**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 March
      31, 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 ofincorporation 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 xNo o





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





As
      of May
      11, 2006 the registrant had 48,850,194 shares
      of common stock outstanding.











**TABLE
      OF CONTENTS**




**PART
                    I.FINANCIAL
                    INFORMATION**
                
                Page(s)Item
                    1.
                
                Financial
                    Statements
                
                F1-F18Item
                    2.
                
                Management's
                    Discussion and Analysis or Plan of Operations
                
                1Item
                    3.
                
                Controls
                    and Procedures
                
                4**PART II.OTHER
                    INFORMATION**Item
                    1.
                
                Legal
                    Proceedings
                
                5Item
                    2.
                
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                
                5Item
                    3.
                
                Defaults
                    Upon Senior Securities
                
                5Item
                    4.
                
                Submission
                    of Matters to a Vote of Security Holders
                
                5Item
                    5.
                
                Other
                    Information
                
                5Item
                    6.
                
                Exhibits
                    and Reports on Form 8-K
                
                5Signatures
                
                
                
                6













**CHINA
      3C GROUP AND SUBSIDIARIES**








**CONSOLIDATED
      FINANCIAL STATEMENTS**





**MARCH
      31, 2006**

















**TABLE
      OF CONTENTS**


Report
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheet
            
            
            F-4Consolidated
                Statements of Income
            
            
            F-5Consolidated
                Statements of Cash Flow
            
            
            F-6Consolidated
                Statements of Stockholders Equity
            
            
            F-7Notes
                to Consolidated Financial Statements
            
            
            F-8
                - F-18















***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 March 31, 2006 and the consolidated condensed statements
      of income for the three-months ended March 31, 2006 and consolidated statements
      of cash flows for the three 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


May
      6,
      2006










Report
      of
      Independent Registered Public Accounting Firm








Board
      of
      Directors and Stockholders of


China
      3C
      Group and Subsidiaries, Inc.





We
      have
      audited the accompanying consolidated balance sheet of China 3C Group and
      Subsidiaries, Inc. (a Nevada corporation) as of December 31, 2005, and the
      related consolidated statements of income, stockholders' equity, and cash flows
      for the year ended December 31, 2005. These consolidated financial statements
      are the responsibility of the Company's management. Our responsibility is to
      express an opinion on these consolidated financial statements based on our
      audit.




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




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of China
      3C
      Group and Subsidiaries, Inc. as of
      December 31, 2005, and the consolidated results of their operations and their
      consolidated cash flows for the year ended December 31, 2005, in conformity
      with
      U.S. generally accepted accounting principles.






/s/
      Kabani & Company, Inc.


**Certified
      Public Accountants**





Los
      Angeles California


March
      10,
      2006




F-1




**CHINA
                  3C GROUP INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEET****(UNAUDITED)****MARCH
                  31, 2006 AND DECEMBER 31,
                  2005**
  **ASSETS**
              
              **2006**
              
              **2005****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              1,796,535
              
              $
              1,949,222Accounts
                  receivable, net
              
              
              1,669,330
              
              
              913,215Inventory
              
              
              770,117
              
              
              602,974Advance
                  to supplier
              
              
              1,171,170
              
              
              372,000Other
                  receivable
              
              
              123,800Refundable
                  Deposits
              
              
              921Prepaid
                  expenses
              
              
              297,892
              
              
              139,193Total
                  Current Assets
              
              
              5,829,765
              
              
              3,976,604**Property
                  & equipment, net**
              
              
              39,351
              
              
              43,662**Total
                  Assets**
              
              $
              5,869,116
              
              $
              4,020,266******LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  LiabilitiesAccounts
                  payable and accrued expenses
              
              $
              380,480
              
              $
              111,296Income
                  tax payable
              
              
              508,950
              
              
              222,550Notes
                  payable
              
              
              5,195
              
              
              7,769Total
                  Current Liabilities
              
              
              894,625
              
              
              341,615**Stockholders'
                  Equity**Common
                  stock, $.001 par value, 100,000,000shares
                  authorized, 39,870,077 issued and outstanding
              
              
              48,850
              
              
              39,870Shares
                  to be issued, 8,980,000
              
              
              
              
              
              502,000Additional
                  paid in capital
              
              
              2,606,330
              
              
              2,113,310Deferred
                  consulting expense
              
              
              
              
              
