SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    


    


    FINANCIAL
      STATEMENTS

    


    DECEMBER
      31, 2005 AND 2004

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    TABLE
      OF CONTENTS

     

    
      	
               

            	 	
               

            	 
	
              Report
                of Independent Registered Public Accounting Firm

            	 	 	
              F-3

            	 
	
               

            	 	 	
            	 
	
              Balance
                Sheets 

            	 	 	
              F-4

            	 
	
               

            	 	 	
            	 
	
              Statements
                of Income

            	 	 	
              F-5

            	 
	
               

            	 	 	
            	 
	
              Statements
                of Cash Flows

            	 	 	
              F-6

            	 
	
               

            	 	 	
            	 
	
              Statements
                of Stockholders Equity

            	 	 	
              F-7

            	 
	
               

            	 	 	
            	 
	
              Notes
                to Financial Statements

            	 	 	
              F-8
                - 17

            	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    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:
      MSBCPAS@GMAIL.COM 

    


    


    Board
      of
      Directors and Stockholders of

    Shanghai
      Joy & Harmony Electronics Company Limited

    


    We
      have
      audited the accompanying balance sheet of Shanghai Joy & Harmony Electronics
      Company Limited (“Company”) as of December 31, 2005 and 2004, and the related
      statements of income, comprehensive losses, statement of stockholders’ equity,
      and cash flows for the years then ended. These financial statements are the
      responsibility of the Company’s management. Our responsibility is to express an
      opinion on these financial statements based on our audit.

     

    We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States of America). 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 provides a reasonable basis for our opinion.

    


    In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Shanghai
      Joy & Harmony Electronics Company Limited as
      of
      December 31, 2005 and 2004, and the results of their operations and their cash
      flows for the
      periods then ended.,
      in
      conformity with generally accepted accounting principles in the United States
      of
      America.

    


    


    Morgenstern,
      Svoboda & Baer, CPAs, P.C.

    Certified
      Public Accountants

    


    New
      York,
      NY 

    December
      17, 2006

    


    
      
        
        

      

      
        F-3

        
          

        

      

      
        
        

      

    

    


    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              BALANCE
                SHEET

            
	
              DECEMBER
                31, 2005 AND 2004

            


    

    


    
      	
              ASSETS

            	 	
              2005

            	 	
              2004

            	 
	
              Current
                Assets

            	 	 	 	 	 	
            	 
	
              Cash
                and cash equivalents

            	 	
              $

            	
              642,897

            	 	
              $

            	
              609,059

            	 
	
              Accounts
                receivable, net

            	 	 	
              773,623

            	 	 	
              227,164

            	 
	
              Inventory

            	 	 	
              543,379

            	 	 	
              185,749

            	 
	
              Other
                receivables & Trade Deposits

            	 	 	
              601,076

            	 	 	
              478,937

            	 
	
              Prepaid
                expenses

            	 	 	
              620

            	 	 	
              1,636

            	 
	
              Total
                Current Assets

            	 	 	
              2,561,595

            	 	 	
              1,502,545

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Property
                & equipment, net

            	 	 	
              2,913

            	 	 	
              4,133

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Total
                Assets

            	 	
              $

            	
              2,564,508

            	 	
              $

            	
              1,506,678

            	 
	
               

            	 	 	 	 	 	
            	 
	
               LIABILITIES
                AND STOCKHOLDERS’ EQUITY 

            	 	 	 	 	 	
            	 
	
               

            	 	 	 	 	 	
            	 
	
              Current
                Liabilities

            	 	 	 	 	 	
            	 
	
              Short
                Term Loans

            	 	
              $

            	
              -

            	 	
              $

            	
              182,017

            	 
	
              Accounts
                payable and accrued expenses

            	 	 	
              170,973

            	 	 	
              40,577

            	 
	
              Income
                tax payable

            	 	 	
              167,303

            	 	 	
              -

            	 
	
              Total
                Current Liabilities 

            	 	 	
              338,276

            	 	 	
              222,594

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Stockholders’
                Equity

            	 	 	 	 	 	
            	 
	
               

            	 	 	 	 	 	
            	 
	
              Common
                stock, par value, “nil”

            	 	 	 	 	 	
            	 
	
              shares
                authorized, 500,000 and 500,000 issued and outstanding

            	 	 	
              606,722

            	 	 	
              606,722
                

            	 
	
              Statutory
                reserve

            	 	 	
              238,047

            	 	 	
              101,767
                

            	 
	
              Other
                comprehensive income

            	 	 	
              38,979

            	 	 	
              326

            	 
	
              Retained
                earnings

            	 	 	
              1,342,484

            	 	 	
              575,269

            	 
	
              Total
                Stockholders’ Equity

            	 	 	
              2,226,232

            	 	 	
              1,284,084

            	 
	
              Total
                Liabilities and Stockholders’ Equity

            	 	
              $

            	
              2,564,508

            	 	
              $

            	
              1,506,678

            	 


    

     

     

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

     

    
      
        
        

      

      
        F-4

        
          

        

      

      
        
