UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549


_________________





**FORM
      10-KSB**





**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              For
                the fiscal year ended**December 31, 2006****OR****o**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
              For
                the transition period from ____________ to
                __________________





Commission
      file number 000-28767





**CHINA
      3C GROUP**


(Name
      of
      Small Business Issuer in Its Charter)





**NEVADA**
            **88-0403070**(State
                or Other jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer Identification No.)





**368
      HuShu Nan Road**


**HangZhou
      City, Zhejiang Province, China 310014**





(Address
      of Principal Executive Offices, including zip code.)





**086-0571-88381700**


(Issuer’s
      Telephone Number, Including Area Code)





Securities
      registered pursuant to Section 12(b) of the Act:


**Title
                of each class**
            **Name
                of each exchange on which registered****None**
            **None**





Securities
      registered pursuant to Section 12(g) of the Act:


**Title
                of each class**
            **Common
                Stock, $.001 par value**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act ྑ





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the Company was required to file such reports) and (2) has been subject
      to
      such filing requirements for the past 90 days.


Yes x No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of Company’s knowledge, in definitive proxy or information statements
      incorporated by referenced in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB o





Indicate
      by check mark whether the Company is a shell company (as defined in Rule 12b-2
      of the Exchange Act) Yes ྑ No x





State
      issuer’s revenues for the year ended **** December
      31, 2006: **** $148,218,848.





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity. As of March
      27,
      2007, the value was $323,857,469.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of March 27, 2007, there were 52,489,055 shares of common stock outstanding.




Transitional
      Small Business Disclosure Format (Check One): Yes ྑ No x





**TABLE
      OF CONTENTS**





PART
                I
            PAGEITEM
                1.
            
            DESCRIPTION
                OF BUSINESS.
            3ITEM
                2.
            
            DESCRIPTION
                OF PROPERTY.
            8ITEM
                3.
            
            LEGAL
                PROCEEDINGS.
            8ITEM
                4.
            
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS.
            9PART
                IIITEM
                5.
            
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
            9ITEM
                6.
            
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
            11ITEM
                7.
            
            FINANCIAL
                STATEMENTS.
            21ITEM
                8.
            
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE.
            21ITEM
                8A.
            
            CONTROLS
                AND PROCEDURES.
            22ITEM
                8B.
            
            OTHER
                INFORMATION.
            22PART
                IIIITEM
                9.
            
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
                SECTION
                16(a) OF THE EXCHANGE ACT.
            22ITEM
                10.
            
            EXECUTIVE
                COMPENSATION.
            27ITEM
                11.
            
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS.
            30ITEM
                12.
            
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                INDEPENDENCE.
            31ITEM
                13.
            
            EXHIBITS.
            32ITEM
                14.
            
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES.
            33


2




**Forward
      Looking Statements**





We
      have
      included and from time to time may make in our public filings, press releases
      or
      other public statements, certain statements, including, without limitation,
      those under “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” in Part II, Item 7. In some cases these statements are
      identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,”
“may,” “should,” “will,” “would” and similar expressions. You are cautioned not
      to place undue reliance on these forward-looking statements. In addition, our
      management may make forward-looking statements to analysts, investors,
      representatives of the media and others. These forward-looking statements are
      not historical facts and represent only our beliefs regarding future events,
      many of which, by their nature, are inherently uncertain and beyond our
      control.





**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





China
      3C
      Group (formerly Sun Oil & Gas Corp.) (the “Company”, “we”, “us”) was
      incorporated on August 20, 1998 under the laws of the State of Nevada as
      Editworks, Ltd. In 2001, the Company changed its name to Trilucent Technologies
      Corp. The Company changed its name to Anza Innovations, Inc. in 2003. In 2004,
      the Company changed its name to Gaofeng Gold Corp. and then later in 2004 to
      Sun
      Oil & Gas Corporation. In December 2005, we changed our name to China 3C
      Group, to more accurately reflect the business of the Company.





Due
      to
      the strategic change to the new business operation model “stores in stores”,
      sales increased substantially in 2006. We continued to establish more “stores in
      stores” in Eastern China. More than 800 “stores in stores” were established or
      acquired by the end of 2006. This new business model results expanded marketing
      channels thus positively stimulating the growth of sales.





During
      2006 we acquired two companies whose main products are digital products and
      small home electronics in 2006. These acquisitions further brought in
      considerable sales and profit to the Company.





**Capital
      Future Development Limited (“CFDL”)**





On
      December 21, 2005, we entered into a Merger Agreement with CFDL, pursuant to
      which we acquired CFDL, thus making CFDL a wholly owned subsidiary of the
      Company. CFDL was
      incorporated on July 22, 2004 under
      the
      laws of the British Virgin Island and a holding company that owns all of the
      issued and outstanding stock of Zhejiang Yong Xin Digital Technology Company
      Limited (“ZYXD”),  Hangzhou
      Sanhe Electronic Technology Limited (see further discussion below), and Shanghai
      Joy & Harmony Electronics Company Limited (see further discussion below).





3





ZYXD
      is a
      holding company organized under the laws of China, and it owns 90% of the issued
      and outstanding capital stock of each of Hangzhou Wang Da Electronics Company,
      Limited (“HWDA”) and Yiwu Yong Xin Telecommunication Company, Limited (“YYXC”),
      both of which are organized under the laws of China. HWDA and YYXC each own
      the
      remaining 10% of other’s issued and outstanding capital stock. HWDA and YYXC are
      operating companies, thereby indirectly acquired the Chinese holding company
      ZYXD and its Chinese operating company subsidiaries, HWDA and YYXC. CFDL
      shareholders received stock consideration consisting of 35,000,000 newly issued
      shares of Company common stock, which were divided proportionally among the
      CFDL
      shareholders in accordance with their respective ownership interests in CFDL
      immediately before the completion of this transaction, and aggregate cash
      consideration of $500,000, again divided proportionally among the CFDL
      shareholders in accordance with their respective ownership interests in CFDL
      immediately before the completion of this transaction and payable no later
      than
      the first anniversary of the closing of this transaction pursuant to nine
      interest-free promissory notes.





**Zhejiang
      Yong Xin Digital Technology Company Limited (“ZYXD”)**





ZYXD
      is
      located in Mainland China, and was incorporated on July 11, 2005 under the
      laws
      of the Peoples Republic of China. ZYXD owns 90% of the issued and outstanding
      capital stock of each of Hangzhou Wang Da Electronics Company, Limited
      (“ HWDA ”)
      and
      Yiwu Yong Xin Telecommunication Company, Limited (“ YYXC ”).  In
      2001,
      ZYXD started its fax machine distribution business and is currently an
      authorized agent for many well known brand fax machines. ZYXD entered into
      the
      cell phone market in 2003, and is currently authorized agent for Chinese brands
      like Sang Da, Da Xian, and Jin Zhen cell phones. The internal structure of
      ZYXD
      includes CEO office, financial department, audit department, human resource
      department and marketing department.





**Business
      Description**





ZYXD
      is a
      large-scale enterprise integrating the selling, circulation and modern logistics
      of 3C products (communication products, information technology (“IT”) products
      and digital products) in China. ZYXD distributes products to both first and
      second tier retailers in China. First tier retailers are defined as large
      retailing business centers and second tier retailers are defined as small
      individual retail stores. ZYXD allocates its distribution channels according
      to
      the size and population of the cities in which the retailers are located, thus
      distributing products mainly to second tier retailers in bigger Chinese cities
      that have larger populations and distributing products to first tier retailers
      in smaller Chinese cities that have relatively smaller populations.





ZYXD
      does not have a research and development department and does not initiate any
      advertising or promotion activities on the products because it is not the
      manufacturer. However, ZYXD coordinates with the promotional activities
      initiated or planned by the product manufacturers. ZYXD prefers to focus on
      circulation and distribution activity and thereby eliminate unnecessary
      expenses.




ZYXD
      manages credit risk by having its own credit system with the retailer customers.
      ZYXD provides different policies or benefits on the payment and credit period
      according to different credit level of the customers.





4
 
  ZYXD’s
        strategy is to combine the distribution channel with the chain stores, selling
        telecommunication products, digital products, and IT products.  The
        sales
        of ZYXD are primarily focusing in East China. ZYXD’s plan is to move out from
        the cord telephones market, focus on fax machines, cell phones and other
        digital
        and IT products throughout China.





ZYXD
      strictly follows all China state regulations regarding after sales services,
      including policies allowing products to be returned and exchanged within seven
      days, providing a one-year repair guarantee, and having specialists focus on
      after sales services.





**Competition**





The
      main
      competitors of ZYXD include Hangzhou Guang Tong Company, Hangzhou Yin Dun
      Company, Hangzhou Qing Teng Company, Hangzhou Si Tong Company, and Zhejiang
      Shen
      You Electrical Appliance Company.




**Distribution
      Channel Management**




Distribution
      Channel Management is the integration of key business processes from end user
      through to original suppliers that provide products, services and information
      that add value for customers and other stakeholders. In the fax machine
      industry, ZYXD distributes to both first and second tier retailer businesses.
      ZYXD allocates the channel according to the size of the cities, for example,
      in
      some areas like Jinhua, Zhaoxing, Hangzhou, etc, ZYXD will distribute to small
      retailers. In other areas, the distribution will go to big retailer business
      center, thus cutting the cost of shipping and enables the products to reach
      all
      areas.





**Hangzhou
      Wang Da Electronics Company, Limited (“HWDA”)**





HWDA
      was
      incorporated on March 30, 1998 under the laws of the Peoples Republic of China. HWDA
      is
      an authorized sales agent focusing on the selling, circulation and modern
      logistics of cell phones, cell phones products, IT products (including notebook
      or laptop computers), and digital products (including digital cameras, digital
      camcorders, MP3 players, PDAs, flash disks, and removable hard disks) in China.





**Competition**





The
      main
      competitors of HWDA include Telephone World, Hangzhou Yindun, Shanghai Guangda,
      Changjiang Tianyin and Hangzhou Zhenghua.





**Suppliers
      and Customers**





The
      five
      largest suppliers for HWDA are Shenzhen Sang Da Hui Tong Electronics Company
      Limited, Shenzhen Yang Guang Xin Ke Digital Technology Company Limited, Shenzhen
      Jie Pu Lin Holding Company Limited, Shenzhen Lian Sheng (Shi Dai) Technology
      Company Limited, and Hangzhou Wei Hua Communication Equipment Company Limited.
      The five largest customers for HWDA are Tai Zhou Yi Tong Communication Equipment
      Company Limited, Wen Zhou Heng Da Electronics Company Limited, Shao Xing Yin
      Hai
      Cell Phones Market, Shao Xing Peng Fei Communication Equipment Company Limited,
      and Ci Xi Guang Da Communication Equipment Company Limited.





5




**Yiwu
      Yong Xin Telecommunication Company, Limited (“YYXC”)**





YYXC
      was
      incorporated on July 18, 1997 under the laws of the Peoples Republic of China. YYXC
      is
      an authorized sales agent, focusing on the selling, circulation and modern
      logistics of fax machines and cord phone products in China.  YYXC
      mainly focuses in Philips fax machines and China’s number one local brand Feng
      Da and CJT fax machines.





**Suppliers
      and Customers**




The
      five
      largest suppliers for YYXC are Guangdong Feng Da High Technology Company
      Limited, Hangzhou Sen Rui Da Trading Company Limited, Shanghai Rong Duo Trading
      Company Limited, Shanghai Zhong Fang Electronics Company Limited, and Ningbo
      Zhong Xun Electronics Company Limited. The five largest customers for YYXC
      are
      Shanghai Guo Mei Electrical Appliance Company Limited, Shanghai Jin Jiang Mai
      De
      Long Shopping Mall Company Limited, Tai Zhou Shi Road Qiao Bo Xiong Electrical
      Appliance Company Limited, Ningbo Hao You Duo Department Store Company Limited
      (Ningbo Branch), and An Qing Mei Sheng Communication (An Qing Heng Da Technology
      Company Limited).





**Competition**





The
      main
      competitors of YYXC include Zhongyou Huahai, Changshu Jinlong, Nanjing Jialian,
      Nanjing Tianshuo, Hangzhou Qingteng and Hangzhou Baolong.





**Hangzhou
      Sanhe Electronic Technology Ltd** .





On
      August
      3, 2006, we entered into a Share Exchange Agreement (the “HSET Share Exchange
      Agreement”) with CFDL, Hangzhou Sanhe Electronic Technology Limited (“HSET”),
      and the shareholders of HSET (the “HSET Shareholders”), pursuant to which CFDL
      acquired 100% of HSET in a cash and stock transaction valued at approximately
      US$8.75 million (the “HSET Share Exchange Transaction”).




Under
      the
      HSET Share Exchange Agreement, in exchange of surrendering all their ownership
      in HSET, the HSET Shareholders received both stock consideration and cash
      consideration. The stock consideration consisted of 915,751 newly issued shares
      of our common stock, which were divided proportionally among the HSET
      Shareholders in accordance with their respective ownership interests in HSET
      immediately before the closing of the HSET Share Exchange Transaction. The
      cash
      consideration consisted of $5,000,000 in cash, again divided proportionally
      among the HSET Shareholders in accordance with their respective ownership
      interests in HSET immediately before the completion of the HSET Share Exchange
      Transaction and payable no later than the first anniversary of the closing
      of
      the HSET Share Exchange Transaction. The obligation to pay the cash
      consideration is evidenced by two interest-free promissory notes by us to each
      of the HSET Shareholders.




6




**Business
      Description**





HSET
      is a
      home electronics retail chain in Eastern China. It has 200 retail outlets in
      Shanghai City, Zhejiang Province and Jiangsu Province. HSET specializes in the sale of home electronics, including air
      conditioners, audio
      systems, speakers (92 different types of models), DVD players (272 different
      types of models). In 2006, the company expanded its business to televisions
      industry, and it already got sales agent licenses from TCL, Chuangwei and Haier.
      HSET’s is headquartered in Hangzhou city, China. Its major markets are Zhejiang,
      Jiangsu and Shanghai.





**Competition**





The
      main
      competitors of HSET include
      Hangzhou Meidi, Hangzhou Danong, Nanjing Mingci, Shanghai Feitong and Jiangshu
      Huayi.





**Shanghai
      Joy & Harmony Electronics Company Limited**





On
      November 28, 2006, we entered into a Share Exchange Agreement (the “Shanghai
      Share Exchange Agreement”), with CFDL, Shanghai Joy & Harmony Electronics
      Company Limited (“Shanghai”), and the shareholders of Shanghai (the “Shanghai
      Shareholders”), pursuant to which CFDL, acquired 100% of CFDL in a cash and
      stock transaction valued at approximately US$18.5 million (the “Shanghai Share
      Exchange Transaction”).




Under
      the
      Shanghai Share Exchange Agreement, in exchange of surrendering all their
      ownership in Shanghai, the Shanghai Shareholders received both stock
      consideration and cash consideration. The stock consideration consisted of
      2,723,110 shares of our common stock, which were divided proportionally among
      the Shanghai Shareholders in accordance with their respective ownership
      interests in Shanghai immediately before the closing of the Shanghai Share
      Exchange Transaction. The cash consideration consisted of $7,500,000 in cash,
      divided proportionally among the Shanghai Shareholders in accordance with their
      respective ownership interests in Shanghai immediately before the completion
      of
      the Shanghai Share Exchange Transaction, is payable as follows: $3,000,000
      within 10 business days after the closing of the Shanghai Share Exchange
      Transaction, and $4,500,000 payable six months after the closing of the Shanghai
      Share Exchange Transaction as evidenced by promissory notes issued by us to
      the
      Shanghai Shareholders.




**Business
      Description**





Shanghai
      is a consumer electronics retail chain in Eastern China. It has 180 retail
      outlets in Shanghai City and Jiangsu Province. The company specializes in the
      sale of consumer electronics, including MP3 players, MP4 players, iPod,
      electronic dictionary, CD players, radios, Walkman, audio systems and speakers.
      The company is the authorized sales agent for well-known manufacturers in China
      like Tecsun Radio and Changhong ZARVA.