              (387,945
              )Subscription
                  receivable
              
              
              (50,000
              )
              
              (50,000
              )Statutory
                  reserve
              
              
              402,030
              
              
              402,030Other
                  comprehensive income
              
              
              (5653
              )
              
              74,950Retained
                  earnings
              
              
              1,972,934
              
              
              984,436Total
                  Stockholders' Equity
              
              
              4,974,491
              
              
              3,678,651Total
                  Liabilities and Stockholders' Equity
              
              $
              5,869,116
              
              $
              4,020,266
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-2
 
 **CHINA
                  3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****(UNAUDITED)****FOR
                  THE THREE MONTHS ENDED MARCH 31, 2006 AND THE YEAR ENDED DECEMBER
                  31,
                  2005**
  2006
              
              2005Sales,
                  net
              
              $
              13,450,749
              
              $
              32,588,634Cost
                  of sales
              
              
              11,520,281
              
              
              28,325,332**Gross
                  profit**
              
              
              1,930,468
              
              
              4,263,302General
                  and administrative expenses
              
              
              505,052
              
              
              1,706,869**Income
                  from operations**
              
              
              1,425,416
              
              
              2,556,433Other
                  (Income) ExpenseInterest
                  income
              
              
              (4,098
              )
              
              (10,156
              )Other
                  expense
              
              
              5,491
              
              
              17,364Interest
                  expense
              
              
              86
              
              
              2,954Total
                  Other (Income) Expense
              
              
              1,479
              
              
              10,162**Income
                  before income taxes**
              
              
              1,423,937
              
              
              2,546,271Provision
                  for income taxes
              
              
              510,389
              
              
              1,088,021**Net
                  income**
              
              $
              913,548
              
              $
              1,458,250**Net
                  income per share:**Basic
                  & diluted
              
              $
              0.02
              
              $
              0.04**Weighted
                  average number of shares outstanding:**Basic
                  & diluted
              
              
              44,360,077
              
              
              35,133,427
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-3
 **CHINA
                  3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                  THE THREE MONTHS ENDED MARCH 31, 2006 AND YEAR ENDED DECEMBER 31,
                  2005**
  2006
                
                2005**CASH
                    FLOWS FROM OPERATING ACTIVITIES**Net
                    Income
                
                $
                913,548
                
                $
                1,458,250Adjustments
                    to reconcile net income to net cashprovided
                    by operating activities:Depreciation
                
                
                4,272
                
                
                17,420Loss
                    on asset disposition
                
                
                201Provision
                    for bad debts
                
                
                4,537Issuance
                    of shares for consultants
                
                
                
                
                
                225,680Amortization
                    of deferred consulting expense
                
                
                100,000
                
                
                12,055Shares
                    to be issued to consultants
                
                
                
                
                
                498,000(Increase)
                    / decrease in assets:Accounts
                    receivables
                
                
                (760,652
                )
                
                (286,498
                )Inventory
                
                
                (167,143
                )
                
                (421,658
                )Due
                    From Officer
                
                
                (123,800
                )Prepaid
                    expense
                
                
                129,246
                
                
                (42,522
                )Advance
                    to supplier
                
                
                (799,170
                )
                
                (372,000
                )Deposits
                
                
                (921
                )
                
                1,288Increase
                    / (decrease) in current liabilities:Accounts
                    payable and accrued expenses
                
                
                269,184
                
                
                (267,816
                )Income
                    tax payable
                
                
                286,400
                
                
                122,067Total
                    Adjustments
                
                
                (1,057,846
                )
                
                (513,984
                )**Net
                    cash provided by operating activities**
                
                
                (144,298
                )
                
                944,266**CASH
                    FLOWS FROM INVESTING ACTIVITIES**Purchase
                    of property & equipment
                
                
                (534
                )
                
                (2,308
                )Proceeds
                    from asset sales
                
                
                372**Net
                    cash provided by Investing activities**
                
                
                (162
                )
                
                —**CASH
                    FLOWS FROM FINANCING ACTIVITIES**Capital
                    contribution to subsidiary before acquisition
                
                
                
                
                
                1,210,000Dividends
                    paid
                
                
                
                
                
                (529,140
                )Proceed
                    on loan from related parties
                
                
                
                
                
                97,760Payments
                    on loan to related parties
                
                
                
                
                
                (250,877
                )Payments
                    on note payable
                
                
                (2,574
                )
                
