**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 June
      30, 2006 _____.








[_]
      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.
                EmployerIdentification
                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 [_]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act):  Yes [_] No [X]





As
      of
      August 7, 2006, the registrant had 48,850,194 shares
      of common stock outstanding.





Transitional
      Small Business Disclosure Format (Check one):  Yes [_] No
      [X]





**PART
                  I. FINANCIAL INFORMATION**
              ******Page(s)**Item
                  1.Financial
                  Statements:Balance
                  Sheets as of June 30, 2006 (unaudited) and December 31,
                  2005
              3Statements
                  of Operations for the Six Months Ended June 30, 2006 and 2005
                  (unaudited)
              4Statements
                  of Cash Flows for the Six Months ended June 30, 2006 and 2005
                  (unaudited)
              5Notes
                  to Financial Statements
              7Item
                  2.Management’s
                  Discussion and Analysis Or Plan of Operations
              19Item
                  3.Controls
                  and Procedures
              22**PART
                  II. OTHER INFORMATION**Item
                  1.Legal
                  Proceedings
              22Item
                  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
              24Exhibit
                  Index





Exhibit
      31.1  Certification
      by Zhenggang Wang, Chief Executive Officer, pursuant


to
      Rule
      13a-14(a) and 15d-14(a) of the Securities and Exchange Act of


1934
      as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act


of
      2002
      for the quarterly period ended June 30, 2006.





Exhibit
      31.2  Certification
      by Jian Liu, Chief Financial Officer, pursuant


to
      Rule
      13a-14(a) and 15d-14(a) of the Securities and Exchange Act of


1934
      as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act


of
      2002
      for the quarterly period ended June 30, 2006.





Exhibit
      32.1  Certification
      by Zhenggang Wang, Chief Executive Officer pursuant to


18
      U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the


Sarbanes-Oxley
      Act of 2002 for the quarterly period ended June 30, 2006.





Exhibit
      32.2  Certification
      by Jian Liu, Chief Financial Officer pursuant to


18
      U.S.C.
      Section 1350, as adopted pursuant to Section 906 of the


Sarbanes-Oxley
      Act of 2002 for the quarterly period ended June 30, 2006.














-i-







PART
        I.
        FINANCIAL INFORMATION
 
 **Item
        1.**   **Financial
        Statements**
 
 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 June 30, 2006 and the consolidated condensed statements
        of income for the six and three ended June 30, 2006 and consolidated statements
        of cash flows for the six 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
 July
        28,
        2006
 
  
 
 Report
        of
        Independent Registered Public Accounting Firm
  1
  
 
 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
   2
  
 **CHINA
                  3C GROUP INC. AND SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEET****(UNAUDITED)****JUNE
                  30, 2006 AND DECEMBER 31,
                  2005**
  **ASSETS**
              
              **2006**
              
              **2005****Current
                  Assets**Cash
                  and cash equivalents
              
              $
              3,274,231
              
              $
              1,949,222Accounts
                  receivable, net
              
              
              2,264,329
              
              
              913,215Inventory
              
              
              935,775
              
              
              602,974Advance
                  to supplier
              
              
              2,087,408
              
              
              372,000Refundable
                  Deposits
              
              
              931Prepaid
                  expenses
              
              
              194,419
              
              
              139,193Total
                  Current Assets
              
              
              8,757,093
              
              
              3,976,604**Property
                  & equipment, net**
              
              
              38,392
              
              
              43,662**Total
                  Assets**
              
              $
              8,795,485
              
              $
              4,020,266**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  LiabilitiesAccounts
                  payable and accrued expenses
              
              $
              391,311
              
              $
              111,296Income
                  tax payable
              
              
              1,110,748
              
              
              222,550Notes
                  payable
              
              
              2,629
              
              
              7,769Total
                  Current Liabilities
              
              
              1,504,688
              
              
              341,615**Stockholders'
                  Equity**Common
                    stock, $.001 par value, 100,000,000shares authorized, 48,850,077
                    and 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
              
