China Entertainment 10QSB 2006 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(X)	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2006

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

For the transition period from _____________ to _____________

Commission File No. 000-29019

CHINA ENTERTAINMENT GROUP, INC.

(Name of small business issuer as specified in its charter)

NEVADA		22-3617931
(State or jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Unit 3409 Shun Tak Centre, West Tower, 168-200 Connaught Road Central, Hong Kong		n/a
(Address of principal executive offices)		(Zip Code)

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

The registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date. As of February 20, 2008, there were approximately 128,963,425 shares of the issuer's $.001 par value common stock issued and outstanding.

Transitional Small Business Disclosure Form (Check one): Yes o No þ

TABLE OF CONTENTS

TO QUARTERLY REPORT ON FORM 10-QSB

FOR PERIOD ENDED JUNE 30, 2006

		Page

PART I	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheet (unaudited)	1
	Condensed Consolidated Statement of Income (unaudited)	2
	Condensed Consolidated Statement of Cash Flows (unaudited)	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis or Plan of Operations	10
Item 3.	Controls and Procedures	15

PART II	OTHER INFORMATION	15

Item 1.	Legal Proceedings	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 4.	Submission of Matters to Vote of Security Holders	16
Item 5.	Other Information	16
Item 6.	Exhibits	16

Signatures		17

(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)

PART I - FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)

	June 30, 2006			December 31, 2005
		$			$

ASSETS
Current Assets
Cash and cash equivalents		971,561			269,760
Accounts receivable		49,113			86,120
Deposits paid to artists, prepaid expenses and other current assets		1,324,201			2,069,192
Amount due from an affiliate		15,771			739,928
Total current assets		2,360,646			3,165,000

Fixed assets, net		43,136			48,570

Total assets		2,403,782			3,213,570

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities
Accounts payable		130,586			127,877
Accrued expenses and other liabilities		309,062			320,042
Deposits received from customers		1,209,127			1,559,116
Amounts due to affiliates		1,485,470			1,870,536
Total current liabilities		3,134,245			3,877,571

Commitments and contingencies

Stockholders’ Deficiency
Common stock, $0.001 par value; 200,000,000 shares authorized;
128,963,425 shares issued and outstanding		128,963			128,963
Additional paid-in capital		118,762			118,762
Accumulated deficit		(978,188	)		(911,726	)
Total stockholders’ deficiency		(730,463	)		(664,001	)

Total liabilities and stockholders’ deficiency		2,403,782			3,213,570

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

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
	$			$			$			$

Revenue, net		191,437			385,265			772,677			844,221

Other revenue		384			62			552			256

Reversal of provision for impairment of amount due from an affiliate		88,738			-			88,738			-

General and administrative expenses		(328,924	)		(268,533	)		(601,403	)		(538,673	)

Provisions for impairment of deposits paid and other current assets		(8,846	)		-			(327,026	)		-

(Loss) income before income taxes		(57,211	)		116,794			(66,462	)		305,804

Income tax expenses		-			-			-			-

Net (loss) income		(57,211	)		116,794			(66,462	)		305,804

Basic and diluted (loss) earning per share		(0.001	)		0.001			(0.001	)		0.002

Basic and diluted weighted average shares outstanding		128,963,425			128,963,402			128,963,425			128,963,402

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

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (UNAUDITED)

	Six months ended June 30,
	2006			2005
		$			$
Operating activities
Net (loss) income		(66,462	)		305,804
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation		5,434			96
Provisions for impairment of deposits paid and other current assets		327,026			-
Changes in operating assets and liabilities
Decrease in accounts receivable		37,007			39,987
Decrease (increase) in deposits paid, prepaid expenses and other current assets		417,965			(655,456	)
(Decrease) increase in accounts payable, accrued expenses, other liabilities and deposits received		(358,260	)		566,200
Decrease in income taxes payable		-			(26,679	)
Net cash provided by operating activities		362,710			229,952

Investing activities
Purchase of fixed assets		-			(231	)
Net cash used in investing activities		-			(231	)

Financing activities
Proceeds from bank loan		-			193,907
Advances from (repayments to) affiliates		339,091			(373,105	)
Net cash provided by (used in) financing activities		339,091			(179,198	)

Increase in cash and cash equivalents		701,801			50,523

Cash and cash equivalents, beginning of period		269,760			79,120

Cash and cash equivalents, end of period		971,561			129,643

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

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1.