**Competition**





The
      main
      competitors of Shanghai include
      Shanghai Huaning, Shanghai Juexiang, Shanghai Wansi and Shanghai
      Feitong.





7


**Employees**





The
      Company currently has 777 employees, all of which are full time employees
      located in China. ZYXD
      has
      30 employees, YYXC has 175 employees, HWDA has 204 employees, Hangzhou
      has 154 employees, and Shanghai has 214 employees.





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY.**





The
      Company does not own any real estate properties; all of the properties are
      leased. The lease terms are as follows:





**YYXC**





1.
      Shanghai office: lease term: one year (June 2006 - June 2007)


2.
      Yiwu
      headquarter office: lease term: one year (Aug. 2006 - Aug. 2007)


3.
      Apartments:1) A3 Yiwu building, Yiwu village, Lease term: 6 months (Sep. 2006
      -
      Mar. 2007); 2) Qiancheng District, Yiwu, Lease term one year (Nov. 2006 - Nov.
      2007).





**HWDA**





1.
      West-town computer center offices: Lease term: one year for office 1 (July
      2006
      - July 2007); one year for office 2 (Aug. 2006 - Aug. 2007).


2.
      Suite
      417 and Suite 608, 347 Shaoxin Road: Lease term: 3 months (Oct. 2006 - Jan.
      2007).


3.
      Apartments: Taizhou tower, Lease term one year (Oct. 2006 - Oct. 2007).





**HSET**





1.
      Yuanhua office: Lease term one year (Aug. 2006 - July 2007).


2.
      Hangzhou Qunying office: Lease Term six months (Nov. 2006 - Apr. 2007).


3.
      Apartments: Hangzhou: Lease Term three months (Jan. 2007 - Mar.
      2007).





**Shanghai**





1.
      Wuxi
      Tower office: Lease term three months (Jan. 2007 - Mar. 2007).


2.
      Warehouse: Shanghai, Lease term: two months (Jan. 2007 - Feb. 2007).





**ITEM
      3. LEGAL PROCEEDINGS.**





Neither
      the Company nor its property is a party to any pending legal proceeding. The
      Company’s management does not believe that there are any proceedings to which
      any director, officer, or affiliate of the Company, any owner of record of
      beneficially held or owner of more than five percent (5%) of the Company’s
      common stock, or any associate of any such director, officer, affiliate of
      the
      Company, or security holder is a party adverse to the Company, or has a material
      interest adverse to the Company.




8




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





There
      were no matters submitted to the stockholders in the fourth quarter of 2006
      required to be disclosed.




**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
      MATTERS.**





The
      Company’s common stock is traded on the OTCBB under the symbol “CHCG.OB.” The
      following table sets forth the range of quarterly
      high and low closing bids of the common stock as reported during the years
      ending December 31, 2005 and  December
      31, 2006:




low
                bid*
            high
                bid*2005quarter
                ended March
            $13.50
            $21.50quarter
                ended June
            $3.50
            $16.50quarter
                ended September
            $2.00
            $7.50quarter
                ended December
            $1.20
            $7.60low
                bid*
            high
                bid*2006quarter
                ended March
            $1.00
            $9.24quarter
                ended June
            $1.75
            $7.50quarter
                ended September
            $1.55
            $4.75quarter
                ended December
            $1.08
            $4.95





*The
      quotations reflect inter-dealer prices, without retail mark-up, mark-down or
      commission and may not represent actual transactions.





**Stockholders**





As
      of the
      close of business on December 31, 2006, there were approximately 4,641
      holders of record of the Company’s common stock. H owever,
      we believe that there are additional beneficial owners of our common
      stock who own their shares in “street name.”





**Dividends**





The
      Company’s four operating entities in China paid no dividends during
      2006 . The
      Company has no plans to declare cash dividends on its common stock in the
      future. There are no restrictions that limit the ability of the Company to
      declare cash dividends on our common stock and the Company does not believe
      that
      there are any that are likely to do so in the future.




9


**Securities
      authorized for issuance under equity compensation plans**





The
      following is a summary of all of our equity compensation plans as of December
      31, 2006.




**Plan
                Category**
            
            **Number
                of securities to be**
              **issued
                upon exercise**
              **of
                outstanding options,**
              **warrants
                and rights**
            
            **Weighted
                average exercise**
              **price
                of outstanding**
              **options,
                warrants and**
              **rights**
            
            **Number
                of securities**
              **remaining
                available for**
              **future
                issuance under**
              **equity
                compensation plan**
              **(excluding
                securities**
              **reflected
                in column (a))****(a)**
            
            **(b)**
            
            **(c)**Equity
                Compensation Plans Approved by Securityholders (4)
            
            5,000,000
            (1)(2)
            $.10
            (2)
            20,000
            (2)Equity
                Compensation Plans Not Approved by Securityholders (3)
            
            4,000,000
            
            $.10
            
            0







(1)
      Pursuant to the terms of the China 3C Group 2005 Equity Incentive Plan,
      5,000,000 shares of our Common Stock are available for grant (both incentive
      stock options and non-qualified stock options), and/or issuance.


(2)
      On
      December 21, 2005 the Board of Directors approved the grant to seven
      individuals, an aggregate of 4,980,000 shares of Common Stock under the China
      3C
      Group 2005 Equity Incentive Plan. These grants were not deemed effective until
      March 10, 2006. On December 8, 2006 the Company granted an option to purchase
      50,000 shares of our Common stock to Kenneth T. Berents in connection with
      Mr.
      Berents joining the Board of Directors of the Company. This
      grant was not completed until 2007 when the Plan was amended.


(3)
      Includes warrants to purchase 4,000,000 shares of common stock at an exercise
      price of $.10 per share issued on December 20, 2005 to two individuals. The
      warrants were exercised on December 30, 2005. The shares were issued
      subsequently in 2006.




**Repurchase
      of Securities**




We
      did
      not repurchase any of shares of our common stock during the fourth quarter
      of
      2006.





**Recent
      Sales of Unregistered Securities**




All
      equity securities sold by us during the period covered by this Report previously
      has been included on a Quarterly Report on Form 10-QSB or on a Current Report
      on
      Form 8-K.


10




**Forward
      Looking Statements**





We
      have
      included and from time to time may make in our public filings, press releases
      or
      other public statements, certain statements, including, without limitation,
      those under “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations” in Part II, Item 7. In some cases these statements are
      identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,”
“may,” “should,” “will,” “would” and similar expressions. You are cautioned not
      to place undue reliance on these forward-looking statements. In addition, our
      management may make forward-looking statements to analysts, investors,
      representatives of the media and others. These forward-looking statements are
      not historical facts and represent only our beliefs regarding future events,
      many of which, by their nature, are inherently uncertain and beyond our
      control.




**Item
      6.**  **Management’s
      Discussion and Analysis or Plan of Operation** **.**





The
      following discussion should be read in conjunction with the Consolidated
      Financial Statements and Notes thereto appearing elsewhere in this Form 10-KSB.
      The following discussion contains forward-looking statements. Our actual results
      may differ significantly from those projected in the forward-looking statements.
      Factors that may cause future results to differ materially from those projected
      in the forward-looking statements include, but are not limited to, those
      discussed in “Risk Factors” and elsewhere in this Form 10-KSB.




**Overview**





****   China
      3C
      Group was incorporated on August, 20, 1998 under the laws of the State of
      Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
      22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
      Technology Co., Ltd. (“ZYXD”), Yiwu Yong Xin Communication Ltd. (“YYXC”),
      Hangzhou Wandga Electronics Co., Ltd. (“HWDA”), Hangzhou Sanhe Electronic
      Technology, Limited (HSET), and Shanghai Joy & Harmony Electronic
      Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
      Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
      2004, and August 25 2003 respectively. China 3C Group owns 100% of CFDL and
      CFDL
      owns 100% of the capital stock of ZYXD. ZYXD owns 90% and YYXC owns 10% of
      HWDA.
      ZYXD owns 90% and HWDA owns 10% of YYXC. Collectively the six corporations
      are
      referred to herein as the Company.





On
      December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group
      through a merger with a wholly owned subsidiary of the Company. China 3C Group
      acquired all of the issued and outstanding capital stock of CFDL pursuant to
      a
      Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY
      Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger
      Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned
      subsidiary of China 3C Group and, in exchange for the CFDL shares, China 3C
      Group issued 35,000,000 shares of its common stock to the shareholders of CFDL,
      representing 93% of the issued and outstanding capital stock of China 3C Group
      at that time and a cash consideration of $500,000.






11




As
      a
      result of the Merger Agreement, the reorganization was treated as an acquisition
      by the accounting acquiree that is being accounted for as a recapitalization
      and
      as a reverse merger by the legal acquirer for accounting purposes. Pursuant
      to
      the recapitalization, all capital stock shares and amounts and per share data
      have been retroactively restated. Accordingly, the financial statements include
      the following:





(1)
      The
      balance sheet consists of the net assets of the accounting acquirer at
      historical cost and the net assets of the legal acquirer at historical
      cost.





(2)
      The
      statements of operations include the operations of the accounting acquirer
      for
      the period presented and the operations of the legal acquirer from the date
      of
      the merger.





The
      Company is now engaged in the business of mobile phone, facsimile machines,
      DVD
      players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries,
      CD players, radios, Walkman, and audio systems distribution. We sell and
      distribute products through retail stores and secondary
      distributors.





Pursuant
      to A share exchange agreement, dated August 3, 2006, we issued 915,751 shares
      of
      restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic
      Technology Ltd. The shares were valued at $3,750,000, which was the fair value
      of the shares at the date of exchange agreement. This amount is included in
      the
      cost of net assets and goodwill purchased.





Pursuant
      to a share exchange agreement, dated November 28, 2006, we issued 2,723,110
      shares of newly issued shares of Common Stock to the former shareholders of
      Shanghai Joy & Harmony Electronics Company Limited. The shares were valued
      at $11,000,000, which was the fair value of the shares at the date of exchange
      agreement. This amount is included in the cost of net assets and goodwill
      purchased.





**Results
      of Operations**





The
      following table presents certain consolidated statement of operations
      information stated as a percentage of total revenues. All financial information
      is presented for the 12 months ended December 31, 2006 and 2005.





**2006**
            
            **2005**Sales,
                net
            
            $
            148,218,848
            
            $
            32,588,634Cost
                of sales
            
            
            125,411,758
            
            
            28,325,332General
                and Administrative Expense
            
            
            5,544,924
            
            
            1,706,869Income
                from Operations
            
            $
            17,262,166
            
            $
            2,556,433





**Net
      sales**





Net
      sales
      for 2006 totaled $148,218,848 compared to $32,588,634 for 2005. The increase
      was
      partially due to the inclusion of $35,133,964 of revenue from two newly acquired
      subsidiaries (HSET and Shanghai) during 2006. The increase was also due to
      the
      organic growth of YYXC and HWDA. In 2006, the revenue of YYXC and HWDA were
      approximately $51 million and $62 million respectively, an increase of 122%
      and
      480% respectively compared with 2005.







12




Percentage
      of sales





YYXC
            HWDA
            HSET
            ShanghaiRetail
                store
            59.43%
            57.45%
            74.39%
            76.61%Secondary
                Distributors
            40.57%
            42.55%
            25.61%
            23.39%





**Cost
      of Sales**





Cost
      of
      sales for 2006 totaled $125,411,758 or approximately 84.61% of net sales
      compared to $28,325,532 or approximately 86.90% for 2005. The cost of sales
      as a
      percentage decreased during 2006 due to the introduction of new product models
      with higher gross profit margin. Also, we were able to obtain the maximum
      discount privilege from our suppliers because of the substantial increase of
      sales.





Top
      Ten
      Suppliers of each of our subsidiaries:





YYXC
            HWDA
            HSET
            Shanghai1
            Fengda
                Technology Co., Ltd.
            Shenzhen
                Jiepulin Co., Ltd.
            Zhejiang
                Shaixinke Co., Ltd
            Guangzhou
                Jinhuang Electronics Co., Ltd.2
            Shanghai
                Zhongfang Electronics Co., Ltd.
            Hangzhou
                Telecommunication
              Equipments
                Co., Ltd
            Shenzhen
                Aosike Electronics Co., Ltd
            Shenzhen
                Dengjing Eletronics Co., Ltd.3
            Shanghai
                Rongduo Business Co., Ltd.
            Shenzhen
                Jinfeng Datong Technology Co., Ltd.
            Hangzhou
                Ruiqi eletronics Co., Ltd.
            Dongguan
                Desheng General Eletronics Co., Ltd.4
            Ninbo
                Zhongxun Eletronics Co.,Ltd
            Liansheng
                Technology Co., Ltd.
            Shenzhen
                Deyuan Eletronics Co., Ltd.
            Shanghai
                Network Equipment Co., Ltd5
            Hangzhou
                Shenruida Trade Co., Ltd.
            Shenzhen
                Sunshine Xinke Digital Technology Co., Ltd.
            Hangzhou
                Wanlian Electronics Co., Ltd
            Shanghai
                Hanshun Trade Co., Ltd6
            Shanghai
                Guangdian Equipment Co., Ltd.
            Hangzhou
                Tianchen Digital Telecommunication Co., Ltd
            Guangzhou
                Fenda Audio Co., Ltd
            Dongwan
                Gemei Eletronics Co., Ltd.7
            Yiwu
                Wantong Telecom Equipment Co., Ltd
            Shenzhen
                Sangdahuitong Eletronics Co., Ltd
            Shenzhen
                Chuangwei-RGB Electronics Co., Ltd
            SONY-Shanghai
                Co., Ltd8
            Aomeng
                Technology Co., Ltd.
            Hangzhou
                Qiuxin Internet equipment Co., Ltd
            Guangzhou
                Shengshida Eletronics company
            Shenyou
                Technology Co., Ltd.9
            Shanghai
                Meiyun Industry Co., Ltd
            Huayu
                Telecom Equipment Co., Ltd
            TCL
                Electronics Co., Ltd
            Zhaohua
                Digital Technology Co., Ltd10
            Shanghai
                Huoke Electronics Co., Ltd
            Hangzhou
                Yingjie Trade Co., Ltd.
            Hangzhou
                Hengrong Trade Co., Ltd.
            Zhongshan
                Wanxin Eletronics Co., Ltd.






13




**Gross
      Profit Margin**





Gross
      profit margin for 2006 was 15.39% compared to 13.08% for 2005. The increase
      was
      partially due to the inclusion of the newly acquired subsidiaries. The average
      profit margin for the newly acquired companies is approximately 18%. The
      increase was also due to the increase in consumer demand and improvement in
      product mix.





**Operating
      Expense**





General
      and administrative expense for 2006 totaled $5,544,924 or approximately 3.74%
      of
      net sales, compared to $1,706,869 or approximately 5.2% for 2005. The decrease
      of 1.46% was due to the inclusion of the newly acquired
      subsidiaries.


**Income
      from Operations**





Income
      from operations for 2006 was $17,262,166 or 11.65% of net sales as compared
      to
      income from operations of $2,556,433 for 2005 or 7.84% of net sales. The
      increase was due to our acquisitions during 2006, an increase in consumer demand
      and improvement in product mix.




**Interest
      Expense**





Interest
      expense for 2006 totaled $7,565 compared to $2,954 for 2005. The increase was
      due to the inclusion in our financial statements of our newly acquired
      subsidiary Shanghai Joy & Harmony Electronics Company Limited.





**Net
      Income**





Net
      income was $11,277,126 or 7.61% of net Sales for 2006 compared to $1,458,250
      or
      4.47% of net Sales for 2005. The increase in percentage was due to the factors
      stated above, including lower cost of goods, lower operating expenses and high
      profit margin from the newly acquired companies.


**Liquidity
      and Capital Resources**





Cash
      has
      historically been generated from operations. Operations and liquidity needs
      are
      funded primarily through cash flows from operations and short-term borrowings.
      Cash and cash equivalents were $6,498,450 at December 31, 2006 and current
      assets totaled $39,987,575 at December 31, 2006. The Company’s total current
      liabilities were $9,061,180 at December 31, 2006. Working capital at December
      31, 2006 was $10,512,314. During 2006, net cash provided by operating activities
      was $11,968,616.