              
              122,907
              
              
              74,950Retained
                  earnings
              
              
              4,160,680
              
              
              984,436Total
                  Stockholders' Equity
              
              
              7,290,797
              
              
              3,678,651Total
                  Liabilities and Stockholders' Equity
              
              $
              8,795,485
              
              $
              4,020,266
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 3
  
 **CHINA
                  3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF INCOME****(UNAUDITED)****FOR
                  THE SIX AND THREE MONTHS ENDED JUNE 30,
                  2006**
  Six
                  Months Ended6/30/2006
              
              Three
                  Months Ended3/31/2006Sales,
                  net
              
              $
              42,068,945
              
              $
              28,618,196Cost
                  of sales
              
              
              35,867,624
              
              
              24,347,343**Gross
                  profit**
              
              
              6,201,321
              
              
              4,270,853General
                  and administrative expenses
              
              
              1,408,990
              
              
              903,938**Income
                  from operations**
              
              
              4,792,331
              
              
              3,366,915Other
                  (Income) ExpenseInterest
                  income
              
              
              (8,347
              )
              
              (4,249
              )Other
                  expense
              
              
              5,772
              
              
              281Interest
                  expense
              
              
              140
              
              
              54Total
                  Other (Income) Expense
              
              
              (2,435
              )
              
              (3,914
              )**Income
                  before income taxes**
              
              
              4,794,766
              
              
              3,370,828Provision
                  for income taxes
              
              
              1,618,522
              
              
              1,108,133**Net
                  income**
              
              $
              3,176,244
              
              $
              2,262,695**Net
                  income per share:**Basic
                  & diluted
              
              $
              0.07
              
              $
              0.05**Weighted
                  average number of shares outstanding:**Basic
                  & diluted
              
              
              44,360,077
              
              
              44,360,077
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  4
 
 
 **CHINA
                  3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS****(UNAUDITED)****FOR
                  THE SIX MONTHS ENDED JUNE 30, 2006 AND YEAR ENDED DECEMBER 31,
                  2005**
 2006
              
              
              2005**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Income
              
              $
              3,176,244
              
              $
              1,458,250Adjustments
                    to reconcile net income to net cashprovided by operating
                    activities:Depreciation
              
              
              8,457
              
              
              17,420Loss
                  on asset disposition
              
              
              201Provision
                  for bad debts
              
              
              4,639Issuance
                  of shares for consultants
              
              
              
              
              
              225,680Amortization
                  of deferred consulting expense
              
              
              200,000
              
              
              12,055Shares
                  to be issued to consultants
              
              
              
              
              
              498,000(Increase)
                  / decrease in assets:Accounts
                  receivables
              
              
              (1,355,651
              )
              
              (286,498
              )Inventory
              
              
              (332,801
              )
              
              (421,658
              )Prepaid
                  expense
              
              
              132,719
              
              
              (42,522
              )Advance
                  to supplier
              
              
              (1,715,408
              )
              
              (372,000
              )Deposits
              
              
              (931
              )
              
              1,288Increase
                  / (decrease) in current liabilities:Accounts
                  payable and accrued expenses
              
              
              280,015
              
              
              (267,816
              )Income
                  tax payable
              
              
              888,196
              
              
              122,067Total
                  Adjustments
              
              
              (1,890,564
              )
              
              (513,984
              )**Net
                  cash provided by operating activities**
              
              
              1,285,680
              
              
              944,266**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of property & equipment
              
              
              (3,860
              )
              
              (2,308
              )Proceeds
                  from asset sales
              
              
              372**Net
                  cash provided by Investing activities**
              
              
              (3,488
              )
              
              ---**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
              
              
              (5,140
              )
              
              (9,807
              )**Net
                  cash (used in) provided by financing activities**
              
              
              (5,140
              )
              
              517,936Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              47,957
              
              
              19,670Net
                  change in cash and cash equivalents
              
              
              1,325,009
              
              
              1,479,564**Cash
                  and cash equivalents, beginning balance**
              
              
              1,949,222
              
              
              469,658**Cash
                  and cash equivalents, ending balance**
              
              $
              3,274,231
              
              $
              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.
    5
  
 **CHINA
                  3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY****(UNAUDITED)****FOR
                  THE SIX MONTHS ENDED JUNE 30, 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
              