        

      

    

    


    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENTS
                OF INCOME

            
	
              FOR
                THE YEARS ENDING DECEMBER 31, 2005 AND 2004
                

            


    

     

    
      	
               

            	 	
               2005

            	 	
               2004

            	 
	
               

            	 	
               

            	 	
               

            	 
	
              Sales,
                net

            	 	
              $

            	
              10,409,742

            	 	
              $

            	
              4,711,158

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Cost
                of sales

            	 	 	
              8690,611

            	 	 	
              3,764,637
                

            	 
	
              Gross
                profit

            	 	 	
              1,719,131

            	 	 	
              946,521

            	 
	
               

            	 	 	
            	 	 	
            	 
	
              General
                and administrative expenses

            	 	 	
              365,253

            	 	 	
              266,973

            	 
	
              Income
                from operations

            	 	 	
              1,353,878

            	 	 	
              679,548

            	 
	
               

            	 	 	 	 	 	
            	 
	
              Other
                (Income) Expense

            	 	 	
            	 	 	
            	 
	
              Interest
                income

            	 	 	
              (5,189

            	
              )

            	 	
              (4,400

            	
              )

            
	
              Other
                expense

            	 	 	
              5,394

            	 	 	
              5,476

            	 
	
              Bad
                debt provision

            	 	 	
              2,691

            	 	 	
              1,141

            	 
	
              Total
                Other (Income) Expense

            	 	 	
              2,896

            	 	 	
              2,217

            	 
	
              Income
                before income taxes

            	 	 	
              1,350,982

            	 	 	
              677,331

            	 
	
               

            	 	 	
            	 	 	
            	 
	
              Provision
                for income taxes

            	 	 	
              447,487

            	 	 	
              -0-

            	 
	
              Net
                income 

            	 	
              $

            	
              903,495

            	 	
              $

            	
              677,331

            	 


    

    


    


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

     

    
      
        
        

      

      
        F-5

        
          

        

      

      
        
        

      

    

     

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENTS
                OF CASH FLOWS

            
	
              FOR
                THE YEARS ENDED DECEMBER 31, 2005 AND 2004
                

            


    

     

    
      	 	 	 	
               2005

            	 	 	 	 	
               2004

            	 	 	 
	
              CASH
                FLOWS FROM OPERATING ACTIVITIES 

            	 	 	 	 	 	 	 	 	 	 	 
	
              Net
                Income

            	 	
              $

            	
              903,495

            	 	 	 	
              $

            	
              677,331

            	 	 	 
	
              Adjustments
                to reconcile net income to net cash

            	 	 	 	 	 	 	 	 	 	 	 
	
              provided
                by operating activities:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Depreciation
                

            	 	 	
              1,701

            	 	 	 	 	
              645
                

            	 	 	 
	
              Provision
                for doubtful accounts

            	 	 	
              2,691

            	 	 	 	 	
              1,141

            	 	 	 
	
              (Increase)
                / decrease in assets:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Accounts
                receivables

            	 	 	
              (549,149

            	
              )

            	 	 	 	
              (210,108

            	
              )

            	 	 
	
              Inventory

            	 	 	
              (357,630

            	
              )

            	 	 	 	
              175,766

            	 	 	 
	
              Other
                current assets

            	 	 	
              (121,123

            	
              )

            	 	 	 	
              (400,280

            	
              )

            	 	 
	
              Increase
                / (decrease) in current liabilities:

            	 	 	 	 	 	 	 	 	 	 	 
	
              Accounts
                payable and accrued expenses

            	 	 	
              130,396

            	 	 	 	 	
              29,483

            	 	 	 
	
              Income
                tax payable

            	 	 	
              167,303

            	 	 	 	 	
              -0-

            	 	 	 
	
               

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Net
                cash provided by operating activities

            	 	 	
              177,684

            	 	 	 	 	
              273,978

            	 	 	 
	
               

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              CASH
                FLOWS FROM INVESTING ACTIVITIES

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Purchase
                of property & equipment

            	 	 	
              (481

            	
              )

            	 	 	 	
              (4,777

            	
              )

            	 	 
	
              Net
                cash provided by Investing activities

            	 	 	
              (481

            	
              )

            	 	 	 	
              (4,777

            	
              )

            	 	 
	
              CASH
                FLOWS FROM FINANCING ACTIVITIES

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Short-term
                loans / borrowings (repayments)

            	 	 	
              (182,017

            	
              )

            	 	 	 	
              192,798

            	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 
	
              Net
                cash (used in) provided by financing activities 

            	 	 	
              (182,017

            	
              )

            	 	 	 	
              192,798

            	 	 	 
	
              Effect
                of exchange rate changes on cash and cash equivalents

            	 	 	
              38,653

            	 	 	 	 	
              326

            	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 
	
               

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Net
                change in cash and cash equivalents

            	 	 	
              33,838

            	 	 	 	 	
              462,325

            	 	 	 
	
              Cash
                and cash equivalents, beginning balance

            	 	 	
              609,059

            	 	 	 	 	
              146,734

            	 	 	 
	