Under
      the
      Shanghai Share Exchange Agreement, dated November 28, 2006, in exchange of
      surrendering all their ownership in Shanghai, the Shanghai Shareholders received
      both stock consideration and cash consideration. The cash consideration
      consisted of $7,500,000 in cash is payable as follows: $3,000,000 within 10
      business days after the closing of the transaction, and $4,500,000 payable
      six
      months after the closing of the transaction as evidenced by promissory notes
      issued by us to the Shanghai Shareholders. The due date of the $4,500,000
      payment is May 27, 2007.




14





**Capital
      expenditures**





Total
      capital expenditures during 2006 were $30,591 for purchase of fixed assets.
      We
      have no plans for material capital expenditures during 2007.





**Working
      Capital Requirements**





Historically
      operations and short term financing have been sufficient to meet our cash needs.
      We believe that we will be able to generate revenues from sales and raise
      capital through private placement offerings of our equity securities to provide
      the necessary cash flow to meet anticipated working capital requirements.
      However, our actual working capital needs for the long and short term will
      depend upon numerous factors, including operating results, competition, and
      the
      availability of credit facilities, none of which can be predicted with
      certainty. Future expansion will be limited by the availability of financing
      products and raising capital.





**Off-Balance
      Sheet Arrangements**





We
      have
      never entered into any off-balance sheet financing arrangements and have never
      established any special purpose entities. We have not guaranteed any debt or
      commitments of other entities or entered into any options on non-financial
      assets.





**RISK
      FACTORS**





**Risks
      associated with our Common Stock**





***There
      is a limited public market for our common stock.*** **** There
      is
      currently a limited public market for the common stock. Holders of our common
      stock may, therefore, have difficulty selling their common stock, should they
      decide to do so. In addition, there can be no assurances that such markets
      will
      continue or that any shares of common stock, which may be purchased may be
      sold
      without incurring a loss. Any such market price of the common stock may not
      necessarily bear any relationship to our book value, assets, past operating
      results, financial condition or any other established criteria of value, and
      may
      not be indicative of the market price for the common stock in the future.
      Further, the market price for the common stock may be volatile depending on
      a
      number of factors, including business performance, industry dynamics, news
      announcements or changes in general economic conditions.







15





***Our
      common stock may be deemed penny stock with a limited trading
      market*** . 
      Our common stock is currently listed for trading in the Over-The-Counter Market
      on the NASD Electronic Bulletin Board or in the “pink sheets” maintained by the
      National Quotation Bureau, Inc., which are generally considered to be less
      efficient markets than markets such as NASDAQ or other national exchanges,
      and
      which may cause difficulty in conducting trades and difficulty in obtaining
      future financing. Further, our securities are subject to the “penny stock rules”
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”). The penny stock rules apply to non-NASDAQ
      companies whose common stock trades at less than $5.00 per share or which have
      tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
      operating for three or more years). Such rules require, among other things,
      that
      brokers who trade “penny stock” to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
      provide investors with certain information concerning trading in the security,
      including a risk disclosure document and quote information under certain
      circumstances. Many brokers have decided not to trade “penny stock” because of
      the requirements of the penny stock rules and, as a result, the number of
      broker-dealers willing to act as market makers in such securities is limited.
      In
      the event that we remain subject to the “penny stock rules” for any significant
      period, there may develop an adverse impact on the market, if any, for our
      securities. Because our securities are subject to the “penny stock rules,”
investors will find it more difficult to dispose of our securities. Further,
      for
      companies whose securities are traded in the Over-The-Counter Market, it is
      more
      difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for
      significant news events because major wire services, such as the Dow Jones
      News
      Service, generally do not publish press releases about such companies, and
      (iii)
      to obtain needed capital.




***We
      do not intend to pay dividends on our common stock.***  The
      Company’s two operating subsidiaries in China paid $525,460 in dividends during
      2005, but there
      are
      no plans for paying dividends in the foreseeable future. We intend to retain
      earnings, if any, to provide funds for the implementation of our new business
      plan.  We do not intend to declare or pay any dividends in the foreseeable
      future.  Therefore, there can be no assurance that holders of common stock
      will receive any additional cash, stock or other dividends on their shares
      of
      common stock until we have funds, which the Board of Directors determines,
      can
      be allocated to dividends.





***If
      we are unable to successfully integrate the businesses we acquire, our ability
      to expand our product offerings and geographic reach may be significantly
      limited.*** In
      order
      to expand our product offerings and grow our customer base by reaching new
      customers through expanded geographic coverage, we may continue to acquire
      businesses that we believe are complimentary to our growth strategy.
      Acquisitions involve numerous risks, including difficulties in the assimilation
      of acquired operations, loss of key personnel, distraction of management’s
      attention from other operational concerns, failure to maintain supplier
      relationships, inability to maintain goodwill of customers from acquired
      businesses, and the inability to meet projected financial results that supported
      how much was paid for the acquired businesses.





***Our
      business will be harmed if we are unable to maintain our supplier alliance
      agreements with favorable terms and conditions.*** We
      have
      licensing/distribution agreements with key suppliers in a number of major
      product categories. Our business will be harmed if we are unable to maintain
      these favorable agreements or are limited in our ability to gain access to
      additional like agreements with our key suppliers.




16
  ***It
          is very difficult to predict the sales cycle for our
          products*** . ***If
          we are unable to successfully select and introduce new products or fail
          to keep
          pace with the rapid advances in technology, our business condition will
          be
          negatively impacted.*** The
          duration and product selection involved in our sales cycle is dependent
          on a
          number of factors, including immediate product availability, pricing, features,
          product complexity, economic environment, and customer financial condition.
          If
          potential customers take longer than we expect to decide to purchase our
          products, or if our customers decide on a different product/feature set
          than
          available from our existing supplier agreements, the financial condition
          and
          results of our operations will be adversely affected.
 
 ***Because
        our operating/business model continues to evolve it is difficult to predict
        our
        future performance, and our business is difficult to evaluate.*** Our
        business model continues to evolve over time. We do not have an extensive
        operating history upon which you can easily and accurately evaluate our
        business, or our ongoing financial condition. As our model evolves over time
        and
        due to our numerous acquisitions, we face risks and challenges due to a lack
        of
        meaningful historical data upon which we can develop budgets and make
        forecasts.
 
 ***Future
        acquisitions may result in potentially dilutive issuances of equity securities,
        the incurrence of further indebtedness, and increased amortization expense.*** Our
        growth model has in the past and most probably in the future will involve
        acquisitions that may result in potentially dilutive issuances of equity
        securities or the incurrence of debt and unknown liabilities. Such acquisitions
        may result in significant write-offs and increased amortization expenses
        that
        could adversely affect our business and the results of our
        operations.
 
 ***If
        our products fail to perform properly our business could suffer significantly.*** Although
        we do not currently develop or manufacturer our existing products, should
        they
        fail to perform we may suffer lost sales and customer goodwill, ongoing
        liability claims, license terminations, severe harm to our brand and overall
        reputation, unexpected costs, and reallocation of resources to resolve product
        issues.
 
 ***Rapid
        and substantial growth is the key to our overall strategy, if we are unable
        to
        manage our growth profitably and effectively, we may incur unexpected expenses
        and be unable to meet our financial and customer obligations.*** In
        order
        for us to meet our financial objectives we will need to substantially expand
        our
        operations to achieve necessary market share. We cannot be certain that our
        IT
        infrastructure, financial controls, systems, and processes will be adequate
        to
        support our expansion. Our future results will depend on the ability of our
        officers and key employees to manage changing business conditions in
        administration, reporting, controls, and operations.
 
 ***If
        we are unable to obtain additional financing for our future needs we may
        be
        unable to respond to competitive pressures and our business may be impaired.*** We
        cannot
        be certain that financing with favorable terms, or at all, will be available
        for
        us to pursue our expansion initiatives. We may be unable to take advantage
        of
        favorable acquisitions or to respond to competitive pressures. This inability
        may harm our operations or financial results.
   17
    ***If
        we are forced to lower our prices to compete, our financial performance may
        be
        negatively impacted.*** We
        derive
        our sales from the resale of products from a number of our suppliers. If
        we are
        forced to lower our prices due to added competition, inferior feature offerings,
        excess inventory, pressure for cash, declining economic climate, or any other
        reason, our business may become less profitable.
 
 ***If
        we are unable to maintain existing supplier relationships or form new ones,
        our
        business and financial condition may suffer.*** We
        rely
        on our current suppliers along with new suppliers to provide us access to
        competitive products for resale. If we are unable to gain access to suppliers
        with needed product with favorable terms our business may be negatively
        impacted.
 
 ***If
        we incur costs that exceed our existing insurance coverage in lawsuits brought
        to us in the future, it could adversely affect our business and financial
        condition.***
 
 **Risks
        related to doing business in China**
 
 ***Our
        business operations take place primarily in China. Because Chinese laws,
        regulations and policies are continually changing, our Chinese operations
        will
        face several risks summarized below.***
 
 ***Limitations
        on Chinese economic market reforms may discourage foreign investment in Chinese
        businesses.*** The
        value
        of investments in Chinese businesses could be adversely affected by political,
        economic and social uncertainties in China. The economic reforms in China
        in
        recent years are regarded by China’s central government as a way to introduce
        economic market forces into China. Given the overriding desire of the central
        government leadership to maintain stability in China amid rapid social and
        economic changes in the country, the economic market reforms of recent years
        could be slowed, or even reversed.
 
 ***Any
        change in policy by the Chinese government could adversely affect investments
        in
        Chinese businesses.*** Changes
        in policy could result in imposition of restrictions on currency conversion,
        imports or the source of suppliers, as well as new laws affecting joint ventures
        and foreign-owned enterprises doing business in China. Although China has
        been
        pursuing economic reforms for the past two decades, events such as a change
        in
        leadership or social disruptions that may occur upon the proposed privatization
        of certain state-owned industries could significantly affect the government’s
        ability to continue with its reform.
 
 ***We
        face economic risks in doing business in China.*** ** As
        a
        developing nation, China’s economy is more volatile than that of developed
        Western industrial economies. It differs significantly from that of the U.S.
        or
        a Western European Country in such respects as structure, level of development,
        capital reinvestment, resource allocation and self-sufficiency. Only in recent
        years has the Chinese economy moved from what had been a command economy
        through
        the 1970s to one that during the 1990s encouraged substantial private economic
        activity. In 1993, the Constitution of China was amended to reinforce such
        economic reforms. The trends of the 1990s indicate that future policies of
        the
        Chinese government will emphasize greater utilization of market forces. For
        example, in 1999 the Government announced plans to amend the Chinese
        Constitution to recognize private property, although private business will
        officially remain subordinated to the state-owned companies, which are the
        mainstay of the Chinese economy. However, there can be no assurance that,
        under
        some circumstances, the government’s pursuit of economic reforms will not be
        restrained or curtailed. Actions by the central government of China could
        have a
        significant adverse effect on economic conditions in the country as a whole
        and
        on the economic prospects for our Chinese operations.
   18
  ***The
        Chinese legal and judicial system may negatively impact foreign
        investors.*** ** In 1982,
        the National People’s Congress amended the Constitution of China to authorize
        foreign investment and guarantee the “lawful rights and interests” of foreign
        investors in China. However, China’s system of laws is not yet comprehensive.
        The legal and judicial systems in China are still rudimentary, and enforcement
        of existing laws is inconsistent. Many judges in China lack the depth of
        legal
        training and experience that would be expected of a judge in a more developed
        country. Because the Chinese judiciary is relatively inexperienced in enforcing
        the laws that do exist, anticipation of judicial decision-making is more
        uncertain than would be expected in a more developed country. It may be
        impossible to obtain swift and equitable enforcement of laws that do exist,
        or
        to obtain enforcement of the judgment of one court by a court of another
        jurisdiction. China’s legal system is based on written statutes; a decision by
        one judge does not set a legal precedent that is required to be followed
        by
        judges in other cases. In addition, the interpretation of Chinese laws may
        be
        varied to reflect domestic political changes.
 
 The
        promulgation of new laws, changes to existing laws and the pre-emption of
        local
        regulations by national laws may adversely affect foreign investors. However,
        the trend of legislation over the last 20 years has significantly enhanced
        the
        protection of foreign investment and allowed for more control by foreign
        parties
        of their investments in Chinese enterprises. There can be no assurance that
        a
        change in leadership, social or political disruption, or unforeseen
        circumstances affecting China’s political, economic or social life, will not
        affect the Chinese government’s ability to continue to support and pursue these
        reforms. Such a shift could have a material adverse effect on our business
        and
        prospects.
 
 The
        practical effect of the People’s Republic of China legal system on our business
        operations in China can be viewed from two separate but intertwined
        considerations. First, as a matter of substantive law, the Foreign Invested
        Enterprise laws provide significant protection from government interference.
        In
        addition, these laws guarantee the full enjoyment of the benefits of corporate
        Articles and contracts to Foreign Invested Enterprise participants. These
        laws,
        however, do impose standards concerning corporate formation and governance,
        which are not qualitatively different from the general corporation laws of
        the
        several states. Similarly, the People’s Republic of China accounting laws
        mandate accounting practices, which are not consistent with U.S. Generally
        Accepted Accounting Principles. China’s accounting laws require that an annual
“statutory audit” be performed in accordance with People’s Republic of China
        accounting standards and that the books of account of Foreign Invested
        Enterprises are maintained in accordance with Chinese accounting laws. Article
        14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
        requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
        reports and statements to designated financial and tax authorities, at the
        risk
        of business license revocation. Second, while the enforcement of substantive
        rights may appear less clear than United States procedures, the Foreign Invested
        Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered
        companies, which enjoy the same status as other Chinese registered companies
        in
        business-to-business dispute resolution. Generally, the Articles of Association
        provide that all business disputes pertaining to Foreign Invested Enterprises
        are to be resolved by the Arbitration Institute of the Stockholm Chamber
        of
        Commerce in Stockholm, Sweden applying Chinese substantive law. Any award
        rendered by this arbitration tribunal is, by the express terms of the respective
        Articles of Association, enforceable in accordance with the “United Nations
        Convention on the Recognition and Enforcement of Foreign Arbitral Awards
        (1958).” Therefore, as a practical matter, although no assurances can be given,
        the Chinese legal infrastructure, while different in operation from its United
        States counterpart, should not present any significant impediment to the
        operation of Foreign Invested Enterprises.
   19
  ***Economic
        Reform Issues***
 
 Although
        the Chinese government owns the majority of productive assets in China, in
        the
        past several years the government has implemented economic reform measures
        that
        emphasize decentralization and encourage private economic activity. Because
        these economic reform measures may be inconsistent or ineffectual, there
        are no
        assurances that:
 
 -
              We
                  will be able to capitalize on economic reforms;-
              The
                  Chinese government will continue its pursuit of economic reform
                  policies;-
              The
                  economic policies, even if pursued, will be successful;-
              Economic
                  policies will not be significantly altered from time to time;
                  and-
              Business
                  operations in China will not become subject to the risk of
                  nationalization.
 
 Since
        1979, the Chinese government has reformed its economic systems. Because many
        reforms are unprecedented or experimental, they are expected to be refined
        and
        improved. Other political, economic and social factors, such as political
        changes, changes in the rates of economic growth, unemployment or inflation,
        or
        in the disparities in per capita wealth between regions within China, could
        lead
        to further readjustment of the reform measures. This refining and readjustment
        process may negatively affect our operations.
 
 Over
        the
        last few years, China’s economy has registered a high growth rate. Recently,
        there have been indications that rates of inflation have increased. In response,
        the Chinese government recently has taken measures to curb this excessively
        expansive economy. These measures have included devaluations of the Chinese
        currency, the Renminbi (RMB), restrictions on the availability of domestic
        credit, reducing the purchasing capability of certain of its customers, and
        limited re-centralization of the approval process for purchases of some foreign
        products. These austerity measures alone may not succeed in slowing down
        the
        economy’s excessive expansion or control inflation, and may result in severe
        dislocations in the Chinese economy. The Chinese government may adopt additional
        measures to further combat inflation, including the establishment of freezes
        or
        restraints on certain projects or markets.
 
