UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-QSB
 
 (X)
              QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30,
      2006
 
 (_)
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the transition period from _____________ to _____________
 
 Commission
File No. 000-29019
  CHINA
ENTERTAINMENT GROUP, INC.
 (Name
of small business issuer as specified in its charter)
  NEVADA
              
              22-3617931(State
      or jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)Unit
      3409 Shun Tak Centre, West Tower,
                168-200
      Connaught Road Central, Hong Kong
              
              n/a(Address
      of principal executive offices)
              
              (Zip
      Code)
 
 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 oNo þ
  The
registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act).     Yes oNo þ
  APPLICABLE
ONLY TO CORPORATE ISSUERS:
 
 State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practical date.  As of February 20, 2008, there were
approximately 128,963,425 shares of the issuer's $.001 par value common stock
issued and outstanding.
  Transitional
Small Business Disclosure Form (Check one):  Yes o No þ
  
 
 TABLE OF
CONTENTS
 TO
QUARTERLY REPORT ON FORM 10-QSB
 FOR
PERIOD ENDED SEPTEMBER 30, 2006
 
  PagePART
      I
              FINANCIAL
      INFORMATION
              
              1Item
      1.
              Financial
      Statements
              
              1Condensed
      Consolidated Balance Sheet (unaudited)
              
              1Condensed
      Consolidated Statement of Income (unaudited)
              
              2Condensed
      Consolidated Statement of Cash Flows (unaudited)
              
              3Notes
      to Condensed Consolidated Financial Statements
              
              4Item
      2.
              Management’s
      Discussion and Analysis or Plan of Operations
              
              10Item
      3.
              Controls
      and Procedures
              
              15PART
      II
              OTHER
      INFORMATION
              
              16Item
      1.
              Legal
      Proceedings
              
              16Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              16Item
      3.
              Defaults
      Upon Senior Securities
              
              16Item
      4.
              Submission
      of Matters to Vote of Security Holders
              
              16Item
      5.
              Other
      Information
              
              16Item
      6.
              Exhibits
              
              16Signatures
              
              17
  (REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
  
 
 PART
I - FINANCIAL INFORMATION
 
 ITEM
      1.
              FINANCIAL
      STATEMENTS
  CHINA
ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEET (UNAUDITED)
 
 September
      30, 2006
                
                
                December
      31,
                  2005$
                
                
                
                $ASSETSCurrent
      AssetsCash
      and cash equivalents
                
                
                976,162
                
                
                
                269,760Accounts
      receivable
                
                
                54,214
                
                
                
                86,120Deposits
      paid to artists, prepaid expenses and other current assets
                
                
                1,258,840
                
                
                
                2,069,192Amount
      due from an affiliate
                
                
                15,771
                
                
                
                739,928Total
      current assets
                
                
                2,304,987
                
                
                
                3,165,000Fixed
      assets, net
                
                
                40,561
                
                
                
                48,570Total
      assets
                
                
                2,345,548
                
                
                
                3,213,570LIABILITIES AND STOCKHOLDERS’
      DEFICIENCYCurrent
      LiabilitiesAccounts
      payable
                
                
                132,631
                
                
                
                127,877Accrued
      expenses and other liabilities
                
                
                123,539
                
                
                
                320,042Deposits
      received from customers
                
                
                1,348,042
                
                
                
                1,559,116Amounts
      due to affiliates
                
                
                1,656,915
                
                
                
                1,870,536Total
      current liabilities
                
                
                3,261,127
                
                
                
                3,877,571Commitments
      and contingenciesStockholders’
      DeficiencyCommon
      stock, $0.001 par value; 200,000,000 shares authorized;128,963,425
      shares issued and outstanding
                
                
                128,963
                
                
                
                128,963Additional
      paid-in capital
                
                
                118,762
                
                
                
                118,762Accumulated
      deficit
                
                
                (1,163,304
                )
                
                
                (911,726
                )Total
      stockholders’ deficiency
                
                
                (915,579
                )
                
                
                (664,001
                )Total
      liabilities and stockholders’ deficiency
                
                
                2,345,548
                
                
                
                3,213,570
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  1
  CHINA
ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
 
 Three
      months ended
                  September
      30,
                
                
                Nine
      months ended
                  September
      30,2006
                
                
                2005
                
                
                2006
                
                
                2005$
                
                
                $
                
                
                $
                
                
                $Revenue,
      net
                
                
                75,375
                
                
                
                87,142
                
                
                
                848,052
                
                
                
                931,363Other
      revenue
                
                
                186
                
                
                
                114
                
                
                
                738
                
                
                
                370Reversal
      of provision for impairment of amount due from an
affiliate
                
                
                -
                
                
                
                -
                
                
                
                88,738
                
                
                
                -General
      and administrative expenses
                
                
                (257,351
                )
                
                
                (267,317
                )
                
                
                (858,755
                )
                
                
                (805,990
                )Provisions
      for impairment of deposits paid and other current assets
                
                
                (3,324
                )
                
                
                -
                
                
                
                (330,350
                )
                
                
                -(Loss)
      income before income taxes
                
                
                (185,114
                )
                
                
                (180,061
                )
                
                
                (251,577
                )
                
                
                125,743Income
      tax expenses
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Net
      (loss) income
                
                
                (185,114
                )
                
                
                (180,061
                )
                
                
                (251,577
                )
                
                
                125,743Basic
      and diluted (loss) earning  per share
                
                
                (0.001
                )
                
                
                (0.001
                )
                
                
                (0.002
                )
                
                
                0.001Basic
      and diluted weighted average shares outstanding
                
                
                128,963,425
                
                
                
                127,708,769
                
                
                
                128,963,425
                
                
                
                127,708,769
 
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  2
  CHINA
ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED)
 
 Nine
      months ended
                  September
      30,2006
                
                
                2005$
                
                
                
                $Operating
      activitiesNet
      (loss) income
                
                
                (251,577
                )
                
                
                125,743Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activitiesDepreciation
                
                
                8,156
                
                
                
                2,811Provisions
      for impairment of deposits paid and other current assets
                
                
                330,350
                
                
                
                -Changes
      in operating assets and liabilitiesDecrease
      in accounts receivable
                
                
                31,906
                
                
                
                18,179Decrease
      in deposits paid, prepaid expenses and other current
assets
                
                
                480,001
                
                
                