              Cash
                and cash equivalents, ending balance

            	 	
              $

            	
              642,897

            	 	 	 	
              $

            	
              609,059

            	 	 	 
	
              SUPPLEMENTAL
                DISCLOSURES:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Cash
                paid during the year for:

            	 	 	 	 	 	 	 	
              
              

            	 	 	 
	
              Income
                tax payments

            	 	
              $

            	
              280,184

            	 	 	 	
              $

            	
              -0

            	- 	 	 
	
              Interest
                payments

            	 	
              $

            	
              -0

            	- 	 	 	
              $

            	
              -0

            	- 	 	 


    

    


    


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

    


    
      
        
        

      

      
        F-6

        
          

        

      

      
        
        

      

    

    


    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF STOCKHOLDERS’ EQUITY

            
	
              FOR
                THE YEAR ENDED DECEMBER 31, 2005 AND
                2004

            


    

     

    
      	 	 	 	 	 	 	 	 	 	
               Other

            	 	 	
               Retained
                Earnings

            	 	 	
               Total

            	 
	 	 	 	
               Common
                Stock

            	 	 	
               Statutory

            	 	 	 Comprehensive	 	 	
               (Accumulated

            	 	 	
               Stockholders’

            	 
	 	 	 	
               Shares

            	 	 	
               Amount

            	 	 	
               Reserve

            	 	 	
               Income

            	 	 	
               Deficit)

            	 	 	
               Equity/Deficit

            	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
              Balance
                January 1, 2004 

            	 	 	
              500,000

            	 	 	
              606,722
                

            	 	 	
            	 	 	
              -0-

            	 	 	
              (295

            	
              )

            	 	
              606,427
                

            	 
	
               

            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 
	
              Transfer
                to statutory reserve

            	 	 	 	 	 	 	 	 	
              101,767

            	 	 	 	 	
              $

            	
              (101,767

            	
              )

            	 	
              -0-

            	 
	
              Foreign
                currency translation adjustments

            	 	 	 	 	 	 	 	 	
            	 	
              $

            	
              326
                

            	 	 	 	 	 	
              326

            	 
	
              net
                income for the period ended 12/31/2004

            	 	 
	 
 	 	 
	  	 	 
	  
  
 
	 	 
	 
  	 	 	
              677,331

            	 	 	
              677,331

            	 
	
              Balance
                December 31, 2004 

            	 	 	
              500,000
                

            	 	 	
              606,722

            	 	 	
              101,767

            	 	 	
              326

            	 	 	
              575,268

            	 	 	
              1,284,084

            	 
	 	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 	 	
            	 
	
              Foreign
                currency translation adjustments

            	 	 	 	 	 	 	 	 	 	 	 	
              38,653

            	 	 	 	 	 	
              38653

            	 
	
              net
                income for the year ended 12/31/2005

            	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
              903,495

            	 	 	
              903,495

            	 
	
              Transferred
                to statutory reserve

            	 	 
	 
	 	 
	 
	 	 	
              136,280

            	 	 
	  
	 	 	
              (136,280

            	
              )

            	 	
              -0-

            	 
	
              Balance
                December 31, 2005

            	 	 	
              500,000

            	 	
              $

            	
              606,722

            	 	
              $

            	
              238,047

            	 	
              $

            	
              38,979

            	 	
              $

            	
              1,342,483

            	 	
              $

            	
              2,226,232

            	 


    

     

    
      
        
        

      

      
        F-7

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTE
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004 

    


    Note
      1 - ORGANIZATION

    


    Shanghai
      Joy & Harmony Electronic Company Limited (the “Company”) was incorporated on
      August 20, 2003 under the laws of the People’s Republic of China (“PRC”). The
      Company is engaged in the business of distributing MP3 and MP4 players, iPod,
      electronic dictionaries, CD players, radios, Walkman, and audio systems and
      speakers at company maintained shops at various retail
      establishments.

    


    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES

    


    Basis
      of Presentation

    


    The
      accompanying 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 Shanghai Joy & Harmony
      Electronics Company Limited were maintained, and its financial statements were
      expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were
      translated into U.S. Dollars (“USD”) in accordance with Statement of Financial
      Accounts Standards (“SFAS”) No. 52, Foreign Currency Translation with the CNY as
      the functional currency. According to the Statement, all assets and liabilities
      were translated at the current exchange rate, stockholders equity are translated
      at the historical rates and income statement items are translated at the average
      exchange rate for the period. The resulting translation adjustments are reported
      under other comprehensive income in accordance with SFAS No. 130, Reporting
      Comprehensive Income as a component of shareholders equity. Transaction gains
      and losses are reflected in the income statement.

    


    
      
        
        

      

      
        F-8

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    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. 

    


    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-9

        
          

        

      

      
        
        

      

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    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 $3,890 and $1,141 as at December 31, 2005 and 2004 respectively.
      

