UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

[X]      QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
         OF 1934

         For the quarterly period ended September 30, 2004

[_]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
         OF 1934

         For the transition period from ________ to _________

                        Commission file number: 333-42036

                                Soyo Group, Inc.
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


           Nevada                                               95-4502724
-------------------------------                           ----------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                            Identification Number)


1420 South Vintage Avenue, Ontario, California                     91761
----------------------------------------------                  ----------
   (Address of principal executive offices)                     (Zip Code)


                                 (909) 292-2500
              ----------------------------------------------------
              (Registrant's telephone number, including area code)


                                 Not Applicable
               ---------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

         Indicate by check mark whether the registrant is an  accelerated  filer
(as defined in Rule 12b-2 of the Act). [ ]

         As of September  30, 2004,  the  registrant  had  40,000,000  shares of
common stock issued and outstanding.

         Documents incorporated by reference: None.




<PAGE>

                         SOYO GROUP, INC. AND SUBSIDIARY

                                      INDEX


PART I.   FINANCIAL INFORMATION

   Item 1.  Financial Statements

            Condensed Consolidated Balance Sheets - September 30, 2004
            (Unaudited) and December 31, 2003

            Condensed Consolidated Statements of Operations (Unaudited) -
            Three Months and Nine Months Ended September 30, 2004 and 2003

            Condensed Consolidated Statements of Cash Flows (Unaudited) -
            Nine Months Ended September 30, 2004 and 2003

            Notes to Condensed Consolidated Financial Statements (Unaudited) -
            Three Months and Nine Months Ended September 30, 2004 and 2003


   Item 2.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations

   Item 3.  Quantitative and Qualitative Disclosures about Market Risk

   Item 4.  Controls and Procedures


PART II.  OTHER INFORMATION

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

   Item 6.  Exhibits


SIGNATURES








                                       2
<PAGE>

                         Soyo Group, Inc. and Subsidiary
                      Condensed Consolidated Balance Sheets


                                                 September 30,     December 31,
                                                      2004             2003
                                                 -------------    -------------
                                                                   (Unaudited)

ASSETS

CURRENT
  Cash and cash equivalents                      $   1,270,512    $     717,196
  Accounts receivable, net of
    allowance for doubtful accounts
    of $334,212 and $856,386 at
    September 30, 2004 and December
    31, 2003, respectively                           5,595,857        6,818,729
  Inventories, including $1,725,354
    and $3,426,342 purchased from
    Soyo Computer, Inc. at September
    30, 2004 and December 31, 2003,
    respectively                                     4,787,195        5,036,125
  Prepaid expenses                                      22,980           43,973
  Income tax refund receivable                          47,000           47,000
                                                 -------------    -------------
                                                    11,723,544       12,663,023
                                                 -------------    -------------

Property and equipment                                 241,353           86,483
Less:  accumulated depreciation
  and amortization                                     (66,497)         (45,088)
                                                 -------------    -------------
                                                       174,856           41,395
                                                 -------------    -------------

Deposits                                                48,868           25,035
                                                 -------------    -------------
                                                 $  11,947,268    $  12,729,453
                                                 =============    =============













                                   (continued)

                                       3
<PAGE>

                         Soyo Group, Inc. and Subsidiary
                Condensed Consolidated Balance Sheets (continued)


                                                 September 30,     December 31,
                                                      2004             2003
                                                 -------------    -------------
                                                                   (Unaudited)

LIABILITIES

CURRENT
  Accounts payable -
    Soyo Computer, Inc.                          $   3,378,191    $   6,557,253
    Other                                            8,300,440        5,475,999
  Accrued liabilities                                  692,200          592,984
  Advances from officer, director
    and major shareholder                              447,707          240,000
  Notes payable                                        913,750             --
                                                 -------------    -------------
                                                    13,732,288       12,866,236
                                                 -------------    -------------


NON-CURRENT
  Long-term payable - Soyo
    Computer, Inc.                                        --         12,000,000
                                                 -------------    -------------


SHAREHOLDERS' DEFICIENCY
Preferred stock, $0.001 par value
  Authorized - 10,000,000 shares
  Issued and outstanding -
    1,000,000 shares of Class A
      Convertible Preferred Stock,
      $1.00 per share stated
      liquidation value
      ($1,000,000 aggregate
      liquidation value)                                 1,000            1,000
    2,575,562 shares of Class B
      Convertible Preferred Stock,
      $1.00 per share stated
      liquidation value
      ($2,575,562 aggregate
      liquidation value)                             1,449,993             --
Common stock, $0.001 par value
  Authorized - 75,000,000 shares
  Issued and outstanding -
    40,000,000 shares                                   40,000           40,000
  Additional paid-in capital                        11,155,000          459,000
  Accumulated deficit                              (14,431,013)     (12,636,783)
                                                 -------------    -------------
                                                    (1,785,020)     (12,136,783)
                                                 -------------    -------------
                                                 $  11,947,268    $  12,729,453
                                                 =============    =============




     See accompanying notes to condensed consolidated financial statements.

                                       4
<PAGE>

                         Soyo Group, Inc. and Subsidiary
           Condensed Consolidated Statements of Operations (Unaudited)


                                               Three Months Ended September 30,
                                               --------------------------------
                                                    2004              2003
                                               --------------    --------------
                                                                   (Restated -
                                                                     Note 6)

Net revenues                                   $    9,347,427    $    6,759,316
Cost of revenues, including
  inventories purchased from Soyo
  Computer, Inc. of $3,772,301
  and $3,416,840 in 2004 and
  2003, respectively                                9,039,914         7,194,773
                                               --------------    --------------
Gross margin (deficit)                                307,513          (435,457)
                                               --------------    --------------

Costs and expenses:
  Sales and marketing                                 227,523           471,654
  General and administrative                          876,265           442,611
  Depreciation and amortization                        13,141             4,036
                                               --------------    --------------
    Total costs and expenses                        1,116,929           918,301
                                               --------------    --------------
Loss from operations                                 (809,416)       (1,353,758)
                                               --------------    --------------

Other income (expense):
  Interest income                                        --               5,182
  Interest expense                                     (4,745)           (6,823)
                                               --------------    --------------
Other expense, net                                     (4,745)           (1,641)
                                               --------------    --------------
Loss before provision for
  income taxes                                       (814,161)       (1,355,399)

Provision for income taxes                               --              25,680
                                               --------------    --------------
Net loss                                             (814,161)       (1,381,079)

Less:  Dividends on Class B
  Convertible Preferred Stock                         (74,220)             --
                                               --------------    --------------
Net loss attributable to
  common shareholders                          $     (888,381)   $   (1,381,079)
                                               ==============    ==============

Net loss per common share -
  Basic and diluted                            $        (0.02)   $        (0.03)
                                               ==============    ==============

Weighted average number of
  common shares outstanding -
  Basic and diluted                                40,000,000        40,000,000
                                               ==============    ==============





     See accompanying notes to condensed consolidated financial statements.

                                       5
<PAGE>

                         Soyo Group, Inc. and Subsidiary
           Condensed Consolidated Statements of Operations (Unaudited)


                                                Nine Months Ended September 30,
                                                -------------------------------
                                                     2004              2003
                                                -------------     -------------
                                                                   (Restated -
                                                                     Note 6)

Net revenues                                    $  28,136,117     $  23,158,714
Cost of revenues, including
  inventories purchased from Soyo
  Computer, Inc. of $14,229,570
  and $11,574,565 in 2004 and
  2003, respectively                               26,316,464        21,013,131
                                                -------------     -------------
Gross margin                                        1,819,653         2,145,583
                                                -------------     -------------

Costs and expenses:
  Sales and marketing                                 526,811           945,087
  General and administrative                        2,713,845         2,236,120
  Provision for doubtful accounts                     196,335              --
  Depreciation and amortization                        21,409            12,110
                                                -------------     -------------
    Total costs and expenses                        3,458,400         3,193,317
                                                -------------     -------------
Loss from operations                               (1,638,747)       (1,047,734)
                                                -------------     -------------

Other income (expense):
  Interest income                                        --              30,406
  Interest expense                                     (9,490)          (26,248)
                                                -------------     -------------
Other income (expense), net                            (9,490)            4,158
                                                -------------     -------------
Loss before provision for
  income taxes                                     (1,648,237)       (1,043,576)

Provision for income taxes                               --              90,680
                                                -------------     -------------
Net loss                                           (1,648,237)       (1,134,256)

Less:  Dividends on Class B
  Convertible Preferred Stock                        (145,993)             --
                                                -------------     -------------
Net loss attributable to
  common shareholders                           $  (1,794,230)    $  (1,134,256)
                                                =============     =============

Net loss per common share -
  Basic and diluted                             $       (0.04)    $       (0.03)
                                                =============     =============

Weighted average number of
  common shares outstanding -
  Basic and diluted                                40,000,000        40,000,000
                                                =============     =============



     See accompanying notes to condensed consolidated financial statements.