LIQUIDITY AND GOING CONCERN

As of June 30, 2006 and December 31, 2005, the Company had negative working capital and accumulated deficit. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Although the Company expects to incur additional losses for at least next twelve months, the Company anticipates that its current cash and cash equivalents and the ability to borrow from affiliates will be sufficient to fund its operations at least through June 30, 2007. This assumes the Company either achieves profitable operations and the cash burn rate from the results experienced in the recent past does not increase significantly. If, however, the Company is unable to realize profitable operations and additional resources are required to operate, the Company may be forced to borrow additional funds, which could increase the risk of operating as a going concern, or cease operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern.

Note 2.

SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Basis of presentation

The condensed consolidated financial statements include the accounts of China Entertainment Group, Inc. and its subsidiaries. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP’). All significant intercompany transactions and balances have been eliminated.

The condensed consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accrued expenses necessary for a fair presentation of our condensed consolidated balance sheets, operating results and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicatives of the results for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the 2005 annual report on Form 10-KSB.

Reclassifications

Certain financial statements line items have been reclassified to conform to the current period presentation and have no impact on the previously reported consolidated net revenue, operating results, or net financial position.

Concentration risk

The Company is subject to certain concentration of risk as follow:

·	Due to accounts receivable – Accounts receivable as at June 30, 2006 and December 31, 2005 includes 2 and 3 customers that each accounted for more than 10% of the accounts receivable balance as at the respective balance sheet date.

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Due to revenues and major customers – For the three months ended June 30, 2006 and 2005, 2 and 1 artist(s) that each accounted for more than 10% of the Company’s net revenue during the corresponding period. For the six months ended June 30, 2006 and 2005, 4 artists that each accounted for more than 10% of the Company’s net revenue during the corresponding period.

Share-based compensation

Prior to January 1, 2006, the Company applied Statement of Financial Accounting Standards (“SFAS”) 123 and Accounting Principle Board Opinion (“APB”) No. 25 in accounting for its stock option plans that no compensation cost would be recognized in the Company’s consolidated financial statements for stock options granted under any of the stock option plans which on the date of grant the exercise price per share was equal to or exceeded the fair value per share. Compensation cost was only recognized for warrants and options granted to non-employees for services provided. Effective January 1, 2006, the Company adopted the provisions of SFAS 123-R, Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) requires that all share-based payments to employees, including grants of stock options, is measured based on their grant-date fair value and recognize as expense. The adoption of SFAS 123(R) has no significant impact on the result of operations for the three months and six months ended June 30, 2006 as the Company did not have share-based compensation during those periods.

Note 3.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements 133 and 140 (“SFAS 155”). SFAS 155 will be effective for the Company beginning January 1, 2007. The statement permits interests in hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation, to be accounted for as a single financial instrument at fair value, with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments hold, obtain, or issue as of the adoption date. The Company does not expect there to be any significant impact of adopting SFAS 155 on its consolidated financial position, cash flows and results of operation.

In June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective for the Company on January 1, 2007, with the cumulative effect of the change in accounting principle, if any, recorded as an adjustment to opening retained earnings. The Company does not expect there to be any significant impact of adopting FIN 48 on its consolidated financial position, cash flows and results of operation.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”), which provides guidance about how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another US GAAP requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard will also require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and will be adopted by us beginning in the first quarter of 2008. The Company does not expect there to be any significant impact of adopting SFAS 157 on its consolidated financial positions, cash flows and results of operation.

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was issued to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. The Company began to apply the provisions of SAB 108 to its annual financial statements for the year ending December 31, 2006. The application of this guidance has not had a material effect on the Company’s consolidated financial position, cash flows and results of operation.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115 (“SFAS 159”), which will be effective for the Company beginning January 1, 2008. This standard permits entities to choose to measure many financial instruments and certain other items at fair value and consequently report unrealized gains and losses on such items in earnings. The Company does not expect there to be any significant impact of adopting this standard on its consolidated financial positions, cash flows and results of operation.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force (“EITF”)), the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Note 4.

SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operation decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Metrolink Pacific Limited’s (“MPL’s”) wholly-owned subsidiaries are as follows: Anglo Market International Limited ("AMIL"), China Star Management Limited ("CSML"), and Metrolink Global Limited ("MGL"). The principal activities of MPL’s subsidiaries are the provision of artist management services. The “other” column represents unallocated corporate-related costs of the parent company.