 To
        date
        reforms to China’s economic system have not adversely impacted our operations
        and are not expected to adversely impact operations in the foreseeable future;
        however, there can be no assurance that the reforms to China’s economic system
        will continue or that we will not be adversely affected by changes in China’s
        political, economic, and social conditions and by changes in policies of
        the
        Chinese government, such as changes in laws and regulations, measures which
        may
        be introduced to control inflation, changes in the rate or method of taxation,
        imposition of additional restrictions on currency conversion and remittance
        abroad, and reduction in tariff protection and other import
        restrictions.
 
 **Risk
        Factors Associated with Our Business**
  ***Non-performance
        by Our suppliers may adversely affect Our operations by delaying delivery
        or
        causing delivery failures, which may negatively affect demand, sales and
        profitability.***
  We
        purchase various types of products from our suppliers.  We would be
        materially and adversely affected by the failure of our suppliers to perform
        as
        expected.  We could experience delivery delays or failures caused by
        production issues or delivery of non-conforming products if its suppliers
        failed
        to perform, and we also face these risks in the event any of its suppliers
        becomes insolvent or bankrupt.
   20
  ***We
        Depend on the Continued Services of Our Executive Officers and the Loss of
        Key
        Personnel Could Affect Our Ability to Successfully Grow Our Business.***
 
 We
        are
        highly dependent upon the services of our senior management team, particularly
        Zhenggang Wang, our Chairman and Chief Executive Officer and Jian Liu, our
        Chief
        Financial Officer. The permanent loss for any of our key executives, could
        have
        a material adverse effect upon our operating results. We may not be able
        to
        locate suitable replacements for our executives if their services were lost.
        We
        do not maintain key man life insurance on any of these individuals.
  ***With
        the markets being highly competitive, We may not be able to compete
        successfully.***
  Many
        of
        our competitors have substantially greater revenues and financial resources
        than
        we do. We may not be able to compete favorably and increased competition
        may
        substantially harm our business, business prospects and results of operations.
        If we are not successful in our target markets, our sales could decline,
        our
        margins could be negatively impacted and we could lose market share, any
        of
        which could materially harm our business, results of operations and
        profitability.
  **ITEM
        7.**  **FINANCIAL
        STATEMENTS.**
 
 The
        financial statements of the Company are included following the signature
        page to
        this Form 10-KSB.
 
 **ITEM
        8.**  **CHANGES
        IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE.**
 
 **Dismissal
        of Kabani & Company, Inc.**
 
 On
        April
        20, 2006, the Company dismissed Kabani & Company, Inc. (“Kabani”) as its
        principal independent accountant. Kabani’s report on the Company’s financial
        statements for the year ended December 31, 2005 did not contain an adverse
        opinion or disclaimer of opinion. The Board of Directors approved the decision
        to dismiss Kabani as the Company’s principal independent accountant. During the
        Company’s recent fiscal year and through the date of Kabani’s dismissal, there
        were no disagreements with Kabani on any matter of accounting principles
        or
        practices, financial statement disclosure, or auditing scope or procedure,
        which, if not resolved to the satisfaction of Kabani, would have caused it
        to
        make reference to the subject matter of the disagreement(s) in connection
        with
        its report.
 
 **Engagement
        of Morgenstern & Company, CPA’s, P.C.**
  On
        April
        20, 2006 the Company retained Morgenstern & Company, CPA’s, P.C. to serve as
        the Company’s principal independent accountant.
  21
  **ITEM
        8A. CONTROLS AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
  As
        of
        December 31, 2006, the end of the period covered by this report, our Chief
        Executive Officer and our Chief Financial Officer reviewed and evaluated
        the
        effectiveness of our disclosure controls and procedures (as defined in Exchange
        Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material
        information we must disclose in our report filed or submitted under the
        Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
        processed, summarized, and reported on a timely basis, and have concluded,
        based
        on that evaluation, that as of such date, our disclosure controls and procedures
        were effective to ensure that information required to be disclosed by us
        in
        reports that we file or submit under the Exchange Act is accumulated and
        communicated to our Chief Executive Officer and Chief Financial Officer as
        appropriate to allow timely decisions regarding required disclosure.
  **Changes
        in Internal Control over Financial Reporting**
  There
        was
        no change in our internal control over financial reporting that occurred
        during
        the fourth fiscal quarter of the fiscal year covered by this Annual Report
        on
        Form 10-KSB that has materially affected, or is reasonably likely to materially
        affect, our internal control over financial reporting.
 
 **ITEM
        8B.**  **OTHER
        INFORMATION.**
 
 There
        is
        no information required to be disclosed in a report on Form 8-K during the
        fourth quarter of the fiscal year covered by this Form 10-KSB but not reported.
 
 **PART
        III**
  **ITEM
        9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH
        SECTION 16(a) OF THE EXCHANGE ACT.**
 
 The
        following table sets forth the name, age and position of each of our officers
        and directors as of March 23, 2007.
   Name
              Age
              PositionZhenggang Wang
              38
              Chairman of the Board, Chief Executive
                Officer,Chairman ofthe
                BoardJian Liu
              33
              Chief
                Financial OfficerXiang Ma
              32
              PresidentChenghua Zhu
              31
              DirectorMingjun Zhu
              38
              DirectorRongjin Weng
              43
              DirectorWei Kang Gu
              68
              DirectorKenneth T. Berents
              59
              Director, Chairman Audit
                CommitteeTodd L. Mavis
              46
              Director, Member Audit
                Committee
   22
  ***Zhenggang
        Wang, Chairman of the Board, Chief Executive Officer, Chairman of the
        Board***
  Mr. Wang,
        has been the Company’s chairman and chief executive officer and a member of its
        Board of Directors since December 2005. He is also the founder, chairman
        and
        chief executive officer of Zhejiang
        Yong Xin Digital Technology Company Limited ,
        a
        holding company for the purpose of holding interests in Hangzhou
        Wang Da Electronics Company, Limited **** and Yiwu
        Yong
        Xin Telecommunication Company, Limited ,
        both of
        which are based in China. Mr. Wang established Yiwu
        Yong
        Xin Telecommunication Company, Limited in 1997,
        and he serves as its chairman and chief executive officer. In 1998,
        Mr. Wang established Hangzhou
        Wang Da Electronics Company, Limited ,
        which
        is in the business of distributing cellular telephone phones. Mr. Wang is
        the chairman and chief executive officer of Hangzhou
        Wang Da Electronics Company, Limited .
 
 Mr. Wang
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Mr. Wang and the
        directors, executive officers, or persons nominated or chosen by the Company
        to
        become directors or executive officers. Other than the Merger Transaction,
        during the last two years, there have been no transactions to which the Company
        was a party in which Mr. Wang (or any member of his immediate family) had a
        direct or indirect material interest.
 
 ***Jian
        Liu, Chief Financial Officer*** ****
 
 Mr. Liu
        has been the chief financial officer of the Company since December 2005.
        He is
        also the chief financial officer of Zhejiang
        Yong Xin Digital Technology Company Limited ,
        a
        position he has held since 2002. Prior to that, from 1998 to 2002, Mr. Liu
        was the chief financial officer of Beijing Liao Hua Group, a Chinese company
        that produces steel products.
 
 Mr. Liu
        does not hold any directorships with reporting companies in the United States.
        There are no family relationships between Mr. Liu and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Mr. Liu (or any member of his immediate family) had a direct or
        indirect material interest.
 
 ***Xiang
        Ma, President***
 
 Mr.
        Ma
        was President of Yiwu Yong Xin Telecommunication Company Limited, China 3C's
        largest subsidiary, from 1999 to the present. During the past six years,
        Mr.
        Ma's expertise in marketing and management have contributed significantly
        to the
        company's rapid growth, where it has gone from a small business in the
        distribution of 3C products, particularly fax machines, in Eastern China
        to
        being a major presence in that market. Prior to that, from 1996 to 1999,
        Mr. Ma
        was the manager of Zhejiang Transfar Company Limited, a high-tech publicly
        traded company in China. During his time at Zhejiang Transfar, Mr. Ma was
        also
        responsible for the company's corporate communications. Mr. Ma received his
        Bachelor degree from Zhejiang University with a concentration in business
        management.
  23
  Mr.
        Ma
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Mr. Ma and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Mr. Ma (or any member of his immediate family) had a direct or indirect
        material interest.
 
 ***Chenghua
        Zhu, Director***
 
 Ms.
        Zhu,
        31, is a senior project manager of Shanghai Shengzhang, a certified public
        accounting firm. She was project manager at two CPA firms prior to joining
        Shanghai Shengzhang, Shanghai Jiarui and Hubei Dahua.
 
 Ms.
        Zhu
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Ms. Zhu and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Ms. Zhu (or any member of his immediate family) had a direct or
        indirect material interest.
 
 ***Mingjun
        Zhu, Director***
 
 Mr.
        Zhu,
        38, is General Manager of Zhejiang Mingda, a certified public accounting
        firm.
        He was General Manager of Zhejiang Mingda Management Consulting Company.
        From
        1993 to 2004, he was Deputy Director of Yiwu Zhicheng, a CPA firm.
 
 Mr.
        Zhu
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Mr. Zhu and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Mr. Zhu (or any member of his immediate family) had a direct or
        indirect material interest.
 
 ***Rongjin
        Weng, Director***
 
 Mr.
        Weng
        is Chairman of Langsha Group. He established Langsha Knitting Company Limited
        in
        1995, and has served as its chairman and chief executive officer since that
        time. The company has experienced a 500,000% growth in assets during the
        past 11
        years. Currently, Langsha is the largest sock manufacturer in China with
        annual
        revenue of $100 million. Mr. Weng holds a Master degree in Business
        Administration.
 
 Mr.
        Weng
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Mr. Weng and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Mr. Weng (or any member of his immediate family) had a direct or
        indirect material interest.
  24
  ***Wei
        Kang Gu, Director***
 
 Mr.
        Gu is
        a Professor of Electronic Engineering at Zhejiang University. Founded in
        1897,
        the University has always been ranked among the few top universities in China
        and is today the third most recognized university in China. It is a major
        research university comprised of 22 colleges. Mr. Gu also serves on the Board
        of
        Bird Ningbo Company. Founded in 1992, Bird Ningbo has grown to be China's
        leading domestic manufacturer of mobile phones. He is also Vice Chairman
        of
        Zhejiang Electronic Association.
 
 Mr.
        Gu
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Mr. Gu and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Mr. Gu (or any member of his immediate family) had a direct or indirect
        material interest.
 
 ***Kenneth
        T. Berents, Director, Chairman Audit Committee***
 
 Mr.
        Berents is a former managing director and senior portfolio manager for Goldman
        Sachs Asset Management in Tampa, Fla., which manages $30 billion in growth
        stocks. Before joining Goldman Sachs, he was the managing director and director
        of equity research for First Union Securities, now Wachovia Securities, from
        1993 to 2000. He holds a bachelor's in history from Villanova University
        and a
        master's degree in journalism from the University of Missouri-Columbia. He
        also
        was an Alfred P. Sloan Fellow in economics at Princeton University. He has
        appeared on ABC's Nightline, CNN, CNBC and is widely quoted in national and
        trade publications.
 
 Mr.
        Berents does not hold any other directorships with reporting companies in
        the
        United States. There are no family relationships between Mr. Berents and
        the
        directors, executive officers, or persons nominated or chosen by the Company
        to
        become directors or executive officers. Other than the Merger Transaction,
        during the last two years, there have been no transactions to which the Company
        was a party in which Mr. Berents (or any member of his immediate family)
        had a
        direct or indirect material interest.
 
 ***Todd
        L. Mavis, Director, Member Audit Committee***
 
 Mr.
        Mavis
        most recently served as president and CEO of Danka Business Systems, a
        Nasdaq-listed company, where he generated $80 million in incremental revenue
        and
        led a company-wide turnaround. Danka is a $1.3 billion office imaging services
        and solutions provider headquartered in St. Petersburg, Fla. Prior to Danka,
        Mr.
        Mavis was executive vice president and general manager at Mitchell
        International, a privately held software developer in San Diego, California.
        Mr.
        Mavis also served as senior vice president at Checkmate Electronics, a publicly
        held software and services provider for the retail point-of-sale industry.
        There
        he developed and deployed a worldwide distributions strategy, created a sales
        and marketing program and negotiated three of the company's largest
        contracts.
  25
  Mr.
        Mavis
        does not hold any other directorships with reporting companies in the United
        States. There are no family relationships between Mr. Mavis and the directors,
        executive officers, or persons nominated or chosen by the Company to become
        directors or executive officers. Other than the Merger Transaction, during
        the
        last two years, there have been no transactions to which the Company was
        a party
        in which Mr. Mavis (or any member of his immediate family) had a direct or
        indirect material interest.
 
 **Family
        Relationships**
 
 There
        are
        no family relationships among the officers and directors of the
        Company.
 
 **Involvement
        in Certain Legal Proceedings**
 
 To
        our
        knowledge, during the past five years, our officers and directors: have not
        filed a petition under the federal bankruptcy laws or any state insolvency
        law,
        nor had a receiver, fiscal agent or similar officer appointed by a court
        for the
        business or present of such a person, or any partnership in which (s)he was
        a
        general partner at or within two years before the time of such filing, or
        any
        corporation or business association of which (s)he was an executive officer
        within two years before the time of such filing; were not convicted in a
        criminal proceeding or named subject of a pending criminal proceeding (excluding
        traffic violations and other minor offenses); were not the subject of any
        order,
        judgment or decree, not subsequently reversed, suspended or vacated, of any
        court of competent jurisdiction, permanently or temporarily enjoining him
        from
        or otherwise limiting their respective activities.
 
 **Compliance
        with Section 16 (a) of the Exchange Act**
 
 Based
        solely upon a review of Forms 3 and 4 and amendments thereto furnished to
        us
        pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934 during
        our
        most recent fiscal year and Forms 5 and amendments thereto furnished to us
        with
        respect to our most recent fiscal year, all officers, directors and owners
        of
        10% or more of our outstanding shares have filed all Forms 3, 4 and 5 required
        by Section 16(a) of the Securities Exchange Act of 1934, as amended, except
        that
        each of Messrs. Berents and Mavis filed a late Form 3.
 
 **Code
        of Ethics**
 
 In
        2002
        we adopted a corporate code of ethics. We believe our code of ethics is
        reasonably designed to deter wrongdoing and promote honest and ethical conduct;
        provide full, fair, accurate, timely and understandable disclosure in public
        reports; comply with applicable laws; ensure prompt internal reporting of
        code
        violations; and provide accountability for adherence to the code.
 
 **Audit
        Committee**
 
 Our
        Audit
        Committee consists of Chairman Kenneth T. Berents and member Todd L. Mavis.
        The
        Board of Directors of the Company has determined that Mr. Berents is the
        audit
        committee financial expert.
   26
  **Miscellaneous**
 
 On
        June
        22, 2006 Jimei Liu resigned as a Director. Ms. Liu resigned due to personal
        reasons. There was no disagreement between Ms. Liu and the Company in any
        respects.
  On
        June
        22, 2006 the Board of Directors appointed Mingjun Zhu and Chenghua Zhu to
        serve
        as a member of the Board of Directors of the Company.
 
 On
        December 8, 2006 the Board of Directors appointed Kenneth Berents to serve
        as a
        member of the Board of Directors and became Chairman of the Audit
        Committee.
 
 On
        January 2, 2007 the Board of Directors appointed Todd L. Mavis to serve as
        a
        member of the Board of Directors of the Company and a member of the Audit
        Committee.
 