                                       6
<PAGE>

                         Soyo Group, Inc. and Subsidiary
           Condensed Consolidated Statements of Cash Flows (Unaudited)


                                                Nine Months Ended September 30,
                                                -------------------------------
                                                      2004                2003
                                                -------------     -------------
                                                                   (Restated -
                                                                     Note 6)

OPERATING ACTIVITIES
  Net loss                                      $  (1,648,237)    $  (1,134,256)
    Adjustments to reconcile net
      loss to net cash used in
      operating activities:
        Depreciation and
          amortization                                 21,409            12,110
        Provision for doubtful
          accounts                                    196,335              --
        Changes in operating
          assets and liabilities:
          (Increase) decrease in:
            Accounts receivable                     1,026,537         1,265,779
            Inventories                               248,930         9,016,006
            Prepaid expenses                           20,993            50,714
            Deposits                                  (23,833)          (25,035)
          Increase (decrease) in:
            Accounts payable -
              Soyo Computer, Inc.                  (3,179,062)       (5,967,746)
            Accounts payable -
              other                                 2,824,441        (2,954,566)
            Accrued liabilities                        99,216          (687,563)
            Income taxes payable                         --              90,430
                                                -------------     -------------
  Net cash used in operating
    activities                                       (413,271)         (334,127)
                                                -------------     -------------


INVESTING ACTIVITIES
  Additions to property and
    equipment                                        (154,870)           (2,512)
                                                -------------     -------------
  Net cash used in investing
    activities                                       (154,870)           (2,512)
                                                -------------     -------------














                                   (continued)


                                       7
<PAGE>

                         Soyo Group, Inc. and Subsidiary
     Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)


                                                Nine Months Ended September 30,
                                                -------------------------------
                                                     2004             2003
                                                --------------   --------------
                                                                   (Restated -
                                                                     Note 6)

FINANCING ACTIVITIES
  Advances from officer,
    director and major
    shareholder                                 $      207,707   $      360,000
  Repayments of advances
    from officer, director
    and major shareholder                                 --           (120,000)
  Repayment of revolving
    note payable                                          --         (1,200,000)
  Decrease in restricted
    cash                                             1,000,000
  Proceeds from issuance
    of notes payable                                   913,750             --
                                                --------------   --------------
  Net cash provided by
    financing activities                             1,121,457           40,000
                                                --------------   --------------

CASH AND CASH EQUIVALENTS
  Net increase (decrease)                              553,316         (296,639)
  At beginning of period                               717,196          623,296
                                                --------------   --------------
  At end of period                              $    1,270,512   $      326,657
                                                ==============   ==============

SUPPLEMENTAL DISCLOSURE OF
  CASH FLOW INFORMATION

Cash paid for -
  Interest                                      $         --     $       26,248
  Income taxes                                  $         --     $        1,050

NON-CASH INVESTING AND
  FINANCING ACTIVITIES

Issuance of 2,500,000
  shares of Class B
  Convertible Preferred
  Stock as settlement of
  $12,000,000 long-term
  payable -
    Preferred stock                             $    1,304,000   $         --
    Additional paid-in
      capital                                   $   10,696,000   $         --
Dividends on Class
  B Convertible
  Preferred Stock -
    Stated                                      $       75,562   $         --
    Accreted                                    $       70,431   $         --




     See accompanying notes to condensed consolidated financial statements.


                                       8
<PAGE>

                         Soyo Group, Inc. and Subsidiary
        Notes to Condensed Consolidated Financial Statements (Unaudited)
         Three Months and Nine Months Ended September 30, 2004 and 2003


1.  Organization and Basis of Presentation

Organization - Effective October 24, 2002, Vermont Witch Hazel Company,  Inc., a
Nevada  corporation  ("VWHC"),  acquired Soyo, Inc., a Nevada corporation ("Soyo
Nevada"),  from Soyo Computer,  Inc., a Taiwan  corporation  ("Soyo Taiwan),  in
exchange for the issuance of 1,000,000 shares of convertible preferred stock and
28,182,750  shares of common  stock,  and changed  its name to Soyo Group,  Inc.
("Soyo"). The 1,000,000 shares of preferred stock were issued to Soyo Taiwan and
the  28,182,750  shares of common  stock were issued to certain  members of Soyo
Nevada management.

Subsequent to this  transaction,  Soyo Taiwan  maintained an equity  interest in
Soyo, continued to be the primary supplier of inventory to Soyo, and was a major
creditor. In addition,  there was no change in the management of Soyo and no new
capital invested, and there was a continuing family relationship between certain
members of the management of Soyo and Soyo Taiwan. As a result, this transaction
was accounted for as a  recapitalization  of Soyo Nevada,  pursuant to which the
accounting  basis  of  Soyo  Nevada  continued   unchanged   subsequent  to  the
transaction date. Accordingly,  the pre-transaction financial statements of Soyo
Nevada are now the historical financial statements of the Company.

In conjunction with this  transaction,  Soyo Nevada  transferred  $12,000,000 of
accounts  payable to Soyo Taiwan to long-term  payable,  without  interest,  due
December  31, 2005.  During the three  months ended March 31, 2004,  the Company
agreed  with a third  party  to  convert  the  long-term  payable  into  Class B
Convertible Preferred Stock (see Note 4).

Soyo Taiwan also agreed to continue to provide computer parts and components to
Soyo on an open account basis at the quantities required and on a timely basis
to enable Soyo to continue to conduct its business operations at budgeted
levels, which is not less than a level consistent with the operations of Soyo
Nevada's business in 2001 and 2000. This supply commitment is effective through
December 31, 2005.

On December 9, 2002,  Soyo's Board of Directors  elected to change Soyo's fiscal
year end from July 31 to  December  31 to conform to Soyo  Nevada's  fiscal year
end.

On October 24, 2002,  the primary  members of Soyo Nevada  management  were Ming
Tung Chok, the Company's  President,  Chief Executive Officer and Director,  and
Nancy Chu, the Company's Chief Financial  Officer.  Ming Tung Chok and Nancy Chu
are husband and wife.  Andy Chu, the  President  and major  shareholder  of Soyo
Taiwan, is the brother of Nancy Chu.

Unless the context indicates  otherwise,  Soyo and its wholly-owned  subsidiary,
Soyo Nevada, are referred to herein as the "Company".

Basis  of  Presentation  - The  accompanying  condensed  consolidated  financial
statements  include  the  accounts  of Soyo and  Soyo  Nevada.  All  significant
intercompany  accounts and transactions  have been eliminated in  consolidation.
The condensed consolidated financial statements have been prepared in accordance
with United States generally accepted  accounting  principles.  The accompanying
consolidated  financial  statements have been prepared assuming that the Company
will continue as a going concern,  which  contemplates the realization of assets
and the  satisfaction  of  liabilities  in the normal  course of  business.  The
carrying  amounts  of  assets  and  liabilities  presented  in the  consolidated
financial  statements do not purport to represent  the  realizable or settlement
values, and do not include any adjustments that might result from the outcome of
this uncertainty.


                                       9
<PAGE>

Interim Financial Statements - The accompanying  interim condensed  consolidated
financial  statements  are  unaudited,  but in the opinion of  management of the
Company,  contain all adjustments,  which include normal recurring  adjustments,
necessary to present  fairly the financial  position at September 30, 2004,  the
results of operations  for the three months and nine months ended  September 30,
2004 and 2003,  and cash flows for the nine months ended  September 30, 2004 and
2003.  The  condensed  consolidated  balance  sheet as of  December  31, 2003 is
derived from the Company's audited consolidated financial statements.

Certain  information  and footnote  disclosures  normally  included in financial
statements  that have been prepared in  accordance  with  accounting  principles
generally  accepted in the United States have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange Commission, although
management  of the Company  believes  that the  disclosures  contained  in these
condensed consolidated financial statements are adequate to make the information
presented  therein  not  misleading.  For  further  information,  refer  to  the
consolidated  financial  statements  and  the  notes  thereto  included  in  the
Company's  Annual  Report on Form 10-K for the fiscal  year ended  December  31,
2003, as filed with the Securities and Exchange Commission.

The  preparation  of  financial  statements  in  conformity  with United  States
generally accepted  accounting  principles requires management to make estimates
and  assumptions  that affect the  reported  amounts of assets and  liabilities,
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. Significant estimates primarily relate to the realizable value
of accounts  receivable,  vendor programs and inventories.  Actual results could
differ from those estimates.

The results of operations  for the three months and nine months ended  September
30,  2004 is not  necessarily  indicative  of the  results of  operations  to be
expected for the full fiscal year ending December 31, 2004.

Business - The Company sells computer components and peripherals to distributors
and  retailers  primarily  in North,  Central  and South  America.  The  Company
currently  operates  in one  business  segment.  A  substantial  majority of the
Company's  products  are  purchased  from Soyo Taiwan  pursuant to an  exclusive
distribution  agreement  effective through December 31, 2005, and are sold under
the  "Soyo"  brand.   Inventories   consist  primarily  of  computer  parts  and
components.

Earnings  Per Share -  Statement  of  Financial  Accounting  Standards  No. 128,
"Earnings Per Share",  requires presentation of basic earnings per share ("Basic
EPS") and diluted earnings per share ("Diluted EPS").  Basic earnings (loss) per
share  is  computed  by  dividing   earnings   (loss)   attributable  to  common
stockholders by the weighted average number of common shares  outstanding during
the period.  Diluted  earnings per share gives effect to all dilutive  potential
common  shares  outstanding  during  the  period.   These  potentially  dilutive
securities  were not included in the calculation of loss per share for the three
months and nine months  ended  September  30, 2004 and 2003  because the Company
incurred  a loss  during  such  periods  and thus their  effect  would have been
anti-dilutive. Accordingly, basic and diluted loss per share is the same for the
three months and nine months ended September 30, 2004 and 2003.

As of September 30, 2004, potentially dilutive securities consisted of 1,000,000
shares of Class A Convertible Preferred Stock with a stated liquidation value of
$1.00 per share that are convertible into common stock at fair market value, and
2,575,562  shares  of  Class  B  Convertible   Preferred  Stock  with  a  stated
liquidation  value of $1.00 per share that are convertible  into common stock at
fair market value, but not less than $0.25 per share.



                                       10
<PAGE>

As of September 30, 2004,  13,752,162  shares of common stock were issuable upon
conversion  of  the  Class  A  Convertible  Preferred  Stock  and  the  Class  B
Convertible  Preferred  Stock,  consisting  of 3,846,154  shares of common stock
issuable  upon  conversion  of the  Class  A  Convertible  Preferred  Stock  and
9,906,008  shares  of  common  stock  issuable  upon  conversion  of the Class B
Convertible  Preferred Stock,  based on the closing price of the common stock at
September 30, 2004 of $0.26 per share.

As of September  30, 2003,  7,142,857  shares of common stock were issuable upon
conversion  of the Class A  convertible  preferred  stock,  based on the closing
price of the common stock at September 30, 2003 of $0.14 per share.

Comprehensive Income (Loss) - The Company displays comprehensive income or loss,
its  components  and  accumulated   balances  in  its   consolidated   financial
statements.  Comprehensive  income or loss includes all changes in equity except
those  resulting from  investments by owners and  distributions  to owners.  The
Company did not have any items of  comprehensive  income (loss) during the three
months and nine months ended September 30, 2004 and 2003.

Significant  Risks  and  Uncertainties  -  The  Company  operates  in  a  highly
competitive industry subject to aggressive pricing practices, pressures on gross
margins,  frequent introductions of new products,  rapid technological advances,
continual improvement in product price/performance characteristics, and changing
consumer demand.