                756,114Decrease
      in accounts payable, accrued expenses, other liabilities and deposits
      received
                
                
                (402,823
                )
                
                
                (509,956
                )Decrease
      in income taxes payable
                
                
                -
                
                
                
                (26,679
                )Net
      cash provided by operating activities
                
                
                196,013
                
                
                
                366,212Investing
      activitiesPurchase
      of fixed assets
                
                
                (147
                )
                
                
                (53,432
                )Net
      cash used in investing activities
                
                
                (147
                )
                
                
                (53,432
                )Financing
      activitiesProceeds
      from bank loan
                
                
                -
                
                
                
                298,739Advances
      from (repayments to) affilities
                
                
                510,536
                
                
                
                (398,909
                )Net
      cash provided by (used in) financing activities
                
                
                510,536
                
                
                
                (100,170
                )Increase
      in cash and cash equivalents
                
                
                706,402
                
                
                
                212,610Cash
      and cash equivalents, beginning of period
                
                
                269,760
                
                
                
                79,120Cash
      and cash equivalents, end of period
                
                
                976,162
                
                
                
                291,730
   The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3
  CHINA ENTERTAINMENT GROUP,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   Note
      1.
                LIQUIDITY
      AND GOING CONCERN
 
 As of
September 30, 2006 and December 31, 2005, the Company had negative working
capital and accumulated deficit. These matters raise substantial doubt about the
Company’s ability to continue as a going concern. Although the Company expects
to incur additional losses for at least next twelve months, the Company
anticipates that its current cash and cash equivalents and the ability to borrow
from affiliates will be sufficient to fund its operations at least through
September 30, 2007. This assumes the Company either achieves profitable
operations and the cash burn rate from the results experienced in the recent
past does not increase significantly. If, however, the Company is unable to
realize profitable operations and additional resources are required to operate,
the Company may be forced to borrow additional funds, which could increase the
risk of operating as a going concern, or cease operations. The condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities or any other adjustments that might be necessary
should the Company be unable to continue as a going concern.
 
 
 Note
      2.
                SUMMARY
      OF PRINCIPAL ACCOUNTING POLICIES
 
 Basis
of presentation
 
 The
condensed consolidated financial statements include the accounts of China
Entertainment Group, Inc. and its subsidiaries. The condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”). All significant
intercompany transactions and balances have been eliminated.
 
 The
condensed consolidated financial statements are unaudited and, in our opinion,
include all adjustments, consisting of normal recurring adjustments and accrued
expenses necessary for a fair presentation of our condensed consolidated balance
sheets, operating results and cash flows for the periods presented. Operating
results for the periods presented are not necessarily indicatives of the results
for a full year. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with US GAAP have been condensed
or omitted in accordance with the rules and regulations of the Securities and
Exchange Commission (“SEC”). The condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and accompanying notes included in the 2005 annual report on Form
10-KSB.
 
 Reclassifications
 
 Certain
financial statements line items have been reclassified to conform to the current
period presentation and have no impact on the previously reported consolidated
net revenue, operating result, or net financial position.
 
 Concentration
risk
 
 The
Company is subject to certain concentration of risk as follow:
  ·
                Due to accounts
      receivable – Accounts receivable as at September 30, 2006 and
      December 31, 2005 includes 4 and 2 customers that each accounted for more
      than 10% of the accounts receivable balance as at the respective balance
      sheet date.
  4
 
 CHINA ENTERTAINMENT GROUP,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 ·
                Due to revenues and major
      customers – For the three months ended September 30, 2006 and 2005,
      3 artists that each accounted for more than 10% of the Company’s net
      revenue during the corresponding period.  For the nine months
      ended September 30, 2006 and 2005, 4 and 3 artists that each accounted for
      more than 10% of the Company’s net revenue during the corresponding
      period.
 
 Share-based
compensation
 
 Prior to
January 1, 2006, the Company applied Statement of Financial Accounting Standards
(“SFAS”) 123 and Accounting Principle Board Opinion (“APB”) No. 25 in accounting
for its stock option plans that no compensation cost would be recognized in the
Company’s consolidated financial statements for stock options granted under any
of the stock option plans which on the date of grant the exercise price per
share was equal to or exceeded the fair value per share. Compensation cost was
only recognized for warrants and options granted to non-employees for services
provided. Effective January 1, 2006, the Company adopted the provisions of SFAS
123-R, Share-Based
Payment (“SFAS 123(R)”). SFAS 123(R) requires that all share-based
payments to employees, including grants of stock options, is measured based on
their grant-date fair value and recognize as expense. The adoption of SFAS
123(R) has no significant impact on the result of operations for the three
months and nine months ended September 30, 2006 as the Company did not have
share-based compensation during those periods.
 
 
 Note
      3.
                RECENT
      ACCOUNTING PRONOUNCEMENTS
 
 In
February 2006, the Financial Accounting Standards Board (the
“FASB”) issued SFAS 155, Accounting for Certain Hybrid
Financial Instruments – an amendment of FASB Statements 133 and 140
(“SFAS 155”).  SFAS 155 will be effective for the Company beginning
January 1, 2007.  The statement permits interests in hybrid financial
instruments that contain an embedded derivative that would otherwise require
bifurcation, to be accounted for as a single financial instrument at fair value,
with changes in fair value recognized in earnings. This election is permitted on
an instrument-by-instrument basis for all hybrid financial instruments hold,
obtain, or issue as of the adoption date. The Company does not expect there to
be any significant impact of adopting SFAS 155 on its consolidated financial
positions, cash flows and results of operation.
 
 In June
2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”),
which clarifies the accounting for uncertainty in tax positions. This
interpretation requires that the Company recognize in its financial statements
the impact of a tax position if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for the Company on January 1, 2007, with
the cumulative effect of the change in accounting principle, if any, recorded as
an adjustment to opening retained earnings. The Company does not expect there to
be any significant impact of adopting FIN 48 on its consolidated financial
positions, cash flows and results of operation.
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurements
(“SFAS 157”), which provides guidance about how to measure assets and
liabilities that use fair value. SFAS 157 will apply whenever another US GAAP
requires (or permits) assets or liabilities to be measured at fair value but
does not expand the use of fair value to any new circumstances. This standard
will also require additional disclosures in both annual and quarterly reports.
SFAS 157 will be effective for financial statements issued for fiscal years
beginning after November 15, 2007, and will be adopted by us beginning in the
first quarter of 2008.  The Company does not expect there to be any
significant impact of adopting SFAS 157 on its consolidated financial positions,
cash flows and results of operation.
 
