Edgar Filing: SOYO GROUP INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K/A

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

For the fiscal year ended December 31, 2005

[_] 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 333-42036

SOYO GROUP, INC.
--------------------------------------------------------------------------------
(Exact Name of Registrant as specified in its Charter)

Nevada 95-4502724
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)

1420 South Vintage Avenue, Ontario, California 91761-3646
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(Address of Principal Executive Offices) (Zip Code)

(909) 292-2500
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(Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]

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

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K (ss.229.405 of this chapter) is not contained in this form, and
no disclosure will be contained to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No

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
31, 2006 was $29,392,507, based on the closing bid price of $0.60 per share on
March 31, 2006.

As of March 31, 2006, there were 48,987,511 shares Outstanding.

Documents Incorporated by Reference: None

SOYO GROUP, INC.
FORM 10-K
INDEX

Page
----

PART I

Item 1. Business..............................................................4

Item 2. Properties...........................................................15

Item 3. Legal Proceedings....................................................16

Item 4. Submission of Matters to a Vote of Security Holders..................16

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................17

Item 6. Selected Financial Data..............................................20

Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................21

Item 7A Quantitative and Qualitative Disclosures About Market Risk...........38

Item 8. Financial Statements and Supplementary Data..........................39

Item 9. Changes in and Disagreements with Accountants on

Accounting and Financial Disclosure..................................72

Item 9A. Controls and Procedures..............................................74

Item 9B. Other Information....................................................76

PART III

Item 10. Directors and Executive Officers of the Registrant...................76

Item 11 Executive Compensation...............................................79

Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................................80

Item 13. Certain Relationships and Related Transactions.......................81

Item 14. Principal Accountant Fees and Services...............................82

PART IV

Item 15. Exhibits, Financial Statement Schedules .............................83

Signatures....................................................................84

PART I

ITEM 1. BUSINESS.

When used in this Form 10-K, the words "expects," "anticipates,"
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties, including
those set forth below under "Risks and Uncertainties," that could cause actual
results to differ materially from those projected. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based. This discussion should be read
together with the financial statements and other financial information included
in this Form 10-K.

Company History

SOYO Group, Inc. formerly Vermont Witch Hazel Company, Inc., a Nevada
corporation (the "Company"), was incorporated on August 3, 1994 in the State of
Vermont. For seven years, the Company created and marketed skin care and pet
care products. The Company manufactured and distributed a line of witch hazel
based natural, hypoallergenic soaps, cleansers and other skin aids.

On December 3, 2001, the Company transferred all its net assets and business to
its wholly owned subsidiary, The Vermont Witch Hazel Co., LLC, a California
limited liability company which had been formed in October 2001. Also, the
Company's board of directors declared a dividend of all of the Company's
interest in the LLC to be distributed to the Company's shareholders of record on
December 10, 2001. Each shareholder received one member unit in the LLC for each
share of common stock held of record by the shareholder.

On December 27, 2001, pursuant to a stock purchase agreement dated December 27,
2001, Kevin Halter Jr. purchased 6,027,000 shares of the Company's common stock
from Deborah Duffy representing approximately 51% of the Company's issued and
outstanding shares of common stock. Simultaneously with the purchase, the
current officers and directors of the Company, namely, Deborah Duffy, Rachel
Braun and Peter C. Cullen, resigned and the following three persons were elected
to replace them: Kevin Halter Jr., President and Director, Kevin B. Halter,
Secretary, Treasurer & Director and Pam Halter, a Director.

On October 8, 2002, the Company changed its domicile from the State of Vermont
to the State of Nevada.

On October 24, 2002, pursuant to the terms of a Reorganization and Stock
Purchase Agreement ("Reorganization Agreement") dated as of October 15, 2002,
the Company acquired (the "Acquisition") all of the equity interest of SOYO,
Inc., a Nevada corporation ("SOYO Nevada" or "SOYO Group"), which was a wholly
owned subsidiary of SOYO Computer, Inc., a Taiwan company ("SOYO Taiwan"). The
Acquisition involved several simultaneous transactions which are set forth
below.