 **ITEM
        10. EXECUTIVE COMPENSATION.**
 
 Shown
        on
        the table below is information on the annual and long-term compensation for
        services rendered to the Company in all capacities, for the years ended
        December 31, 2006, 2005 and 2004, paid by the Company to all individuals
        serving as the Company’s chief executive officer or acting in a similar capacity
        during the last three completed years, regardless of compensation level.
        During
        the 12 months ended December 31, 2006, the Company did not pay aggregate
        compensation to any executive officer in an amount greater than $100,000.
  Annual
                    Compensation
                Long
                    Term Compensation
  Other Annual
                Restricted
                    Stock
                LTIP
                  payouts
                All
                    OtherName
                
                Title
                
                Year
                
                Salary
                
                Bonus
                Compensation
                Awarded
                ($)
                CompensationZhenggang
                    Wang
                
                CEO
                
                2006
                  2005
                  2004
                
                15,000
                  12,500
                  12,500
                
                0
                  0
                  0
                0
                  0
                  0
                0
                  0
                    0
                0
                  0
                  0
                0
                  0
                  0Jian
                    Liu
                
                CFO
                
                2006
                  2005
                  2004
                
                12,000
                  10,000
                  10,000
                
                0
                  0
                  0
                0
                  0
                  0
                0
                  0
                    0
                0
                  0
                  0
                0
                  0
                  0Xiang
                    Ma
                
                President
                
                2006
                  2005
                  2004
                
                12,000
                  10,000
                  10,000
                
                0
                  0
                  0
                0
                  0
                  0
                0
                  0
                    0
                0
                  0
                  0
                0
                  0
                  0Peter
                    G. Wilson
                
                Former
                    President and CEO
                
                2006
                  2005
                  2004
                $
                --
                  0
                  40,000
                
                --
                  0
                  0
                --
                  0
                  0
                0
                  0
                    0
                --
                  0
                  0
                0
                  0
                  0Gary
                    Cambell
                
                Former
                    President
                
                2006
                  2005
                  2004
                $
                --
                  0
                  40,000
                
                --
                  0
                  0
                --
                  0
                  0
                0
                  0
                    0
                --
                  0
                  0
                0
                  0
                  0
  27
  **Option/SAR
        Grants**
 
 Except
        for a grant of 50,000 stock options to Kenneth Berents in December 2006 (which
        were vested upon issuance) at an exercise price of $4.16, which expire December
        2016, no individual grants of stock options, whether or not in tandem with
        stock
        appreciation rights (“SARs”) and freestanding SARs have been made to any
        executive officer or any director during the year ended December 31,
        2006.
 
 **Long-Term
        Incentive Plan Awards**
 
 We
        do not
        have any long-term incentive plans that provide compensation intended to
        serve
        as incentive for performance to occur over a period longer than one fiscal
        year,
        whether such performance is measured by reference to our financial performance,
        our stock price, or any other measure.
 
 **Compensation
        of Directors**
 
 Except
        for the following, the directors of the Company have not received compensation
        for their services as directors nor have they been reimbursed for expenses
        incurred in attending board meetings:
 
 **Kenneth
        T. Berents**
 
 On
        December 8, 2006, t he
        Company entered into an agreement with Mr. Berents whereby Mr. Berents will receive
        the following compensation for so long as he remains a member of the Board
        of
        Directors of the Company:
 
 (a)  Annual
        salary of Seventy Five Thousand ($75,000) Dollars payable monthly at the
        beginning of each month that Mr. Berents is a member of the Board of
        Directors.
 
 (b)  An
        option
        grant to purchase 50,000 shares of common stock of the Company upon execution
        of
        this Agreement and 30,000 shares on each anniversary of such date thereafter,
        provided Mr. Berents is a member of the Board of Directors at such time.
        The
        exercise price of the initial grant of 50,000 shares was be based on the
        closing
        price of the common stock of the Company on December 7, 2006 ($4.16) and
        for
        each future option grant the closing price of the Company common stock on
        the
        anniversary of such date. All option grants vest upon issuance and will have
        an
        exercise period of ten years from date of issuance so long as Mr. Berents
        is a
        member of the Board of Directors at such time. In the event that Mr. Berents
        is
        no longer a member of the Board of Directors, his exercise period for all
        vested
        options will be twenty-four months from the anniversary date of his departure
        from the Board of Directors.
 
 (c)
        $2,500 for each meeting of the board of Directors that Mr. Berents
        attends.
 
 (d)
        $2,000 for each meeting of a committee of the Board of Directors that Mr.
        Berents attends.
 
 (e)
        $5,000 for being named the Chairman of the Audit Committee of the
        Company.
  28
  **Todd
        Mavis**
 
 The
        Company entered into an agreement with Mr. Mavis whereby Mr. Mavis will receive
        the following compensation for so long as he remains a member of the Board
        of
        Directors of the Company:
  (a)  Annual
        salary of Seventy Five Thousand ($75,000) Dollars payable monthly at the
        beginning of each month that Mr. Mavis is a member of the Board of
        Directors.
  (b)  An
        option
        grant to purchase 50,000 shares of common stock of the Company upon execution
        of
        the Agreement and 30,000 shares on each anniversary of such date thereafter,
        provided Mr. Mavis is a member of the Board of Directors at such time. The
        exercise price of the initial grant of 50,000 shares was $3.46, and for each
        future option grant the closing price of the Company common stock on the
        anniversary of such date. All option grants will vest upon issuance and will
        have an exercise period of ten years from date of issuance so long as Mr.
        Mavis
        is a member of the Board of Directors at such time. In the event that Mr.
        Mavis
        is no longer a member of the Board of Directors, his exercise period for
        all
        vested options will be twenty-four months from the anniversary date of his
        departure from the Board of Directors.
 
 (c)
        $2,500 for each meeting of the Board of Directors that Mr. Mavis
        attends.
  (d) $2,000
        for each meeting of a committee of the board of Directors that Mr. Mavis
        attends.
  (e)  $5,000
        if
        he is named the Chairman of any committee of the Board of Directors of the Company,
        at the time he named Chairman.
  (f) $4,500
        as
        a one-time bonus upon joining the Board of Directors.
 
 Due
        to a
        clerical error in the Company’s Stock Option Plan by the Company both Mr. Mavis
        and Mr. Berents have agreed that the options which were issued will be held
        in
        escrow (not exercisable) until the clerical error has been
        rectified.
 
 **Employment
        contracts and termination of employment and change-in-control
        arrangements**
 
 Except
        as
        stated above, we do not have any employment contracts with any of our directors
        and officers.
  29
  **ITEM
        11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
        STOCKHOLDERS MATTERS.**
 
 The
        following table sets forth certain information, as of February 22, 2007,
        concerning shares of common stock of the Company, the only class of its
        securities that are issued and outstanding, held by (1) each shareholder
        known by the Company to own beneficially more than five percent of the common
        stock, (2) each director of the Company, (3) each executive officer of
        the Company, and (4) all directors and executive officers of the Company as
        a group:
 
 **Amount
                  and Nature****of
                  Beneficial**
              
              **Percentage
                  of****Name
                  and Address of Beneficial Owner (1)******
              
              **Ownership**
              
              **Common
                  Stock (3)**Zhenggang
                  Wang
              
              
              9,625,000
              
              
              
              18.34
              %Jian
                  Liu
              
              
              0
              
              
              
              0Xiang
                  Ma
              
              
              0
              
              
              
              0Chenghua
                  Zhu
              
              
              0
              
              
              
              0Mingjun
                  Zhu
              
              
              0
              
              
              
              0Rongjin
                  Weng
              
              
              0
              
              
              
              0Wei
                  Kang Gu
              
              
              0
              
              
              
              0Kenneth
                  T. Berents
              
              
              50,000
                  (4)
              
              
              
              *Todd
                  L. Mavis
              
              
              50,000(4)
              
              
              
              *Weiyi
                  Lv
              
              
              5,495,000
              
              
              
              10.47
              %Yimin
                  Zhang
              
              
              5,495,000
              
              
              
              10.47
              %Xiaochun
                  Wang
              
              
              4,130,000
              
              
              
              7.87
              %Wen-An
                  Chen (2)
              
              
              4,000,000
              
              
              
              7.62
              %Huoqing
                  Yang (2)
              
              
              4,000,000
              
              
              
              7.62
              %Zhongsheng
                  Bao
              
              
              2,730,000
              
              
              
              5.20
              %All
                  directors and executive officers as a group (9 persons)
              
              
              9,725,000
              
              
              
              18.53
              %
 *
        Less
        than One Percent.
 
 (1)
              
              Unless
                  otherwise indicated in the footnotes to the table, each shareholder
                  shown
                  on the table has sole voting and investment power with respect
                  to the
                  shares beneficially owned by him or it. Unless otherwise indicated
                  in the
                  footnotes to the table, the address for each shareholder is c/o:
                  368 HuShu
                  Nan Road, HangZhou City, Zhejiang Province, China 310014. Percentages
                  of
                  less than one percent have been omitted from the table.(2)
              
              Represents
                  shares of common stock held jointly by Wen-An Chen and Huoqing
                  Yang.(3)
              
              Calculated
                  on the basis of52,489,055shares
                  of common stock issued and outstanding as of February 22, 2007
                  except that
                  shares of common stock underlying options and warrants exercisable
                  within
                  60 days of the date hereof are deemed to be outstanding for purposes
                  of
                  calculating the beneficial ownership of securities of the holder
                  of such
                  options or warrants.(4)
              
              Represents
                  shares of common stock issuable upon exercise of outstanding stock
                  options
                  (as described above).
 
 30
  **ITEM
        12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
        INDEPENDENCE.**
 
 **Related
        Transactions**
 
 Since
        October 2005, Zhenggang Wang, our CEO and Chairman of the Board of
        Directors, a former shareholder of CFDL and its sole director, has served
        as the
        chairman of the board and the chief executive officer of the Company and
        has
        been a member of the board of directors of the Company (the “ Board
        of Directors ”).
        China
        US Bridge Capital Limited, a former shareholder of CFDL, has been a holder
        of
        the Company’s common stock since October 2005. Immediately prior to the
        Merger Transaction, it held approximately 4.6% of the Company’s issued and
        outstanding common stock.
 
 Except
        as
        otherwise disclosed herein or incorporated herein by reference, there have
        not
        been any transactions, or proposed transactions, during the last two years,
        to
        which the Company was or is to be a party, in which any director or executive
        officer of the Company, any nominee for election as a director, any security
        holder owning beneficially more than five percent of the common stock of
        the
        Company, or any member of the immediate family of the aforementioned persons
        had
        or is to have a direct or indirect material interest.
 
 **Independent
        Directors**
  The
        following members of the Company’s Board of Directors are independent under the
        listing standards of the Nasdaq Stock Market: Rongjin
        Weng, Weikang Gu, Mingjun Zhu, Chenghua Zhu, Kenneth Berents, and Todd
        Mavis.
  31
 
 **ITEM
        13. EXHIBIT** **S.**
 
 **Exhibit
                  No.**
              **Document
                  Description**4.1
              China
                  3C Group 2005 Equity Incentive Plan. (1)4.2
              Warrant
                  Agreement dated December 20, 2005. (3)10.1
              Guarantee
                  Contract between the Registrant and Shenzhen Shiji Ruicheng Guaranty
                  and
                  Investment Co. Ltd., dated as of December 21, 2005.
                  (2)10.2
              Agreement
                  and Plan of Merger, dated as of December 21, 2005, among the
                  Registrant, YX Acquisition Corporation, Capital Future Development
                  Limited, Zhenggang Wang, Yimin Zhang, Weiyi Lv, Xiaochun Wang,
                  Zhongsheng
                  Bao, Simple (Hongkong) Investment & Management Company Limited, First
                  Capital Limited, Shenzhen Dingyi Investment & Consulting Limited and
                  China US Bridge Capital Limited. (2)10.3
              Subscription
                  Agreement, dated as of December 20, 2005, between the Registrant and
                  Huiqi Xu. (3)10.4
              Consulting
                  Agreement, dated as of December 20, 2005, among the Registrant,
                  Wen-An Chen and Huoqing Yang. (3)10.5
              Stock
                  Purchase Agreement, dated as of October 17, 2005, by and among Sun
                  Oil & Gas, Inc., EH&P Investments, John D. Swain, Fred Holcapek,
                  PH Holding Group, Ma Cheng Ji, Zhou Wei, Zeng Xiu Lan, Gu Xiao
                  Dong,
                  Jacksonville Management Ltd., Colin Wilson, Alliance Capital Management,
                  Inc., Hanzhong Fang and China U.S. Bridge Capital,
                  Ltd.(4)10.6
              Form
                  of Promissory Note dated December 21, 2005. (2)21.1
              List
                  of Subsidiaries23.1
              Consent
                  ofKabani
                  & Company, Inc.23.2
              Consent
                  ofChisholm,
                  Bierwolf & Nilson, LLP23.3
              Consent
                  of Lichter, Yu and Associates31.1
              Certification
                  of the Chief Executive Officer Pursuant to Rule 13a-14(a) under
                  the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of the Chief Financial Officer Pursuant to Rule 13a-14(a) under
                  the
                  Securities Exchange Act of 1934, as adopted pursuant to Section
                  302 of the
                  Sarbanes-Oxley Act of 2002.32.1
              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
                  200232.2
              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)
                  Previously filed as an exhibit to the Company’s Registration Statement on
                  Form S-8 filed with the Securities and Exchange Commission on March
                  10,
                  2006.(2)
                  Previously filed as an exhibit to the Company’s Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on
                  December 22, 2005.(3)
                  Previously filed as an exhibit to the Company’s Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on
                  December 20, 2005.(4)
                  Previously filed as an exhibit to the Company’s Current Report on
                  Form 8-K filed with the Securities and Exchange Commission on
                  October 21, 2005.
 _________________
   32
 
 **ITEM
        14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**
 
 On
        April
        20, 2006, the Company dismissed Kabani & Company, Inc. (“Kabani”) as its
        principal independent accountant.
  On
        April
        20, 2006 the Company retained Morgenstern & Company, CPA’s, P.C.
        (“Morgenstern”) to serve as the Company’s principal independent accountant.
 
 The
        following represents fees for professional audit services rendered by Kabani for
        the
        audit of our annual financial statements for the transition period from February
        1, 2005 to December 31, 2005 and Morgenstern for the fiscal year ended December
        31, 2006.
 
 **Audit
        Fees**
 
 The
        aggregate fees billed by our current auditors, Morgenstern, for professional
        services rendered for the audit of our annual financial statements for the
        year
        ended December 31, 2006 were $99,184. The aggregate fees billed by our former
        auditors, Kabani for professional services rendered for the audit of our
        annual
        financial statements for the fiscal year 2005 were $42,000.
 
 **Audit
        Related Fees**
 
 We
        incurred no audit related fees to Morgenstern and Kabani during the year
        ended
        December 31, 2006. The aggregate fees billed by our former auditors, Lichter
        Yu
& Associates for professional services rendered for the reviews of the
        financial statements included in our Quarterly Reports on Form 10-QSB during
        fiscal year 2006 were $5,010.
 
 **Tax
        Fees**
 
 Our
        principal accountants did not render any services for tax compliance, tax
        advice
        and tax planning during transition period ended December 31, 2006 and 2005
        fiscal year, respectively.
 
 **All
        Other Fees**
 
 Our
        principal accountants did not bill us any additional fees that are not disclosed
        under audit fees, audit related fees or tax fees in each of the last two
        calendar years.
  **Audit
        Committee Pre-Approval Process, Policies and Procedures**
  We
        have
        an Audit Committee which is composed of Kenneth T. Berents (Chairman) and
        Todd
        Mavis. Our principal accountants have performed their audit procedures in
        accordance with pre-approved policies and procedures established by our Audit
        Committee.  Our principal auditors have informed our Audit Committee of the
        scope and nature of each service provided.
   33
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities and Exchange
        Act of
        1934, the Company has duly caused this report to be signed on its behalf
        by the
        undersigned, thereunto duly authorized, on this 30 th day of
        March 2007.
 
 **CHINA
                  3C GROUP**/s/Zhenggang
                  WangZhenggang
                  WangChief
                  Executive Officer and Chairman
   Pursuant
        to the requirements of the Securities Exchange Act of 1934, this amended
        report
        has been signed below by the following persons on behalf of the Company and
        in
        the capacities indicated below and on the dates indicated .
 