 In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 108,
Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (“SAB 108”). SAB 108 was issued to eliminate the
diversity of practice in how public companies quantify misstatements of
financial statements, including misstatements that were not material to prior
years’ financial statements.  The Company began to apply the
provisions of SAB 108 to its annual financial statements for the year ending
December 31, 2006.  The application of this guidance has not had a
material effect on the Company’s consolidated financial positions, cash flows
and results of operation.
  5
  CHINA ENTERTAINMENT GROUP,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (“SFAS 159”), which will be effective for the Company beginning
January 1, 2008. This standard permits entities to choose to measure many
financial instruments and certain other items at fair value and consequently
report unrealized gains and losses on such items in earnings. The Company does
not expect there to be any significant impact of adopting this standard on its
consolidated financial positions, cash flows and results of
operation.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force (“EITF”)), the American Institute of Certified Public
Accountants (“AICPA”), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future consolidated financial
statements.
 
 
 Note
      4.
                SEGMENT
      INFORMATION
 
 Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operation decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Metrolink Pacific Limited (“MPL’s”)
wholly-owned subsidiaries are as follows: Anglo Market International
Limited ("AMIL"), China Star Management Limited ("CSML"), and Metrolink Global
Limited ("MGL"). The principal activities of MPL’s subsidiaries are the
provision of artist management services. The “other” column represents
unallocated corporate-related costs of the parent company.
 
 The
Company’s segment information for the three and nine months ended September 30,
2006 and 2005 and as at September 30, 2006 and 2005 are as follows:
 
 Three
      months ended September 30, 2006
                
                AMIL
                
                
                CSML
                
                
                MGL
                
                
                OTHER
                
                
                Total$
                
                
                
                $
                
                
                
                $
                
                
                
                $
                
                
                
                $Revenue,
      net
                
                
                -
                
                
                
                75,375
                
                
                
                -
                
                
                
                -
                
                
                
                75,375Net
      loss
                
                
                (4,630
                )
                
                
                (164,617
                )
                
                
                (3,845
                )
                
                
                (12,022
                )
                
                
                (185,114
                )Total
      assets
                
                
                109,033
                
                
                
                1,320,674
                
                
                
                915,841
                
                
                
                -
                
                
                
                2,345,548
 
 Three
      months ended September 30, 2005
                
                AMIL
                
                
                CSML
                
                
                MGL
                
                
                OTHER
                
                
                Total$
                
                
                
                $
                
                
                
                $
                
                
                
                $
                
                
                
                $Revenue,
      net
                
                
                64,429
                
                
                
                22,713
                
                
                
                -
                
                
                
                -
                
                
                
                87,142Net
      income (loss)
                
                
                60,249
                
                
                
                (242,861
                )
                
                
                (3,846
                )
                
                
                6,397
                
                
                
                (180,061
                )Total
      assets
                
                
                73,874
                
                
                
                2,454,671
                
                
                
                1,322,879
                
                
                
                -
                
                
                
                3,851,424
 
 Nine
      months ended September 30, 2006
                
                AMIL
                
                
                CSML
                
                
                MGL
                
                
                OTHER
                
                
                Total$
                
                
                
                $
                
                
                
                $
                
                
                
                $
                
                
                
                $Revenue,
      net
                
                
                49,913
                
                
                
                798,139
                
                
                
                -
                
                
                
                -
                
                
                
                848,052Net
      (loss) income
                
                
                37,581
                
                
                
                40,791
                
                
                
                (270,477
                )
                
                
                (59,472
                )
                
                
                (251,577
                )Total
      assets
                
                
                109,033
                
                
                
                1,320,674
                
                
                
                915,841
                
                
                
                -
                
                
                
                2,345,548
 
 Nine
      months ended September 30, 2005
                
                AMIL
                
                
                CSML
                
                
                MGL
                
                
                OTHER
                
                
                Total$
                
                
                
                $
                
                
                
                $
                
                
                
                $
                
                
                
                $Revenue,
      net
                
                
                143,982
                
                
                
                507,936
                
                
                
                279,445
                
                
                
                -
                
                
                
                931,363Net
      income (loss)
                
                
                131,703
                
                
                
                (280,247
                )
                
                
                267,890
                
                
                
                6,397
                
                
                
                125,743Total
      assets
                
                
                73,874
                
                
                
                2,454,671
                
                
                
                1,322,879
                
                
                
                -
                
                
                
                3,851,424
  6
 CHINA ENTERTAINMENT GROUP,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
   Geographic
information is based on the location of the selling service. Revenues from
external customers by geographic region were as follows:
 
 Three
      months ended
                
                
                Nine
      months ended30
      September
                
                
                30
      September2006
                
                
                2005
                
                
                2006
                
                
                2005People’s
      Republic of China
                
                
                56
                %
                
                
                21
                %
                
                
                14
                %
                
                
                41
                %Hong
      Kong
                
                
                44
                %
                
                
                12
                %
                
                
                85
                %
                
                
                52
                %United
      States of America
                
                
                -
                
                
                
                -
                
                
                
                1
                %
                
                
                -Taiwan
                
                
                -
                
                
                
                67
                %
                
                
                -
                
                
                
                7
                %100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
 
 
 Note
      5.
                PROVISIONS
      FOR IMPAIRMENT OF DEPOSITS PAID
 
 Certain
of the artist management contracts were expired during the three months and nine
months ended September 30, 2006 and the Company has made provisions for
impairment of deposits paid in the amount of approximately $3,000 and $328,000,
respectively.
   Note
      6.
                INCOME
      TAX EXPENSES
 
 No income
tax expenses were provided for the three and nine months ended September 30,
2006 and 2005 as the Company and its subsidiaries did not have assessable profit
at each period presented.
 