1. Mr. Ming Tung Chok ("Ming") and Ms. Nancy Chu ("Nancy") purchased jointly
6,026,798 shares of the Company's common stock for $300,000 from Kevin
Halter Jr., a controlling shareholder of the Company, thereby making Ming
and Nancy the majority shareholders of the Company.

2. The Company issued 1,000,000 shares of Class A Convertible Preferred Stock,
par value $0.001, with a $1.00 per share stated liquidation value to SOYO
Taiwan in exchange for all of the outstanding equity interest in SOYO
Group, Inc.

3. The Company issued 28,182,750 shares of common stock, par value $0.001, to
Ming and Nancy as part of the acquisition.

4. Kevin Halter Jr. resigned from his position as President and Director,
Kevin B Halter resigned from his position as Secretary, Treasurer and
Director and Pam Halter resigned from her position as Director. Effective
October 25, 2002, Nancy, Ming and Bruce Nien Fang Lin began serving their
terms as directors of the Company. These newly elected directors then
appointed the following persons as officers:

---------------------------------------- ---------------------------------------
Name Title
---------------------------------------- ---------------------------------------
Ming Tung Chok President, Chief Executive Officer
---------------------------------------- ---------------------------------------
Nancy Chu Chief Financial Officer
---------------------------------------- ---------------------------------------
Nancy Chu Secretary
---------------------------------------- ---------------------------------------

Bruce Nien Fang Lin resigned and left the Company in July 2003.

The consideration for the Acquisition was determined through arms length
negotiations and a Form 8-K was filed on October 30, 2002, as amended by a Form
8-K/A filed on December 20, 2002. On November 15, 2002, the Company changed its
name from Vermont Witch Hazel Company, Inc. to SOYO Group, Inc.

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

Through October 24, 2002, the Company had only nominal assets and liabilities
and no current business operations. As a result of the Acquisition, the Company
continued the business operations of SOYO Nevada, which are described here.

SOYO Inc. was incorporated in Nevada on October 22, 1998. Through 2004, the
Company was a distributor of computer products, a substantial portion of which
were manufactured in Taiwan and China. Through SOYO Inc., the Company offered a
full line of designer motherboards and related peripherals for intensive
multimedia applications, corporate alliances, telecommunications and specialty
market requirements. The product line also included basic bare bones PC
motherboard systems, flash memory as well as small hard disk drives for
corporate and mobile users, internal multimedia reader/writer and wireless
networking solutions products for home and office (SOHO) users.

SOYO Group's products have always been sold through an extensive network of
authorized distributors to resellers, system integrators, and value-added
resellers (VARs).

These products are also sold through major retailers, mail-order catalogs and
e-tailers to the consumers throughout North America and Latin America.

In 2004, the Company expanded its product offerings into new and higher margin
segments. The offerings were divided into three areas: Computer Components and
Peripherals, Communications Equipment, and Consumer Electronics. Throughout
2005, these were the areas that produced revenues for the Company.

PRODUCTS

Computer Components and Peripherals

Motherboards/Bare Bones Systems
------------

The motherboard has been an integral part of most personal computers for
more than twenty years. Actually, a carryover from architecture used for years
in mainframe computers, a motherboard is the physical arrangement in a computer
that contains the computer's basic circuitry and components. It is the data and
power infrastructure for the entire computer.

SOYO Group Inc.'s Bare Bones System product solution is the basis for any
computer system. The All-in-One (Audio, Video and LAN onboard) contains our
motherboard in AMD as well as Intel platforms, case, power supply, keyboard,
mouse and speakers. The 4-in-1 includes the Bare Bones case, power supply, mouse

and keyboard. Consumer demand for this product is very high since the majority
of components are integrated in the box.