              
              
              
              
              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
              )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
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              47,957
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              47,957income
                  for the six Months ended June 30, 2006
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,176,244
              
              
              3,176,244Transferred
                  To prepaid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              387,945
              
              
              
              
              
              
              
              
              
              
              
              387,945**Balance
                  March 31, 2006**
              
              
              48,930,680
              
              
              48,850
              
              
              
              
              
              2,606,330
              
              
              122,907
              
              
              
              
              
              (50,000
              )
              
              402,030
              
              
              4,160,680
              
              
              7,290,797
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 6
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        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”) 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.
  7
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        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 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.
 
  8
   **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        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 $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 June 30, 2006 and December 31, 2005 inventory consisted of finished
        goods valued at $935,775 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
        June 30, 2006 Property, Plant & Equipment consist of the
        following:
 
 Automobile
              
              $
              95,360Office
                  equipment
              
              
              42,799138,059Accumulated
                  depreciation
              
              
              (99,667
              )$
              38,392
 9
 
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        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
        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.
  10
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        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 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.
   11
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 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.
 
 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.
   12
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 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
        June 30, 2006 and December 31, 2005 the company had paid $2,087,408 and
        $372,000, respectively as advances to suppliers.
  **Note
        4 -** **Notes
        Payable**
 
 At
        June
        30, 2006, the Company had borrowings outstanding in the aggregate amount
        of
        $2,629. Notes Payable were as follows on June 30, 2006:
 
 **Description**Secured
                  note payable to a bank in China, interest at 4.941% per annum,
                  due on July
                  30, 2006
              
              $
              1,720Secured
                  note payable to a bank in China, interest at 4.941% per annum,
                  due on
                  August 12, 2006
              
              
              909Total
              
              $
              2,629
   13
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 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%. For the six months ended June 30,
        2006
        and for the year ended December 31, 2005, $200,000 and $12,055 of consulting
        fee
        was expensed relating to the warrants, respectively.
  14
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 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.
 
  15
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 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:6/30/2006
              
              U.S.
              
              State
              
              International
              
              TotalCurrent
              
              $
              0
              
              $
              0
              
              $
              1,618,522
              
              $
              1,618,522DeferredTotal
              
              $
              0
              
              $
              0
              
              $
              1,618,522
              
              $
              1,618,52212/31/2005
              
              
              U.S.
              
              
              State
              
              
              International
              
              
              TotalCurrent
              
              $
              0
              
              $
              800
              
              $
              1,087,221
              
              $
              1,088,021DeferredTotal
              
              $
              0
              
              $
              800
              
              $
              1,087,221
              
              $
              1,088,021Reconciliation
                  of the differences between the statutory U.S. Federal income tax
                  rate and
                  the effective rate is as follows:
  6/30/2006
              
              
              12/31/2005US
                  statutory tax rate
              
              
              34
              %
              
              34
              %Foreign
                  income not recognized in US
              
              
              -34
              %
              
              -34
              %PRC
                  income tax
              
              
              33
              %
              
              33
              %Effective
                  rate
              
              
              15
              %
              
              15
              %
 
 **Note
        10 -** **Committments**
  The
        Company leases various office facilities under operating leases that have
        terminated during 2006. Rental expense for these leases consisted of $23,601
        for
        the six months ended June 30, 2006. The Company has no future minimum lease
        obligations.
 
  16
  
 **CHINA
        3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **JUNE
        30, 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
        June 30, 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 June 30, 2006 and December
        31, 2005 are as follows:
 
 Foreign
                  Currency Translation Adjustment
              
              Accumulated
                  Other Comprehensive IncomeBalance
                  at December 31, 2004
              
              $
              
              
              $Change
                  for 2005
              
              
              74,950
              
              
              74,950Balance
                  at December 31, 2005
              
              $
              74,950
              
              $
              74,950Change
                  6 months ended June 30, 2006
              
              
              47,957
              
              
              47,957Balance
                  at June 30, 2006
              
              $
              122,907
              
              $
              122,907
 
 **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 16.72% of its sales from five customers during
        the
        period ended June 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
        June 30, 2006.
 