 
 Note
      7.
                CONTINGENCIES
 
 Litigations
 
 Lang, et
al. v. Welch, et al. (China Entertainment Group, Inc.) (United States District
Court, Central District California, Case No. CV 07-1068-GHK-PJWx). On December
20, 2006, plaintiffs Sanford Lang and Martin Goldrod (collectively,
“Plaintiffs”) initiated a lawsuit in the Los Angeles Superior Court, Central
District, alleging claims for fraud, breach of contract, violations of RICO, and
civil conspiracy against several parties, including the Company. The Company was
provided with a copy of Plaintiffs’ Complaint on or about February 28, 2007,
after the matter was removed to United States District Court. According to the
Complaint, the Company is “a nominal Defendant” as Plaintiffs purport to assert
claims derivatively on its behalf. Accordingly, it appears that no relief is
being sought against the Company itself. On or about January 31, 2008,
Plaintiffs and Defendants, including the Company, entered into a confidential
settlement agreement to resolve all claims pending between them. The parties
submitted a Joint Stipulation to Stay all proceedings in the action to allow for
the satisfaction of certain obligations set forth in the confidential settlement
agreement. Subject to satisfactory discharge of those obligations, it is
anticipated that a dismissal of the action will be filed no later than early
January 2009.
  7
  CHINA ENTERTAINMENT GROUP,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
  SEC
filings
 
 The
Company has failed to comply with substantially all of the obligations imposed
upon it by the Securities Exchange Act of 1934 Act (the “1934 Act”) and is
delinquent in filing its periodic filings including its annual report on Form
10-KSB for 2006 and its 2006 and 2007 quarterly reports on Form 10-QSB. As a
result, the Company and its officers and directors could be subject to
substantial civil and criminal penalties due to such non-compliance. There can
be no assurance that substantial civil and criminal penalties will not be
imposed.
  
 Note
      8.
                RELATED
      PARTY TRANSACTIONS
 
 Amounts
due from/to affiliates are unsecured, interest-free and due on demand. The
following table summarizes significant related party balances as at September
30, 2006 and December 31, 2005:
 
 Related
      party
                
                Nature
      of
                  relationship
                  and
      control
                
                Description
      of
                  transactions
                
                September
      30, 2006
                
                
                December
      31, 2005$
                
                
                
                $Due
      fromTogether
      Again Limited (“TAL”)
                
                Intermediate
      holding company, 51% owned by Colima Enterprise Holdings, Inc. (“Colima”)
      and 49% owned by China Star Entertainment Limited (“China
      Star”)
                
                Amount
      receivable in relation to service income and funds transferred between
      entities for working capital purposes
                
                
                15,771
                
                
                
                739,928Due
      toMs.
      Chen Ming Yin, Tiffany
                
                Director
      of the Company
                
                Director
      compensation
                
                
                11,538
                
                
                
                19,231Mr.
      Tang Chien Chang
                
                Director
      of the Company
                
                Funds
      transferred to the Company for working capital purposes
                
                
                250,005
                
                
                
                292,037Imperial
      International Limited
                
                Intermediate
      holding company, ultimately owned by Colima
                
                Funds
      transferred between entities for working capital purposes
                
                
                666,797
                
                
                
                671,028China
      Star HK Distribution Limited (“China Star Distribution”)
                
                Related
      company, a subsidiary of China Star which owned 49% of TAL
                
                Amount
      receivable in relation to service income and funds transferred between
      entities for working capital purposes
                
                
                728,575
                
                
                
                888,2401,656,915
                
                
                
                1,870,536
  8
  CHINA ENTERTAINMENT GROUP,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 Related
party transactions included in the condensed consolidated statement of income
for the periods presented include the following:
 
 Related
      party
                
                Nature
      of
                  relationship
                  and
      control
                
                Description
                  of
                  transactions
                
                Three
      months ended
                  September
      30,
                
                
                Nine
      months ended
                  September
      30,2006
                
                
                2005
                
                
                2006
                
                
                2005$
                
                
                
                $
                
                
                
                $
                
                
                
                $China
      Star Distribution
                
                Related
      company, a subsidiary of China Star which owned 49% of TAL
                
                Services
      income, net
                  (note
      a)
                
                
                -
                
                
                
                -
                
                
                
                572,615
                
                
                
                377,821China
      Star
                
                Related
      company, owned 49% of TAL
                
                Management
      fee paid
                  (note
      b)
                
                
                26,923
                
                
                
                26,923
                
                
                
                80,769
                
                
                
                80,769China
      Star Laser Disc Company Limited
                
                Related
      company, a subsidiary of China Star which owned 49% of TAL
                
                Management
      fee paid
                  (note
      b)
                
                
                126,923
                
                
                
                126,923
                
                
                
                380,769
                
                
                
                380,769
 
 Notes:
                (a)
                The
      transactions were carried out at market price or, where no market price
      was available, at cost plus a percentage profit
mark-up.(b)
                The
      transactions were carried out at terms agreed between both
      parties.
   Note
      9.
                SUBSEQUENT
      EVENT
 
 On
January 17, 2008, the Company entered into an agreement (the “Agreement”) with
Imperial International Limited (“Imperial”), an intermediate holding company,
that the Company agreed to sell and Imperial agreed to purchase 100% of total
issued and paid up capital of MPL (the “Disposal”) at a consideration of $1 with
effect from December 31, 2007.
    9
 ITEM
      2.
                MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS.
 THIS
FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF MANAGEMENT
OF THE COMPANY.  FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT
ESTIMATE THE HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL
FACT.  FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT",
"ESTIMATE", "ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD",
"CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE
TERMS.  THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING
INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS
MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE REASONABLE.  OUR
FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO
REPRESENTATION, GUARANTEE, OR WARRANTY IS TO BE INFERRED FROM THOSE
FORWARD-LOOKING STATEMENTS.
 
 THE
ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE
FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBECT TO
UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER
CIRCUMSTANCES.  AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF
DATA AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS
FROM AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS.  WE CANNOT
GUARANTY THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
 
 INTRODUCTION
 
 China
Entertainment Group, Inc. (together with our direct and indirect subsidiaries,
and their respective predecessors, unless the context otherwise requires, (the
"Company") is a multi-faceted entertainment company with historically profitable
operations in film, television, print and music artist management fees comprised
of talent development fees, artist casting, booking and brokering commissions,
and artist promotional fees. Our Company's Board of Directors and management
team is comprised of senior management from the group headed by China Star
Entertainment Limited ("China Star", together with its subsidiaries "China Star
Group"), a Hong Kong listed company and one of the largest media companies in
Asia.
 