Portable Storage Devices

The CIGAR 20GB and 40GB USB 2.0 Hard Drives are ideal for desktop and laptop
users who need high capacity in an ultra-small package. One of the smallest
hardrives available today, large graphics and audio files are quickly and easily
displayed, copied or transported to any USB Ported computer. Incorporating a
1.8-inch hard disk from Toshiba, the SlimDrive measures just 4.02" x 2.36" x
0.43" (LWH) and weighs only 3.5 oz. The SlimDrive fits easily into a pocket,
purse or briefcase for convenient travel and leaves a small footprint on the
desktop. Compatible with both PC and Macintosh operating systems, the
SlimDrive's USB 2.0 cable delivers fast transfer rates of up to 480Mbps and does
not require any external power supplies or batteries. The magnesium alloy casing
provides superior shock resistance. Additional capacities are expected to be
available later this year.

Flash memory is a specialized type of memory component used to store user
data and program code. It retains such information even when the power is off.
Although flash memory is currently used predominantly in mobile phones and PDAs,
it is also found in common consumer products, including MP3 music players,
handheld voice recorders and digital answering machines, as well as industrial
products.

The BayOne(R) Flash Media Reader/Writer is a unique 6-in-1 breakout box
that can be installed in a 3.5" or 5.25" drive bay for easy front panel access,
featuring combination reader/writer for 6 flash media standards and two (2)
front USB 2.0 ports. The BayOne(R) internal multimedia reader/writer
conveniently fits into the front of the PC. With the BayOne(R), SOYO Group,
Inc.'s customers can now connect multiple devices to their computers and
download digital photos, video, MP3 music or hot sync their handheld devices all
at the same time. The multiple memory reader/writer slots also can be used
simultaneously, enabling SOYO Group, Inc.'s customers to take full advantage of
this compact all-in-one solution. The BayOne(R) was designed to be universally
compatible with all systems and external devices, making it easy to install and
also very user-friendly.

The Compact Hub Reader/Writer is a combination USB 2.0 Hub and 12-in-1
flash media card reader/writer that expands the functionality of computers. It
offers three USB 2.0 hubs for convenient connection between a computer and
digital camera, PDA, hand-held computer, USB phone, MP3 player, keyboard, mouse
or printer. The flash memory card slots can all be used at the same time for
data download, exchange and storage. The Compact Hub Reader/Writer is
hot-swappable, which means that external devices can be added or removed while
the computer is on, offers automatic plug-n-play convenience and is backward
compatible to USB 1.1.

Consumer Electronics Products
-----------------------------

SOYO Group, Inc. entered the consumer electronics market in 2005 with a
strong line of entertainment products that includes docking stations, LCD and
plasma TVs, wireless headphones and USB speakers. Although this is the newest
group in the product line, it accounted for over 30% of sales in 2005.

SOYO entered the LCD market in the 2nd quarter of 2005. The Company began by
selling 17 and 19 inch LCD computer monitors, and 32" and 37" LCD televisions,
and will soon ship 42" sets.

MONITORS
--------

The Dymond series LCD monitor incorporates TFT (Thin Film Transistor) display
technology in a compact design that frees up valuable desk space, with a
wide-angle flat screen that offers a view of the screen from various angles
without compromising image quality. Featuring high brightness, sharp contrast
and vivid colors, the Dymond's built-in speakers deliver stereo-quality sound.
Designed to provide a display solution for a wide variety of applications at the
office, home or school, the Dymond's SXGA (Super Extended Graphics Array)
technology delivers text and images to assist in creating spreadsheets and
reports, writing emails, preparing presentations, watching movies, playing
games, or surfing the Internet. The Dymond series monitors are available in
black or silver and are currently manufactured in the 17 inch and 19 inch sizes.

HOME ENTERTAINMENT FLAT SCREEN TELEVISIONS
-------------------------------------------

SOYO's Ultra Slim flat-panel, HD-Ready 32-inch and 37 inch LCD TV delivers
stunning picture quality to home entertainment. The product offers a wide range
of multimedia entertainment options, including broadcast, cable and satellite
television programming, as well as DVD and VHS movies, video and online gaming,
and the capability of surfing the Internet. Incorporating advanced imaging
technology features such as 3:2 pull down, progressive scan and digital 3D comb
filter that bring you larger, clearer pictures, the Atlas LCD TV features two
powerful, removable 10-watt speakers that deliver stereo surround sound.