     

    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 December 31, 2005 and 2004 inventory consisted of finished goods
      valued at $334,240 and $286,870 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:

    


    
      	
              Computers
                & office Equipment

            	
              5
                years

            


    

     

    As
      of
      December 31, 2005 and 2004 Property, Plant & Equipment consist of the
      following:

     

    
      
        	 	 	 	
                 2005

              	 	 	
                 2004

              	 
	 	 	 	 	 	 	 	 
	
                Computers
                  and Office equipment

              	 	
                $

              	
                5,258
                  

              	 	 	
                4,777
                  

              	 
	
                 

              	 	 	
                5,258

              	 	 	
                4,777
                  

              	 
	
                Accumulated
                  depreciation

              	 	 	
                (2,345

              	
                )

              	 	
                (644

              	
                )

              
	
                 

              	 	
                $

              	
                2,913

              	 	 	
                4,133

              	 


      

    

     

    
      
        
        

      

      
        F-10

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

     

    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-11

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

     

    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 are 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-12

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    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
      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.


    


    
      
        
        

      

      
        F-13

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    


    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    


    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. 

    


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

    


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

    


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

    


    
      
        
        

      

      
        F-14

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004 

    


    Note
      3 - SHARE EXCHANGE
      AGREEMENT

    


    On
      November 28, 2006 Shanghai Joy & Harmony Electronics Company Limited, a
      Corporation in China (“Company”), and the shareholders of the Company (the
“Shareholders”) entered into a Share Exchange Agreement (the “Agreement”) with
      China 3C Group, a Nevada corporation (“CHCG”), Capital Future Development
      Limited, a BVI corporation (“CFDL”). The Shareholders own all of the outstanding
      equity of the Company (the “Shares”). 

     

    CFDL
      is a
      wholly owned subsidiary of CHCG. CFDL purchase from the Shareholders, and the
      Shareholders desire to sell to CFDL the Shares in exchange for shares of CHCG
      Common Stock, all on the terms and subject to the conditions set forth in this
      Agreement (the “Exchange”). As a result of the Exchange, the Company will merge
      with and into CFDL with the Company being the surviving entity.

     

    As
      full
      consideration for the sale, assignment, transfer and delivery of the Shares
      by
      the Shareholders to CFDL, CHCG shall issue to the Shareholders an aggregate
      of
      2,723,110 shares of newly issued shares of CHCG Common Stock (the “Acquisition
      Shares”)
      at
      $4.039 per share (“Average CHCG Stock Price”) and pay cash (the “Cash
      Component”)
      of
      $7,500,000 to the Shareholders. The Cash Component is payable by CHCG as
      follows: $3,000,000 within 10 business days after the Closing and $4,500,000
      is
      payable six months after the Closing as evidenced by a promissory note. The
      parties understand and acknowledge that such exchange is based upon an
      approximate valuation of the Company at US $18,500,000.

    


    Note
      4 - 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. 

    


    Note
      5 - INCOME
      TAXES

    


    The
      Company is governed by the Income Tax Laws of the PRC. 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
      Company received a notice of exemption from income taxes for 2004.

    


    
      	
              The
                following is a reconciliation of income tax expense:

            	
               

            
	
              12/31/2005

            	
               

            


    

    
       

      
        
          	
                  Current

                	 	
                  $

                	
                  447,487

                	 
	
                  Deferred

                	 	 	 	 
	
                  Total

                	 	
                  $

                	
                  447,487

                	 
	
                  12/31/2004

                	 	 	 	 
	
                  Current

                	 	
                  $

                	
                  -0

                	 
	
                  Deferred

                	 	 	 	 
	
                  Total

                	 	
                  $

                	
                  -0

                	 
	
                  PRC
                    income tax

                	% 	 	
                  33

                	 
	
                  Effective
                    rate

                	% 	 	
                  33

                	 


        

      

       

      
        
          
          

        

        
          F-15

          
            

          

        

        
          
          

        

      

    

     

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    


    Note
      6 - COMMITTMENTS

     

    The
      Company leases office and warehouse facilities under operating leases that
      terminate through 2005 and 2006. Rental expense under these agreements consisted
      of $22,135 and $14,122 for 2005 and 2004 respectively. The Company has the
      following future minimum obligations as of:

     

    
      	 	 	 	 12/31/2005	 	 	 12/31/2004	 
	 	 	 	 	 	 	 	 
	2005 	 	$	-	 	$	14,122	 
	2006 	 	 	22,135	 	 	-	 
	 	 	 	 	 	 	 	 
	Total 	 	$	22,135	 	$	14,122	 


    

     

    Note
      7 - 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 ten
      percent (10%) of the profit after tax to the surplus reserve fund and additional
      five to ten percent to the public affair fund. The public affair fund reserve
      was limited to fifty percent (50%) of the registered capital. Effective January
      1, 2006 there is now only one fund requirement. The reserve is ten percent
      (10%)
      of income after tax, not to exceed fifty percent (50%) 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 funds are 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
      December 31, 2005 and 2004, the Company had allocated $238,047 and $101,767
      respectively to these non-distributable reserve funds. 