As a result of the  dynamic  nature of the  business,  it is  possible  that the
Company's  estimates  with  respect  to the  realizability  of  inventories  and
accounts  receivable  may be materially  different  from actual  amounts.  These
differences  could  result in higher than  expected  allowance  for bad debts or
inventory  reserve  costs,  which could have a materially  adverse effect on the
Company's financial position and results of operations.

Stock-Based  Compensation  - The  Company  has adopted  Statement  of  Financial
Accounting Standards No. 123,  "Accounting for Stock-Based  Compensation" ("SFAS
No. 123"),  which  establishes a fair value method of accounting for stock-based
compensation plans, as amended by Statement of Financial Accounting Standard No.
148,  "Accounting  for  Stock-Based  Compensation - Transition  and  Disclosure"
("SFAS No. 148").

The  provisions of SFAS No. 123 allow  companies to either expense the estimated
fair value of stock options or to continue to follow the intrinsic  value method
set forth in Accounting  Principles Board Opinion No. 25,  "Accounting for Stock
Issued to  Employees",  but to disclose the pro forma effect on net loss and net
loss per  share had the fair  value of the stock  options  been  exercised.  The
Company has elected to continue to account for  stock-based  compensation  plans
utilizing the intrinsic value method.  Accordingly,  compensation cost for stock
options will be measured as the excess,  if any, of the fair market price of the
Company's  common  stock at the date of grant above the amount an employee  must
pay to acquire the common stock.

In  accordance  with SFAS No. 123, as amended by SFAS No. 148,  the Company will
provide  prominent  footnote  disclosure  with respect to  stock-based  employee
compensation,  and the effect of the method used on reported results.  The value
of a stock-based award will be determined using the Black-Scholes option-pricing
model, whereby compensation cost is the fair value of the award as determined by
the pricing  model at the grant date or other  measurement  date.  The resulting
amount will be charged to expense on the straight-line  basis over the period in
which the Company  expects to receive  benefit,  which is generally  the vesting
period. Stock options issued to non-employee directors at fair market value will
be accounted for under the intrinsic value method.



                                       11
<PAGE>

The Company has not issued any stock-based compensation to date. Accordingly, no
pro forma financial disclosure has been presented.


2.  Advances from Officer, Director and Major Shareholder

During March 2003,  Nancy Chu, the Company's Chief Financial  Officer,  director
and major shareholder, loaned the Company $360,000 for working capital purposes,
of which $120,000 was repaid during September 2003. During the nine months ended
September 30, 2004, the Ms. Chu loaned the Company an additional $207,707. These
loans are non-interest bearing and due on demand.


3.  Notes Payable

On March 29, 2004, LGT Computer, Inc. loaned the Company $213,750 pursuant to an
unsecured note payable due March 28, 2005, with interest at 4% per annum. On May
29, 2004, LGT Computer,  Inc. loaned the Company an additional $700,000 pursuant
to an unsecured note payable due May 29, 2005, with interest at 4% per annum.


4. Equity-Based Transactions

Effective  December 30,  2003,  Soyo Taiwan  entered  into an agreement  with an
unrelated  third party to sell the $12,000,000  long-term  payable due it by the
Company. As part of the agreement, Soyo Taiwan required that the purchaser would
be limited to  collecting a maximum of $1,630,000  of the  $12,000,000  from the
Company  without the prior  consent of Soyo Taiwan.  In  substance,  Soyo Taiwan
forgave debt in an amount equal to the difference  between the  $12,000,000  and
the  value of the  preferred  stock  issued in  settlement  of this  debt.  This
forgiveness of debt was treated as a capital transaction. Payment from the third
party was received by Soyo Taiwan in February and March 2004.  An agreement  was
reached during the three months ended March 31, 2004 whereby 2,500,000 shares of
Class B preferred  stock would be issued by the Company to the  unrelated  third
party in exchange for the long-term payable.

The Class B preferred  stock has a stated  liquidation  value of $1.00 per share
and a 6% dividend, payable quarterly in arrears, in the form of cash, additional
shares of preferred  stock, or common stock,  at the option of the Company.  The
Class B preferred  stock has no voting  rights.  The shares of Class B preferred
stock are  convertible,  in increments of 100,000 shares,  into shares of common
stock based on the $1.00 stated  value,  at any time through  December 31, 2008,
based on the fair market value of the common stock as of the date of conversion,
subject, however, to a minimum conversion price of $0.25 per share. No more than
500,000 shares of Class B preferred  stock may be converted into common stock in
any one year. On December 31, 2008, any unconverted  shares of Class B preferred
stock  automatically  convert into shares of common stock based on the then fair
market value of the common  stock,  subject,  however,  to a minimum  conversion
price of $0.25 per  share.  Beginning  one year  after  issuance,  upon ten days
written  notice,  the Company or its designee  will have the right to repurchase
for cash any portion or all of the outstanding shares of Class B preferred stock
at 80% of the  liquidation  value ($0.80 per share).  During such notice period,
the holder of the preferred stock will have the continuing  right to convert any
such  preferred  shares  pursuant to which written notice has been received into
common stock without regard to the conversion limitation.  The Class B preferred
stock has unlimited piggy-back registration rights, and is non-transferable.

The Company  recorded  the  issuance of the Class B preferred  stock at its fair
market  value on March  31,  2004 of  $1,304,000,  which  was  determined  by an
independent  investment  banking firm. The  $10,696,000  difference  between the
$12,000,000  long-term payable and the $1,304,000 fair market value of the Class
B preferred  stock was credited to additional  paid-in  capital.  The difference
between the fair market value and the liquidation value of the Class B preferred
stock is being  recognized  as an  additional  dividend to the Class B preferred
stockholder, and as an increase in the loss attributable to common stockholders,
and is being accreted from April 1, 2004 through December 31, 2008.



                                       12
<PAGE>
<TABLE>
<CAPTION>

For the three  months  ended  June 30,  2004,  the  Company  recorded  aggregate
dividends of $71,773,  consisting of dividends  based on the stated value of the
Class B  Convertible  Preferred  Stock of $37,500,  which were declared and paid
through  the  issuance of an  additional  37,500  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $34,273.

For the three months ended  September 30, 2004, the Company  recorded  aggregate
dividends of $74,220,  consisting of dividends  based on the stated value of the
Class B  Convertible  Preferred  Stock of $38,062,  which were declared and paid
through  the  issuance of an  additional  38,062  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $36,158.

For the nine months ended  September 30, 2004,  the Company  recorded  aggregate
dividends of $145,993,  consisting of dividends based on the stated value of the
Class B  Convertible  Preferred  Stock of $75,562,  which were declared and paid
through  the  issuance of an  additional  75,562  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $70,431.


5.  Significant Concentrations

a.  Customers

The Company sells to both  distributors  and  retailers.  Revenues  through such
distribution channels are summarized as follows:

                 Three Months Ended September 30,    Nine Months Ended September 30,
                 --------------------------------   --------------------------------
                      2004              2003             2004              2003
                 --------------    --------------   --------------    --------------
<S>              <C>               <C>              <C>               <C>
Net Revenues
  Retailers      $    7,033,831    $    5,585,001   $   18,235,720    $   18,956,373
  Distributors        2,026,231         1,174,315        9,391,999         4,202,342
  Other                 287,365              --            508,398              --
                 --------------    --------------   --------------    --------------
                 $    9,347,427    $    6,759,316   $   28,136,117    $   23,158,715
                 ==============    ==============   ==============    ==============
</TABLE>

During the three months ended  September 30, 2004 and 2003, the Company  offered
price  protection  to certain  customers  under  specific  programs  aggregating
$137,270 and  $601,564,  respectively,  which  reduced net revenues and accounts
receivable accordingly.

During the nine months ended  September 30, 2004 and 2003,  the Company  offered
price  protection  to certain  customers  under  specific  programs  aggregating
$294,125 and $2,074,564,  respectively,  which reduced net revenues and accounts
receivable accordingly.

Information  with respect to  customers  that  accounted  for 10% or more of the
Company's revenues is presented below.

During the three months ended  September 30, 2004, the Company had two customers
that accounted for revenues of $2,960,070 and $891,484,  equivalent to 31.7% and
9.5% of net revenues, respectively.  During the three months ended September 30,
2003, the Company had two customers that accounted for revenue of $1,472,178 and
$1,273,130, equivalent to 21.8% and 18.8% of net revenues, respectively.



                                       13
<PAGE>
<TABLE>
<CAPTION>

During the nine months ended  September 30, 2004,  the Company had two customers
that  accounted for revenues of $8,713,231 and  $2,100,196,  equivalent to 31.0%
and 7.5% of net revenues,  respectively.  During the nine months ended September
30,  2003,  the  Company  had two  customers  that  accounted  for  revenues  of
$5,564,669  and  $2,359,379,  equivalent  to 24.0%  and  10.2% of net  revenues,
respectively.

b.  Geographic Segments

Financial information by geographic segments is summarized as follows:

                    Three Months Ended September 30,    Nine Months Ended September 30,
                    --------------------------------   --------------------------------
                         2004              2003             2004              2003
                    --------------    --------------   --------------    --------------
<S>                 <C>               <C>              <C>               <C>
Net Revenues
  North America     $    7,289,340    $    4,646,947   $   21,593,356    $   18,535,547
  Central and
    South America        2,012,028           655,189        6,266,976         2,910,104
  Other locations           46,050         1,457,180          275,785         1,713,064
                    --------------    --------------   --------------    --------------
                    $    9,347,427    $    6,759,316   $   28,136,117    $   23,158,715
                    ==============    ==============   ==============    ==============
</TABLE>


c.  Suppliers

A substantial  majority of the Company's  inventories  are  manufactured by Soyo
Taiwan and are  purchased  from Soyo Taiwan or an affiliate of Soyo Taiwan on an
open account basis.

Through  October 24, 2002,  Soyo Nevada was a  wholly-owned  subsidiary  of Soyo
Taiwan (see Note 1).  Subsequent to that date, Soyo Taiwan has agreed to provide
inventory to Soyo on an open account basis through December 31, 2005.