                (9,807
                )**Net
                    cash (used in) provided by financing activities**
                
                
                (2,574
                )
                
                517,936Effect
                    of exchange rate changes on cash and cash equivalents
                
                
                (5,653
                )
                
                19,670Net
                    change in cash and cash equivalents
                
                
                (152,687
                )
                
                1,479,564**Cash
                    and cash equivalents, beginning balance**
                
                
                1,949,222
                
                
                469,658**Cash
                    and cash equivalents, ending balance**
                
                $
                1,796,535
                
                $
                1,949,222**SUPPLEMENTAL
                    DISCLOSURES:**Cash
                    paid during the year for:Income
                    tax payments
                
                $
                222,819
                
                $
                965,354Interest
                    payments
                
                $
                86
                
                $
                2,954
  The
        accompanying notes are an integral part of these consolidated financial
        statements.




F-4


**CHINA
                  3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****(UNAUDITED)****FOR
                  THE THREE MONTHS ENDED MARCH 31, 2006 AND THE YEAR ENDED DECEMBER
                  31,
                  2005**
  **Shares**
              
              **Additional**
              
              **Other**
              
              **Deferred**
              
              
              
              
              
              **Retained
                  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
              
              
              0
              
              
              267,500
              
              
              0
              
              
              0
              
              
              0
              
              
              70,379
              
              
              383,297
              
              
              756,176Changes
                  due to recapitalization
              
              
              2,613,282
              
              
              2,613
              
              
              0
              
              
              1,226,387
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              1,229,000Shares
                  issued for consulting fees
              
              
              0
              
              
              0
              
              
              498,000
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              498,000Warrants
                  issued for deferred consulting fees
              
              
              0
              
              
              0
              
              
              0
              
              
              400,000
              
              
              0
              
              
              (387,945
              )
              
              0
              
              
              0
              
              
              0
              
              
              12,055Stock
                  issued for guarantee fee
              
              
              2,256,795
              
              
              2,257
              
              
              0
              
              
              223,423
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              225,680Warrants
                  exercised
              
              
              0
              
              
              0
              
              
              4,000
              
              
              (4,000
              )
              
              0
              
              
              
              
              
              0
              
              
              0
              
              
              0
              
              
              ¡XStock
                  subscription receivable
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              (50,000
              )
              
              0
              
              
              0
              
              
              (50,000
              )Dividend
                  paid
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              (525,460
              )
              
              (525,460
              )Foreign
                  currency translation adjustments
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              74,950
              
              
              0
              
              
              0
              
              
              0
              
              
              
              
              
              74,950Transfer
                  to statutory reserve
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              331,651
              
              
              (331,651
              )
              
              ¡XNet
                  income for the year ended December 31, 2005
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              0
              
              
              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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (80,603
              )
              
              
              
              
              
              
              
              
              
              
              74,950
              
              
              (5,653
              )income
                  for the three Months ended March 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              913,548
              
              
              913,548Transferred
                  To prepaid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              387,945
              
              
              
              
              
              
              
              
              
              
              
              387,945**Balance
                  March 31, 2006**
              
              
              48,930,680
              
              
              48,850
              
              
              
              
              
              2,606,330
              
              
              (5,653
              )
              
              
              
              
              (50,000
              )
              
              402,030
              
              
              1,972,934
              
              
              4,899,541
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-5
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 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”) and Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”) were incorporated
        under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997
        and
        March, 30, 1998 respectively. China 3C Group owns 100% of Capital and Capital
        owns 100% of the capital stock of 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
        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
        December 31, 2005 and 2004, the accounts of Zhejiang, Wang Da and Yiwu 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, stockholder’s 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.
 
 F-6
 
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 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 and Yiwu, 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.
 
 F-7
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 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 $3,521 as at December 31, 2005.
  Inventories
 
 Inventories
        are valued at the lower of cost (determined on a weighted average basis)
        or
        market. The 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 March 31, 2006 and December 31, 2005 inventory consisted of
        finished goods valued at $770,117 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
        March 31, 2006 Property, Plant & Equipment consist of the
        following:
 
 Automobile
              
              $
              95,360Office
                  equipment
              
              
              39,473134,833Accumulated
                  depreciation
              
              
              (95,482
              )$
              39,351
  F-8
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 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 December 31, 2005 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 collectibility 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 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.
  F-9
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 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 is 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.
 