    


    Note
      8 - OTHER
      COMPREHENSIVE INCOME

    


    Balances
      of related after-tax components comprising accumulated other comprehensive
      income (loss), included in stockholders equity at December 31, 2005 and December
      31, 2004 are as follows:

    

      
        	 	 	 	
                 Foreign
                  Currency Translation Adjustment

              	 	 	
                 Accumulated
                  Other Comprehensive Income

              	 
	 	 	 	 	 	 	 	 
	
                Balance
                  at January 1, 2004

              	 	
                $

              	
                -0-

              	 	
                $

              	
                -0-

              	 
	
                Change
                  for 2004

              	 	 	
                326

              	 	 	
                326

              	 
	
                Balance
                  at December 31, 2004

              	 	
                $

              	
                326

              	 	
                $

              	
                326

              	 
	
                Change
                  for 2005

              	 	 	
                38,653

              	 	 	
                38,653

              	 
	
                Balance
                  at December 31, 2005

              	 	
                $

              	
                38,979

              	 	
                $

              	
                38,979

              	 


      

    

     

    
      
        
        

      

      
        F-16

        
          

        

      

      
        
        

      

    

     

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    


    Note
      9 -
      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
      10 - MAJOR
      CUSTOMERS AND CREDIT RISK

    


    The
      Company had no customers who accounted for more than ten percent (10%) of
      revenues during the years ended 2005 or 2004. No customers accounted for more
      than ten percent (10%) of the company’s accounts receivable at December 31, 2005
      or 2004. The Company purchased approximately sixty three percent (63%) and
      sixty
      nine percent (69%) of its inventory form three vendors during 2005 and 2004
      respectively

    


    
      
        
        

      

      
        F-17

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    


    FINANCIAL
      STATEMENTS

    


    SEPTEMBER
      30, 2006

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    TABLE
      OF CONTENTS

     

    
      	
              Report
                of Independent Registered Public Accounting Firm

            	 	 	
              F-3

            	 
	
               

            	 	 	
              
              

            	 
	
              Balance
                Sheet

            	 	 	
              F-4

            	 
	
               

            	 	 	
              
              

            	 
	
              Statement
                of Income

            	 	 	
              F-5

            	 
	
               

            	 	 	
              
              

            	 
	
              Statement
                of Cash Flows

            	 	 	
              F-6

            	 
	
               

            	 	 	
              
              

            	 
	
              Statement
                of Stockholders Equity

            	 	 	
              F-7

            	 
	
               

            	 	 	
              
              

            	 
	
              Notes
                to Financial Statements

            	 	 	
              F-8
                - F-17

            	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    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:
      MSBCPAS@gmail.Com 

    


    


    Board
      of
      Directors and Stockholders of

    Shanghai
      Joy & Harmony Electronics Company Limited

    


    


    We
      have
      reviewed the accompanying balance sheets of Shanghai Joy & Harmony
      Electronics Company Limited as of September 30, 2006 and the condensed
      statements of income for the nine-months ended September 30, 2006 and statements
      of cash flows for the nine-month then ended. These financial statements are
      the
      responsibility of the Company’s management. 

    


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

    


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

    


    


    


    Morgenstern,
      Svoboda & Baer, CPAs, P.C.

    Certified
      Public Accountants

    


    New
      York,
      NY 

    December
      17, 2006

    


    
      
        
        

      

      
        F-3

        
          

        

      

      
        
        

      

    

    


    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              BALANCE
                SHEET

            
	
              SEPTEMBER
                30, 2006

            


    

    


    
      	
              ASSETS

            	 	 	
               

            
	
              Current
                Assets

            	 	
               

            	
               

            
	
              Cash
                and cash equivalents

            	 	
              $

            	
              214,561

            	 
	
              Accounts
                receivable, net

            	
               

            	
               

            	
              3,599,680

            	 
	
              Inventory

            	
               

            	
               

            	
              1,021,435

            	
               

            
	
              Other
                Receivable & Trade deposits

            	 	 	
              300,304

            	 
	
              Prepaid
                expenses

            	
               

            	
               


            	
              4,387

            	
               

            
	
              Total
                Current Assets

            	
               

            	
               

            	
              5,140,367
                

            	
               

            
	
               

            	
               

            	
               

            	
               

            	 
	
              Property
                & equipment, net

            	 	
               

            	
              11,342

            	 
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Total
                Assets

            	
               

            	
              $

            	
              5,151,709

            	 
	
               

            	
               

            	
               

            	
               

            	
               

            
	
               LIABILITIES
                AND STOCKHOLDERS’ EQUITY 

            	
               

            	
               

            	
               

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Current
                Liabilities

            	
               

            	
               

            	
               

            	
               

            
	
              Accounts
                payable and accrued expenses

            	
               

            	
              $

            	
              103,162

            	
               

            
	
              Income
                tax payable

            	
               

            	
               

            	
              664,115

            	
               

            
	 	
               

            	
               

            	
               

            	
               

            
	
              Total
                Current Liabilities 

            	
               

            	
               

            	
              767,277

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Stockholders’
                Equity

            	
               

            	
               