 As of
September 30, 2006, we owned all of the equity interest in Metrolink Pacific
Limited ("MPL"), a British Virgin Islands corporation. MPL, in turn, owns a 100%
equity interest in Anglo Market International Limited, a corporation
incorporated in the British Virgin Islands on September 15, 2000, a 100% equity
interest in China Star Management Limited, a company incorporated in Hong Kong
on September 6, 1985, and a 100% equity interest in Metrolink Global Limited, a
corporation incorporated in the British Virgin Islands on September 10, 2004.
MPL's subsidiaries currently provide artist management, talent development and
artist brokering services.   Our principal executive office is
located at Unit 3409 Shun Tak Centre, West Tower, 168-200 Connaught Road
Central, Hong Kong. Our telephone number is 011-852-2313-1888.
 
 HISTORICAL
BACKGROUND
 
 We were
originally incorporated in the state of Nevada as Shur De Cor, Inc. ("Shur De
Cor") on August 14, 1987. By 1999, Shur De Cor was a public company with no
operations searching for a business opportunity. In April 1999, Shur De Cor
merged with Interactive Marketing Technology, Inc., a New Jersey corporation
("Interactive New Jersey"), in an arm's length transaction. Interactive New
Jersey was engaged in the business of direct marketing of consumer products and
desired to become a public company. Shur De Cor was the surviving corporation
and changed its name to Interactive Marketing Technology, Inc. Shur De Cor's
management resigned and the management of Interactive New Jersey filled the
vacancies.
 
 Through
our then wholly owned subsidiary, IMT's Plumber, Inc., we produced, marketed,
and sold a licensed product called the Plumber's Secret, which was discontinued
during fiscal 2001. In May 2002, we discontinued our former business and
actively sought to either acquire a third party, merge with a third party or
pursue a joint venture with a third party in order to re-enter our former
business of direct marketing of proprietary consumer products in the United
States and worldwide.
 
 On
November 17, 2004, our Board of Directors unanimously approved, subject to
shareholder approval, entering into a Share Exchange Agreement (the "Agreement")
with MPL, an international business company organized to do business under the
laws of the British Virgin Islands. At that time, MPL was wholly owned by
Imperial International Limited ("Imperial"), a company incorporated under the
laws of the British Virgin Islands. The parent company and 100% owner of
Imperial is Together Again Limited ("Together Again").
  10
 
 On
November 17, 2004, the Board also approved, subject to shareholder approval,
amendments to our Articles of Incorporation to change our corporate name ("Name
Change") from Interactive Marketing Technology, Inc. to China Artists Agency,
Inc. ("China Artists"), and to increase the authorized common stock of the
Company to 200,000,000 shares (the "Authorized Share Increase"). On that same
date, and also subject to shareholder approval, the Board also approved a 1 for
1.69 reverse stock split to accommodate the terms of the Agreement (the "Reverse
Split"), and a spin-off of the Company's existing business, including its assets
and liabilities, into a Nevada corporation formed as the Company's wholly owned
subsidiary into a separate public company by means of pro-rata share dividend
(the "Spin-off").
 
 The
above-described actions approved by the Board also required approval by a
majority of the Company's shareholders under Nevada Revised Statutes. Thus, on
November 15, 2004, as authorized by the Nevada Revised Statutes, the majority
shareholders, who together owned 50.4% of our issued and outstanding shares of
common stock, approved the Agreement, the Authorized Share Increase, the Name
Change, the Reverse Split, and the Spin-off by action of written
consent.
 
 On
November 17, 2004, the Company, as contemplated under the Agreement, issued an
aggregate of 109,623,006 shares of its common stock to Imperial, the sole
shareholder of MPL, in exchange for 100% of the issued and outstanding shares of
MPL capital stock transferred to China Artists by Imperial at the closing (the
"Share Exchange"). The acquisition of the 100% interest includes MPL's interests
in its subsidiaries, Anglo Market International Limited, China Star Management
Limited, and Metrolink Global Limited (hereinafter MPL and its subsidiaries are
collectively referred to as the "Metrolink Group"). Upon completion of the Share
Exchange, MPL became the Company's wholly owned subsidiary and China Artist's
former owner subsequently transferred control of China Artists to
Imperial.  We relied on Rule 506 of Regulation D of the Securities Act
of 1933, as amended, (the "Act") in regard to the shares that we issued pursuant
to the Share Exchange.  We believe this offering qualified as a
"business combination" as defined by Rule 501(d).  Reliance on Rule
506 requires that there are no more than 35 non-accredited purchasers of
securities from the issuer in an offering under Rule 506.  MPL
represented to us that it had one stockholder who certified that it was an
`accredited investor' as defined in Rule 501(a) of Regulation D.  MPL
also represented to us that there had been no advertising or general
solicitation in connection with this transaction.  The Company's
Certificate of Amendment to our Articles of Incorporation to effect the Name
Change, the Reverse Split, and the Authorized Share Increase was filed with the
Nevada Secretary of State and became effective on December 21, 2004. Concurrent
with Name Change, Reverse Split and Authorized Share Increase, the Company also
obtained a new stock symbol, "CAAY", and a new CUSIP Number.  The new
stock symbol and CUSIP number also became effective on December 21,
2004.
 
 The
Spin-off, which was approved by both the Board and the majority shareholders
prior to the closing of the Agreement, resulted in the formation of a separate
public company, All Star Marketing, Inc. ("All Star"). All Star is a Nevada
corporation and it was formed as a wholly owned subsidiary of the Company. The
Spin-off was satisfied by means of a pro-rata share dividend to the Company's
shareholders of record as of December 10, 2004. The purpose of the Spin-Off was
to allow the subsidiary to operate as a separate public company and raise
working capital through the sale of its own equity. This allows our management
to focus exclusively on our business after the Share Exchange, while at the same
time, allowing the spun-off company to have greater exposure by trading as an
independent public company. Additionally, the shareholders and the market can
then more easily identify the results and performance of the Company as a
separate entity from that of All Star.
 