The following is a summary of the Company's  transactions and balances with Soyo
Taiwan as of September 30, 2004 and December 31, 2003,  and for the three months
and nine months ended September 30, 2004 and 2003:

                                   September 30,    December 31,
                                       2004            2003
                                   -------------   -------------

Accounts payable to Soyo Taiwan    $   3,378,191   $   6,557,253
Long-term payable to Soyo Taiwan            --        12,000,000

<TABLE>
<CAPTION>

                 Three Months Ended September 30,   Nine Months Ended September 30,
                 --------------------------------  --------------------------------
                      2004             2003            2004             2003
                 --------------    --------------  --------------    --------------
<S>              <C>               <C>             <C>               <C>
Purchases from
  Soyo Taiwan    $    3,772,301    $    3,416,840  $   14,229,570    $   11,574,565
Payments to
  Soyo Taiwan         5,069,739         2,112,470      17,173,422        14,979,470
</TABLE>




                                       14
<PAGE>

During the nine months ended  September  30, 2003,  the Company  received  price
protection from Soyo Taiwan aggregating $435,415,  which reduced inventories and
accounts  payable to Soyo  Taiwan  accordingly.  The Company did not receive any
price  protection  from Soyo Taiwan during the three months ended  September 30,
2003 and 2004 or the nine months ended September 30, 2004.


6.  Restatement

In conjunction with the audit of the Company's consolidated financial statements
for the year ended December 31, 2003, the Company conducted a review of its 2003
interim financial  statements.  As a result of this review, the Company restated
its results of  operations  for the three months ended March 31, 2003,  June 30,
2003 and  September  30,  2003,  to reflect  various  adjustments,  primarily to
correct the intra-period allocation of net revenues and cost of revenues.

The  adjustments  to the statement of  operations  for the three months and nine
months ended September 30, 2003 are summarized as follows:

                                                  Three Months     Nine Months
                                                     Ended            Ended
                                                 September 30,    September 30,
                                                      2003             2003
                                                 -------------    -------------

Net income (loss), as reported                   $     265,672    $     933,450

Adjustments to:
  Decrease revenues                                    (59,754)        (106,808)
  Increase cost of revenues                         (1,540,114)      (1,857,921)
  Increase selling, general
    and administrative expenses                        (46,882)        (102,977)
                                                 -------------    -------------
Net income (loss), as revised                    $  (1,381,078)   $  (1,134,256)
                                                 =============    =============


Net income (loss) per common
  share), as reported:
  Basic                                          $        0.01    $        0.02
  Diluted                                        $        0.01    $        0.02


Net income (loss) per common
  share, as revised:
  Basic                                          $       (0.03)   $       (0.03)
  Diluted                                        $       (0.03)   $       (0.03)



Weighted average number of
  common shares outstanding -
  Basic                                             40,000,000       40,000,000
  Diluted                                           47,142,857       47,142,857







                                       15
<PAGE>

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

This Quarterly  Report on Form 10-Q for the quarterly period ended September 30,
2004 contains "forward-looking  statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended,  including  statements  that include the
words  "believes",  "expects",  "anticipates",  or  similar  expressions.  These
forward-looking   statements  include,   but  are  not  limited  to,  statements
concerning   the   Company's   expectations   regarding   its  working   capital
requirements,  financing requirements,  business prospects, and other statements
of expectations,  beliefs,  future plans and strategies,  anticipated  events or
trends,  and similar  expressions  concerning  matters  that are not  historical
facts. The forward-looking  statements in this Quarterly Report on Form 10-Q for
the quarterly  period ended  September 30, 2004 involve known and unknown risks,
uncertainties and other factors that could cause the actual results, performance
or achievements  of the Company to differ  materially from those expressed in or
implied by the forward-looking statements contained herein.

Background and Overview:

The Company sells  computer  components  and  peripherals  to  distributors  and
retailers   primarily  in  North,   Central  and  South  America.   The  Company
historically has operated in only one business segment.  A substantial  majority
of the  Company's  products  are  purchased  from  Soyo  Taiwan  pursuant  to an
exclusive  distribution  agreement  effective through December 31, 2005, and are
sold under the "Soyo" brand.

During the three  months  ended  September  30,  2004,  the Company  expanded it
business  by  commencing  the sale of Voice IP Computer  telephones  and related
peripheral  products.  These  telephones  allow  users  to place  long  distance
telephone  calls  through  active  computer   networks,   resulting  in  heavily
discounted,  and at times, free telephone calls. The Company is also pre-selling
the long  distance  time  through  prepaid  phone cards and other  methods.  The
Company expects to commit significant resources to this business.

Effective  October  24,  2002,  Vermont  Witch  Hazel  Company,  Inc.,  a Nevada
corporation ("VWHC"), acquired Soyo, Inc., a Nevada corporation ("Soyo Nevada"),
from Soyo Computer,  Inc., a Taiwan corporation ("Soyo Taiwan),  in exchange for
the issuance of 1,000,000  shares of convertible  preferred stock and 28,182,750
shares of common stock, and changed its name to Soyo Group, Inc.  ("Soyo").  The
1,000,000  shares  of  preferred  stock  were  issued  to  Soyo  Taiwan  and the
28,182,750  shares of common stock were issued to certain members of Soyo Nevada
management.  During  October  2002,  certain  members of the  management of Soyo
Nevada also separately  purchased  6,026,798 shares of the 11,817,250  shares of
common stock of VWHC outstanding prior to VWHC's acquisition of Soyo Nevada, for
$300,000  in  personal  funds.  The  6,026,798  shares  represented  51%  of the
outstanding  shares of VWHC common stock.  Accordingly,  Soyo Nevada  management
currently  owns  34,209,548  shares of the  40,000,000  shares of the  Company's
common stock outstanding.

Subsequent to this  transaction,  Soyo Taiwan  maintained an equity  interest in
Soyo, continued to be the primary supplier of inventory to Soyo, and was a major
creditor. In addition,  there was no change in the management of Soyo and no new
capital invested, and there was a continuing family relationship between certain
members of the  management of Soyo and Soyo Taiwan.  As a result,  for financial



                                       16
<PAGE>
<TABLE>
<CAPTION>

reporting purposes,  this transaction was accounted for as a recapitalization of
Soyo Nevada,  pursuant to which the  accounting  basis of Soyo Nevada  continued
unchanged subsequent to the transaction date.  Accordingly,  the pre-transaction
financial  statements of Soyo Nevada are now the historical financial statements
of the Company.

Unless the context indicates  otherwise,  Soyo and its wholly-owned  subsidiary,
Soyo Nevada, are referred to herein as the "Company".

The Company sells to both  distributors  and  retailers.  Revenues  through such
distribution channels are summarized as follows:

                 Three Months Ended September 30,    Nine Months Ended September 30,
                 -------------------------------    --------------------------------
                           2004              2003             2004              2003
                 --------------    --------------   --------------    --------------
<S>              <C>               <C>              <C>               <C>
Net Revenues
  Retailers      $    7,033,831    $    5,585,001   $   18,235,720    $   18,956,373
  Distributors        2,026,231         1,174,315        9,391,999         4,202,342
  Other                 287,365              --            508,398              --
                 --------------    --------------   --------------    --------------
                 $    9,347,427    $    6,759,316   $   28,136,117    $   23,158,715
                 ==============    ==============   ==============    ==============
</TABLE>


Information  with respect to  customers  that  accounted  for 10% or more of the
Company's revenues is presented below.

During the three months ended  September 30, 2004, the Company had two customers
that accounted for revenues of $2,960,070 and $891,484,  equivalent to 31.7% and
9.5% of net revenues, respectively.  During the three months ended September 30,
2003, the Company had two customers that accounted for revenue of $1,472,178 and
$1,273,130 equivalent to 21.8% and 18.8% of net revenues, respectively.

During the nine months ended  September 30, 2004,  the Company had two customers
that  accounted for revenues of $8,713,231 and  $2,100,196,  equivalent to 31.0%
and 7.5% of net revenues,  respectively.  During the nine months ended September
30,  2003,  the  Company  had two  customers  that  accounted  for  revenues  of
$5,564,669  and  $2,359,379,  equivalent  to 24.0%  and  10.2% of net  revenues,
respectively.
<TABLE>
<CAPTION>

Financial information by geographic segments is summarized as follows:

                    Three Months Ended September 30,    Nine Months Ended September 30,
                    --------------------------------   --------------------------------
                              2004              2003             2004              2003
                    --------------    --------------   --------------    --------------
<S>                 <C>               <C>              <C>               <C>
Net Revenues
  North America     $    7,289,349    $    4,646,947   $   21,593,356    $   18,535,547
  Central and
    South America        2,012,028           655,189        6,266,976         2,910,104
  Other locations           46,050         1,457,180          275,785         1,713,064
                    --------------    --------------   --------------    --------------
                    $    9,347,427    $    6,759,316   $   28,136,117    $   23,158,715
                    ==============    ==============   ==============    ==============
</TABLE>


                                       17
<PAGE>

Financial Outlook:

During early 2003, as a result of the Company  changing its product mix to focus
on the sales of higher margin  products and the decrease in market  pressures on
the  Company's  gross  margin  resulting  from the West  Coast  dock  strike  in
September and early October 2002, the Company's gross margin  improved  compared
to 2002.  The  Company's  sales  for the  year  ended  December  31,  2003  were
$31,034,239,  with a gross margin of 9.9%.  For the nine months ended  September
30, 2004, the Company's sales were  $28,136,117,  as compared to $23,185,714 for
the nine months ended  September  30, 2003,  an increase of $4,977,403 or 21.5%.
However,  the Company's gross profit margin  decreased to 6.5% in 2004 from 9.3%
in 2003.

There were several reasons for the decrease in gross margin. Most significantly,
motherboard  technology has improved  significantly in the past year, leading to
higher  wholesale  prices for such  products.  In future  periods,  the  Company
expects to be able to pass along the price increases to its customers.  However,
during the nine months ended September 30, 2004, the Company priced its products
very  aggressively  as it  introduced  its products to new markets in Mexico and
South  America.  The  initial  success of this  strategy is apparent in the nine
months  revenue  from the Central  and South  America  markets,  which more than
tripled over the  preceding  year.  In  addition,  the Company took an inventory
write-down of $583,520  during the three months and nine months ended  September
30, 2004 as it liquidated its old inventory.