The Company’s segment information for the three months and six months ended June 30, 2006 and 2005 and as at June 30, 2006 and 2005 are as follows:

Three months ended June 30, 2006	AMIL			CSML			MGL			OTHER			Total
		$			$			$			$			$
Revenue, net		44,945			146,492			-			-			191,437
Net loss		(410	)		(6,177	)		(3,847	)		(46,779	)		(57,211	)
Total assets		113,193			1,374,748			915,841			-			2,403,782

Three months ended June 30, 2005	AMIL		CSML			MGL		OTHER		Total
		$		$			$		$		$
Revenue, net		36,990		68,830			279,445		-		385,265
Net income (loss)		32,932		(191,720	)		275,582		-		116,794
Total assets		142,268		3,691,478			1,188,159		-		5,021,905

Six months ended June 30, 2006	AMIL		CSML		MGL			OTHER			Total
		$		$		$			$			$
Revenue, net		49,913		722,764		-			-			772,677
Net (loss) income		42,211		205,409		(266,632	)		(47,450	)		(66,462	)
Total assets		113,193		1,374,748		915,841			-			2,403,782

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Six months ended June 30, 2005	AMIL		CSML			MGL		OTHER		Total
	$		$			$		$		$
Revenue, net		79,553		485,223			279,445		-		844,221
Net income (loss)		71,454		(37,386	)		271,736		-		305,804
Total assets		142,268		3,691,478			1,188,159		-		5,021,905

Geographic information is based on the location of the selling service. Revenue from external customers by geographic region are as follows:

	Three months ended						Six months ended
	30 June						30 June
	2006			2005			2006			2005
People’s Republic of China		42	%		82	%		11	%		43	%
Hong Kong		58	%		16	%		88	%		56	%
United States of America		-			-			1	%		3	%
Taiwan		-			-			-			1	%
Other		-			2	%		-			-

		100	%		100	%		100	%		100	%

Note 5.

PROVISIONS FOR IMPAIRMENT OF DEPOSITS PAID

Certain of the artist management contracts were expired during the three months and six months ended June 30, 2006 and the Company has made provisions for impairment of deposits paid in the amount of approximately $9,000 and $325,000, respectively.

Note 6.

INCOME TAX EXPENSES

No income tax expenses were provided for the three months and six months ended June 30, 2006 and 2005 as the Company and its subsidiaries did not have assessable profit at each period presented.

Note 7.

CONTINGENCIES AND COMMITMENTS

Litigations

Lang, et al. v. Welch, et al. (China Entertainment Group, Inc.) (United States District Court, Central District California, Case No. CV 07-1068-GHK-PJWx). On December 20, 2006, plaintiffs Sanford Lang and Martin Goldrod (collectively, “Plaintiffs”) initiated a lawsuit in the Los Angeles Superior Court, Central District, alleging claims for fraud, breach of contract, violations of RICO, and civil conspiracy against several parties, including the Company. The Company was provided with a copy of Plaintiffs’ Complaint on or about February 28, 2007, after the matter was removed to United States District Court. According to the Complaint, the Company is “a nominal Defendant” as Plaintiffs purport to assert claims derivatively on its behalf. Accordingly, it appears that no relief is being sought against the Company itself. On or about January 31, 2008, Plaintiffs and Defendants, including the Company, entered into a confidential settlement agreement to resolve all claims pending between them. The parties submitted a Joint Stipulation to Stay all proceedings in the action to allow for the satisfaction of certain obligations set forth in the confidential settlement agreement. Subject to satisfactory discharge of those obligations, it is anticipated that a dismissal of the action will be filed no later than early January 2009.

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SEC filings

The Company has failed to comply with substantially all of the obligations imposed upon it by the Securities Exchange Act of 1934 Act (the “1934 Act”) and is delinquent in filing its periodic filings including its annual report on Form 10-KSB for 2006 and its 2006 and 2007 quarterly reports on Form 10-QSB. As a result, the Company and its officers and directors could be subject to substantial civil and criminal penalties due to such non-compliance. There can be no assurance that substantial civil and criminal penalties will not be imposed.

Operating leases commitments

The Company leases office space under a non-cancellable operating lease through August 31, 2006 at $3,528 per month. Minimum future payments required under the non-cancellable operating lease in effect as of June 30, 2006 is as follow:

		$
2006			7,057

Note 8.