 On June
27, 2005, the Company's Board of Directors and the Company's majority
shareholder approved and authorized a name change to China Entertainment Group,
Inc.  The Certificate of Amendment to our Articles of Incorporation to
effect our name change to China Entertainment Group, Inc. was filed with the
Nevada Secretary of State and became effective on August 4, 2005. Concurrent
with the Name Change, we also obtained a new stock symbol, "CGRP", and a new
CUSIP Number.  The new stock symbol and CUSIP number became effective
on August 9, 2005.
  As
discussed more fully in the Company’s Current Report on Form 8-K (the “Form
8-K”) filed concurrently with this Form 10-QSB, on January 17, 2008, the Company
entered into an Agreement (“Agreement”) with Imperial, the Company’s current
majority shareholder, pursuant to which the Company agreed to sell and Imperial
agreed to purchase substantially all of the Company’s
assets.  Pursuant to the Agreement, the Company will sell 100% of
total issued and paid up capital of MPL, the Company’s wholly-owned subsidiary
and operating business to Imperial with effect from December 31, 2007 in
exchange for Imperial’s payment of US$1 to the Company (the “Asset Sale”) at the
closing of the Asset Sale transaction (the “Closing”).  The Closing of
the proposed Asset Sale transaction is subject to the satisfaction of all of the
closing conditions set forth in the Agreement including majority shareholder
approval of the Asset Sale, and also the Company’s compliance with the
shareholder notification provisions of Section 14(c) of the Securities Exchange
Act of 1934, as amended, and Regulation 14C thereunder as applicable to the
Asset Sale, and thus the Closing date of the Asset Sale is
uncertain.  If the proposed Asset Sale transaction is completed, the
Company presently intends to maintain its corporate existence. 
Although there are no specific plans, Company expects that it may seek to find a
private, operating company with which to combine.  In the event Company can
find and complete any such transaction, it is generally to be expected that the
current owners of Company, in the aggregate, would have a significantly
reduced equity ownership of the surviving company.  There can be
no assurance that Company will be able to identify any business with which the
Company may conduct a business combination, nor that any such transaction
could be completed.  The Agreement was attached to the Form 8-K as
Exhibit 10.1 and is incorporated herein by reference; provided, however, that
the warranties and representations contained in such agreement are made solely
to Imperial and solely for purposes of the proposed Asset Sale.  The
foregoing summary and description do not purport to be complete and are
qualified in their entirety by reference to the Agreement.
 We are
currently authorized to issue 200,000,000 shares of common stock, $0.001 par
value, of which 128,963,425 shares of common stock are issued and outstanding as
of February 20, 2008.  We are currently not authorized to issue
preferred stock.
 
 RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In
February 2006, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Acocunting Standards
(“SFAS”) 155, Accounting
for Certain Hybrid Financial Instruments – an amendment of FASB Statements 133
and 140 (“SFAS 155”).  SFAS 155 will be effective for the
Company beginning January 1, 2007.  The statement permits interests in
hybrid financial instruments that contain an embedded derivative that would
otherwise require bifurcation, to be accounted for as a single financial
instrument at fair value, with changes in fair value recognized in earnings.
This election is permitted on an instrument-by-instrument basis for all hybrid
financial instruments hold, obtain, or issue as of the adoption date. The
Company does not expect there to be any significant impact of adopting SFAS 155
on its consolidated financial positions, cash flows and results of
operations.
  11
 
 In June
2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income
Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”),
which clarifies the accounting for uncertainty in tax positions. This
interpretation requires that the Company recognize in its financial statements
the impact of a tax position if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective for the Company on January 1, 2007, with
the cumulative effect of the change in accounting principle, if any, recorded as
an adjustment to opening retained earnings. The Company does not expect there to
be any significant impact of adopting FIN 48 on its consolidated financial
positions, cash flows and results of operations.
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurements
(“SFAS 157”), which provides guidance about how to measure assets and
liabilities that use fair value. SFAS 157 will apply whenever another accounting
principles generally accepted in the United States of America (“US GAAP”)
requires (or permits) assets or liabilities to be measured at fair value but
does not expand the use of fair value to any new circumstances. This standard
will also require additional disclosures in both annual and quarterly reports.
SFAS 157 will be effective for financial statements issued for fiscal years
beginning after November 15, 2007, and will be adopted by us beginning in the
first quarter of 2008.  The Company does not expect there to be any
significant impact of adopting SFAS 157 on its consolidated financial positions,
cash flows and results of operations.
 
 In
September 2006, the Securities and Exchange Commission (“SEC”) staff issued
Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”). SAB 108 was issued to eliminate the diversity of
practice in how public companies quantify misstatements of financial statements,
including misstatements that were not material to prior years’ financial
statements.  The Company began to apply the provisions of SAB 108 to
its annual financial statements for the year ending December 31,
2006.  The application of this guidance has not had a material effect
on the Company’s consolidated financial position, cash flows and results of
operations.
 
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (“SFAS 159”), which will be effective for the Company beginning
January 1, 2008. This standard permits entities to choose to measure many
financial instruments and certain other items at fair value and consequently
report unrealized gains and losses on such items in earnings. The Company does
not expect there to be any significant impact of adopting this standard on its
consolidated financial positions, cash flows and results of
operations.
 
 Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force (“EITF”)), the American Institute of Certified Public
Accountants (“AICPA”), and the SEC did not or are not believed by management to
have a material impact on the Company's present or future consolidated financial
statements.
 
 CRITICAL
ACCOUNTING POLICIES
 
 Our
Management's Discussion and Analysis or Plan of Operations section discusses our
financial statements, which have been prepared in accordance with US GAAP. This
discussion and analysis should be read in conjunction with the accompanying
condensed consolidated financial statements and related notes.
 
 An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used or changes in the accounting estimate that are reasonably likely to
occur could materially change the financial statements. We believe the following
critical accounting policies reflect our more significant estimates and
assumptions used in the preparation of our financial statements:
 
 Use of
Estimates
 
 The
preparation of these condensed consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
 
 Revenue
recognition and provision for losses:
 
 Service
fee income from provision of artist management services is recognized when
services are rendered. In accordance with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," the Company presents its revenue
on a net basis as it acts as an agent for the artists. Provisions for losses are
determined on the basis of loss experience and current economic conditions. In
the event that our receivables became uncollectible after exhausting all
available means of collection, we would be forced to record additional
adjustments to receivables to reflect the amounts at net realizable value. The
accounting effect of this entry would be a charge to income, thereby reducing
our net earnings. Although we consider the likelihood of this occurrence to be
remote based on past history and the current status of our accounts, there is a
possibility of this occurrence.
  12
 
 Contingencies
and litigation:
 
 We may be
subject to certain asserted and unasserted claims encountered in the normal
course of business. It is our belief that the resolution of these matters will
not have a material adverse effect on our financial position or results of
operations, however, we cannot provide assurance that damages that result in a
material adverse effect on our financial position or results of operations will
not be imposed in these matters. We account for contingent liabilities when it
is probable that future expenditures will be made and such expenditures can be
reasonably estimated.
 