The Company's general and  administrative  expenses  increased  significantly in
2004 over the comparable  period in 2003. The increased  professional  and audit
fees were a direct result of the problems that the Company  experienced with its
internal controls and accounting  systems. In an attempt to rectify the problem,
the  Company  hired  a new  controller  in May  2004.  The  increased  level  of
professional and audit fees has not continued during the second half of 2004.

As of  September  30,  2004,  the  Company  has  negative  cash  flows  from its
operations.  The Company does not have any external sources of liquidity,  other
than advances from an officer, director and major shareholder and loans from LGT
Computer, Inc.

Since  October  24,  2002,  the date  that  Soyo  Nevada  became a  wholly-owned
subsidiary of VWHC, Soyo has attempted to implement various measures designed to
improve its operating results, cash flows and financial position,  including the
following:

- The Company has  reviewed  its product  mix, and has revised its sales plan to
focus on higher margin products.

- The  Company is  attempting  to expand  the  number and credit  quality of its
customer accounts.

- The Company is attempting to arrange  additional  supply sources and to reduce
its reliance on inventory purchases from Soyo Taiwan.

- The Company  moved its office and  warehouse  operations  into a larger,  more
efficient facility in September 2003.

- The Company is  attempting  to increase its  operating  liquidity by retaining
advisors to explore the  availability of outside debt and equity  financing,  to
the extent such funding is available under reasonable terms and conditions.

There can be no assurances  that these measures will result in an improvement in
the  Company's  operations  or  liquidity.  To the  extent  that  the  Company's
operations  and  liquidity do not  improve,  the Company may be forced to reduce
operations to a level consistent with its available  working capital  resources.
The  Company may also have to  consider a formal or  informal  restructuring  or
reorganization.


                                       18
<PAGE>

As a  result  of these  factors,  the  Company's  independent  accountants  have
included  an  explanatory  paragraph  in  their  report  on the  Company's  2003
consolidated  financial  statements  indicating that there is substantial  doubt
about the Company's  ability to continue as a going  concern.  The  accompanying
consolidated  financial  statements have been prepared assuming that the Company
will continue as a going concern,  which  contemplates the realization of assets
and the  satisfaction  of  liabilities  in the normal  course of  business.  The
carrying  amounts  of  assets  and  liabilities  presented  in the  consolidated
financial  statements do not purport to represent  the  realizable or settlement
values, and do not include any adjustments that might result from the outcome of
this uncertainty.

Critical Accounting Policies:

The  Company  prepared  its  condensed   consolidated  financial  statements  in
accordance with United States  generally  accepted  accounting  principles.  The
preparation  of these  financial  statements  requires the use of estimates  and
assumptions  that affect the reported  amounts of assets and liabilities and the
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period.  Management  periodically  evaluates the  estimates and judgments  made.
Management  bases its estimates and  judgments on historical  experience  and on
various  factors that are  believed to be  reasonable  under the  circumstances.
Actual  results  may  differ  from  these  estimates  as a result  of  different
assumptions or conditions.

The Company  operates in a highly  competitive  industry  subject to  aggressive
pricing  practices,  pressures on gross margins,  frequent  introductions of new
products,  rapid  technological  advances,   continual  improvement  in  product
price/performance characteristics, and changing consumer demand.

As a result of the  dynamic  nature of the  business,  it is  possible  that the
Company's  estimates  with  respect  to the  realizability  of  inventories  and
accounts  receivable  may be materially  different  from actual  amounts.  These
differences  could  result in higher than  expected  allowance  for bad debts or
inventory  reserve  costs,  which could have a materially  adverse effect on the
Company's financial position and results of operations.

The following critical accounting policies affect the more significant judgments
and estimates used in the  preparation of the Company's  condensed  consolidated
financial statements.

Vendor Programs:

Funds received from vendors for price protection, product rebates, marketing and
training,  product  returns and  promotion  programs are  generally  recorded as
adjustments to product costs,  revenue or sales and marketing expenses according
to the nature of the  program.  The  Company  records  estimated  reductions  to
revenues for incentive offerings and promotions. Depending on market conditions,
the Company may  implement  actions to increase  customer  incentive  offerings,
which  may  result  in an  incremental  reduction  of  revenue  at the  time the
incentive is offered.

Accounts Receivable:

The Company  recognizes  revenue  when  persuasive  evidence  of an  arrangement
exists,  delivery has occurred,  the sales price is fixed or  determinable,  and
collectibility is probable.

The Company records estimated  reductions to revenue for incentive offerings and
promotions. Depending on market conditions, the Company may implement actions to
increase  customer  incentive  offerings,  which may  result  in an  incremental
reduction of revenue at the time the incentive is offered.


                                       19
<PAGE>

In order to  determine  the  value of the  Company's  accounts  receivable,  the
Company  records a provision  for  doubtful  accounts to cover  probable  credit
losses.  Management  reviews and adjusts this  allowance  periodically  based on
historical  experience and its evaluation of the  collectibility  of outstanding
accounts  receivable.  Accordingly,  the Company  established  a  provision  for
doubtful  accounts of $1,052,720 and $856,386 at September 30, 2004 and December
31,  2003,  respectively,  which the Company  believes is adequate  based on its
review and analysis of aged accounts receivable.

Inventories:

Inventories  are stated at the lower of cost or market.  Cost is  determined  by
using the  average  cost  method.  The Company  maintains a perpetual  inventory
system which  provides for  continuous  updating of average  costs.  The Company
evaluates  the market value of its  inventory  components on a regular basis and
reduces the computed  average cost if it exceeds the  component's  market value.
Inventories  consist  primarily of computer parts and components  purchased from
Soyo Taiwan.

Income Taxes:

The Company  records a valuation  allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. In the event the Company
was to determine that it would be able to realize its deferred tax assets in the
future in excess of its  recorded  amount,  an  adjustment  to the  deferred tax
assets  would be credited to  operations  in the period such  determination  was
made.  Likewise,  should  the  Company  determine  that it would  not be able to
realize all or part of its deferred tax assets in the future,  an  adjustment to
the  deferred  tax  assets  would be charged to  operations  in the period  such
determination was made.

Restatement:

In conjunction with the audit of the Company's consolidated financial statements
for the year ended December 31, 2003, the Company conducted a review of its 2003
interim financial  statements.  As a result of this review, the Company restated
its results of  operations  for the three months ended March 31, 2003,  June 30,
2003 and  September  30,  2003,  to reflect  various  adjustments,  primarily to
correct the intra-period  allocation of revenues,  cost of revenues and selling,
general and administrative expenses (see "ITEM 4. CONTROLS AND PROCEDURES"). The
Company's  restated  results of operations  for the three months and nine months
ended September 30, 2003 are summarized at Note 6 to the Condensed  Consolidated
Financial Statements.

Results of Operations:

Three Months Ended September 30, 2004 and 2003:

Net Revenues.  Net revenues  increased by $2,588,111 or 38.3%,  to $9,347,427 in
2004, as compared to $6,759,316 in 2003. The increase in net revenues in 2004 as
compared  to 2003 was a result of the  Company  focusing  on  obtaining a higher
market share by reducing prices, particularly in South America. The Company also
liquidated slow-moving inventories in 2004.

During the three months  September 30, 2004 and 2003, the Company  offered price
protection to certain customers under specific programs aggregating $137,270 and
$601,564,  respectively,  which  reduced net revenues  and  accounts  receivable
accordingly.

Gross  Margin.  Gross  margin  was  $307,513  or 3.3% in 2004,  as  compared  to
$(435,457)  or (6.4)% in 2003.  There were  several  reasons for the increase in
gross  margin.   Most   significantly,   motherboard   technology  has  improved
significantly  in the past  year,  leading to higher  wholesale  prices for such
products.  In future  periods,  the Company expects to be able to pass along the
price  increases  to its  customers.  However,  during  the  nine  months  ended
September  30, 2004,  the Company  priced its products very  aggressively  as it
introduced its products to new markets in Mexico and South America. In addition,
the Company took an  inventory  write-down  of $443,544  during the three months
ended September 30, 2004 as it liquidated its old inventory. The Company did not
record any  inventory  write-down  during the three months ended  September  30,
2003.


                                       20
<PAGE>

Sales and  Marketing  Expenses.  Selling and  marketing  expenses  decreased  by
$244,131  or 51.8%,  to  $227,523  in 2004,  as  compared  to  $471,654 in 2003.
Co-operative  marketing  program  expense was  $78,449 and  $272,859 in 2004 and
2003, respectively.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased by $433,654 or 98.0%,  to $876,265 in 2004, as compared to $442,611 in
2003. With regard to changes in operating  expenses in 2004 as compared to 2003,
the higher  quality of new  motherboards  has led to  significant  decreases  in
product returns and in price protection offered by the Company to its customers,
which has reduced the Company's selling and marketing  expenses.  However,  that
increase was more than offset by very high  professional and audit fees relating
to the audit of the Company's 2003  financial  statements,  which  increased the
Company's general and administrative  expenses.  The increased  professional and
audit fees were a direct  result of the  problems  that the Company  experienced
with its internal controls and accounting  systems. In an attempt to rectify the
problem,  the Company hired a new controller in May 2004. The increased level of
professional  and audit fees is not expected to continue during the remainder of
2004.

Provision  for  Doubtful  Accounts.  The Company did not record a provision  for
doubtful accounts for the three months ended September 30, 2004 or 2003.

Depreciation  and  Amortization.  Depreciation  and amortization of property and
equipment was $13,141 in 2004, as compared to $4,036 in 2003.

Loss from  Operations.  Loss from  operations  was $809,416 for the three months
ended  September 30, 2004, as compared to loss from operations of $1,353,758 for
the three months ended September 30, 2003, primarily as a result of the increase
in gross profit margin as described above at "Gross Margin".

Interest  Income.  Interest  income  was $5,182 in 2003.  There was no  interest
income in 2004.

Interest  Expense.  Interest  expense  was  $4,745  for the three  months  ended
September  30, 2004 as compared to $6,823 the three months ended  September  30,
2003, reflecting interest on the Company's note payable in 2004.

Provision for Income Taxes.  The provision for income taxes was $25,680 in 2003.
There was no provision for income taxes in 2004.

Net Loss.  The Company  incurred a loss of $814,161  for the three  months ended
September  30, 2004,  as compared to a loss of  $1,381,079  for the three months
ended September 30, 2003,  primarily as a result of the increase in gross profit
margin as described above at "Gross Margin".