Bluetooth Wireless Headphone
----------------------------

FreeStyler Bluetooth Headset
----------------------------

FreeStyler is a simple, straightforward Bluetooth headset with excellent sound
quality. The headset can be connected to your mobile phone and PDA wirelessly.
Supported by Bluetooth 1.1V with 2402~2480MHz frequency range, FreeStyler
provides up to 10 meter operation range hands free, and its auto Pairing and
authentication function allows users to connect to their cellular phone and PDA
wirelessly. It provides 4~6 Hrs. talk time and 200 Hrs. standby time by the
rechargeable battery at 120mA 3.7v. with only 1.5~2.0 Hrs. charging time. The
headset is now available through SOYO's exclusive launch partner Fry's
Electronics, and will also be sold through SOYO's network of dealers,
distributors and online retailers.

Communications Equipment

--------------

The Telecommunications Industry Association forecast that spending on VoIP
systems would rise to $3.5 billion in 2005. VOIP protocols have evolved to offer
a richer set of features, scalability and standardization than was available
only a few years ago, and In November 2004, Soyo introduced our "Z-Connect"
family of Voice over IP products and services. The Z-Connect product line
includes the Z-Connect phone, Z-Connect router, and two versions of the
Z-Connect gateway, delivering VoIP capabilities with zero set-up fees, zero
monthly fees, zero service contracts, zero configuration and zero hidden
charges. Users simply plug the Z-Connect phone into a broadband connection for
instant VoIP service. The Z-Connect router combines a voice gateway and a
broadband router, enabling users to plug their traditional telephones for VoIP
service, and up to four computers can also share Internet access. Z-Connect
customers immediately begin saving money on long-distance and international
calls, using the free call time of up to 150 minutes included with the phone or
router. Additional call time can be purchased on our web site. SOYO Group's VoIP
service is based on a flexible pay-as-you go strategy, enabling users to prepay
for minutes, and make international and long-distance calls at extremely low
rates. "Peer-to-peer" calls between Z-Connect telephones and routers within the
Z-Connect Network are always free, anywhere in the world.

In November 2004, we introduced our "Z-Connect" family of Voice over IP
products and services. The Z-Connect product line includes the Z-Connect phone,
Z-Connect router, and two versions of the Z-Connect gateway, delivering VoIP
capabilities with zero set-up fees, zero monthly fees, zero service contracts,
zero configuration and zero hidden charges. Users simply plug the Z-Connect
phone into a broadband connection for instant VoIP service. The Z-Connect router
combines a voice gateway and a broadband router, enabling users to plug their
traditional telephones for VoIP service, and up to four computers can also share
Internet access. Z-Connect customers immediately begin saving money on
long-distance and international calls, using the free call time of up to 150
minutes included with the phone or router. Additional call time can be purchased
on our web site. SOYO Group's VoIP service is based on a flexible pay-as-you go

strategy, enabling users to prepay for minutes, and make international and
long-distance calls at extremely low rates. "Peer-to-peer" calls between
Z-Connect telephones and routers within the Z-Connect Network are always free,
anywhere in the world.

The Z-Connect Single Mode Gateway is the ideal IP telephony solution for
small businesses to save money on long-distance and international phone calls
and faxes. Up to four analog telephones or a PBX can be connected to the
Single-Mode Gateway, which provides the option for users to choose separate DID
(Direct Inbound Dial) number for each phone line for inbound calls, and also
determine the order in which inbound calls are received.

The Z-Connect Dual Mode Gateway supports any IP network and the PSTN. It
features an intelligent switching function that determines which network - the
IP or PSTN - to make for using calls, without changing the user's familiar
dialing interaction with the phone system. The Dual Mode Gateway seamlessly
integrates into the office environment, easily connecting to the PBX, and is
compatible with a variety of networks, broadband access devices and system
configurations. All local calls, as well as emergency and toll-free numbers, are
routed through the PSTN, while long-distance and international calls are routed
through the IP, for maximum cost savings.