RELATED PARTY TRANSACTIONS

Amounts due from/to affiliates are unsecured, interest-free and due on demand. The following table summarizes significant related party balances at June 30, 2006 and December 31, 2005:

Related party

Nature of

relationship and

control

Description of transactions

June 30,

2006

December 31, 2005

Due from

Together Again Limited (“TAL”)

Intermediate holding company, 51% owned by Colima Enterprise Holdings, Inc. (“Colima”) and 49% owned by China Star Entertainment Limited (“China Star”)

Amount receivable in relation to service income and funds transferred between entities for working capital purposes

15,771

739,928

Due to

Ms. Chen Ming Yin, Tiffany

Director of the Company

Director compensation

26,923

19,231

Mr. Tang Chien Chang

Director of the Company

Funds transferred to the Company for working capital purposes

250,005

292,037

Imperial International Limited

Intermediate holding company, ultimately owned by Colima

Funds transferred between entities for working capital purposes

668,720

671,028

China Star HK Distribution Limited (“China Star Distribution”)

Related company, a subsidiary of China Star which owned 49% of TAL

Amount receivable in relation to service income and funds transferred between entities for working capital purposes

539,822

888,240

1,485,470

1,870,536

CHINA ENTERTAINMENT GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENDSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Related party transactions included in the condensed consolidated statement of income for the periods presented include the following:

Related party	Nature of relationship and control	Description of transactions	Three months ended June 30,				Six months ended June 30,
			2006		2005		2006		2005
				$		$		$		$

China Star Distribution	Related company, a subsidiary of China Star which owned 49% of TAL	Services income, net (note a)		31,410		-		572,615		377,821

China Star	Related company, owned 49% of TAL	Management fee paid (note b)		26,923		26,923		53,846		53,846

China Star Laser Disc Company Limited	Related company, a subsidiary of China Star which owned 49% of TAL	Management fee paid (note b)		126,923		126,923		253,846		253,846

Notes:	(a)	The transactions were carried out at market price or, where no market price was available, at cost plus a percentage profit mark-up.

	(b)	The transactions were carried out at terms agreed between both parties.

Note 9.

SUBSEQUENT EVENT

On January 17, 2008, the Company entered into an agreement (the “Agreement”) with Imperial International Limited (“Imperial”), an intermediate holding company, that the Company agreed to sell and Imperial agreed to purchase 100% of total issued and paid up capital of MPL (the “Disposal”) at a consideration of $1 with effect from December 31, 2007.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.

THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT ESTIMATE THE HAPPENING OF FUTURE EVENTS AND ARE NOT BASED ON HISTORICAL FACT. FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "MAY", "SHALL", "COULD", "EXPECT", "ESTIMATE", "ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS, HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTEE, OR WARRANTY IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.

THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBECT TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. WE CANNOT GUARANTY THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.

INTRODUCTION

China Entertainment Group, Inc. (together with our direct and indirect subsidiaries, and their respective predecessors, unless the context otherwise requires, (the "Company") is a multi-faceted entertainment company with historically profitable operations in film, television, print and music artist management fees comprised of talent development fees, artist casting, booking and brokering commissions, and artist promotional fees. Our Company's Board of Directors and management team is comprised of senior management from the group headed by China Star Entertainment Limited ("China Star", together with its subsidiaries "China Star Group"), a Hong Kong listed company and one of the largest media companies in Asia.

As of June 30, 2006, we owned all of the equity interest in Metrolink Pacific Limited ("MPL"), a British Virgin Islands corporation. MPL, in turn, owns a 100% equity interest in Anglo Market International Limited, a corporation incorporated in the British Virgin Islands on September 15, 2000, a 100% equity interest in China Star Management Limited, a company incorporated in Hong Kong on September 6, 1985, and a 100% equity interest in Metrolink Global Limited, a corporation incorporated in the British Virgin Islands on September 10, 2004. MPL's subsidiaries currently provide artist management, talent development and artist brokering services. Our principal executive office is located at Unit 3409 Shun Tak Centre, West Tower, 168-200 Connaught Road Central, Hong Kong. Our telephone number is 011-852-2313-1888.

HISTORICAL BACKGROUND

We were originally incorporated in the state of Nevada as Shur De Cor, Inc. ("Shur De Cor") on August 14, 1987. By 1999, Shur De Cor was a public company with no operations searching for a business opportunity. In April 1999, Shur De Cor merged with Interactive Marketing Technology, Inc., a New Jersey corporation ("Interactive New Jersey"), in an arm's length transaction. Interactive New Jersey was engaged in the business of direct marketing of consumer products and desired to become a public company. Shur De Cor was the surviving corporation and changed its name to Interactive Marketing Technology, Inc. Shur De Cor's management resigned and the management of Interactive New Jersey filled the vacancies.

