.93
            
            
            732,337.40
            
            
            1,708,663.00Income
                from continuing operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            568,330.14
            
            
            
            
            
            
            
            
            1,157,014.43
            
            
            1,498,509.43
            
            
            3,223,854.00NET
                INCOME (LOSS)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            568,330.14
            
            
            
            
            
            
            
            
            1,157,014.43
            
            
            1,498,509.43
            
            
            3,223,854.00




Hangzhou
                Sanhe
            
            Yiwu
                Yong Xin
            
            Hangzhou
                Wang
            
            China
                3cChina
                3C Group Segment Reporting
            
            DVD
                Players
            
            Hi
                Fi System
            
            Speakers
            
            Fittings
            
            Total
            
            Fax
                machine
            
            Telephone
            
            Total
            
            Mobile
                phone
            
            Total
                CompanyNine
                Months Ending
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$
            
            $US$September
                30, 2006Included
                In Consolidation Q3 OnlyOPERATING
                REVENUES
            
            
            5,423,936.82
            
            
            1,645,761.63
            
            
            2,169,311.65
            
            
            6,390.63
            
            
            9,245,400.73
            
            
            32,864,628.07
            
            
            2,618,424.64
            
            
            35,483,052.72
            
            
            39,914,411.55
            
            
            84,642,865.00COST
                OF OPERATING REVENUES
            
            
            -4,423,587.70
            
            
            -1,292,025.01
            
            
            -1,759,658.09
            
            
            -4,293.74
            
            
            -7,479,564.54
            
            
            -27,528,979.26
            
            
            -2,270,382.41
            
            
            -29,799,361.67
            
            
            -34,563,469.79
            
            
            -71,842,396.00GROSS
                PROFIT
            
            
            1,000,349.12
            
            
            353,736.63
            
            
            409,653.56
            
            
            2,096.89
            
            
            1,765,836.20
            
            
            5,335,648.82
            
            
            348,042.23
            
            
            5,683,691.05
            
            
            5,350,941.75
            
            
            12,800,469.00OPERATING
                EXPENSESSelling
                General & administrative
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -809,635.99
            
            
            
            
            
            
            
            
            -1,787,533.20
            
            
            -464,098.82
            
            
            -3,061,268.00Total
                operating expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -809,635.99
            
            
            
            
            
            
            
            
            -1,787,533.20
            
            
            -464,098.82
            
            
            -3,061,268.00INCOME
                FROM OPERATIONS
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            956,200.21
            
            
            
            
            
            
            
            
            3,896,157.85
            
            
            4,886,842.94
            
            
            9,739,201.00NON-OPERATING
                INCOME:Interest
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,379.31
            
            
            
            
            
            
            
            
            11,363.51
            
            
            2,865.18
            
            
            17,608.00Total
                non-operating income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3,379.31
            
            
            
            
            
            
            
            
            11,363.51
            
            
            2,865.18
            
            
            17,608.00NON-OPERATING
                EXPENSES:Others
                & ( Bad Debt)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -23,320.72
            
            
            
            
            
            
            
            
            -5,772.00
            
            
            -271.29
            
            
            -29,364.00Interest
                expense on obligation under finance leases
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0.00
            
            
            
            
            
            
            
            
            -145.74
            
            
            -16.26
            
            
            -162.00Total
                non-operating expenses
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -23,320.72
            
            
            
            
            
            
            
            
            -5,917.73
            
            
            -287.55
            
            
            -29,526.00INCOME
                BEFORE INCOME TAX
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            936,258.81
            
            
            
            
            
            
            
            
            3,901,603.62
            
            
            4,889,420.57
            
            
            9,727,283.00INCOME
                TAX
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            367,928.66
            
            
            
            
            
            
            
            
            2,226,918.93
            
            
            732,337.40
            
            
            3,327,185.00Income
                from continuing operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            568,330.14
            
            
            
            
            
            
            
            
            1,674,684.69
            
            
            4,157,083.17
            
            
            6,400,098.00NET
                INCOME (LOSS)
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            568,330.14
            
            
            
            
            
            
            
            
            1,674,684.69
            
            
            4,157,083.17
            
            
            6,400,098.00








YYXC
      commenced a new line of activity distributing fixed line telephone sets in
      May
      2006. Segment information for newly acquired subsidiary only includes three
      months ended September 30, 2006.