 **Signatures**
              **Title**
              **Date**/s/
                  Zhenggang Wang
              
              March
                  30, 2007Zhenggang
                  Wang
              Chief
                  Executive Officer and Chairman/s/Xiang MaXiang
                  Ma
              President
              March
                  30, 2007/s/Jian LiuJian
                  Liu
              Chief
                  Financial Officer
              March
                  30, 2007/s/Chenghua ZhuChenghua
                  Zhu
              Director
              March
                  30, 2007/s/
                  Mingjun ZhuMingjun
                  Zhu
              Director
              March
                  30, 2007/s/
                  Rongjin WengRongjin
                  Weng
              Director
              March
                  30, 2007/s/
                  Wei Kang GuWei
                  Kang Gu
              Director
              March
                  30, 2007/s/
                  Kenneth T. BerentsKenneth
                  T. Berents
              Director
              March
                  30, 2007/s/
                  Todd L. MavisTodd
                  L. Mavis
              Director
              March
                  30, 2007
 
 
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 
 **DECEMBER
        31, 2006**
  **TABLE
            OF CONTENTS**
  Report
                      of Independent Registered Public Accounting Firm
                  F-1Consolidated
                      Balance Sheets
                  F-2Consolidated
                      Statements of Income
                  F-3Consolidated
                      Statements of Cash Flow
                  F-4Consolidated
                      Statements of Stockholders Equity
                  F-5Notes
                      to Consolidated Financial Statements
                  F-6
                      - F-19
  
 
 ***MORGENSTERN,
            SVOBODA & BAER, CPA’s, P.C.***
  *CERTIFIED
            PUBLIC ACCOUNTANTS*
 40
            Exchange Place, Suite 1820
 New
            York,
            NY 10005
 TEL:
            (212)
            925-9490
 FAX:
            (212)
            226-9134
 E-MAIL:
            MORGENCPA@CS.COM
 
 
 Board
            of
            Directors and Stockholders of
 China
            3C
            Group Inc. and Subsidiaries
 
 
 We
            have
            audited the accompanying consolidated balance sheet of China 3C Group
            and
            Subsidiaries, Inc. (a Nevada corporation) as of December 31, 2006, and
            the
            related consolidated statements of income, stockholders' equity, and
            cash flows
            for the year ended December 31, 2006. These consolidated financial statements
            are the responsibility of the Company's management. Our responsibility
            is to
            express an opinion on these consolidated financial statements based on
            our
            audit.
  We
            conducted our audit in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audit to obtain reasonable assurance about whether the
            consolidated financial statements are free of material misstatement.
            An audit
            includes examining, on a test basis, evidence supporting the amounts
            and
            disclosures in the financial statements. An audit also includes assessing
            the
            accounting principles used and significant estimates made by management,
            as well
            as evaluating the overall consolidated financial statement presentation.
            We
            believe that our audit provide a reasonable basis for our opinion.
  In
            our
            opinion, the consolidated financial statements referred to above present
            fairly,
            in all material respects, the consolidated financial position of China
            3C
            Group and Subsidiaries, Inc. as of
            December 31, 2006, and the consolidated results of their operations and
            their
            consolidated cash flows for the year ended December 31, 2006, in conformity
            with
            U.S. generally accepted accounting principles.
  
 Morgenstern,
            Svoboda & Baer CPA’s P.C.
 **Certified
            Public Accountants**
 
 New
            York,
            New York
 February
            19, 2006
 
 
 
 **Report
            of Independent Registered Public Accounting Firm**
 
 
 Board
            of
            Directors and Stockholders of
 China
            3C
            Group and Subsidiaries, Inc.
 
 
 We
            have
            audited the accompanying consolidated statements of income, stockholders'
            equity, and cash flows of China 3C Group and Subsidiaries, Inc. (a Nevada
            corporation) for the year ended December 31, 2005. These consolidated
            financial
            statements are the responsibility of the Company's management. Our
            responsibility is to express an opinion on these consolidated financial
            statements based on our audit.
  We
            conducted our audit in accordance with the standards of the Public Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audit to obtain reasonable assurance about whether the
            consolidated financial statements are free of material misstatement.
            An audit
            includes examining, on a test basis, evidence supporting the amounts
            and
            disclosures in the financial statements. An audit also includes assessing
            the
            accounting principles used and significant estimates made by management,
            as well
            as evaluating the overall consolidated financial statement presentation.
            We
            believe that our audit provide a reasonable basis for our opinion.
  In
            our
            opinion, the consolidated financial statements referred to above present
            fairly,
            in all material respects, the consolidated results of the operations
            of China
            3C
            Group and Subsidiaries, Inc. and
            their consolidated cash flows for the year ended December 31, 2005, in
            conformity with U.S. generally accepted accounting principles.
   /s/Kabani
            & Company, Inc.
 **Certified
            Public Accountants**
 
 Los
            Angeles California
 March
            10,
            2006
  F-1
  
 **CHINA
                      3C GROUP INC. AND SUBSIDIARIES****CONSOLIDATED
                      BALANCE SHEET****S****DECEMBER
                      31, 2006 AND 2005****ASSETS**
                  
                  **2006****Current
                      Assets**Cash
                      and cash equivalents
                  
                  $
                  6,498,450Accounts
                      receivable, net
                  
                  
                  8,013,071Inventory
                  
                  
                  2,779,506Advance
                      to supplier
                  
                  
                  2,215,841Refundable
                      Deposits
                  
                  
                  6,567Prepaid
                      expenses
                  
                  
                  60,059Total
                      Current Assets
                  
                  
                  19,573,494**Property
                      & equipment, net**
                  
                  
                  65,803Goodwill
                  
                  
                  20,348,278**Total
                      Assets**
                  
                  $
                  39,987,575**LIABILITIES
                      AND STOCKHOLDERS' EQUITY**Current
                      LiabilitiesAccounts
                      payable and accrued expenses
                  
                  $
                  1,964,663Income
                      tax payable
                  
                  
                  2,596,517Notes
                      payable
                  
                  
                  4,500,000Total
                      Current Liabilities
                  
                  
                  9,061,180**Stockholders'
                      Equity**Common
                      stock, $.001 par value, 100,000,000shares
                      authorized, 52,488,938 and 39,870,077 issued and
                      outstanding
                  
                  
                  52,489Shares
                      to be issued, 8,980,000Additional
                      paid in capital
                  
                  
                  17,352,691Deferred
                      consulting expenseSubscription
                      receivable
                  
                  
                  (50,000Statutory
                      reserve
                  
                  
                  3,320,755Other
                      comprehensive income
                  
                  
                  427,616Retained
                      earnings
                  
                  
                  9,822,844Total
                      Stockholders' Equity
                  
                  
                  30,926,395Total
                      Liabilities and Stockholders' Equity
                  
                  $
                  39,987,575
  The
            accompanying notes are an integral part of these consolidated financial
            statements.
  F-2
  **CHINA
                      3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                      STATEMENTS OF INCOME****FOR
                      YEARS ENDING DECEMBER 31,
                      2006**
  12/31/2006
                  
                  12/31/2005Sales,
                      net
                  
                  $
                  148,218,848
                  
                  $
                  32,588,634Cost
                      of sales
                  
                  
                  125,411,758
                  
                  
                  28,325,332**Gross
                      profit**
                  
                  
                  22,807,090
                  
                  
                  4,263,302General
                      and administrative expenses
                  
                  
                  5,544,924
                  
                  
                  1,706,869**Income
                      from operations**
                  
                  
                  17,262,166
                  
                  
                  2,556,433Other
                      (Income) ExpenseInterest
                      income
                  
                  
                  (31,293
                  )
                  
                  (10,156
                  )Other
                      expense
                  
                  
                  100,646
                  
                  
                  17,364Interest
                      expense
                  
                  
                  7,565
                  
                  
                  2,954Total
                      Other (Income) Expense
                  
                  
                  76,918
                  
                  
                  10,162**Income
                      before income taxes**
                  
                  
                  17,185,248
                  
                  
                  2,546,271Provision
                      for income taxes
                  
                  
                  5,908,122
                  
                  
                  1,088,021**Net
                      income**
                  
                  $
                  11,277,126
                  
                  $
                  1,458,250**Net
                      income per share:**Basic
                      & diluted
                  
                  $
                  0.24
                  
                  $
                  0.04**Weighted
                      average number of shares outstanding:**Basic
                      & diluted
                  
                  
                  46,179,507
                  
                  
                  35,133,427
 
 
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
  F-3
  **CHINA
                      3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                      STATEMENTS OF CASH FLOWS****FOR
                      THE YEARS ENDED DECEMBER 31, 2006 AND
                      2005**
  2006
                  
                  2005**CASH
                      FLOWS FROM OPERATING ACTIVITIES**Net
                      Income
                  $
                  11,277,126
                  
                  $
                  1,458,250Adjustments
                      to reconcile net income to net cashprovided
                      by operating activities:Depreciation
                  
                  20,191
                  
                  
                  17,420Gain
                      on asset disposition
                  
                  (936
                  )Provision
                      for bad debts
                  
                  82,686Issuance
                      of shares for consultants
                  
                  
                  
                  
                  225,680Amortization
                      of deferred consulting expense
                  
                  387,945
                  
                  
                  12,055Shares
                      to be issued to consultants
                  
                  
                  
                  
                  498,000(Increase)
                      / decrease in assets:Accounts
                      receivables
                  
                  (2,375209
                  )
                  
                  (286,498
                  )Inventory
                  
                  (487,593
                  )
                  
                  (421,658
                  )Prepaid
                      expense
                  
                  85,216
                  
                  
                  (42,522
                  )Advance
                      to supplier
                  
                  (848,842
                  )
                  
                  (372,000
                  )Deposits
                  
                  (5,929
                  )
                  
                  1,288Increase
                      / (decrease) in current liabilities:Accounts
                      payable and accrued expenses
                  
                  1.356,272
                  
                  
                  (267,816
                  )Income
                      tax payable
                  
                  1,477,695
                  
                  
                  122,067Total
                      Adjustments
                  
                  (308,510
                  )
                  
                  (513,984
                  )**Net
                      cash provided by operating activities**
                  
                  11.968,616
                  
                  
                  944,266**CASH
                      FLOWS FROM INVESTING ACTIVITIES**Purchase
                      of property & equipment
                  
                  (30,591
                  )
                  
                  (2,308
                  )Proceeds
                      from asset sales
                  
                  1,508**Net
                      cash used by Investing activities**
                  
                  (29.083
                  )
                  
                  (2,308
                  )**CASH
                      FLOWS FROM FINANCING ACTIVITIES**Capital
                      contribution to subsidiary before acquisition
                  
                  
                  
                  
                  1,210,000Dividends
                      paid
                  
                  
                  
                  
                  (529,140
                  )Proceed
                      on loan from related parties
                  
                  
                  
                  
                  97,760Payments
                      on loan to related parties
                  
                  
                  
                  
                  (250,877
                  )Payments
                      of notes - other
                  
                  (7,769
                  )
                  
                  (9,807
                  )Payments
                      of acquisition notes - net of cash acquired
                  
                  (6,550,157
                  )**Net
                      cash provided by financing activities**
                  
                  (6,557,926
                  )
                  
                  517,936Effect
                      of exchange rate changes on cash and cash equivalents
                  
                  167,621
                  
                  
                  19,670Net
                      change in cash and cash equivalents
                  
                  4,549,228
                  
                  
                  1,479,564**Cash
                      and cash equivalents, beginning balance**
                  
                  1,949,222
                  
                  
                  469,658**Cash
                      and cash equivalents, ending balance**
                  $
                  6,498,450
                  
                  $
                  1,949,222**SUPPLEMENTAL
                      DISCLOSURES:**Cash
                      paid during the year for:Income
                      tax payments
                  $
                  3,534,155
                  
                  $
                  965,354Interest
                      payments
                  $
                  7,565
                  
                  $
                  2,954**Non
                      cash transactions relating to acquisitions**Purchased
                      Goodwill
                  
                  (20,348,278
                  )Fair
                      value of assets purchased less cash acquired
                  
                  (5,451,879
                  )Acquisition
                      financed with stock issuance
                  
                  14,750,000Acquisition
                      financed with notes
                  
                  12,500,000Net
                      cash acquired in acquisitions
                  
                  1,449,843
 
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
   F-4
 
 **CHINA
                      3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                      STATEMENT OF STOCKHOLDERS' EQUITY****(UNAUDITED)****FOR
                      THE YEARS ENDED DECEMBER 31, 2006 AND
                      2005**
  **Shares**
                  
                  **Additional**
                  
                  **Other**
                  
                  **Deferred**
                  
                  
                  
                  
                  
                  **Retained
                      Earnings**
                  
                  **Total****Common
                      Stock**
                  
                  **to
                      be**
                  
                  **Paid-In**
                  
                  **Comprehensive**
                  
                  **Consulting**
                  
                  **Subscription**
                  
                  **Statutory**
                  
                  **(Accumulated**
                  
                  **Stockholders'****Shares**
                  
                  **Amount**
                  
                  **issued**
                  
                  **Capital**
                  
                  **Income**
                  
                  **Expense**
                  
                  **Receivable**
                  
                  **Reserve**
                  
                  **Deficit)**
                  
                  **Equity/Deficit****Balance
                      December 31, 2004**
                  
                  
                  35,000,000
                  
                  
                  35,000
                  
                  
                  
                  
                  
                  267,500
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  70,379
                  
                  
                  383,297
                  
                  
                  756,176Changes
                      due to recapitalization
                  
                  
                  2,613,282
                  
                  
                  2,613
                  
                  
                  
                  
                  
                  1,226,387
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,229,000Shares
                      issued for consulting fees
                  
                  
                  
                  
                  
                  
                  
                  
                  498,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  498,000Warrants
                      issued for deferred consulting fees
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  400,000
                  
                  
                  
                  
                  
                  (387,945
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  12,055Stock
                      issued for guarantee fee
                  
                  
                  2,256,795
                  
                  
                  2,257
                  
                  
                  
                  
                  
                  223,423
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  225,680Warrants
                      exercised
                  
                  
                  
                  
                  
                  
                  
                  
                  4,000
                  
                  
                  (4,000
                  )Stock
                      subscription receivable
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (50,000
                  )
                  
                  
                  
                  
                  
                  
                  
                  (50,000
                  )Dividend
                      paid
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (525,460
                  )
                  
                  (525,460
                  )Foreign
                      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  74,950
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  74,950Transfer
                      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  331,651
                  
                  
                  (331,651
                  )Net
                      income for the year ended December 31, 2005
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,458,250
                  
                  
                  1,458,250**Balance
                      December 31, 2005**
                  
                  
                  39,870,077
                  
                  $
                  39,870
                  
                  $
                  502,000
                  
                  $
                  2,113,310
                  
                  $
                  74,950
                  
                  $
                  (387,945
                  )
                  $
                  (50,000
                  )
                  $
                  402,030
                  
                  $
                  984,436
                  
                  $
                  3,678.651Stock
                      Issued
                  
                  
                  8,980,000
                  
                  
                  8,980
                  
                  
                  (502,000
                  )
                  
                  493,020Foreign
                      currency translation adjustments
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  167,621
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  167,621income
                      for the year ended December 31, 2006
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,277,126
                  
                  
                  11,277,126Transfer
                      to statutory reserve
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,438,717
                  
                  
                  (2,438,717
                  )Purchase
                      Acquisition
                  
                  
                  3,638,861
                  
                  
                  3,639
                  
                  
                  
                  
                  
                  14,746,,361
                  
                  
                  185,045
                  
                  
                  
                  
                  
                  
                  
                  
                  480,008
                  
                  
                  
                  
                  
                  15,415,053Transferred
                      To prepaid
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  387,945
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  387,945**Balance
                      December 31, 2006**
                  
                  
                  52,488,938
                  
                  $
                  52,489
                  
                  
                  
                  
                  $
                  17,352,691
                  
                  $
                  427,616
                  
                  
                  
                  
                  $
                  (50,000
                  )
                  $
                  3,320,755
                  
                  $
                  9,822,844
                  
                  $
                  30,926,395
  The
            accompanying notes are an integral part of these consolidated financial
            statements
  F-5
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **Note
            1 -** **ORGANIZATION**
 
 China
            3C
            Group was incorporated on August, 20, 1998 under the laws of the State
            of
            Nevada. Capital Future Developments Limited - BVI (Capital) was incorporated
            on
            July 22, 2004 under the laws of the British Virgin Islands. Zhejiang
            Yong Xin
            Digital Technology Co., Ltd. (Zhejiang), Yiwu Yong Xin Communication
            Ltd.
            (Yiwu), Hangzhou Wandga Electronics Co., Ltd. (Wang Da), Hangzhou Sanhe
            Electronic Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony
            Electronics Company Limited (Joy & Harmony) were incorporated under the laws
            of Peoples Republic of China on July 11, 2005, July 18, 1997, March,
            30, 1998,
            April 12, 2004, and August 20, 2003 respectively. China 3C Group owns
            100% of
            Capital and Capital owns 100% of the capital stock of Joy & Harmony, Sanhe,
            and Zhejiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. Zhejiang
            owns 90%
            and Wang Da owns 10% of Yiwu. Collectively the six corporations are referred
            to
            herein as the “Company ̈.
 