Dividends on Class B Convertible Preferred Stock. The Company recorded aggregate
dividends of $74,220 for the three months ended  September 30, 2004,  consisting
of dividends of $38,062 and the accretion of the discount of $36,158.

Net Loss  Attributable to Common  Shareholders.  The Company  incurred a loss of
$888,381 for the three months ended September 30, 2004, as compared to a loss of
$1,381,079 for the three months ended September 30, 2003,  primarily as a result
of the increase in gross profit margin as described above at "Gross Margin".

Nine Months Ended September 30, 2004 and 2003:

Net Revenues.  Net revenues  increased by $4,977,403 or 21.5%, to $28,136,117 in
2004, as compared to  $23,158,714  in 2003. The increase in net revenues in 2004
as compared to 2003 was a result of the Company  focusing on  obtaining a higher
market share by reducing prices, particularly in South America. The Company also
liquidated slow-moving inventories in 2004.

During the nine months ended  September 30, 2004 and 2003,  the Company  offered
price  protection  to certain  customers  under  specific  programs  aggregating
$294,125 and $2,074,564,  respectively,  which reduced net revenues and accounts
receivable accordingly.



                                       21
<PAGE>

Gross  Margin.  Gross  margin was  $1,819,653  or 6.5% in 2004,  as  compared to
$2,145,583 or 9.3% in 2003. There were several reasons for the decrease in gross
margin. Most significantly, motherboard technology has improved significantly in
the past year,  leading to higher wholesale prices for such products.  In future
periods, the Company expects to be able to pass along the price increases to its
customers. However, during the nine months ended September 30, 2004, the Company
priced its  products  very  aggressively  as it  introduced  its products to new
markets in Mexico and South America. In addition,  the Company took an inventory
write-down  of $583,520  during the nine months ended  September  30, 2004 as it
liquidated its old inventory.  During the nine months ended  September 30, 2003,
the Company recorded an inventory write-down of $30,000.

Sales and  Marketing  Expenses.  Selling and  marketing  expenses  decreased  by
$418,276  or 44.3%,  to  $526,811  in 2004,  as  compared  to  $945,087 in 2003,
reflecting  in part  reduced  vendor  support  programs  funded by the  Company.
Co-operative  marketing  program  expense was  $155,492 and $691,065 in 2004 and
2003, respectively.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased by $477,725 or 21.4%, to $2,713,845 in 2004, as compared to $2,236,120
in 2003.  With  regard to changes in  operating  expenses in 2004 as compared to
2003, the higher quality of new motherboards has led to significant decreases in
product returns and in price protection offered by the Company to its customers,
which has reduced our selling and marketing expenses.  However, that benefit was
more than offset by very high  professional and audit fees relating to the audit
of the  Company's  2003  financial  statements,  which  increased  the Company's
general and administrative  expenses.  The increased professional and audit fees
were a direct  result of the  problems  that the  Company  experienced  with its
internal controls and accounting  systems. In an attempt to rectify the problem,
the  Company  hired  a new  controller  in May  2004.  The  increased  level  of
professional  and audit fees is not expected to continue during the remainder of
2004.

Provision for Doubtful  Accounts.  The Company recorded a provision for doubtful
accounts of $196,335 for the nine months ended  September 30, 2004.  The Company
did not record a provision  for  doubtful  accounts  for the nine  months  ended
September 30, 2003.

Depreciation  and  Amortization.  Depreciation  and amortization of property and
equipment was $21,409 in 2004, as compared to $12,110 in 2003.

Loss from  Operations.  Loss from  operations was $1,638,747 for the nine months
ended  September 30, 2004, as compared to loss from operations of $1,047,734 for
the nine months ended September 30, 2003,  primarily as a result of the decrease
in gross profit margin as described above at "Gross Margin".

Interest  Income.  Interest  income was  $30,406 in 2003.  There was no interest
income in 2004.

Interest  Expense.  Interest  expense  was  $9,490  for the  nine  months  ended
September 30, 2004,  as compared to $26,248 for the nine months ended  September
30, 2003, reflecting interest on the Company's revolving note payable in 2003.

Provision for Income Taxes. The provision for income taxes was $90,680 in 2003.
There was no provision for income taxes in 2004.

Net Loss.  The Company  incurred a loss of  1,648,237  for the nine months ended
September  30,  2004,  as compared to a loss of  $1,134,256  for the nine months
ended September 30, 2003,  primarily as a result of the decrease in gross profit
margin as described above at "Gross Margin".



                                       22
<PAGE>

Dividends on Class B Convertible Preferred Stock. The Company recorded aggregate
dividends of $145,993 for the nine months ended September,  2004,  consisting of
dividends of $75,562 and the accretion of the discount of $70,431.

Net Loss  Attributable to Common  Shareholders.  The Company  incurred a loss of
$1,794,230  for the nine months ended  September 30, 2004, as compared to a loss
of  $1,134,256  for the nine months ended  September  30,  2003,  primarily as a
result of the  decrease  in gross  profit  margin as  described  above at "Gross
Margin".

Financial Condition - September 30, 2004:

Liquidity and Capital Resources:

Transactions  with Soyo  Taiwan.  Since the  formation of Soyo Nevada in October
1998,  the  Company  has relied on the  financial  support  from Soyo Taiwan for
inventory and capital to provide the resources  necessary to conduct operations.
Through  October 24, 2002,  Soyo Nevada was a  wholly-owned  subsidiary  of Soyo
Taiwan.  Subsequent to that date, Soyo Taiwan continues to provide  inventory to
Soyo, and has agreed to continue to provide inventory to Soyo on an open account
basis through December 31, 2005.

In  conjunction  with the October  2002  transaction,  Soyo  Nevada  transferred
$12,000,000  of accounts  payable to Soyo Taiwan to long-term  payable,  without
interest,  due December 31, 2005. Soyo Taiwan also agreed to continue to provide
computer parts and components to Soyo on an open account basis at the quantities
required  and on a timely  basis to  enable  Soyo to  continue  to  conduct  its
business  operations  at  budgeted  levels,  which  is not  less  than  a  level
consistent with the operations of Soyo Nevada's  business in 2001 and 2000. This
supply commitment is effective through December 31, 2005.

During the three months ended September 30, 2004 and 2003, the Company purchased
inventory from Soyo Taiwan aggregating $3,772,301 and $3,416,840,  respectively.
During the nine months ended September 30, 2004 and 2003, the Company  purchased
inventory   from  Soyo   Taiwan   aggregating   $14,229,570   and   $11,574,565,
respectively. At September 30, 2004, the Company had short-term accounts payable
to Soyo Taiwan of  $3,378,191.  At December 31, 2003, the Company had short-term
accounts  payable to Soyo Taiwan of $6,557,253  and a long-term  payable to Soyo
Taiwan of $12,000,000.

During the nine months ended  September  30, 2003,  the Company  received  price
protection from Soyo Taiwan  aggregating  $435,415.  The Company did not receive
any price  protection  from Soyo Taiwan during the three months ended  September
30, 2003. Such price protection reduced inventories and accounts payable to Soyo
Taiwan  accordingly.  The Company did not receive any price protection from Soyo
Taiwan  during the three months and nine months ended  September  30, 2004.  The
Company does not have any formal price  protection  agreement  with Soyo Taiwan.
The Company  periodically  negotiates  price  protection  adjustments  with Soyo
Taiwan based on current market conditions.

As a result of the  transaction  described  below which was effected  during the
nine  months  ended  September  30,  2004,  $12,000,000  of  long-term  debt was
converted into preferred equity, which resulted in a commensurate improvement in
the Company's  financial  position and a substantial  reduction in shareholder's
deficiency at September 30, 2004 as compared to December 31, 2003.

Effective  December 30,  2003,  Soyo Taiwan  entered  into an agreement  with an
unrelated  third party to sell the $12,000,000  long-term  payable due it by the
Company. As part of the agreement, Soyo Taiwan required that the purchaser would
be limited to  collecting a maximum of $1,630,000  of the  $12,000,000  from the
Company  without the prior  consent of Soyo Taiwan.  In  substance,  Soyo Taiwan
forgave debt in an amount equal to the difference  between the  $12,000,000  and
the  value of the  preferred  stock  issued in  settlement  of this  debt.  This



                                       23
<PAGE>

forgiveness of debt was treated as a capital transaction. Payment from the third
party was received by Soyo Taiwan in February and March 2004.  An agreement  was
reached during the three months ended March 31, 2004 whereby 2,500,000 shares of
Class B preferred  stock would be issued by the Company to the  unrelated  third
party in exchange for the long-term payable.

The Class B preferred  stock has a stated  liquidation  value of $1.00 per share
and a 6% dividend, payable quarterly in arrears, in the form of cash, additional
shares of preferred  stock, or common stock,  at the option of the Company.  The
Class B preferred  stock has no voting  rights.  The shares of Class B preferred
stock are  convertible,  in increments of 100,000 shares,  into shares of common
stock based on the $1.00 stated  value,  at any time through  December 31, 2008,
based on the fair market value of the common stock as of the date of conversion,
subject, however, to a minimum conversion price of $0.25 per share. No more than
500,000 shares of Class B preferred  stock may be converted into common stock in
any one year. On December 31, 2008, any unconverted  shares of Class B preferred
stock  automatically  convert into shares of common stock based on the then fair
market value of the common  stock,  subject,  however,  to a minimum  conversion
price of $0.25 per  share.  Beginning  one year  after  issuance,  upon ten days
written  notice,  the Company or its designee  will have the right to repurchase
for cash any portion or all of the outstanding shares of Class B preferred stock
at 80% of the  liquidation  value ($0.80 per share).  During such notice period,
the holder of the preferred stock will have the continuing  right to convert any
such  preferred  shares  pursuant to which written notice has been received into
common stock without regard to the conversion limitation.  The Class B preferred
stock has unlimited piggy-back registration rights, and is non-transferrable.

The Company  recorded  the  issuance of the Class B preferred  stock at its fair
market  value on March  31,  2004 of  $1,304,000,  which  was  determined  by an
independent  investment  banking firm. The  $10,696,000  difference  between the
$12,000,000  long-term payable and the $1,304,000 fair market value of the Class
B preferred  stock was credited to additional  paid-in  capital.  The difference
between the fair market value and the liquidation value of the Class B preferred
stock is being  recognized  as an  additional  dividend to the Class B preferred
stockholder, and as an increase in the loss attributable to common stockholders,
and is being accreted from April 1, 2004 through December 31, 2008.