The company is also offering DID numbers for the Z-Connect family of
products, allowing calls to be received from any other phone over any IP network
or through the PSTN, and is also entering the calling card market, to offer
consumers cost savings on long-distance calls.

In February 2005, SOYO announced a very important development for the
Z-Connect product line in the form of an agreement with China Unicom USA
Corporation, a division of China Unicom Ltd. (NYSE: CHU), to use its Public
Service Telephone Network and Voice over Internet Protocol network (the largest
in the world), to give users the ability to dial and receive local, long
distance, and international calls. China Unicom is one of the largest
telecommunication companies in the world and its choice of SOYO Group for a
partnership agreement is an extremely important and strategic development
opportunity.

PRODUCTION

SOYO Group does not produce the components that it distributes.
Approximately 80% of SOYO Group, Inc.'s products are supplied by companies
located in Taiwan and China. As of December 31, 2005, no single supplier is

supplying more than 39% of the products distributed and sold by the SOYO Group.
Aside from this one vendor, no other company supplies more than ten percent of
the products that the Company sells.

TRANSPORTATION AND DISTRIBUTION

SOYO Group, Inc. is the exclusive provider for SOYO(R) branded products in
the United States and Latin America. SOYO Group, Inc. has facilities in the U.S.
and worldwide. The logistics team members play a key role by providing product
through this channel. Through their efforts, SOYO Group, Inc. is able to achieve
a high level of efficiency and exceed customer expectations by maintaining a
swift and reliable delivery system.

MARKETING AND SALES

SOYO Group, Inc. has a network of sales offices to service its customers'
needs, from prompt order processing to after-sales customer care. SOYO Group,
Inc.'s primary markets are North and Latin America. SOYO Group, Inc. also sells
products in other markets such as the United Kingdom, Europe, Far East Asia and
South Africa, through local preferred distributors and resellers.

SOYO Group, Inc.'s principal sales strategy targets three main markets: (1)
end-user consumers; (2) small business users; and (3) home/small office users or
SOHO's. To reach target customers, SOYO Group, Inc. sells its products through a
wide range of sales channels including national distributors, such as A.S.I. and
D&H Distributing, along with regional distributors that specialize in promoting
our products to resellers, e-tailers, system builders and other small retailers.
To reach end-user consumers and small business users, SOYO Group, Inc. partners
with major electronic chain retail stores and mail-order catalogs throughout the
continental U.S.A. and Canada including Best Buy Co., Inc., CompUSA, Office
Depot, Fry's Electronics, MicroCenter and TigerDirect (a subsidiary of Systemax,
Inc.).

For the Latin American market, system builders and value-added resellers
(VAR) are the primary targets. To reach these customers, SOYO Group, Inc. uses
an extensive network of international, national and regional distributors. There
are sales offices in Sao Paolo, Brazil, which offer local technical support and
return authorization to better service customers in both Brazil and Argentina.
As of December 31, 2005, approximately 20% of the SOYO Group's sales and
revenues were generated from the Latin American market.

CUSTOMERS

The primary customer base is in North America, where the products have long
been recognized for premium quality and competitive prices. SOYO Group, Inc.
also has a broad customer base in Latin America.

SOYO Group, Inc. also has an ancillary base of customers in the United
Kingdom, Europe, Asia and South Africa, which are serviced through preferred
relationships with independent distributors local to those markets.

During the year ended December 31, 2005, the Company had one customer (E23) that
accounted for revenues of $13,552,324, equivalent to 35% of net revenues. During
the year ended December 31, 2004, the Company had one customer (SYX
Distribution, Inc., otherwise known as Tiger Direct) that accounted for revenues
of $8,591,711, equivalent to 26% of net revenues. During the year ended December
31, 2003, the same customer accounted for revenues of $9,943,855, equivalent to
32% of net revenues.

SUPPLIERS

From the Company's inception through December 31, 2003, over 80% of the
products sold were produced by SOYO Taiwan. In 2004, the Company went through a
partial reorganization, changing the sales mix. The decision was made to focus
more on peripherals, VoIP, and other products, while deemphasizing sales of
hardware and motherboards, which are much more mature markets. As a result, the
Company significantly reduced its reliance on SOYO Taiwan.