 The
Company has failed to timely comply with its period reporting obligations
imposed upon it by the Securities Exchange Act of 1934. As a result, the Company
and its officers and directors could be subject to substantial civil and
criminal penalties due to such non-compliance. There can be no assurance that
substantial civil and criminal penalties will not be imposed.
 
 RESULTS
OF OPERATIONS
 
 General
results of operations for the three and six months ended September 30, 2006
compared to September 30, 2005 are summarized as follows:
 
 
 Three
      Months Ended September 30:
              
              2006
              
              
              2005
              
              
              ChangeRevenue
              
              $
              75,561
              
              
              $
              87,256
              
              
              
              (13.4
              )
      %Reversal
      of provision for impairment ofamount
      due from an affiliate
              
              
              -
              
              
              
              -
              
              
              
              -
              %General
      and administrative expenses
              
              
              (257,351
              )
              
              
              (267,317
              )
              
              
              (3.7
              )
      %Provisions
      for impairment of deposits paidand
      other current assets
              
              
              (3,324
              )
              
              
              -
              
              
              
              100.0
              %Loss
      before income taxes
              
              
              (185,114
              )
              
              
              (180,061
              )
              
              
              2.8
              %Income
      taxes expenses
              
              
              -
              
              
              
              -
              
              
              
              -
              %Net
      loss
              
              $
              (185,114
              )
              
              $
              (180,061
              )
              
              
              2.8
              %
  Nine
      Months Ended September 30:
              
              2006
              
              
              2005
              
              
              ChangeRevenue
              
              $
              848,790
              
              
              $
              931,733
              
              
              
              (8.9
              )
      %Reversal
      of provision for impairment ofamount
      due from an affiliate
              
              
              88,738
              
              
              
              -
              
              
              
              100.0
              %General
      and administrative expenses
              
              
              (858,755
              )
              
              
              (805,990
              )
              
              
              6.5
              %Provisions
      for impairment of deposits paidand
      other current assets
              
              
              (330,350
              )
              
              
              -
              
              
              
              100.0
              %(Loss)
      income before income taxes
              
              
              (251,577
              )
              
              
              125,743
              
              
              
              (300.1
              )
      %Income
      taxes expenses
              
              
              -
              
              
              
              -
              
              
              
              -
              %Net
      (loss) income
              
              $
              (251,577
              )
              
              $
              125,743
              
              
              
              (300.1
              )
      %
 
 
 REVENUE
 
 Our
consolidated revenue decreased 13.4% to $75,561 for the three months ended
September 30, 2006 from $87,256 for the same period in 2005. Our consolidated
revenue decreased 8.9% to $848,790 for the nine months ended September 30, 2006
from $931,733. The decrease in consolidated revenue was a result of decreased
number of performances by our artists. Rampant piracy and the downturn of Hong
Kong made movies affected the overall revenue of all movies in Hong Kong.
Accordingly, movie investors were more cautious in producing movies, thereby
decreasing the opportunities for performances by our artists.
 
 GENERAL
AND ADMINISTRATIVE EXPENSES
 
 General
and administrative expenses incurred for the three months ended September 30,
2006 decreased $9,966, or 3.7%, to $257,351 compared to $267,317 for the same
period in 2005.  General and administrative expenses incurred for the
nine months ended September 30, 2006 increased $52,765, or 6.5%, to $858,755
compared to $805,990 for the same period in 2005.  General and
administrative expenses mainly consisted of management fees, wages, rent, and
professional fees. The increase was due to increase in professional
fees.
  13
 
 PROVISIONS
FOR IMPAIRMENT OF DEPOSITS AND OTHER CURRENT ASSETS
 
 The
increase in provisions for impairment of deposits paid and other current assets
was that certain of the artist management contracts were expired during the
three and nine months ended September 30, 2006 and the Company has made
provisions for impairment of deposits paid in the amount of approximately $3,000
and $328,000 respectively.
 
 INCOME
TAXES EXPENSES
 
 The
income taxes expenses represent the aggregate taxes provided on the assessable
profits for the consolidated entities. No income taxes expenses were provided
for the three and nine months ended September 30, 2006 because the Company
incurred tax losses for the periods. No income taxes expenses were provided for
the three and nine months ended September 30, 2005 because no income taxes were
required under the local jurisdiction at where the income was derived and there
were tax losses brought forward from prior years to offset the assessable
profits for the periods ended September 30, 2005.
 
 NET
(LOSS) INCOME
 
 Net
result for the three months ended September 30, 2006 increased $5,053, or 2.8%,
to $185,114 compared to $180,061 for the same period in 2005.  The
increase in net result was due to a 13.4% decrease in revenue and the provisions
for impairment of deposits paid and other current assets recognized, offset by a
decrease in general and administrative expenses.
 
 Net
result before income taxes for the nine months ended September 30, 2006
decreased $377,320, or 300.1%, to a negative $251,577 compared to $125,743 for
the same period in 2005.  The decrease in net result was due to a
decrease in revenue and increases in general and administrative expenses and the
provisions for impairment of deposits paid and other current
assets.
 
 FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
 
 Nine
      Months Ended September 30:
              
              2006
              
              
              2005
              
              
              ChangeNet
      cash provided by operating activities
              
              $
              196,013
              
              
              $
              366,212
              
              
              
              (46.5
              )
      %Net
      cash used in investing activities
              
              $
              (147
              )
              
              $
              (53,432
              )
              
              
              (99.7
              )
      %Net
      cash provided by (used in) financing activities
              
              $
              510,536
              
              
              $
              (100,170
              )
              
              
              609.7
              %
 
 
 LIQUIDITY
 
 We had
negative working capital as at September 30, 2006 of $956,140.  We
regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations,
deposits received and possible future public and private equity
offerings.  We evaluate possible acquisitions of, or investments in,
businesses that our complementary to ours, which transactions may require the
use of cash. We believe that our cash, other liquid assets, operating cash
flows, credit arrangements, access to equity capital markets, taken together,
provide adequate resources to fund ongoing operating expenditures. In the event
that they do not, we may require additional funds in the future to support our
working capital requirements or for other purposes and may seek to raise such
additional funds through the sale of public or private equity as well as other
sources.
 