            	
               

            	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Common
                stock, $nil par value

            	
               

            	
               

            	 	
               

            
	
              shares
                authorized, 500,000 and 500,000 issued and outstanding

            	
               

            	
               

            	
              606,722

            	
               

            
	
              Statutory
                reserve

            	
               

            	
               

            	
              238,047
                

            	
               

            
	
              Other
                Comprehensive Income

            	 	 	
              140,567

            	 
	
              Retained
                earnings

            	
               

            	
               

            	
              3,399,096

            	
               

            
	
              Total
                Stockholders’ Equity

            	
               

            	
               

            	
              4,384,432

            	
               

            
	
              Total
                Liabilities and Stockholders’ Equity

            	
               

            	
              $

            	
              5,151,709

            	
               

            


    

    


    


    The
      accompanying notes are an integral part of these financial statements


    


    
      
        
        

      

      
        F-4

        
          

        

      

      
        
        

      

    

    


    
      	
               

              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF INCOME

            
	
              FOR
                THE NINE MONTHS ENDING SEPTEMBER 30, 2006
                

            


    

     

    
      	
               

            	
               

            	 	 	
               

            
	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Sales,
                net

            	
               

            	
               

            	
              $

            	
              26,526,830

            	
               

            
	
              Cost
                of sales

            	
               

            	
               

            	
               

            	
              21,504,061

            	
               

            
	
              Gross
                profit

            	
               

            	
               

            	
               

            	
              5,022,769

            	 
	 	 	 	 	 	
               

            
	
               Selling
                & Distribution

            	
               

            	
               

            	
               

            	
              77,722

            	
               

            
	
              General
                and Administrative Expenses

            	
               

            	
               

            	
               

            	
              925,908

            	 
	
              Total
                Operating Expenses

            	
               

            	
               

            	
               

            	
              1,003,630

            	
               

            
	
               Income
                from Operations

            	
               

            	
               

            	
               

            	
              4,019,139

            	
               

            
	
              Other
                (Income) Expense

            	
               

            	
               

            	
               

            	
               

            	
               

            
	
              Interest
                income

            	
               

            	 	
               

            	
              (5,337

            	
              )

            
	
              Other
                expense

            	
               

            	
               

            	
               

            	
              7,959

            	
               

            
	
              Total
                Other (Income) Expense

            	
               

            	
               

            	
               

            	
              2,622

            	
               

            
	
              Income
                before income taxes

            	
               

            	
               

            	
               

            	
              4,016,517

            	 
	
              Provision
                for income taxes

            	
               

            	
               

            	
               

            	
              1,330,798

            	
               

            
	
              Income
                from Continuing Operations

            	 	 	 	
              2,685,719

            	
               

            
	
              Net
                income 

            	
               

            	
               

            	
              $

            	
              2,685,719

            	
               

            


    

    


    


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

    


    
      
        
        

      

      
        F-5

        
          

        

      

      
        
        

      

    

     

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF CASH FLOWS

            
	
              FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006
                

            


    

     

    
      	
              CASH
                FLOWS FROM OPERATING ACTIVITIES

            	 	
               

            	 
	
              Net
                Income

            	 	
              $

            	
              2,685,717

            	 
	
              Adjustments
                to reconcile net income to net cash

            	 	 	 	 
	
              provided
                by operating activities:

            	 	 	
              
              

            	 
	
              Depreciation
                

            	 	 	
              1,805
                

            	 
	
              (Increase)
                / decrease in assets:

            	 	 	
              
              

            	 
	
              Accounts
                receivables

            	 	 	
              (2,826,057

            	
              )

            
	
              Inventory

            	 	 	
              (478,056

            	
              )

            
	
              Prepaid
                expense

            	 	 	
              297,006

            	 
	
              Increase
                / (decrease) in current liabilities:

            	 	 	 	 
	
              Accounts
                payable and accrued expenses

            	 	 	
              12,503

            	 
	
              Value-added
                Tax Liability

            	 	 	
              101,716

            	 
	
              Income
                tax payable

            	 	 	
              314,781

            	 
	
               

            	 	 	
              
              

            	 
	
              Net
                cash provided by operating activities

            	 	 	
              109,415

            	 
	
               

            	 	 	
              
              

            	 
	
              CASH
                FLOWS FROM INVESTING ACTIVITIES

            	 	 	 	 
	
              Acquisitions
                of Property, Plant & Equipment

            	 	 	
              (10,234

            	
              )

            
	
              Net
                cash used by investing activities

            	 	 	
              (10,234

            	
              )

            
	 	 	 	 	 
	
              FINANCING
                REVENUES

            	 	 	 	 
	
              Dividend
                Paid

            	 	 	
              (629,105

            	
              )

            
	
              Net
                Cash Provided By (used in) Financing Activities

            	 	 	
              (629,105

            	
              )

            
	
              Effect
                of exchange rate changes on cash and cash equivalents

            	 	 	
              101,588
                

            	 
	
               

            	 	 	
              
              

            	 
	