 F-10
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 
 **Note
        2 -** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  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.
  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.
        SFAS
        131 has no effect on the Company’s consolidated financial statements as the
        Company consists of one reportable business segment. All revenue is from
        customers in Peoples Republic of China. All of the Company’s assets are located
        in Peoples Republic of China.
 
 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.
  F-11
 
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 
 **Note
        2 -** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 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 its
        consolidated financial position or results of operations.
 
 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.
 
 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 materials.
        As of
        March 31, 2006 and December 31, 2005 the company had paid $1,171,170 and
        $372,000, respectively as advances to suppliers.
  **Note
        4-** **NOTES
        PAYABLE**
 
 At
        March
        31, 2006, the Company had borrowings outstanding in the aggregate amount
        of
        $5,195. Notes Payable were as follows on March 31, 2006:
 
 **Description**Secured
                  note payable to a bank in China, interest at 4.941% per annum,
                  due on July
                  30, 2006
              
              $
              2,961Secured
                  note payable to a bank in China, interest at 4.941% per annum,
                  due on
                  August 12, 2006
              
              
              2,234Total
              
              $
              5,195
  F-12
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 
 **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 individual,
        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.
 
 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.
 
 **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%. During the year ended December
        31,
        2005, $12,055 of consulting fee was expensed relating to the
        warrants.
 
 F-13
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 
 **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 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.
 
 **Note
        8 -** **COMPENSATED
        ABSENCES**
  Regulation
        45 of local 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.
 
 F-14
 
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 
 **Note
        9 -** **INCOME
        TAXES**
 
 The
        Company through its subsidiaries, Zhejiang, Wang Da 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 $738,819 as of December 31,
        2005
        for income tax purposes. However, a hundred percent allowance has been created
        on the deferred tax asset of $295,000 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 comprises of 30% national income tax and 3% local income
        tax.
  The following is a reconciliation of income tax
        expense
  3/31/2006
              
              U.S.
              
              State
              
              International
              
              TotalCurrent
              
              $
              0
              
              $
              0
              
              $
              510,389
              
              $
              510,389Deferred
              
              
              0
              
              
              0
              
              
              0
              
              
              0Total
              
              $
              0
              
              $
              0
              
              $
              510,389
              
              $
              510,38912/31/2005
              
              
              U.S.
              
              
              State
              
              
              International
              
              
              TotalCurrent
              
              $
              0
              
              $
              800
              
              $
              1,087,221
              
              $
              1,088,021Deferred
              
              
              0
              
              
              0
              
              
              0
              
              
              0Total
              
              $
              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:
  3/31/2006
              
              12/31/2005US
                  statutory tax rate
              
              
              34
              %
              
              34
              %Foreign
                  income not recognized in US
              
              
              -34
              %
              
              -34
              %PRC
                  income tax
              
              
              33
              %
              
              33
              %Effective
                  rate
              
              
              15
              %
              
              15
              %
 
 **Note
        10 -** **COMMITTMENTS**
  The
        Company leases various office facilities under operating leases that terminate
        on various dates during 2006. Rental expense for these leases consisted of
        $12,027 for the three months ended March 31, 2006. The Company has future
        minimum lease obligations as follows:
 
 2006
              
              $
              11,666Total
              
              $
              11,666
 
 F-15
 
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **MARCH
        31, 2006**
 
 **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 affair 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 affair fund reserve was limited to
        50
        percent of the registered capital. Effect 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
        March 31, 2006, the Company had allocated $402,030 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 March 31, 2006 and December
        31, 2005 are as follows:
 
 *Foreign
                  Currency Translation Adjustment*
              
              *Accumulated
                  Other Comprehensive Income*Balance
                  at December 31, 2004
              
              $
              ¡X
              
              $
              ¡XChange
                  for 2005
              
              
              74,950
              
              
              74,950Balance
                  at December 31, 2005
              
              $
              74,950
              
              $
              74,950Change
                  3 months ended March 31, 2006
              
              
              (80,603
              )
              
              (80,603
              )Balance
                  at March 31, 2006
              
              
              (5,653
              )
              
              (5,653
              )
 
 **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**
 
 The
        Company derived approximately 17.87% of its sales from 5 customers during
        the
        period ended March 31, 2006. No customer accounted for more than 10%. One
        customer accounted for 16.75% of the company’s accounts receivable at March 31,
        2006.
 