For the three  months  ended  June 30,  2004,  the  Company  recorded  aggregate
dividends of $71,773,  consisting of dividends  based on the stated value of the
Class B  Convertible  Preferred  Stock of $37,500,  which were declared and paid
through  the  issuance of an  additional  37,500  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $34,273.

For the three months ended  September 30, 2004, the Company  recorded  aggregate
dividends of $74,220,  consisting of dividends  based on the stated value of the
Class B  Convertible  Preferred  Stock of $38,062,  which were declared and paid
through  the  issuance of an  additional  38,062  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $36,158.

For the nine months ended  September 30, 2004,  the Company  recorded  aggregate
dividends of $145,993,  consisting of dividends based on the stated value of the
Class B  Convertible  Preferred  Stock of $75,562,  which were declared and paid
through  the  issuance of an  additional  75,562  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $70,431.




                                       24
<PAGE>

Going  Concern.  The  Company is  implementing  various  measures  to attempt to
improve its operations and liquidity as described above at "Financial  Outlook".
To the extent that the Company's  operations and liquidity does not improve, the
Company  may be forced  to  reduce  operations  to a level  consistent  with its
available  working  capital  resources.  The Company may also have to consider a
formal or informal restructuring or reorganization.

As a  result  of these  factors,  the  Company's  independent  accountants  have
included  an  explanatory  paragraph  in  their  report  on the  Company's  2003
consolidated  financial  statements  indicating that there is substantial  doubt
about the Company's  ability to continue as a going  concern.  The  accompanying
consolidated  financial  statements have been prepared assuming that the Company
will continue as a going concern,  which  contemplates the realization of assets
and the  satisfaction  of  liabilities  in the normal  course of  business.  The
carrying  amounts  of  assets  and  liabilities  presented  in the  consolidated
financial  statements do not purport to represent  the  realizable or settlement
values, and do not include any adjustments that might result from the outcome of
this uncertainty.

Operating  Activities.  The  Company  utilized  cash of  $413,271  in  operating
activities  during the nine months  ended  September  30,  2004,  as compared to
$334,127 in  operating  activities  during the nine months ended  September  30,
2003.

At September 30, 2004, the Company had cash and cash  equivalents of $1,270,512,
as compared to $717,196 at December 31, 2003.

The Company had a working  capital  deficiency  of  $2,008,744  at September 30,
2004,  as compared to a working  capital  deficiency of $203,213 at December 31,
2003, resulting in current ratios of 0.85:1 and 0.98:1 at September 30, 2004 and
December 31, 2003, respectively.

Net accounts  receivable  decreased to  $5,595,857  at  September  30, 2004,  as
compared to  $6,818,729 at December 31, 2003, a decrease of $1,222,872 or 17.9%.
The Company recorded a provision for doubtful  accounts of $196,335 for the nine
months  ended  September  30, 2004.  The Company did not record a provision  for
doubtful accounts for the nine months ended September 30, 2003.

Inventories  decreased  to  $4,787,195  at September  30,  2004,  as compared to
$5,036,125  at December  31, 2003, a decrease of $248,930 or 4.9% as a result of
decreased  inventory  purchases during the nine months ended September 30, 2004.
At September 30, 2004 and December 31, 2003,  $1,725,354  and $3,426,342 of such
inventories had been purchased from Soyo Taiwan.

Accounts payable - Soyo Computer,  Inc. decreased to $3,378,191 at September 30,
2004,  as compared to  $6,557,253 at December 31, 2003, a decrease of $3,179,062
or 48.5%, as a result of payments on account  exceeding new inventory  purchases
during 2004.

Accounts  payable - other  increased to  $8,300,440  at September  30, 2004,  as
compared to $5,475,999 at December 31, 2003, an increase of $2,824,441 or 51.6%,
as a result of increased inventory purchases from other suppliers.

Accrued liabilities  increased to $692,200 at September 30, 2004, as compared to
$592,984 at December  31, 2003,  an increase of $44,968 or 7.6%,  as a result of
increased   accruals   with  respect  to   professional   fees,   insurance  and
personnel-related costs.

Investing  Activities.  The  Company  expended  $154,870  in 2004 for  leasehold
improvements  and office  furniture with respect to the Company's new office and
warehouse facility. Additions to property and equipment in 2003 were $2,512.

Financing  Activities.  During  March  2003,  Nancy  Chu,  the  Company's  Chief
Financial Officer,  director and major shareholder,  loaned the Company $360,000
for working  capital  purposes,  of which  $120,000 was repaid during  September
2003.  During the nine months ended  September 30, 2004,  the Ms. Chu loaned the
Company an additional $207,707.  These loans are non-interest bearing and due on
demand.


                                       25
<PAGE>
<TABLE>
<CAPTION>

On March 29, 2004, LGT Computer, Inc. loaned the Company $213,750 pursuant to an
unsecured note payable due March 28, 2005, with interest at 4% per annum. On May
29, 2004, LGT Computer,  Inc. loaned the Company an additional $700,000 pursuant
to an unsecured note payable due May 29, 2005, with interest at 4% per annum.

Principal Commitments:

A summary of the Company's contractual cash obligations as of September 30, 2004
is as follows:

                                                   Payments Due By Period
                                                   ----------------------

Contractual                            Less than     Between      Between       After
Cash Obligations            Total       1 year      2-3 years    4-5 years     5 years
----------------         ----------   ----------   ----------   ----------   ----------
<S>                      <C>          <C>          <C>          <C>          <C>
Operating leases         $  871,689   $  202,438   $  421,111   $  248,140   $     --
Notes payable               913,750      913,750         --           --           --

Advances from officer,
  director and major
  shareholder               447,707      447,707         --           --           --
                         ----------   ----------   ----------   ----------   ----------
Total contractual cash
  obligations            $2,233,146   $1,563,895   $  421,111   $  248,140   $     --
                         ==========   ==========   ==========   ==========   ==========
</TABLE>


Off-Balance Sheet Arrangements:

At September 30, 2004, the Company did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.

Commitments and Contingencies:

At September  30, 2004,  the Company did not have any material  commitments  for
capital expenditures.

Recent Accounting Pronouncements:

In August  2001,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of  Financial  Accounting  Standards  No. 143,  "Accounting  for Asset
Retirement  Obligations"  ("SFAS No.  143").  SFAS No. 143 addresses the diverse
accounting practices for obligations  associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company adopted
SFAS No. 143  effective  January 1, 2003.  The  adoption of SFAS No. 143 did not
have a significant effect on the Company's financial  statement  presentation or
disclosures.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal  of  Long-Lived  Assets",  which  addresses  financial  accounting  and
reporting for the  impairment or disposal of long-lived  assets.  While SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", it retains many of the fundamental
provisions of that statement. The Company adopted SFAS No. 144 effective January
1, 2002.  The adoption of SFAS No. 144 did not have a significant  effect on the
Company's financial statement presentation or disclosures.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections".
SFAS No.  145  rescinds  SFAS 4,  which  required  all  gains  and  losses  from
extinguishment  of debt to be  aggregated  and, if  material,  classified  as an
extraordinary  item, net of related income tax effect. Upon adoption of SFAS No.
145,  the Company  will be required to apply the criteria in APB Opinion No. 30,
"Reporting  the Results of  Operations -- Reporting the Effects of Disposal of a
Segment of a Business,  and  Extraordinary,  Unusual and Infrequently  Occurring
Events and Transactions"  (Opinion No. 30), in determining the classification of



                                       26
<PAGE>

gains and losses resulting from the extinguishment of debt.  Additionally,  SFAS
No. 145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to  sale-leaseback  transactions to be accounted for in
the same manner as sale-leaseback transactions. The Company adopted SFAS No. 145
effective  January 1, 2003. The adoption of SFAS No. 145 for  long-lived  assets
held  for use did not  have a  significant  effect  on the  Company's  financial
statement presentation or disclosures.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit and Disposal Activities".  SFAS No. 146 nullifies Emerging Issues Task
Force  ("EITF")  Issue No. 94-3,  "Liability  Recognition  for Certain  Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)".  Under EITF Issue No. 94-3, a liability for
an exit cost is  recognized  at the date of an  entity's  commitment  to an exit
plan.  Under SFAS No. 146, the  liabilities  associated with an exit or disposal
activity  will be measured at fair value and  recognized  when the  liability is
incurred  and meets the  definition  of a  liability  in the  FASB's  conceptual
framework.  SFAS No. 146 is effective for exit or disposal activities  initiated
after  December  31, 2002.  The adoption of SFAS 146 did not have a  significant
effect on the Company's financial statement presentation or disclosures.

In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123". SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair value based method of accounting  for  stock-based  employee  compensation.
SFAS No. 148 also  amends the  disclosure  requirements  of SFAS No. 123 and APB
Opinion No. 28, "Interim Financial Reporting",  to require prominent disclosures
in both annual and interim  financial  statements about the method of accounting
for  stock-based  employee  compensation  and the effect of the  method  used on
reported results.  The Company  implemented SFAS No. 148 effective  December 31,
2002.  The  Company  has  determined  that  it  will  continue  to  account  for
stock-based employee compensation in accordance with APB No. 25.