              Net
                change in cash and cash equivalents

            	 	 	
              (428,336
                

            	
              )

            
	
              Cash
                and cash equivalents, beginning balance

            	 	 	
              642,897

            	 
	
              Cash
                and cash equivalents, ending balance

            	 	
              $

            	
              214,561

            	 
	
              SUPPLEMENTAL
                DISCLOSURES:

            	 	 	
              
              

            	 
	
              Cash
                paid during the year for:

            	 	 	
              
              

            	 
	
              Income
                tax payments

            	 	
              $

            	
              833,986

            	 
	
              Interest
                payments

            	 	
              $

            	
              -0-

            	 


    

    


    


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

    


    
      
        
        

      

      
        F-6

        
          

        

      

      
        
        

      

    

     

    
      	
              SHANGHAI
                JOY & HARMONY ELECTRONICS COMPANY LIMITED

            
	
              STATEMENT
                OF STOCKHOLDERS’ EQUITY

            
	
              FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2006
                

            


    

     

    
      	 	 	 	 	 	 	
               Other

            	 	 	 	 	 	 	 	 	
               Total

            	 
	 	 	 	
               Common
                Stock

            	 	 	
               Comprehensive

            	 	 	
               Retained
                

            	 	 	
               Statutory

            	 	 	
               Shareholders

            	 
	 	 	 	
               Shares

            	 	 	
               Amount

            	 	 	
               Income

            	 	 	
               Earnings

            	 	 	
               Reserve

            	 	 	
               Equity

            	 
	Balance
              January 1, 2006 	 	 	500,000	 	 	
              606,722

            	 	 	
              38,979

            	 	 	1,342,484	 	 	
              238,047

            	 	 	2,226,232	 
	
              Cash
                Dividend 

            	 	 	 	 	 	 	 	 	 	 	 	
              (629,105

            	) 	 	 	 	 	
              (629,105

            	
              )

            
	
              Foreign
                currency translation adjustments 

            	 	 	 	 	 	 	 	 	 101,588	 	 	 	 	 	 	 	 	 101,588	 
	
              Net
                income for the nine months
                ended September 30, 2006 

            	 	 	 	 	 	 	 	 	 	 	 	 
2,685,717	 	 	 	 	 	 
2,685,717	 
	Balance
              September 30, 2006 	 	 	 500,000	 	
              $ 

            	 606,722	 	
              $ 

            	 140,567	 	
              $ 

            	 3,402,096	 	 	 238,047	 	 	 4,384,432	 


    

     

    


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

    


    
      
        
        

      

      
        F-7

        
          

        

      

      
        
        

      

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTE
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006 

    


    Note
      1 - ORGANIZATION

    


    Shanghai
      Joy & Harmony Economic Development Co., Ltd. (the “Company”) was
      incorporated on August 20, 2003 under the laws of the People’s Republic of China
      (PRC). The Company is engaged in the business of distributing MP3 and MP4
      players, iPod, electronic dictionaries, CD players, radios, Walkman, and audio
      systems and speakers at company maintained shops at various retail
      establishments.

    


    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES

    


    Basis
      of Presentation

    


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

    


    Translation
      Adjustment

    


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

    


    
      
        
        

      

      
        F-8

        
          

        

      

      
        
        

      

    

     

    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    


    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    


    Use
      of
      Estimates 

    


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

    


    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-9

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    


    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    


    Cash
      and Cash Equivalents 

    


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

    


    Accounts
      Receivable 

    


    The
      Company maintains reserves for potential credit losses on accounts receivable.
      Management reviews the composition of accounts receivable and analyzes
      historical bad debts, customer concentrations, customer credit worthiness,
      current economic trends and changes in customer payment patterns to evaluate
      the
      adequacy of these reserves. Terms of the sales vary. Reserves are recorded
      primarily on a specific identification basis. Allowance for doubtful debts
      amounted to $3,890 as at September 30, 2006. 

     

    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 September 30, 2006 inventory consisted of finished goods valued
      at
      $1,021,435.

     

    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:

    


    
      	
              Computers
                & Office Equipment

            	
              5
                years

            


    

     

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

    


    
      	
              Computers
                & Office equipment

            	
               

            	
               

            	
              15,442
                

            	
               

            
	
               

            	
               

            	
               

            	
              15,442
                

            	
               

            
	
              Accumulated
                depreciation

            	
               

            	
               

            	
              (4,150

            	
              )

            
	
               

            	
               

            	
              $

            	
              11,342

            	
               

            


    

     

    
      
        
        

      

      
        F-10

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

     

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     

    Long-Lived
      Assets 

     

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

     

    Stock-Based
      Compensation 

     

    In
      October 1995, the 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-11

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

     

    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    


    Advertising

    


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

     

    Income
      Taxes

     

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

     

    Basic
      and Diluted Earnings Per Share 

     

    Earnings
      per share 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-12

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      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
      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.


    


    
      
        
        

      

      
        F-13

        
          

        

      

      
        
        

      

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    DECEMBER
      31, 2005 AND 2004

    


    


    Note
      2 - SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

    


    


    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. 