Through our then wholly owned subsidiary, IMT's Plumber, Inc., we produced, marketed, and sold a licensed product called the Plumber's Secret, which was discontinued during fiscal 2001. In May 2002, we discontinued our former business and actively sought to either acquire a third party, merge with a third party or pursue a joint venture with a third party in order to re-enter our former business of direct marketing of proprietary consumer products in the United States and worldwide.

On November 17, 2004, our Board of Directors unanimously approved, subject to shareholder approval, entering into a Share Exchange Agreement (the "Agreement") with MPL, an international business company organized to do business under the laws of the British Virgin Islands. At that time, MPL was wholly owned by Imperial International Limited ("Imperial"), a company incorporated under the laws of the British Virgin Islands. The parent company and 100% owner of Imperial is Together Again Limited ("Together Again").

On November 17, 2004, the Board also approved, subject to shareholder approval, amendments to our Articles of Incorporation to change our corporate name ("Name Change") from Interactive Marketing Technology, Inc. to China Artists Agency, Inc. ("China Artists"), and to increase the authorized common stock of the Company to 200,000,000 shares (the "Authorized Share Increase"). On that same date, and also subject to shareholder approval, the Board also approved a 1 for 1.69 reverse stock split to accommodate the terms of the Agreement (the "Reverse Split"), and a spin-off of the Company's existing business, including its assets and liabilities, into a Nevada corporation formed as the Company's wholly owned subsidiary into a separate public company by means of pro-rata share dividend (the "Spin-off").

The above-described actions approved by the Board also required approval by a majority of the Company's shareholders under Nevada Revised Statutes. Thus, on November 15, 2004, as authorized by the Nevada Revised Statutes, the majority shareholders, who together owned 50.4% of our issued and outstanding shares of common stock, approved the Agreement, the Authorized Share Increase, the Name Change, the Reverse Split, and the Spin-off by action of written consent.

On November 17, 2004, the Company, as contemplated under the Agreement, issued an aggregate of 109,623,006 shares of its common stock to Imperial, the sole shareholder of MPL, in exchange for 100% of the issued and outstanding shares of MPL capital stock transferred to China Artists by Imperial at the closing (the "Share Exchange"). The acquisition of the 100% interest includes MPL's interests in its subsidiaries, Anglo Market International Limited, China Star Management Limited, and Metrolink Global Limited (hereinafter MPL and its subsidiaries are collectively referred to as the "Metrolink Group"). Upon completion of the Share Exchange, MPL became the Company's wholly owned subsidiary and China Artist's former owner subsequently transferred control of China Artists to Imperial. We relied on Rule 506 of Regulation D of the Securities Act of 1933, as amended, (the "Act") in regard to the shares that we issued pursuant to the Share Exchange. We believe this offering qualified as a "business combination" as defined by Rule 501(d). Reliance on Rule 506 requires that there are no more than 35 non-accredited purchasers of securities from the issuer in an offering under Rule 506. MPL represented to us that it had one stockholder who certified that it was an `accredited investor' as defined in Rule 501(a) of Regulation D. MPL also represented to us that there had been no advertising or general solicitation in connection with this transaction. The Company's Certificate of Amendment to our Articles of Incorporation to effect the Name Change, the Reverse Split, and the Authorized Share Increase was filed with the Nevada Secretary of State and became effective on December 21, 2004. Concurrent with Name Change, Reverse Split and Authorized Share Increase, the Company also obtained a new stock symbol, "CAAY", and a new CUSIP Number. The new stock symbol and CUSIP number also became effective on December 21, 2004.

The Spin-off, which was approved by both the Board and the majority shareholders prior to the closing of the Agreement, resulted in the formation of a separate public company, All Star Marketing, Inc. ("All Star"). All Star is a Nevada corporation and it was formed as a wholly owned subsidiary of the Company. The Spin-off was satisfied by means of a pro-rata share dividend to the Company's shareholders of record as of December 10, 2004. The purpose of the Spin-Off was to allow the subsidiary to operate as a separate public company and raise working capital through the sale of its own equity. This allows our management to focus exclusively on our business after the Share Exchange, while at the same time, allowing the spun-off company to have greater exposure by trading as an independent public company. Additionally, the shareholders and the market can then more easily identify the results and performance of the Company as a separate entity from that of All Star.