  17
  
 
 **Note
        15 - Reclassifications**
 
 Certain
        prior period amounts have been reclassified to conform to the six months
        ended
        June 30, 2006 presentation.
 
  18
  **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 of Financial Condition and
        Results of Operations” in Part II, Item 7. 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”) 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.
  19
  
 **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 6 months ended June 30, 2006 and, the 3 months, ended
        June
        30, 2006. As the reverse merger took place on December 31, 2005, no comparative
        figures are available for June 30, 2005.
 
 **Q2**
              
              **Q1****2006**
              
              **2006**Sales,
                  net
              
              $
              28,618,196
              
              $
              13,450,749Cost
                  of sales
              
              
              24,347,343
              
              
              11,520,281General
                  and Administrative Expense
              
              
              903,938
              
              
              505,052Income
                  from Operations
              
              $
              3,366,915
              
              $
              1,425,416
 
 **Net
        sales**
 
 Net
        sales
        for the three months ended June 30, 2006 totaled $28,618,196 compared to
        $13,450,749 for the 3 months ended March 31, 2006. The increase was due to
        increased sales volume from new products and existing products during the
        three
        months ended June 30, 2006.
  **Cost
        of Sales**
  Cost
        of
        sales for the three months ended June 30, 2006 totaled $24,347,343 or
        approximately 85.08% of net sales compared to $11,520,281 or approximately
        85.65% for the three months ended March 31, 2006. The cost of sales as a
        percentage remains stable during the 3 months ended June 30, 2006.
 
 **Gross
        Profit Margin**
 
 Gross
        profit margin for the three months ended June 30, 2006 was 14.92% compared
        to
        14.35% for the 3 months ended March 31, 2006. The gross profit margin remains
        stable during the three months ended June 30, June.
 
 **Operating
        Expense**
 
 General
        and administrative expense for the three months ended June 30, 2006 totaled
        $903,938 or approximately 3.16% of net sales, compared to $505,052 or
        approximately 3.75% for the three months ended March 31, 2006. The decrease
        of
        0.59% was due to the benefit from scale of operations in that the increment
        in
        net sales is higher than the increment in overall general and administrative
        expenses.
 
 **Income
        from Operations**
 
 Income
        from operations for the three months ended June 30, 2006 was $3,366,915 or
        12.12% of net Sales as compared to income from operations of $1,425,916 for
        the
        three months ended March 31, 2006 or 10.6% 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 June 30, 2006 totaled $54 compared to
        $86 for
        the three months ended March 31, 2006. By August of 2006 the company will
        have
        completely paid off existing notes payable.
  20
  
 **Net
        Income**
 
 Net
        income was $2,262,695 or 7.91% of net Sales for the three months ended June
        30,
        2006 compared to $913,548 or 6.79% of net Sales for the 3 months ended March
        31,
        2006. The increase in percentage was due to slight increase in gross profit
        margin and decrease in cost.
 
 **Segment
        Performance**
 
 **HWDA**
              
              **YYXC**Q2
                  2006
              
              Q1
                  2006
              
              Q2
                  2006
              
              
              
              
              
              Q1
                  2006********
              
              
              
              ********
              
              ********
              
              
              
              ************
              
              **Fixed
                    line**
              
              
              
              ****
              
              **Fixed
                    line****Mobile
                  phone**
              
              **Mobile
                  phone**
              
              **Fax
                  machine**
              
              **Telephone****sets**
              
              **Total**
              
              **Fax
                  machine**
              
              **Telephone****Sets**
              
              **Total**Operating
                  revenue
              
              
              15,132,322
              
              
              6,012,716
              
              
              13,194,912
              
              
              290,961
              
              
              13,485,873
              
              
              7,438,033
              
              
              0
              
              
              7,438,033Cost
                  of operating revenue
              
              
              (13,156,757
              )
              
              (5,329,682
              )
              
              (10,939,506
              )
              