As of December 31, 2005, no more than 39% of the products distributed by
the SOYO Group are being supplied by any one supplier. Other than that single
supplier, no other Vendor supplied more than ten percent of the Company's
inventory available for sale. Notwithstanding the reduced emphasis on
distributing SOYO Taiwan products, SOYO Group had a supply Commitment Agreement
with SOYO Taiwan which provided that SOYO Taiwan would continue to supply SOYO
Group at current levels on an open account basis through 2005. The agreement
expired on December 31, 2005. In 2005, SOYO Group did not purchase any goods
from SOYO Taiwan.

SOYO Group, Inc. is aggressively establishing new partnership with other OEM
manufacturers in the North America and Asia Pacific Regions in order to provide
innovative products for consumers.

REGULATIONS

SOYO Group, Inc. is subject, to various laws and regulations administered
by various state, local and international government bodies relating to the
operation of its distribution facilities. SOYO Group, Inc. believes that it is
in compliance with all governmental laws and regulations related to its products
and facilities, and it does not expect to make any material expenditures in 2006
with respect to compliance with any such regulations.

STRATEGY

SOYO Group, Inc.'s strategy is to capitalize on its market position as a
leading provider of consumer electronics, communications, and networking
products by increasing its penetrations of existing markets through acquisitions
and expanding into new markets.

COMPETITION

With the wide range of product offerings, SOYO Group, Inc. competes with a
large number of small and well-established companies that produce and distribute
products in all categories. The following is a list of competitors by category:

>> Computer Components and Peripherals - Abit, Asus, Gigabyte, MSI, ViewSonic,
Daewoo, Dell, SanDisk, Lexar Media and SimpleTech

>> Consumer Electronics - Panasonic, ViewSonic, Samsung
>> Communications - Vonage, Packet8, Net2Phone

EMPLOYEES

As of March 31, 2006, the Company employed thirty six (36) people at its
headquarters in Ontario, California.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should
carefully consider the following factors which could materially affect our
business, financial condition or future results. The risks described below are
not the only risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating
results.

Our inability to finance future growth could hurt our business.

Our revenues and profit margins are based on our ability to supply substantial
amounts of inventory to our customers at a very rapid pace. If we are unable to
obtain sufficient inventory from our distributors, our customers will be
affected, which could harm our long term ability to sell products through those
sales channels.

Increased competition could hurt our business.

There are many manufacturers and distributors of many of the products we sell.
Since consumer electronics and communications equipment have traditionally been
high volume/high profit areas, increased competition could enter the market and
adversely affect our sales and profitability.

We rely on our distributors for a significant portion of our business. If we are
unable to maintain good relationships with our distributors, our business could
suffer.

We were forced to sue a customer (Xtraplus, d.b.a. ZipZoomFly last year for non
payment of invoices resulting from a dispute. The customer felt that we did not
pay rebates to our end users buying our products through this distributor on a
timely basis. The dispute led to a lawsuit that is currently pending in
California Superior Court. If that scenario is repeated, or if we are unable to
maintain relationships with our distributors, the business could suffer.

We rely on a single supplier for a significant portion of our business. If the
supplier is unable to produce the necessary amount of merchandise, our business
could suffer.

Last year, 39% of the SOYO Group's net revenue resulted from products purchased
from a single supplier. If that supplier is unable to produce and sell
merchandise to us in the quantities ordered, our revenue would be affected while
we found other sources of merchandise. The Company is currently negotiating with
different suppliers to reduce our dependence on one supplier.

Increases in the cost of energy could affect our profitability.

We were adversely affected in 2005 by the skyrocketing price of fuel, which led
to higher freight costs. If the price of shipping merchandise continues to
climb, it will affect our future profitability.

Litigation or legal proceedings could expose us to significant liabilities and
thus negatively affect our financial results.