On June 27, 2005, the Company's Board of Directors and the Company's majority shareholder approved and authorized a name change to China Entertainment Group, Inc. The Certificate of Amendment to our Articles of Incorporation to effect our name change to China Entertainment Group, Inc. was filed with the Nevada Secretary of State and became effective on August 4, 2005. Concurrent with the Name Change, we also obtained a new stock symbol, "CGRP", and a new CUSIP Number. The new stock symbol and CUSIP number became effective on August 9, 2005.

As discussed more fully in the Company’s Current Report on Form 8-K (the “Form 8-K”) filed concurrently with this Form 10-QSB, on January 17, 2008, the Company entered into an Agreement (“Agreement”) with Imperial, the Company’s current majority shareholder, pursuant to which the Company agreed to sell and Imperial agreed to purchase substantially all of the Company’s assets. Pursuant to the Agreement, the Company will sell 100% of total issued and paid up capital of MPL, the Company’s wholly-owned subsidiary and operating business to Imperial with effect from December 31, 2007 in exchange for Imperial’s payment of US$1 to the Company (the “Asset Sale”) at the closing of the Asset Sale transaction (the “Closing”). The Closing of the proposed Asset Sale transaction is subject to the satisfaction of all of the closing conditions set forth in the Agreement including majority shareholder approval of the Asset Sale, and also the Company’s compliance with the shareholder notification provisions of Section 14(c) of the Securities Exchange Act of 1934, as amended, and Regulation 14C thereunder as applicable to the Asset Sale, and thus the Closing date of the Asset Sale is uncertain. If the proposed Asset Sale transaction is completed, the Company presently intends to maintain its corporate existence. Although there are no specific plans, Company expects that it may seek to find a private, operating company with which to combine. In the event Company can find and complete any such transaction, it is generally to be expected that the current owners of Company, in the aggregate, would have a significantly reduced equity ownership of the surviving company. There can be no assurance that Company will be able to identify any business with which the Company may conduct a business combination, nor that any such transaction could be completed. The Agreement was attached to the Form 8-K as Exhibit 10.1 and is incorporated herein by reference; provided, however, that the warranties and representations contained in such agreement are made solely to Imperial and solely for purposes of the proposed Asset Sale. The foregoing summary and description do not purport to be complete and are qualified in their entirety by reference to the Agreement.

We are currently authorized to issue 200,000,000 shares of common stock, $0.001 par value, of which 128,963,425 shares of common stock are issued and outstanding as of February 20, 2008. We are currently not authorized to issue preferred stock.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements 133 and 140 (“SFAS 155”). SFAS 155 will be effective for the Company beginning January 1, 2007. The statement permits interests in hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation, to be accounted for as a single financial instrument at fair value, with changes in fair value recognized in earnings. This election is permitted on an instrument-by-instrument basis for all hybrid financial instruments hold, obtain, or issue as of the adoption date. The Company does not expect there to be any significant impact of adopting SFAS 155 on its consolidated financial position, cash flows and results of operations.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”), which provides guidance about how to measure assets and liabilities that use fair value. SFAS 157 will apply whenever another accounting principles generally accepted in the United States of America (“US GAAP”) requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard will also require additional disclosures in both annual and quarterly reports. SFAS 157 will be effective for financial statements issued for fiscal years beginning after November 15, 2007, and will be adopted by us beginning in the first quarter of 2008. The Company does not expect there to be any significant impact of adopting SFAS 157 on its consolidated financial positions, cash flows and results of operations.

In September 2006, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was issued to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. The Company began to apply the provisions of SAB 108 to its annual financial statements for the year ending December 31, 2006. The application of this guidance has not had a material effect on the Company’s consolidated financial position, cash flows and results of operations.

CRITICAL ACCOUNTING POLICIES

Our Management's Discussion and Analysis or Plan of Operations section discusses our financial statements, which have been prepared in accordance with US GAAP. This discussion and analysis should be read in conjunction with the accompanying condensed consolidated financial statements and related notes.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements:

Use of Estimates

The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition and provision for losses:

Service fee income from provision of artist management services is recognized when services are rendered. In accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," the Company presents its revenue on a net basis as it acts as an agent for the artists. Provisions for losses are determined on the basis of loss experience and current economic conditions. In the event that our receivables became uncollectible after exhausting all available means of collection, we would be forced to record additional adjustments to receivables to reflect the amounts at net realizable value. The accounting effect of this entry would be a charge to income, thereby reducing our net earnings. Although we consider the likelihood of this occurrence to be remote based on past history and the current status of our accounts, there is a possibility of this occurrence.