              (251,080
              )
              
              (11,190,586
              )
              
              (6,190,599
              )
              
              0
              
              
              (6,190,599
              )1,975,566
              
              
              683,034
              
              
              2,255,406
              
              
              39,881
              
              
              2,295,287
              
              
              1,247,434
              
              
              0
              
              
              1,247,434General
                    and administrative expenses
              
              
              (307,660
              )
              
              (141,751
              )
              
              
              
              
              
              
              
              (300,861
              )
              
              
              
              
              
              
              
              (210,396
              )Income
                  from operations
              
              
              1,667,905
              
              
              541,283
              
              
              
              
              
              
              
              
              1,994,427
              
              
              
              
              
              
              
              
              1,037,038Other
                  Income / (Expense)Interest
                  income
              
              
              973
              
              
              663
              
              
              
              
              
              
              
              
              1,469
              
              
              
              
              
              
              
              
              1,259Other
                  expense
              
              
              (252
              )
              
              (159
              )
              
              
              
              
              
              
              
              (28
              )
              
              
              
              
              
              
              
              (5,332
              )Interest
                  expense
              
              
              (32
              )
              
              (47
              )
              
              
              
              
              
              
              
              (22
              )
              
              
              
              
              
              
              
              (39
              )Total
                  Other Income / (Expense)
              
              
              689
              
              
              457
              
              
              
              
              
              
              
              
              1,419
              
              
              
              
              
              
              
              
              (4,112
              )Income
                  before income taxes
              
              
              1,668594
              
              
              541,740
              
              
              
              
              
              
              
              
              1,995,846
              
              
              
              
              
              
              
              
              1,032,926Provision
                  for income taxes
              
              
              514,685
              
              
              178,790
              
              
              
              
              
              
              
              
              593,448
              
              
              
              
              
              
              
              
              331,599Net
                  income
              
              
              1,153,909
              
              
              362,950
              
              
              
              
              
              
              
              
              1,402,397
              
              
              
              
              
              
              
              
              701,327
 
 YYXC
        commenced a new line of activity distributing fixed line telephone sets from
        May
        2006 during the three months ended June 30, 2006. In addition, other
        subsidiaries incurred general and administrative expenses totaling $295,417
        for
        the three months ended June 30, 2006, and interest income of
        $1,808.
 
 **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 $3,274,231 at June 30, 2006 and current assets
        totaled $8,747,093 at June 30, 2006. The Company’s total current liabilities
        were $1,504,688 at June 30, 2006. Working capital at June 30, 2006 was
        $7,252,405. 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 June
        30,
        2006, net cash provided by operating activities was $1,429,978.
   21
  **Capital
        expenditures**
 
 Total
        capital expenditures during the three months ended June 30, 2006 was $3,860
        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
        June 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.
 
 **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.
  22
  
 **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.****Exhibit****s.**
  **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 report to be signed on its behalf
        by the
        undersigned, thereunto duly authorized, on this 7 th day of
        August, 2006.
 
  **CHINA
                  3C GROUP**By:
              /s/ Zhenggang
                  WangName:  
                  Zhenggang Wang
                Title:    
                  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
              
              
              
              August
                  7, 2006Zhenggang
                  Wang
              
              Chief
                  Executive Officer and Chairman/s/
                  Jian Liu
              
              
              
              August
                  7, 2006Jian
                  Liu
              
              Chief
                  Financial Officer/s/
                  Xiang Ma
              
              
              
              August
                  7, 2006Xiang
                  Ma
              
              President/s/
                  Jimei Liu
              
              
              
              August
                  7, 2006Jimei
                  Liu
              
              Director/s/
                  Weikang GuWeikang
                  Gu
              
              Director
              
              August
                  7, 2006/s/
                  Rongjin WengRongjin
                  Weng
              
              Director
              
              August
                  7, 2006/s/
                  Chenghua ZhuChenghua
                  Zhu
              
              Director
              
              August
                  7, 2006/s/
                  Mingjun ZhuMingjun
                  Zhu
              
              Director
              
              August
                  7, 2006
   
 24