 **Note
        15 -** **RECLASSIFICATIONS**
 
 Certain
        prior period amounts have been reclassified to conform to the three months
        ended
        March 31, 2006 presentation.
 
 F-16
 
 **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 Operation” in Part
        I, 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 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) and
        Hangzhou Wandga Electronics Co., Ltd. (HWDA) were incorporated under the
        laws of
        Peoples Republic of China on July 11, 2005, July 18, 1997 and March, 30,
        1998
        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.
 
 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
        distribution.
  **PLAN
        OF OPERATIONS**
  **Fax
        Machines**
  **Market
        Trend**
  Price
        and
        sales volume of our products are the two main competitive factors we face.
        The
        increase in the market for these products will come from household and small
        business users.
  1
 **Competition**
  Currently
        in Zhejiang, Jiangsu and Shanghai area, tSonya, San Xing (first tier) combine
        for a 30% share of the market; Philips, Xiabu, Feng Da and other well known
        second tier products combine for a 55% share of the market; and the remaining
        15% of the market are comprised of third and fourth tier products.
  Our
        competitors including Hangzhou Sen Rui Da Trading Company Ltd, Hangzhou Bao
        Long
        Seng Ye Digital Technology Company and Ningbo Zhong Xun Office Supply Company
        Ltd. All of these competitors are implementing district distributing channels.
  **Cell
        Phones**
  **Market
        Trend**
  The
        following are the trends we foresee in this product line: **** Local
        and
        international brand cell phones increasing competition; development
        into digital format; increased importance on Channels; local cell phone
        manufacturers will constantly look for breakthroughs with new ideas; Chinese Government
        will provide guidance in cell phone industry; and additional methods
        in distribution channels will appear.
  **Competition**
  There
        are
        two types of selling methods: direct sales and indirect sales. Indirect sales
        are the current market trend, with 90% of the cell phones in China sold through
        this method. International brands are mostly sold through the indirect sales
        method, while local brands are sold through both methods.
  Competitors
        include Hangzhou Kangbu Company Ltd, and Hangzhou Jin Shi Ji Company Ltd.
        Both
        have a good reputation and same competitive ability with our company, but
        their
        margins are currently lower than ours, although we believe we can achieve
        a
        higher margin with our channeling and business model.
  **IT
        Products**
  **Market
        Trend**
  The
        following are the trends we foresee in this product line: wireless,
        entertainment, and safety features will be the main focus points; lower prices;
        and an increase in market share by direct channel.
  We
        believe f irst
        and
        second tier market’s increasing rate has slowed down, and therefore third and
        forth tier cities will be the next target market for the Company. A well
        established channel should eliminate a lot of previous problems encountered
        by
        the manufacturers in notebooks market where cost was high.
  **Conclusion**
  With
        all
        the discussion above, we believe telecommunication and IT products will have
        a
        big run in the Chinese market in next few years.
  2
  **Short
        Term Plan**
  We
        will
        implement our currently successful operating model of the cell phones and
        fax
        machines on new products.
  **Intermediate
        Plan**
  We
        will
        start moving into retailer business with “3C” products chain stores in East
        China area to distribute telecommunication products, digital products, and
        IT
        products.
  **Long
        Term Plan**
  The
        traditional sales channel of digital and IT products is complicated and
        low-effective, therefore increasing the cost of the retailers and distributors.
        Ultimately, this decreases the sales of manufacturers. With our new distribution
        channel, we believe the Company will become the leading 3C products agent
        and
        retailing business in East China area within three years, and will achieve
        30%
        of the market share in East China. The mission is to become the national
        leader
        on 3C products and chain stores business within five years.
  
 **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 3 months ending March 31, 2006 and, the 12 months, ending
        December 31, 2005. Certain columns may not add due to rounding.
 
 **2006**
              
              **2005**Sales,
                  net
              
              $
              13,450,749
              
              $
              32,588,634Cost
                  of sales
              
              
              11,520,281
              
              
              28,325,332General
                  and Administrative Expense
              
              
              505,052
              
              
              1,706,869Income
                  from Operations
              
              $
              1,425,416
              
              $
              2,556,433
 
 **Net
        sales**
 
 Net
        sales
        for the 3 months ended March 31, 2006 totaled $13,450,749 compared to
        $32,588,634 for the twelve months ended December 31, 2005. The increase was
        due
        to higher selling prices throughout the company and increased sales volume
        from
        new products.
  **Cost
        of Sales**
  Cost
        of
        sales for the 3 months ended March 31, 2006 totaled $11,520,281 or approximately
        85.65% of net sales compared to $28,325,332 or approximately 86.9% for the
        year
        ended December 31, 2005. The decrease in cost of sales as a percentage was
        due
        to a decrease in material cost and benefit derived from increasing quantities
        purchased.
 