Contingencies and litigation:

We may be subject to certain asserted and unasserted claims encountered in the normal course of business. It is our belief that the resolution of these matters will not have a material adverse effect on our financial position or results of operations, however, we cannot provide assurance that damages that result in a material adverse effect on our financial position or results of operations will not be imposed in these matters. We account for contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

The Company has failed to timely comply with its period reporting obligations imposed upon it by the Securities Exchange Act of 1934. As a result, the Company and its officers and directors could be subject to substantial civil and criminal penalties due to such non-compliance. There can be no assurance that substantial civil and criminal penalties will not be imposed.

RESULTS OF OPERATIONS

General results of operations for the three and six months ended June 30, 2006 compared to June 30, 2005 are summarized as follows:

Three Months Ended June 30:	2006			2005			Change

Revenue	$	191,821		$	385,327			(50.2	) %
Reversal of provision for impairment of
amount due from an affiliate		88,738			-			100.0	%
General and administrative expenses		(328,924	)		(268,533	)		22.5	%
Provisions for impairment of deposits paid
and other current assets		(8,846	)		-			100.0	%
(Loss) income before income taxes		(57,211	)		116,794			(149.0	) %
Income taxes expenses		-			-			-	%
Net (loss) income	$	(57,211	)	$	116,794			(149.0	) %

Six Months Ended June 30:	2006			2005			Change

Revenue	$	773,229		$	844,477			(8.4	) %
Reversal of provision for impairment of
amount due from an affiliate		88,738			-			100.0	%
General and administrative expenses		(601,403	)		(538,673	)		11.6	%
Provisions for impairment of deposits paid
and other current assets		(327,026	)		-			100.0	%
(Loss) income before income taxes		(66,462	)		305,804			(121.7	) %
Income taxes expenses		-			-			-	%
Net (loss) income	$	(66,462	)		305,804			(121.7	) %

REVENUE

Our consolidated revenue decreased 50.2% to $191,821 for the three months ended June 30, 2006 from $385,327 for the same period in 2005. Our consolidated revenue decreased 8.4% to $773,229 for the six months ended June 30, 2006 from $844,477. The decrease in consolidated revenue was a result of decreased number of performances by our artists for the three months ended June 30, 2006. Rampant piracy and the downturn of Hong Kong made movies affected the overall revenue of all movies in Hong Kong. Accordingly, movie investors were more cautious in producing movies, thereby decreasing the opportunities for performances by our artists.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses incurred for the three months ended June 30, 2006 increased $60,391, or 22.5%, to $328,924 compared to $268,533 for the same period in 2005. General and administrative expenses incurred for the six months ended June 30, 2006 increased $62,730, or 11.6%, to $601,403 compared to $538,673 for the same period in 2005. General and administrative expenses mainly consisted of management fees, wages, rent, and professional fees. The increase was due to increase in professional fees.

PROVISIONS FOR IMPAIRMENT OF DEPOSITS AND OTHER CURRENT ASSETS

The increase in provisions for impairment of deposits paid and other current assets was that certain of the artist management contracts were expired during the three and six months ended June 30, 2006 and the Company has made provisions for impairment of deposits paid in the amount of approximately $9,000 and $325,000 respectively.

INCOME TAXES EXPENSES

The income taxes expenses represent the aggregate taxes provided on the assessable profits for the consolidated entities. No income taxes expenses were provided for the three and six months ended June 30, 2006 because the Company incurred tax losses for the periods. No income taxes expenses were provided for the three and six months ended June 30, 2005 because no income taxes were required under the local jurisdiction at where the income was derived and there were tax losses brought forward from prior years to offset the assessable profits for the periods ended June 30, 2006.

NET (LOSS) INCOME

Net result for the three months ended June 30, 2006 decreased $174,005, or 149.0%, to a negative $57,211 compared to $116,794 for the same period in 2005. The decrease in net result was due to a decrease in revenue and increases in general and administrative expenses and provisions for impairment of deposits paid and other current assets.

Net result for the six months ended June 30, 2006 decreased $372,266, or 121.7%, to a negative $66,462 compared to $305,804 for the same period in 2005. The decrease in net result was due to a decrease in revenue and increases in general and administrative expenses and provisions for impairment of deposits paid and other current assets.