 On
            December 21, 2005 Capital became a wholly owned subsidiary of China 3C
            Group
            through a reverse merger. China 3C Group acquired all of the issued and
            outstanding capital stock of Capital pursuant to a Merger Agreement dated
            at
            December 21, 2005 by and among China 3C Group, XY Acquisition Corporation,
            Capital and the shareholders of Capital (the “Merger Agreement”). Pursuant to
            the Merger Agreement, Capital became a wholly owned subsidiary of China
            3C Group
            and, in exchange for the Capital shares, China 3C Group issued 35,000,000
            shares
            of its common stock to the shareholders of Capital, representing 93%
            of the
            issued and outstanding capital stock of China 3C Group at that time and
            a cash
            consideration of $500,000.
 
 The
            Company is now engaged in the business of mobile phone, facsimile machines,
            DVD
            players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries,
            CD players, radios, Walkman, and audio systems distribution.
 
 **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES**
 
 Basis
            of Presentation
 
 The
            accompanying consolidated financial statements have been prepared in
            conformity
            with accounting principles generally accepted in the United States of
            America.
            The Company's functional currency is the Chinese Renminbi; however the
            accompanying consolidated financial statements have been translated and
            presented in United States Dollars.
 
 Translation
            Adjustment
 
 As
            of
            December 31, 2006 and December 31, 2005, the accounts of Zhejiang, Wang
            Da,
            Yiwu, Sanhe, and Joy & Harmony were maintained, and its financial statements
            were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements
            were
            translated into U.S. Dollars (USD) in accordance with Statement of Financial
            Accounts Standards (SFAS) No. 52, Foreign Currency Translation,  ̈ with the CNY
            as the functional currency. According to the Statement, all assets and
            liabilities were translated at the current exchange rate, stockholders
            equity
            are translated at the historical rates and income statement items are
            translated
            at the average exchange rate for the period. The resulting translation
            adjustments are reported under other comprehensive income in accordance
            with
            SFAS No. 130, Reporting Comprehensive Income as a component of shareholders
            equity. Transaction gains and losses are reflected in the income
            statement.
  F-6
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 Use
            of
            Estimates
 
 The
            preparation of financial statements in conformity with generally accepted
            accounting principles requires management to make estimates and assumptions
            that
            affect the reported amounts of assets and liabilities and disclosure
            of
            contingent assets and liabilities at the date of the financial statements
            and
            the reported amounts of revenues and expenses during the reporting period.
            Actual results could differ from those estimates.
 
 Principles
            of Consolidation
 
 The
            consolidated financial statements include the accounts of China 3C Group
            and its
            wholly owned subsidiaries Capital, Zhejiang, Wang Da, Yiwu, and Sanhe,
            collectively referred to within as the Company. All material intercompany
            accounts, transactions and profits have been eliminated in
            consolidation.
 
 Risks
            and Uncertainties
 
 The
            Company is subject to substantial risks from, among other things, intense
            competition associated with the industry in general, other risks associated
            with
            financing, liquidity requirements, rapidly changing customer requirements,
            limited operating history, foreign currency exchange rates and the volatility
            of
            public markets.
 
 Contingencies
 
 Certain
            conditions may exist as of the date the financial statements are issued,
            which
            may result in a loss to the Company but which will only be resolved when
            one or
            more future events occur or fail to occur. The Company’s management and legal
            counsel assess such contingent liabilities, and such assessment inherently
            involves an exercise of judgment. In assessing loss contingencies related
            to
            legal proceedings that are pending against the Company or unasserted
            claims that
            may result in such proceedings, the Company’s legal counsel evaluates the
            perceived merits of any legal proceedings or unasserted claims as well
            as the
            perceived merits of the amount of relief sought or expected to be
            sought.
 
 If
            the
            assessment of a contingency indicates that it is probable that a material
            loss
            has been incurred and the amount of the liability can be estimated, then
            the
            estimated liability would be accrued in the Company’s financial statements. If
            the assessment indicates that a potential material loss contingency is
            not
            probable but is reasonably possible, or is probable but cannot be estimated,
            then the nature of the contingent liability, together with an estimate
            of the
            range of possible loss if determinable and material would be disclosed.
 
 Loss
            contingencies considered to be remote by management are generally not
            disclosed
            unless they involve guarantees, in which case the guarantee would be
            disclosed.
  F-7
 
 **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**
 
 Cash
            and Cash Equivalents
 
 Cash
            and
            cash equivalents include cash in hand and cash in time deposits, certificates
            of
            deposit and all highly liquid debt instruments with original maturities
            of three
            months or less.
 
 Accounts
            Receivable
 
 The
            Company maintains reserves for potential credit losses on accounts receivable.
            Management reviews the composition of accounts receivable and analyzes
            historical bad debts, customer concentrations, customer credit worthiness,
            current economic trends and changes in customer payment patterns to evaluate
            the
            adequacy of these reserves. Terms of the sales vary. Reserves are recorded
            primarily on a specific identification basis. Allowance for doubtful
            debts
            amounted to $90,780 as of December 31, 2006.
  Inventories
 
 Inventories
            are valued at the lower of cost (determined on a weighted average basis)
            or
            market. The Management compares the cost of inventories with the market
            value
            and allowance is made for writing down their inventories to market value,
            if
            lower. As of December 31, 2006 inventory consisted of finished goods
            valued at $
            2,779,506.
  Property,
            Plant & Equipment
  Property
            and equipment are stated at cost. Expenditures for maintenance and repairs
            are
            charged to earnings as incurred; additions, renewals and betterments
            are
            capitalized. When property and equipment are retired or otherwise disposed
            of,
            the related cost and accumulated depreciation are removed from the respective
            accounts, and any gain or loss is included in operations. Depreciation
            of
            property and equipment is provided using the straight-line method for
            substantially all assets with estimated lives of:
 
 Furniture
                      and Fixtures
                  5
                      yearsAutomobile
                  10
                      yearsComputer
                      Hardware and Software
                  5
                      years
  As
            of
            December 31, 2006 Property, Plant & Equipment consist of the
            following:
 
 2006Automobile
                  
                  $
                  103,749Office
                      equipment
                  
                  
                  (75,869
                  )179,618Accumulated
                      depreciation
                  
                  
                  (113,815
                  )$
                  65,803
  F-8
 **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
  **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**
  Long-Lived
            Assets
  Effective
            January 1, 2002, the Company adopted Statement of Financial Accounting
            Standards
            No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
            144”), which addresses financial accounting and reporting for the impairment
            or
            disposal of long-lived assets and supersedes SFAS No. 121, “Accounting for the
            Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
            Of,”
and the accounting and reporting provisions of APB Opinion No. 30, ”Reporting
            the Results of Operations for a Disposal of a Segment of a Business.” The
            Company periodically evaluates the carrying value of long-lived assets
            to be
            held and used in accordance with SFAS 144. SFAS 144 requires impairment
            losses
            to be recorded on long-lived assets used in operations when indicators
            of
            impairment are present and the undiscounted cash flows estimated to be
            generated
            by those assets are less than the assets’ carrying amounts. In that event, a
            loss is recognized based on the amount by which the carrying amount exceeds
            the
            fair market value of the long-lived assets. Loss on long-lived assets
            to be
            disposed of is determined in a similar manner, except that fair market
            values
            are reduced for the cost of disposal. Based on its review, the Company
            believes
            that, as of December 31, 2006 there were no significant impairments of
            its
            long-lived assets.
  Fair
            Value of Financial Instruments
  Statement
            of financial accounting standard No. 107, Disclosures about fair value
            of
            financial instruments, requires that the Company disclose estimated fair
            values
            of financial instruments. The carrying amounts reported in the statements
            of
            financial position for current assets and current liabilities qualifying
            as
            financial instruments are a reasonable estimate of fair value.
  Revenue
            Recognition
 
 The
            Company’s revenue recognition policies are in compliance with Staff accounting
            bulletin (“SAB”) 104. Sales revenue is recognized at the date of shipment to
            customers when a formal arrangement exists, the price is fixed or determinable,
            the delivery is completed, no other significant obligations of the Company
            exist
            and collectibility is reasonably assured. Payments received before all
            of the
            relevant criteria for revenue recognition are satisfied are recorded
            as unearned
            revenue.
  Stock-Based
            Compensation
  In
            October 1995, the FASB issued SFAS No. 123, “Accounting for Stock-Based
            Compensation.” SFAS No. 123 prescribes accounting and reporting standards for
            all stock-based compensation plans, including employee stock options,
            restricted
            stock, employee stock purchase plans and stock appreciation rights. SFAS
            No. 123
            requires compensation expense to be recorded (i) using the new fair value
            method
            or (ii) using the existing accounting rules prescribed by Accounting
            Principles
            Board Opinion No. 25, ”Accounting for stock issued to employees” (“APB 25”) and
            related interpretations with proforma disclosure of what net income and
            earnings
            per share would have been had the Company adopted the new fair value
            method. The
            Company uses the intrinsic value method prescribed by APB 25 and has
            opted for
            the disclosure provisions of SFAS No.123.
  F-9
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
  **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**
 
 Advertising
 
 Advertising
            expenses consist primarily of costs of promotion for corporate image
            and product
            marketing and costs of direct advertising. The Company expenses all advertising
            costs as incurred.
  Income
            Taxes
  The
            Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
            recognition of deferred tax assets and liabilities for the expected future
            tax
            consequences of events that have been included in the financial statements
            or
            tax returns. Under this method, deferred income taxes are recognized
            for the tax
            consequences in future years of differences between the tax bases of
            assets and
            liabilities and their financial reporting amounts at each period end
            based on
            enacted tax laws and statutory tax rates applicable to the periods in
            which the
            differences are expected to affect taxable income. Valuation allowances
            are
            established, when necessary, to reduce deferred tax assets to the amount
            expected to be realized.
  Basic
            and Diluted Earnings per Share
  Earnings
            per share are calculated in accordance with the Statement of financial
            accounting standards No. 128 (“SFAS No. 128”), “Earnings per share.” SFAS No.
            128 superseded Accounting Principles Board Opinion No.15 (“APB 15”). Net loss
            per share for all periods presented has been restated to reflect the
            adoption of
            SFAS No. 128. Basic net loss per share is based upon the weighted average
            number
            of common shares outstanding. Diluted net loss per share is based on
            the
            assumption that all dilutive convertible shares and stock options were
            converted
            or exercised. Dilution is computed by applying the treasury stock method.
            Under
            this method, options and warrants are assumed to be exercised at the
            beginning
            of the period (or at the time of issuance, if later), and as if funds
            obtained
            thereby were used to purchase common stock at the average market price
            during
            the period.
  Statement
            of Cash Flows
  In
            accordance with SFAS No. 95, Statement of Cash Flows, cash flows from
            the
            Company’s operations is based upon the local currencies. As a result, amounts
            related to assets and liabilities reported on the statement of cash flows
            will
            not necessarily agree with changes in the corresponding balances on the
            balance
            sheet.
  F-10
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  Concentration
            of Credit Risk
  Financial
            instruments that potentially subject the Company to concentrations of
            credit
            risk are cash, accounts receivable and other receivables arising from
            its normal
            business activities. The Company places its cash in what it believes
            to be
            credit-worthy financial institutions. The Company has a diversified customer
            base, most of which are in China. The Company controls credit risk related
            to
            accounts receivable through credit approvals, credit limits and monitoring
            procedures. The Company routinely assesses the financial strength of
            its
            customers and, based upon factors surrounding the credit risk, establishes
            an
            allowance, if required, for uncollectible accounts and, as a consequence,
            believes that its accounts receivable credit risk exposure beyond such
            allowance
            is limited.
  Segment
            Reporting
 
 Statement
            of Financial Accounting Standards No. 131 (“SFAS 131”), Disclosure about
            Segments of an Enterprise and Related Information ̈ requires use of the
            management approach ̈ model for segment reporting. The management approach model
            is based on the way a company's management organizes segments within
            the company
            for making operating decisions and assessing performance. Reportable
            segments
            are based on products and services, geography, legal structure, management
            structure, or any other manner in which management disaggregates a company.
 
 Recent
            accounting pronouncements
 
 In
            May
            2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle
            and
            requires retrospective application to prior periods' financial statements
            of
            changes in accounting principle, unless this would be impracticable.
            This
            statement also makes a distinction between “retrospective application” of an
            accounting principle and the “restatement” of financial statements to reflect
            the correction of an error. This statement is effective for accounting
            changes
            and corrections of errors made in fiscal years beginning after December
            15,
            2005.
 
 In
            February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
            Financial Instruments”. SFAS No. 155 amends SFAS No 133, “Accounting for
            Derivative Instruments and Hedging Activities”, and SFAF No. 140, “Accounting
            for Transfers and Servicing of Financial Assets and Extinguishments of
            Liabilities”. SFAS No. 155, permits fair value remeasurement for any hybrid
            financial instrument that contains an embedded derivative that otherwise
            would
            require bifurcation, clarifies which interest-only strips and principal-only
            strips are not subject to the requirements of SFAS No. 133, establishes
            a
            requirement to evaluate interest in securitized financial assets to identify
            interests that are freestanding derivatives or that are hybrid financial
            instruments that contain an embedded derivative requiring bifurcation,
            clarifies
            that concentrations of credit risk in the form of subordination are not
            embedded
            derivatives, and amends SFAS No. 140 to eliminate the prohibition on
            the
            qualifying special-purpose entity from holding a derivative financial
            instrument
            that pertains to a beneficial interest other than another derivative
            financial
            instrument. This statement is effective for all financial instruments
            acquired
            or issued after the beginning of the Company’s first fiscal year that begins
            after September 15, 2006.
  F-11
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2006**
 
 **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 In
            December 2004, the FASB issued FASB Statement No. 123R, “Share-Based Payment, an
            Amendment of FASB Statement No. 123” (“FAS No. 123R”). FAS No. 123R requires
            companies to recognize in the statement of operations the grant- date
            fair value
            of stock options and other equity-based compensation issued to employees.
            FAS
            No. 123R is effective beginning in the Company's first quarter of fiscal
            2006.
 
 In
            June
            2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
            Period for Leasehold Improvements (“EITF 05-6.”) EITF 05-6 provides guidance on
            determining the amortization period for leasehold improvements acquired
            in a
            business combination or acquired subsequent to lease inception. The guidance
            in
            EITF 05-6 will be applied prospectively and is effective for periods
            beginning
            after June 29, 2005. EITF 05-6 is not expected to have a material effect
            on its
            consolidated financial position or results of operations.
 