    


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

    


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

    


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

     

    
      
        
        

      

      
        F-14

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006 

    


     

     Note
      3 - SHARE EXCHANGE
      AGREEMENT

    


    On
      November 28, 2006 Shanghai Joy & Harmony Electronics Company Limited, a
      Corporation in China (“Company”), and the shareholders of the Company (the
“Shareholders”) entered into a Share Exchange Agreement (the “Agreement”) with
      China 3C Group, a Nevada corporation (“CHCG”), Capital Future Development
      Limited, a BVI corporation (“CFDL”). The Shareholders own all of the outstanding
      equity of the Company (the “Shares”). 

     

    CFDL
      is a
      wholly owned subsidiary of CHCG. CFDL purchase from the Shareholders, and the
      Shareholders desire to sell to CFDL the Shares in exchange for shares of CHCG
      Common Stock, all on the terms and subject to the conditions set forth in this
      Agreement (the “Exchange”). As a result of the Exchange, the Company will merge
      with and into CFDL with the Company being the surviving entity.

     

    As
      full
      consideration for the sale, assignment, transfer and delivery of the Shares
      by
      the Shareholders to CFDL, CHCG shall issue to the Shareholders an aggregate
      of
      2,723,110 shares of newly issued shares of CHCG Common Stock (the “Acquisition
      Shares”)
      at
      $4.039 per share (“Average CHCG Stock Price”) and pay cash (the “Cash
      Component”)
      of
      $7,500,000 to the Shareholders. The Cash Component is payable by CHCG as
      follows: $3,000,000 within 10 business days after the Closing and $4,500,000
      is
      payable six months after the Closing as evidenced by a promissory note. The
      parties understand and acknowledge that such exchange is based upon an
      approximate valuation of the Company at US $18,500,000.

    


    Note
      4 - 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. 

    


    Note
      5 - INCOME
      TAXES

    


    The
      Company is governed by the Income Tax Laws of the PRC. 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:

            
	
              9/30/2006

            


    

     

    
      	
              Current

            	
               

            	
              $

            	
              1,330,798

            	
               

            
	
              Deferred

            	
               

            	
               

            	 	
               

            
	
              Total

            	
               

            	
              $

            	
              1,330,798

            	
               

            
	
              PRC
                income tax

            	
              %

            	
               

            	
              33 

            	
               

            
	
              Effective
                rate

            	
              %

            	
               

            	
              33 

            	
               

            


    

    


    
      
        
        

      

      
        F-15

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    


    


     Note
      6 - COMMITTMENTS

     

    The
      Company leases office and warehouse facilities under operating leases that
      terminate through 2007. Rental expense under these agreements consisted of
      $18,676 for the nine months ended September 30, 2006. The Company has the
      following future minimum obligations as of September 30, 2006:

     

    
      	2007	
              19,385    

            


    

    


    Note
      7 - 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 ten
      percent (10%) of the profit after tax to the surplus reserve fund and additional
      five to ten percent to the public affair fund. The public affair fund reserve
      was limited to fifty percent (50%) of the registered capital. Effective January
      1, 2006 there is now only one fund requirement. The reserve is ten percent
      (10%)
      of income after tax, not to exceed fifty percent (50%) of registered
      capital.

    


    Statutory
      Reserve funds are restricted for set off against losses, expansion of production
      and operation or increase in register capital of the respective company.
      Statutory public welfare fund is restricted to the capital expenditures for
      the
      collective welfare of employees. These reserves are not transferable to the
      Company in the form of cash dividends, loans or advances. These reserves are
      therefore not available for distribution except in liquidation. As of
      September 30, 2006, the Company had allocated $238,047 to these
      non-distributable reserve funds. 

    


    Note
      8 - OTHER
      COMPREHENSIVE INCOME

    


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

    


    
      	
               

            	 	
              Foreign
                Currency Translation Adjustment

            	 	
              Accumulated
                Other Comprehensive Income

            	 
	
              Balance
                at December 31, 2005

            	 	
              $

            	
              38,979

            	 	
              $

            	
              38979

            	 
	
              Change
                for 2005

            	 	 	
              101,588

            	 	 	
              101,588

            	 
	
              Balance
                at September 31, 2005

            	 	
              $

            	
              140,567

            	 	
              $

            	
              140,567

            	 


    

    


    
      
        
        

      

      
        F-16

        
          

        

      

      
        
        

      

    

    


    SHANGHAI
      JOY & HARMONY ELECTRONICS COMPANY LIMITED

    NOTES
      TO FINANCIAL STATEMENTS

    SEPTEMBER
      30, 2006

    


    


    Note
      9 -
      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
      10 - MAJOR
      CUSTOMERS AND CREDIT RISK

    


    During
      2006 the Company had no customers accounting for more than ten percent (10%)
      of
      sales and no customers accounted for more than ten percent (10%) of the
      Company’s accounts receivable at September 30, 2006. The Company purchased
      approximately 75.6% of their inventory from four vendors during 2006.


    


    
      
        
        

      

      
        F-17