21




**Liquidity
      and Capital Resources**





Cash
      has
      historically been generated from operations. Operations and liquidity needs
      are
      funded primarily through cash flows from operations and short-term borrowings.
      Cash and cash equivalents were $4,916.409 at September 30, 2006 and current
      assets totaled $14,498,812 at September 30, 2006. The Company’s total current
      liabilities were $5,771,834 at September 30, 2006. Working capital at September
      30, 2006 was $8,726,978. We believe that the funds available to us are adequate
      to meet our operating needs for the remainder of 2006. For the nine months
      ended
      September 30, 2006, net cash provided by operating activities was
      $4,129,992.




**Capital
      expenditures**





Total
      capital expenditures during the nine months ended September 30, 2006 were
      $25,676 for purchase of fixed assets. We have no plans for material capital
      expenditures during the remainder of 2006.




**Working
      Capital Requirements**




Historically
      operations and short term financing have been sufficient to meet our cash needs.
      We believe that we will be able to generate revenues from sales and raise
      capital through private placement offerings of our equity securities to provide
      the necessary cash flow to meet anticipated working capital requirements.
      However, our actual working capital needs for the long and short term will
      depend upon numerous factors, including operating results, competition, and
      the
      availability of credit facilities, none of which can be predicted with
      certainty. Future expansion will be limited by the availability of financing
      products and raising capital.




**Off-Balance
      Sheet Arrangements**




We
      have
      never entered into any off-balance sheet financing arrangements and have never
      established any special purpose entities. We have not guaranteed any debt or
      commitments of other entities or entered into any options on non-financial
      assets.




**Item
      3.**  **Controls
      and Procedures**




**Evaluation
      of Disclosure Controls and Procedures**




As
      of
      September 30, 2006, the end of the period covered by this report, our Chief
      Executive Officer and our Chief Financial Officer reviewed and evaluated the
      effectiveness of the our disclosure controls and procedures (as defined in
      Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that
      material information we must disclose in our report filed or submitted under
      the
      Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
      processed, summarized, and reported on a timely basis, and have concluded,
      based
      on that evaluation, that as of such date, our disclosure controls and procedures
      were effective to ensure that information required to be disclosed by us in
      reports that we file or submit under the Exchange Act is accumulated and
      communicated to our Chief Executive Officer and Chief Financial Officer as
      appropriate to allow timely decisions regarding required disclosure.




**Changes
      in Internal Control over Financial Reporting**




There
      was
      no change in our internal control over financial reporting that occurred during
      the fiscal quarter covered by this report on Form 10-QSB that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





22


**PART
      II.**  **OTHER
      INFORMATION**





**Item
      1.**  **Legal
      Proceedings** **.**




Neither
      the Company nor its property is a party to any pending legal proceeding. The
      Company’s management does not believe that there are any proceedings to which
      any director, officer, or affiliate of the Company, any owner of record of
      beneficially held or owner of more than five percent (5%) of the Company’s
      common stock, or any associate of any such director, officer, affiliate of
      the
      Company, or security holder is a party adverse to the Company, or has a material
      interest adverse to the Company.





**Item
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**





Not
      Applicable.





**Item
      3.**  **Defaults
      Upon Senior Securities**





Not
      Applicable.





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





There
      were no matters submitted to the stockholders in the quarter that are required
      to be disclosed.





I **tem
      5.**  **Other
      Information.**





There
      is
      no information required to be disclosed in a report on Form 8-K during the
      quarter of the fiscal year covered by this Form 10-QSB but not reported.





**Item
      6.**  **Exhibits.**




**Exhibit
                No.**
            
            **Document
                Description**31.1
            
            Certification
                of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.32
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002




23




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities and Exchange Act
      of
      1934, the Company has duly caused this amended report to be signed on its behalf
      by the undersigned, thereunto duly authorized, on this 11 th day of
      September, 2006.




**CHINA
                3C GROUP**By:
            /s/ Zhenggang
              WangName:  
                Zhenggang WangTitle:
                Chief Executive Officer and
                Chairman




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





**Signatures**
            
            **Title**
            
            **Date**/s/
                Zhenggang Wang
            
            
            
            November
                6, 2006Zhenggang
                Wang
            
            Chief
                Executive Officer and Chairman/s/
                Jian Liu
            
            
            
            November
                6, 2006Jian
                Liu
            
            Chief
                Financial Officer/s/
                Xiang Ma
            
            
            
            November
                6, 2006Xiang
                Ma
            
            President/s/
                Weikang GuWeikang
                Gu
            
            Director
            
            November
                6, 2006/s/
                Rongjin WengRongjin
                Weng
            
            Director
            
            November
                6, 2006/s/
                Chenghua ZhuChenghua
                Zhu
            
            Director
            
            November
                6, 2006/s/
                Mingjun ZhuMingjun
                Zhu
            
            Director
            
            November
                6, 2006




24