 In
            June
            2005, the FASB Staff issued FASB Staff Position 150-5 (“FSP 150-5”),
“Issuers Accounting under FASB Statement No. 150 for Freestanding Warrants
            and Other Similar Instruments on Shares that are Redeemable.” FSP 150-5
            addresses whether freestanding warrants and other similar instruments
            on shares
            that are redeemable, either puttable or mandatorily redeemable, would
            be subject
            to the requirements of FASB Statement No. 150, “Accounting for Certain
            Financial Instruments with Characteristics of Both Liabilities and Equity,”
regardless of the timing or the redemption feature or the redemption
            price. The
            FSP is effective after June 30, 2005.
 
 On
            February 16, 2006 the Financial Accounting Standards Board (“FASB”) issued
            SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” and SFAS 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
            of Liabilities.” SFAS 155 allows financial instruments that have embedded
            derivatives to be accounted for as a whole (eliminating the need to bifurcate
            the derivative from its host) if the holder elects to account for the
            whole
            instrument on a fair value basis. SFAS 155 also clarifies and amends
            certain
            other provisions of SFAS 133 and SFAS 140. This statement is effective
            for all
            financial instruments acquired or issued in fiscal years beginning after
            September 15, 2006. The Company does not expect its adoption of this new
            standard to have a material impact on its financial position, results
            of
            operations or cash flows.
 
 In
            March
            2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
            Financial Assets - an amendment to FASB Statement No. 140. Statement 156
            requires that an entity recognize a servicing asset or servicing liability
            each
            time it undertakes an obligation to service a financial asset by entering
            into a
            service contract under certain situations. The new standard is effective
            for
            fiscal years beginning after September 15, 2006. The Company does not
            expect its adoption of this new standard to have a material impact on
            its
            financial position, results of operations or cash flows.
 
 In
            September, 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
            defines fair value, establishes a framework for measuring fair value
            in
            generally accepted accounting principles (GAAP), and expands disclosures
            about
            fair value measurements. This Statements applies under other accounting
            pronouncements that require or permit fair value measurements, the Board
            having
            previously concluded in those accounting pronouncements that fair value
            is the
            relevant measurement attribute. Accordingly, this Statement does not
            require any
            new fair value measurements. However, for some entities, the application
            of this
            Statement will change current practice. This Statement is effective for
            financial statements issued for fiscal years beginning after November
            15, 2007,
            and interim periods within those fiscal years. The management is currently
            evaluating the effect of this pronouncement on financial
            statements.
  F-12
 
 **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2006**
 
 **Note
            2 -** **SUMMARY
            OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
 
 
 In
            September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit
            Pension and Other Postretirement Plans - an amendment of FASB Statements
            No. 87,
            88, 106, and 132(R).” This Statement improves financial reporting by requiring
            an employer to recognize the over funded or under funded status of a
            defined
            benefit postretirement plan (other than a multiemployer plan) as an asset
            or
            liability in its statement of financial position and to recognize changes
            in
            that funded statues in the year in which the changes occur through comprehensive
            income of a business entity or changes in unrestricted net assets of
            a
            not-for-profit organization. This Statement also improves financial reporting
            by
            requiring an employer to measure the funded status of a plan as of the
            date of
            its year-end statement of financial position, with limited exceptions.
            An
            employer with publicly traded equity securities is required to initially
            recognize the funded status of a defined benefit postretirement plan
            and to
            provide the required disclosures as of the end of the fiscal year ending
            after
            December 15, 2006. An employer without publicly traded equity securities
            is
            required to recognize the funded status of a defined benefit postretirement
            plan
            and to provide the required disclosures as of the end of the fiscal year
            ending
            after June 15, 2007. However, an employer without publicly traded equity
            securities is required to disclose the following information in the notes
            to
            financial statements for a fiscal year ending after December 15, 2006,
            but
            before June 16, 2007, unless it has applied the recognition provisions
            of this
            Statement in preparing those financial statements:
 
 a.
                  A
                      brief description of the provisions of this
                      Statement
 b.
                  The
                      date that adoption is required
 c.
                  The
                      date the employer plans to adopt the recognition provisions
                      of this
                      Statement, if earlier.
 
 The
            requirement to measure plan assets and benefit obligations as of the
            date of the
            employer’s fiscal year-end statement of financial position is effective for
            fiscal years ending after December 15, 2008.
 
 The
            Company believes that the adoption of these standards will have no material
            impact on its financial statements.
  **Note
            3 -** **ADVANCE
            TO SUPPLIER**
  Advance
            to suppliers represents payments to suppliers for payments of finished
            goods. As
            of December 31, 2006 the company had paid $2,215, as advances to suppliers.
  F-13
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2006**
  **Note
            4-** **NOTES
            PAYABLE**
  Under
            the
            Shanghai Share Exchange Agreement, dated November 28, 2006, in exchange
            of
            surrendering all their ownership in Shanghai, the Shanghai Shareholders
            received
            both stock consideration and cash consideration. The cash consideration
            consisted of $7,500,000 in cash is payable as follows: $3,000,000 within
            10
            business days after the closing of the transaction, and $4,500,000 payable
            six
            months after the closing of the transaction as evidenced by promissory
            notes
            issued by us to the Shanghai Shareholders. The due date of the $4,500,000
            payment is May 27, 2007.
 
 **Note
            5 -** **COMMON
            STOCK**
  On
            December 20, 2005, the Company completed a private offering of 1,000,000
            shares
            of its common stock at a per share price of $0.10 to unaffiliated individual,
            resulting in gross proceeds to the Company of $100,000. The proceeds
            were to be
            used for the Company’s proposed plan to identify and complete a merger or
            acquisition with private entities.
 
 On
            December 20, 2005, the Company issued a warrant to purchase 4,000,000
            shares of its common stock to two individuals at $0.10 per share, which
            was the
            fair value of the shares at the date of issuance. The warrant was issued
            as
            consideration for financial consulting services to be provided from December
            20,
            2005 to December 19, 2006. The warrants were exercised on December 30,
            2005. The
            shares were issued subsequently in 2006.
 
 On
            December 21, 2005, the Company agreed to purchase all of the issued and
            outstanding shares of Capital from its shareholders for approximately
            $500,000
            in cash and 35,000,000 shares of the Company’s common stock, or approximately
            93% of the total issued and outstanding shares.
 
 On
            December 21, 2005, the Company announced a plan named the China 3C Group
            2005
            Equity Incentive Plan (“Plan ̈) for providing incentives to attract, retain and
            motivate eligible persons whose presence and potential contributions
            are
            important to the success of the Company. 5,000,000 shares of common stock
            were
            allocated to the plan.
 
 On
            December 21, 2005, the Company agreed to issue 4,980,000 shares under the
            plan to a number of consultants who were engaged to provide various services
            to
            the Company during the period from January 1, 2005 to December 20, 2005.
            These
            shares were valued at $0.10 per share, or $498,000, and were expensed
            as
            consulting fees in the statements of operations. The shares were issued
            subsequently in 2006.
  F-14
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **SEPTEMBER
            30, 2006**
 
 **Note
            5 -** **COMMON
            STOCK (CONTINUED)**
 
 On
            December 21, 2005, the Company issued 2,256,795 shares of the Company’s common
            stock to a company for guarantee fees related to the acquisition of Capital.
            The
            guarantee was valued at $225,680, which was the fair value of the shares
            issued
            at the date of the transaction and was expensed as consulting fees in
            the
            statement of operations.
 
 Pursuant
            to a share exchange agreement, dated August 3, 2006, the company issued
            915,751
            shares of restricted common stock, to the former shareholders of Hangzhou
            Sanhe
            Electronic Technology Ltd. The shares were valued at $3,750,000, which
            was the
            fair value of the shares at the date of exchange agreement. This amount
            is
            included in the cost of net assets and goodwill purchased.
 
 Pursuant
            to a share exchange agreement, dated November 28, 2006, the company issued
            2,723,110 shares of newly issued shares of Common Stock to the former
            shareholders of Shanghai Joy & Harmony Electronics Company Limited. The
            shares were valued at $11,000,000, which was the fair value of the shares
            at the
            date of exchange agreement. This amount is included in the cost of net
            assets
            and goodwill purchased.
 
 **Note
            6 -** **STOCK
            WARRANT AND OPTIONS**
 
 On
            December 20, 2005, the Company issued a warrant for 4,000,000 shares
            to two
            individuals with an exercise price of $0.10. The warrants were issued
            for
            consulting services to be provided from December 20, 2005 to December
            19, 2006.
            The warrant was exercisable immediately and was exercised on December
            30,
            2005.
  The
            Company is amortizing the fair value of the warrants, $400,000, over
            the period
            of the agreement. The fair value of the warrants was calculated assuming
            293%
            volatility, term of the warrant of 3 years ,
            risk
            free rate of 4% and dividend yield of 0%. For the year ended December
            31, 2006
            and December 31, 2005, $387,945 and $12,055 of consulting fee was expensed
            relating to the warrants, respectively.
 
 On
            December 8, 2006 the company issued, to a newly appointed Board member,
            an
            option grant to purchase 50,000 shares of common stock at the closing
            price as
            of December 7, 2006. Options expire 10 years from issuance.
  F-15
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **Note
            7 -** **STOCK** ****** **EXCHANGE
            AGREEMENT**
 
 On
            December 21, 2005 Capital Future Developments Ltd - BVI became a wholly
            owned
            subsidiary of China 3C Group through a reverse merger. China 3C Group
            acquired
            all of the issued and outstanding capital stock of Capital Future Developments
            Ltd. - BVI pursuant to a Merger Agreement dated at December 21, 2005
            by and
            among China 3C Group, XY Acquisition Corporation, Capital Future Developments
            Ltd. - BVI and the shareholders of Capital Future Developments Ltd -
            BVI (the
“Merger Agreement”). Pursuant to the Merger Agreement, Capital Future
            Developments Ltd. - BVI became a wholly owned subsidiary of China 3C
            Group and,
            in exchange for the Capital Future Developments Ltd. - BVI shares, China
            3C
            Group issued 35,000,000 shares of its common stock to the shareholders
            of
            Capital Future Developments Ltd. - BVI, representing 93% of the issued
            and
            outstanding capital stock of China 3C Group at that time and a cash
            consideration of $500,000.
 
 As
            a
            result of the exchange agreement, the reorganization was treated as an
            acquisition by the accounting acquirer that is being accounted for as
            a
            recapitalization and as a reverse merger by the legal acquirer for accounting
            purposes. Pursuant to the recapitalization, all capital stock shares
            and amounts
            and per share data have been retroactively restated. Accordingly, the
            financial
            statements include the following:
 
 (1)
            The
            balance sheet consists of the net assets of the accounting acquirer at
            historical cost and the net assets of the legal acquirer at historical
            cost.
 
 (2)
            The
            statements of operations include the operations of the accounting acquirer
            for
            the period presented and the operations of the legal acquirer from the
            date of
            the merger.
 
 **Note
            8 -** **COMPENSATED
            ABSENCES**
  Regulation
            45 of local PRC labor law entitles employees to annual vacation leave
            after one
            year of service. In general all leave must be utilized annually, with
            proper
            notification, any unutilized leave is cancelled.
  F-16
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
  **Note
            9 -** **INCOME
            TAXES**
 
 The
            Company, through its subsidiaries, Zhejiang, Wang Da, Sanhe, and Yiwu,
            is
            governed by the Income Tax Laws of the PRC. Operations in the United
            States of
            America have incurred net accumulated operating losses of $1,400,000
            as of
            September 30, 2006 for income tax purposes. However, a hundred percent
            allowance
            has been created on the deferred tax asset of $575,000 due to uncertainty
            of its
            realization.
  Pursuant
            to the PRC Income Tax Laws, the Enterprise Income Tax (”EIT”) is at a statutory
            rate of 33%, which is comprises of 30% national income tax and 3% local
            income
            tax.
 
 The
                      following is a reconciliation of income tax expense:12/31/2006
                  
                  U.S.
                  
                  State
                  
                  International
                  
                  TotalCurrent
                  
                  $
                  0
                  
                  $
                  800
                  
                  $
                  5,907,322
                  
                  $
                  5,908,122Deferred
                  
                  
                  0
                  
                  
                  0
                  
                  
                  0
                  
                  
                  0Total
                  
                  $
                  0
                  
                  $
                  800
                  
                  $
                  5,907,322
                  
                  $
                  5,908,122
  Reconciliation
                      of the differences between the statutory U.S. Federal income
                      tax rate and
                      the effective rate is as follows:12/31/2006US
                      statutory tax rate
                  
                  34
                  %Foreign
                      income not recognized in US
                  
                  -34
                  %PRC
                      income tax
                  
                  33
                  %Effective
                      rate
                  
                  33
                  %
  F-17
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **Note
            10 -** **COMMITTMENTS**
 The
            Company leases various office facilities under operating leases that
            terminate
            thru 2011. The Company also has management agreements that terminate
            in 2007.
            The future minimum obligations under these agreements are as
            follows:
 2007
                    
                    $
                    61,5812008
                    
                    $
                    30,5862009
                    
                    $
                    27,8192010
                    
                    $
                    25,2962011
                    
                    $
                    15,370
  **Note
            11 -** **STATUTORY
            RESERVE**
 In
            accordance with the laws and regulations of the PRC, a wholly-owned Foreign
            Invested Enterprises’ income, after the payment of the PRC income taxes, shall
            be allocated to the statutory surplus reserves and statutory public welfare
            fund. Prior to January 1, 2006 the proportion of allocation for reserve
            was 10
            percent of the profit after tax to the surplus reserve fund and additional
            5-10
            percent to the public affair fund. The public welfare fund reserve was
            limited
            to 50 percent of the registered capital. Effective January 1, 2006, there
            is now
            only one fund requirement. The reserve is 10 percent of income after
            tax, not to
            exceed 50 percent of registered capital.
 
 Statutory
            Reserve funds are restricted for set off against losses, expansion of
            production
            and operation or increase in register capital of the respective company.
            Statutory public welfare fund is restricted to the capital expenditures
            for the
            collective welfare of employees. These reserves are not transferable
            to the
            Company in the form of cash dividends, loans or advances. These reserves
            are
            therefore not available for distribution except in liquidation. As of
            December
            31, 2006, the Company had allocated $2,438,717 to these non-distributable
            reserve funds.
 
 **Note
            12 -** **OTHER
            COMPREHENSIVE INCOME**
 Balances
            of related after-tax components comprising accumulated other comprehensive
            income (loss), included in stockholders equity, at December 31, 2006
            is as
            follows:
  *Foreign
                      Currency Translation Adjustment*
                  
                  *Accumulated
                      Other Comprehensive Income*Balance
                      atDecember
                      31,
                      2006
                  
                  $
                  427,616
                  
                  $
                  427,616
 
 **Note
            13**  **-** **CURRENT
            VULNERABILITY DUE TO CERTAIN RISK FACTORS**
 
 The
            Company’s operations are carried out in the PRC. Accordingly, the Company’s
            business, financial condition and results of operations may be influenced
            by the
            political, economic and legal environments in the PRC, by the general
            state of
            the PRC's economy. The Company’s business may be influenced by changes in
            governmental policies with respect to laws and regulations, anti-inflationary
            measures, currency conversion and remittance abroad, and rates and methods
            of
            taxation, among other things.
 
  F-18
  **CHINA
            3C GROUP AND SUBSIDIARIES**
 **CONSOLIDATED
            FINANCIAL STATEMENTS**
 **DECEMBER
            31, 2006**
 
 **NOTE
            14 - MAJOR CUSTOMERS AND CREDIT RISK**
 
 During
            the year ended December 31, 2006, no customer accounted for more than
            10% of the
            company’s accounts receivable at December 31, 2006. At December 31, 2006 three
            vendors comprised 84% of the company’s accounts payable. No vendors accounted
            for more than 10% of the company’s purchases during 2006.
 
 **NOTE
            15 - SUBSEQUENT EVENTS**
 
 On
            January 2, 2007 the company issued, to a newly appointed Board member,
            an option
            grant to purchase 50,000 shares of common stock at the closing price
            as of
            January 2, 2007. Options expire 10 years from issuance.
 
 On
            January 16, 2007 the company applied for listing on the American Stock
            Exchange.
  F-19