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments  and  Hedging  Activities".  SFAS  No.  149  amends  and
clarifies under what circumstances a contract with initial investments meets the
characteristics  of a  derivative  and when a  derivative  contains a  financing
component.  SFAS No. 149 is  effective  for  contracts  entered into or modified
after June 30,  2003.  The  adoption of SFAS No. 149 did not have a  significant
effect on the Company's financial statement presentation or disclosures.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments with  Characteristics of both Liabilities and Equity".  SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities  and  equity.  SFAS No.  150  requires  that an  issuer  classify  a
financial  instrument  that is within its scope as a  liability  (or an asset in
some circumstances)  because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial  instruments entered into or
modified  after May 31, 2003 and  otherwise is effective at the beginning of the
first  interim  period  beginning  after  June 15,  2003.  SFAS No. 150 is to be
implemented  by  reporting  the  cumulative  effect  of a change  in  accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still  existing  at the  beginning  of the interim  period of  adoption.
Restatement  is not  permitted.  The  adoption  of SFAS  No.  150 did not have a
significant  effect  on  the  Company's  financial  statement   presentation  or
disclosures.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure  Requirements for Guarantees,  Including  Indirect  Guarantees of
Indebtedness to Others" ("FIN 45"), an interpretation of FASB Statements Nos. 5,
57 and 107 and a rescission of FASB  Interpretation No. 34. FIN 45 elaborates on



                                       27
<PAGE>

the  disclosures  to be made by a guarantor in its interim and annual  financial
statements about its obligations under guarantees  issued. FIN 45 also clarifies
that a guarantor  is required to  recognize,  at  inception  of a  guarantee,  a
liability  for  the  fair  value  of  the  obligation  undertaken.  The  initial
recognition  and  measurement  provisions of FIN 45 are applicable to guarantees
issued or modified after December 31, 2002. The disclosure  requirements  of FIN
45 are effective for  financial  statements of interim and annual  periods ended
after  December  15,  2002.  The  adoption of FIN 45 did not have a  significant
effect on the Company's financial statement presentation or disclosures.

In November 2002, the FASB's Emerging Issues Task Force ("EITF") issued EITF No.
00-21  "Revenue  Arrangements  with  Multiple  Deliverables".   EITF  No.  00-21
addresses  certain aspects of the accounting by a vendor for arrangements  under
which it will perform multiple revenue-generating activities. Specifically, EITF
No. 00-21 addresses how to determine whether an arrangement  involving  multiple
deliverables  contains  more than one unit of  accounting.  In applying EITF No.
00-21,  separate  contracts  with the same  entity or related  parties  that are
entered into at or near the same time are presumed to have been  negotiated as a
package  and  should,  therefore,  be  evaluated  as  a  single  arrangement  in
considering whether there are one or more units of accounting.  That presumption
may be overcome if there is sufficient evidence to the contrary.  EITF No. 00-21
also addresses how arrangement consideration should be measured and allocated to
the separate  units of accounting in the  arrangement.  The guidance in EITF No.
00-21 is  effective  for revenue  arrangements  entered  into in fiscal  periods
beginning after June 15, 2003. The Company adopted EITF No. 00-21 effective July
1, 2003. The adoption of EITF No. 00-21 did not have a significant effect on the
Company's financial statement presentation or disclosures.

In February 2003, the Financial Accounting Standards Board issued Interpretation
No.  46,  "Consolidation  of  Variable  Interest  Entities"  ("FIN  46"),  which
addresses  the  consolidation  by  business  enterprises  of  variable  interest
entities,  which  have  one or both of the  following  characteristics:  (1) the
equity  investment at risk is not sufficient to permit the entity to finance its
activities without additional  financial support from other parties,  or (2) the
equity investors lack one or more of the following essential  characteristics of
a controlling  financial  interest:  (a) the direct or indirect  ability to make
decisions about the entity's  activities  through voting or similar rights,  (b)
the obligation to absorb the expected losses of the entity if they occur, or (c)
the right to receive the expected  residual returns of the entity if they occur.
In addition,  FIN 46 contains detailed disclosure  requirements.  FIN 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date.  It applies in the first fiscal year or interim  period ending after March
15, 2004, to variable  interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.  Early adoption is permitted.
The Company  adopted FIN 46 as of December 31, 2003.  The adoption of FIN 46 did
not have a significant effect on the Company's financial statement  presentation
or disclosures.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The  Company  does not have any  market  risk with  respect  to such  factors as
commodity  prices,  equity  prices,  and other market changes that affect market
risk sensitive investments.

As the Company's debt obligations at September 30, 2004 are primarily short-term
in nature and non-interest  bearing,  the Company does not have any risk from an
increase in interest rates. However, to the extent that the Company arranges new
interest-bearing borrowings in the future, an increase in current interest rates
would cause a  commensurate  increase in the  interest  expense  related to such
borrowings.



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<PAGE>

The  Company  does not have any  foreign  currency  risk,  as its  revenues  and
expenses, as well as its debt obligations, are denominated and settled in United
States dollars.


ITEM 4.  CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures:

In conjunction with the audit of the Company's financial statements for the year
ended December 31, 2003,  the Company's  Chief  Executive  Officer and its Chief
Financial  Officer  reviewed and  evaluated the  effectiveness  of the Company's
disclosure  controls and  procedures  (as defined in Exchange Act Rule 13a-15(e)
and  15d-15(e)),  which are  designed to ensure that  material  information  the
Company must  disclose in its reports  filed or submitted  under the  Securities
Exchange Act of 1934, as amended (the "Exchange  Act"), is recorded,  processed,
summarized  and reported on a timely basis,  and have  concluded,  based on that
evaluation,  that  as of  such  date,  the  Company's  disclosure  controls  and
procedures were not adequate.  In addition,  the Company's  automated  financial
reporting  systems are overly  complex,  poorly  integrated  and  inconsistently
implemented.  The Company  estimates  that it may take several months to rectify
this situation.

The Company's  Chief Executive  Officer and Chief  Financial  Officer arrived at
this  conclusion  based on a number of  factors,  including  that the  Company's
system of internal  control did not: (1)  properly  record  accounts  payable to
vendors for purchases of inventory,  (2) did not properly record  adjustments to
inventory per the general  ledger to physical  inventory  balances,  (3) did not
properly record  inventory  adjustments to the lower of cost or market using the
average inventory method, (4) did not periodically  reconcile the Company's main
bank account, (5) did not have adequate controls over interim physical inventory
procedures,  and (6) did not generate timely and accurate financial  information
to allow for the preparation of timely and complete  financial  statements.  The
Company does not have an adequate  financial  reporting  process  because of the
aforementioned material weaknesses,  including the difficulty in identifying and
assembling  all  relevant  contemporaneous  documentation  for ongoing  business
transactions;   significant   turnover  in  the   Company's   financial   staff.
Accordingly,  the Company's Chief Executive  Officer and Chief Financial Officer
concluded  that  there  were  significant   deficiencies,   including   material
weaknesses,  in the Company's internal controls over its financial  reporting at
the end of the fiscal period covered by this report.

The Company has  experienced a substantial  turnover in finance  personnel.  The
Company's finance operations  continue to be understaffed and its personnel lack
comprehensive  accounting  policies and procedures to follow.  In addition,  the
Company's  personnel  need to be further  trained with respect to procedures and
systems. The Company has hired a new controller and currently is seeking to hire
additional personnel to focus on financial accounting and reporting issues.

Every quarter,  the Company's  controller  supervises the  reconciliation of the
accounts  payable   subsidiary   ledgers  with  the  general  ledger,   approves
adjustments  to  inventory  based on  reconciliation  of the  general  ledger to
physical  inventory counts,  and records  inventory  adjustments to the lower of
cost or market.

Every month,  the controller  reconciles the bank accounts and compares the bank
reconciliation  with the balance per general  ledger and the daily cash  report,
reviews the recording of accounts payable to vendors for purchases of inventory,
and prepares financial statements with a complete set of adjustments.



                                       29
<PAGE>

During the three months ended  September  30, 2004,  the Company  implemented  a
cycle count of its inventory,  with the fifty  fastest-moving  items of "Type A"
inventory  physically  counted and  reconciled  every  morning with the recorded
quantities  and  amounts.  All "Type A"  inventory  is  physically  counted  and
reconciled  every  Monday.  A  complete  inventory  is  physically  counted  and
reconciled at the end of every month.

The Chief  Executive  Office and the Chief  Financial  Officer have reviewed and
evaluated the corrective  actions listed above.  Such officers believe that such
corrective  actions  minimize  the  risk  of  material  misstatement,   but  the
corrective  actions  continue to have significant  deficiencies.  The Company is
currently  evaluating new accounting  software that it believes will address the
Company's automated financial reporting system requirements.

(b) Changes in internal control over financial reporting:

In light of the  foregoing,  management  is  taking  the  actions  that it deems
necessary to rectify the current deficiencies as described above.


                           PART II. OTHER INFORMATION


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Effective  March 31, 2004,  the Company issued  2,500,000  shares of its Class B
Convertible Preferred Stock.

For the three  months  ended  June 30,  2004,  the  Company  recorded  aggregate
dividends of $71,773,  consisting of dividends  based on the stated value of the
Class B  Convertible  Preferred  Stock of $37,500,  which were declared and paid
through  the  issuance of an  additional  37,500  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $34,273.

For the three months ended  September 30, 2004, the Company  recorded  aggregate
dividends of $74,220,  consisting of dividends  based on the stated value of the
Class B  Convertible  Preferred  Stock of $38,062,  which were declared and paid
through  the  issuance of an  additional  38,062  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $36,158.

For the nine months ended  September 30, 2004,  the Company  recorded  aggregate
dividends of $145,993,  consisting of dividends based on the stated value of the
Class B  Convertible  Preferred  Stock of $75,562,  which were declared and paid
through  the  issuance of an  additional  75,562  shares of Class B  Convertible
Preferred  Stock,  and  dividends  based on the accretion of the discount on the
Class B Convertible Preferred Stock of $70,431.


ITEM 6.  EXHIBITS

A list of  exhibits  required to be filed as part of this report is set forth in
the  Index  to  Exhibits,  which  immediately  precedes  such  exhibits,  and is
incorporated herein by reference.


                                       30
<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.




                                               SOYO GROUP, INC.
                                           ------------------------
                                                (Registrant)




DATE:  November 17, 2004                By: /s/ MING TUNG CHOK
                                           ------------------------
                                           Ming Tung Chok
                                           President and Chief
                                           Executive Officer







DATE:  November 17, 2004                By: /s/ NANCY CHU
                                           ------------------------
                                           Nancy Chu
                                           Chief Financial Officer
















                                       31
<PAGE>

                                INDEX TO EXHIBITS



Exhibit
Number         Description of Document
------         -----------------------

31.1           Certification  pursuant to Section 302 of the  Sarbanes-Oxley Act
               of 2002 - Ming Tung Chok

31.2           Certification  pursuant to Section 302 of the  Sarbanes-Oxley Act
               of 2002 - Nancy Chu

32             Certification  pursuant to Section 906 of the  Sarbanes-Oxley Act
               of 2002 - Ming Tung Chok and Nancy Chu

















                                       32