 CASH
FLOWS FROM OPERATING ACTIVITIES:
 
 For the
nine months ended September 30, 2006, net cash flows provided by operating
activities was $196,013 (2005: $366,212) primarily resulting from a decrease in
deposits paid and a decrease in accrued expenses, other liabilities and deposits
received.
 
 CASH
FLOWS FROM INVESTING ACTIVITIES:
 
 For the
nine months ended September 30, 2006, net cash flow used in investing activities
were $147 as compared to $53,432 for the same period in 2005. The decrease was
attributable to a decrease in addition to fixed assets.
  14
 
 CASH
FLOWS FROM FINANCING ACTIVITIES:
 
 Net cash
flows provided by financing activities for the nine months ended September 30,
2006 was $510,536.  The cash inflows were mainly provided by advances
from certain affiliates.  Net cash flows used in financing activities
for the nine months ended September 30, 2005 was $100,170, representing
repayments to certain affiliates combined with an increase in bank
loan.
 
 EXPECTED
MATERIAL CAPITAL COMMITMENTS
 
 The
Company has no material commitments for capital expenditures and has no plans or
intention to purchase or sell any plant and/or other significant
equipment.
 
 EXPECTED
SIGNIFICANT CHANGES IN NUMBER OF EMPLOYEES
 
 The
Company does not anticipate any significant changes in its number of employees,
other than the changes that may arise during the course of normal business
operations.
 
 EFFECTS
OF INFLATION
 
 The
Company believes that the effect of inflation has not been material during the
periods presented. The countries in which the Metrolink Group conducts the
majority of its operations, which include Hong Kong, PRC and the United States,
were subject to moderate degree of inflations.
 
 EFFECT OF
FLUCTUATION IN FOREIGN EXCHANGE RATES
 
 All of
the Company's revenues are denominated either in U.S. dollars, Renminbi or Hong
Kong dollars, while its expenses are denominated primarily in Hong Kong dollars.
The value of the Hong Kong dollar-to-United States dollar and other currencies
may fluctuate and is affected by, among other things, changes in political and
economic conditions. Although a devaluation of the Hong Kong dollar relative to
the United States dollar would likely reduce the Company's expenses (as
expressed in United States dollars), any material increase in the value of the
Hong Kong dollar relative to the United States dollar would increase the
Company's expenses, and could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has never
engaged in currency hedging operations but will continue to monitor its foreign
exchange exposure and market conditions to determine if hedging is
required.
 
 ITEM
      3.
              CONTROLS
      AND PROCEDURES
 
 (a) Evaluation of disclosure controls
and procedures. We maintain controls and procedures designed to ensure
that information required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed as of the period covered by this report, our
chief executive officer and the principal financial officer concluded that our
disclosure controls and procedures were inadequate to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. We are developing a plan to ensure
that all information will be recorded, processed, summarized and reported on a
timely basis. This plan is dependent, in part, upon reallocation of
responsibilities among various personnel, possibly hiring additional personnel
and additional funding. It should also be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
 
 (b) Changes in internal controls.
Other than as mentioned above, there were no changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation of those controls by the chief executive officer and
principal financial officer.
  15
  PART
II -- OTHER INFORMATION
 ITEM
      1
                LEGAL
      PROCEEDINGS
 Lang, et
al. v. Welch, et al.(China Entertainment Group, Inc.) (United States District Court, Central
District California, Case No. CV 07-1068-GHK-PJWx).OnDecember 20, 2006, plaintiffs Sanford
Lang and Martin Goldrod (collectively, “Plaintiffs”) initiated a lawsuit in the
Los Angeles Superior Court, Central District, alleging claims for fraud, breach
of contract, violations of RICO, and civil conspiracy against several parties,
including the Company.  The Company was provided with a copy of Plaintiffs’
Complaint on or about February 28, 2007, after the matter was removed to United
States District Court.  According to the Complaint, the Company is “a
nominal Defendant” as Plaintiffs purport to assert claims derivatively on its
behalf.  Accordingly, it appears that no relief is being sought against the
Company itself.  On or about January 31, 2008, Plaintiffs
and Defendants, including the Company, entered into a confidential settlement
agreement to resolve all claims pending between them.  The parties
submitted a Joint Stipulation to Stay all proceedings in the action to
allow for the satisfaction of certain obligations set forth in the
confidential settlement agreement.  Subject to satisfactory discharge of
those obligations, it is anticipated that a dismissal of the action will be
filed no later than early January 2009.
  ITEM
      2
                  UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
 
 None.
 
 ITEM
      3.
              DEFAULTS
      UPON SENIOR SECURITIES
  None.
  ITEM
      4.
                SUBMISSION
      OF MATTERS TO VOTE OF SECURITY
HOLDERS
 None.
 
 ITEM
      5.
              OTHER
      INFORMATION
 
 There
were no changes to the procedures by which security holders may recommend
nominees to our board of directors.
 
 ITEM
      6.
              EXHIBITS
 
 Exhibit
                Number
              Description2.1
              Share
      Exchange Agreement dated November 17, 2004 by and among, inter alia, the
      Registrant, Metrolink Pacific, and the shareholders of Metrolink Pacific
      (1)3.1(i)
              Certificate
      of Amendment to Articles of Incorporation (1)3.1(ii)
              Articles
      of Amendment of Articles of Incorporation (2)3.1(iii)
              Articles
      of Incorporation  (3)3.1(iv)
              Articles
      of Merger (3)3.2
              Bylaws
      (3)31.1
              Certification
      of Chief Executive Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              Certification
      of Chief Accounting Officer (Principal Financial Officer) pursuant to
      Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
              Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
              Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.
 
 (1)   Incorporated  by  reference
from the Company's  Schedule 14C Information Statement filed on
November 30, 2004.
 (2)   Incorporated  by
reference from the Company's Form 10-QSB Quarterly Report filed on October 23,
2001.
 (3)   Incorporated  by reference from the Company's
Registration Statement on Form 10-SB filed on January 19, 2000.
 
 
 [SIGNATURES
PAGE FOLLOWS]
  16
 
 SIGNATURES
 
 In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
  CHINA ENTERTAINMENT GROUP,
      INC.
                  (Registrant)Dated:
      February 22, 2008
                By:
                /s/ Tang
      Chien ChangTang
      Chien ChangChief
      Executive Officer