FINANCIAL CONDITION, LIQUIDITY, CAPITAL RESOURCES

Six Months Ended June 30:	2006		2005			Change

Net cash provided by operating activities	$	362,710	$	229,952			57.7	%

Net cash used in investing activities	$	-	$	(231	)		(100.0	) %

Net cash provided by (used in) financing activities	$	339,091	$	(179,198	)		89.2	%

LIQUIDITY

We had negative working capital as at June 30, 2006 of $773,599. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations, deposits received and possible future public and private equity offerings. We evaluate possible acquisitions of, or investments in, businesses that our complementary to ours, which transactions may require the use of cash. We believe that our cash, other liquid assets, operating cash flows, credit arrangements, access to equity capital markets, taken together, provide adequate resources to fund ongoing operating expenditures. In the event that they do not, we may require additional funds in the future to support our working capital requirements or for other purposes and may seek to raise such additional funds through the sale of public or private equity as well as other sources.

CASH FLOWS FROM OPERATING ACTIVITIES:

For the six months ended June 30, 2006, net cash flows provided by operating activities was $362,710 (2005: $229,952) primarily resulting from a decrease in deposits paid and a decrease in accrued expenses, other liabilities and deposits received.

CASH FLOWS FROM INVESTING ACTIVITIES:

For the six months ended June 30, 2006, there were no investing activities.

CASH FLOWS FROM FINANCING ACTIVITIES:

Net cash flows provided by financing activities for the six months ended June 30, 2006 was $339,091. The cash inflows were mainly provided by advances from certain affiliates. Net cash flows used in financing activities for the six months ended June 30, 2005 was $179,198, representing repayments to certain affiliates combined with an increase in bank loan.

EXPECTED MATERIAL CAPITAL COMMITMENTS

The Company has no material commitments for capital expenditures and has no plans or intention to purchase or sell any plant and/or other significant equipment.

EXPECTED SIGNIFICANT CHANGES IN NUMBER OF EMPLOYEES

The Company does not anticipate any significant changes in its number of employees, other than the changes that may arise during the course of normal business operations.

EFFECTS OF INFLATION

The Company believes that the effect of inflation has not been material during the periods presented. The countries in which the Metrolink Group conducts the majority of its operations, which include Hong Kong, PRC and the United States, were subject to moderate degree of inflations.

EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES

All of the Company's revenues are denominated either in U.S. dollars, Renminbi or Hong Kong dollars, while its expenses are denominated primarily in Hong Kong dollars. The value of the Hong Kong dollar-to-United States dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Although a devaluation of the Hong Kong dollar relative to the United States dollar would likely reduce the Company's expenses (as expressed in United States dollars), any material increase in the value of the Hong Kong dollar relative to the United States dollar would increase the Company's expenses, and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has never engaged in currency hedging operations but will continue to monitor its foreign exchange exposure and market conditions to determine if hedging is required.

ITEM 3.

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed as of the period covered by this report, our chief executive officer and the principal financial officer concluded that our disclosure controls and procedures were inadequate to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. We are developing a plan to ensure that all information will be recorded, processed, summarized and reported on a timely basis. This plan is dependent, in part, upon reallocation of responsibilities among various personnel, possibly hiring additional personnel and additional funding. It should also be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(b) Changes in internal controls. Other than as mentioned above, there were no changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and principal financial officer.

PART II -- OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

There were no changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6.

EXHIBITS

Exhibit Number	Description
2.1	Share Exchange Agreement dated November 17, 2004 by and among, inter alia, the Registrant, Metrolink Pacific, and the shareholders of Metrolink Pacific (1)
3.1(i)	Certificate of Amendment to Articles of Incorporation (1)
3.1(ii)	Articles of Amendment of Articles of Incorporation (2)
3.1(iii)	Articles of Incorporation (3)
3.1(iv)	Articles of Merger (3)
3.2	Bylaws (3)
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Accounting Officer (Principal Financial Officer) pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference from the Company's Schedule 14C Information Statement filed on November 30, 2004.

(2) Incorporated by reference from the Company's Form 10-QSB Quarterly Report filed on October 23, 2001.

(3) Incorporated by reference from the Company's Registration Statement on Form 10-SB filed on January 19, 2000.

[SIGNATURES PAGE FOLLOWS]

SIGNATURES

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

	CHINA ENTERTAINMENT GROUP, INC. (Registrant)

Dated: February 22, 2008	By:	/s/ Tang Chien Chang
		Tang Chien Chang
		Chief Executive Officer

China Entertainment Inactive 10QSB2006 Q2 Quarterly report (small business)