 **Gross
        Profit Margin**
 
 Gross
        profit margin for the 3 months ending March 31, 2006 was 14.35% compared
        to
        13.08% for the year ending December 31, 2005. The increase in gross profit
        margin was due to the lower product sourcing costs.
 
 **Operating
        Expense**
 
 General
        and administrative expense for the three months ending March 31, 2006 totaled
        $505,052 or approximately 3.75% of net sales, compared to $1,706,869 or
        approximately 5.2% for the year ending December31, 2005. The decrease of
        1.45%
        was due to consulting fees research cost not recurring in 2006.
 
 **Income
        from Operations**
  3
  Income
        from operations for the three months ended March 31, 2006 was $1,425,916
        or
        10.6% of net Sales as compared to income from operations of $2,556,433 for
        the
        year ending December 31, 2005 or 7.84% of net Sales. The increase was due
        to
        both costs of Sales and Selling & Administrative costs.
 
 **Interest
        Expense**
 
 Interest
        expense for the three months ended March 31, 2006 totaled $86 compared to
        $2,954
        for the year ended December 31, 2005. By August of 2006 the company will
        have
        completely paid off existing notes payable.
 
 **Net
        Income**
 
 Net
        income was $913,548 or 14.72% of net Sales for the three months ended March
        31,
        2006 compared to $1,458,250 or 4.47% of net Sales for the year ended December
        31, 2005. The increase was due to Sale volumes and decreased costs.
 
 **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 $1,796,535 at March 31, 2006 and current assets
        totaled $5,869,116 at March 31, 2006. The Company's total current liabilities
        were $894,625 at March 31, 2006. Working capital at March 31, 2006 was
        $4,935,140. We believe that the funds available to us are adequate to meet
        our
        operating needs for the remainder of 2006. For the three months ended March
        31,
        2006, net cash used by operating activities was $144,298.
 
 **Capital
        expenditures**
 
 Total
        capital expenditures during the three months ended March 31, 2006 was $534
        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
        March 31, 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.
  4
  **Changes
        in Internal Control over Financial Reporting**
  There
        was
        no change in our internal control over financial reporting that occurred
        during
        the first fiscal quarter of 2006 that has materially affected, or is reasonably
        likely to materially affect, our internal control over financial reporting.
 
 **PART
        II - OTHER INFORMATION**
 **ITEM
        1.**  **LEGAL
        PROCEEDINGS.**
  Neither
        the Company nor its property is a party to any pending legal proceeding.
 
 **ITEM
        2.**  **UNREGISTERED
        SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**  ****
 
 None.
 
 **ITEM
        3.**  **DEFAULTS
        UPON SENIOR SECURITIES**
 
 None.
  **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  There
        were no matters submitted to the stockholders in the first quarter of
        2006.
 
 **ITEM
        5.**  **OTHER
        INFORMATION**
 
 There
        is
        no information required to be disclosed in a report on Form 8-K during the
        first
        quarter of 2006 covered by this Form
        10-QSB but not reported.
 
 **ITEM
        6.**  **EXHIBITS
        AND REPORTS ON FORM 8-K**
 **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
                    of the Chief Executive Officer Pursuant to 18 U.S.C. Section
                    1350, as
                    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002
  
  5
 **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 report to be signed on its behalf
        by the
        undersigned, thereunto duly authorized, on this 12th day of May,
        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 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
              
              
              
              May
                  12, 2006Zhenggang
                  Wang
              
              Chief
                  Executive Officer and Chairman of the Board/s/
                  Jian Liu
              
              
              
              May
                  12, 2006Jian
                  Liu
              
              Chief
                  Financial Officer/s/
                  Jimei LiuJimei
                  Liu
              
              Director
              
              May
                  12, 2006/s/
                  Xiang MaXiang
                  Ma
              
              President
              
              May
                  12, 2006
  6