We are party to several different legal proceedings, which are described in Item
2 of this report. We evaluate these litigation claims and legal proceedings to
assess the likelihood of unfavorable outcomes and to estimate, if possible, the
amount of potential losses. Based on these assessments and estimates, we
establish reserves as required. These assessments and estimates are based on the
information available to management at the time and involve management's best
judgment. It is possible that actual outcomes or losses may differ materially
from those envisioned by our current assessments and estimates. In addition, new
or adverse developments in existing litigation claims or legal proceedings
involving our Company could require us to establish or increase litigation
reserves or enter into unfavorable settlements or satisfy judgments for monetary
damages for amounts significantly in excess of current reserves, which could
adversely affect our financial results for future periods.

Changes in accounting standards and taxation requirements could affect our
financial results.

New accounting standards or pronouncements that may become applicable to
our Company from time to time, or changes in the interpretation of existing
standards and pronouncements, could have a significant effect on our reported
results for the affected periods.

If we are not able to achieve our overall long term goals, the value of an
investment in our Company could be negatively affected.

We have established and publicly announced certain long-term growth
objectives. These objectives were based on our evaluation of our growth
prospects, which are generally based on volume and sales potential of many
product types, some of which are more profitable than others, and on an
assessment of potential level or mix of product sales. There can be no assurance
that we will achieve the required volume or revenue growth or mix of products
necessary to achieve our growth objectives.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company's corporate headquarter is located at 1420 S. Vintage Ave.
Ontario, California, 91761. The property is under a lease agreement expiring
November 30, 2008 with terms and conditions as stipulated below:

-------------- ------------------------ ------------- -------------- -----------
Facility Address Lease Lease Area
Inception Expiration
-------------- ------------------------ ------------- -------------- -----------
Office and 1420 S. Vintage Ave, 9/1/2003 11/30/2008 42,723
Warehouse Ontario C sq. ft.
-------------- ------------------------ ------------- -------------- -----------

Rent Schedule:

------------------------- --------------------------- --------------------------
Start Date End Date Base Rent (NNN)
------------------------- --------------------------- --------------------------
October 1, 2004 February 28, 2006 $16,869.84
------------------------- --------------------------- --------------------------
March 1, 2006 November 30, 2008 $17,724.30
------------------------- --------------------------- --------------------------

The Company owns an option to extend the term of the leased property for an
additional five ( 5) years that can be exercised by providing written notice to
the lessor at least six (6) months but not more than 12 months prior to the date

that the option period would commence. The Company also maintains a sales
representation office in Brazil, located at Rua Andre Ampere 153 andar 17 sala
171/172, Brooklin Novo, Sao Paulo, SP, Brazil.

ITEM 3. LEGAL PROCEEDINGS.

On August 2, 2004, a lawsuit was filed in California Superior Court
entitled Gerry Normandan. et al, v. SOYO Inc. Case No. RCV 082128. The case
seeks class action status and alleges defects in motherboards which Soyo
distributes, and that the Company misrepresented and omitted material facts
concerning the motherboards. The plaintiff seeks restitution and disgorgement of
all amounts obtained by defendant as a result of alleged misconduct, plus
interest, actual damages, punitive damages and attorneys' fees. The Company is
vigorously defending the lawsuit and believes that it will be resolved with no
material adverse effect on the Company.

On April 14, 2005 a lawsuit was filed in Superior Court of the State of
California, County of San Bernardino, entitled Afshin Pourvajdi v. SOYO Group,
Inc., Nancy Chu and various Doe defendants. Case RCV 086992. The complaint
alleges causes of action for: 1) Double damages for violation of labor code
Section 970; 2) Misrepresentation; 3) Intentional Infliction of Emotional
Distress; 4) Breach of Contract. The prayer for relief in the Complaint seeks
damages of no less than $200,000 on the first and second causes of action, plus
an unspecified amount of punitive damages and an unspecified amount of general
and punitive damages on the third cause of action and an unspecified amount of
general and punitive damages on the fourth cause of action. Plaintiff also seeks
to recover all costs and attorney fees. The case arises from a consultant who
worked briefly for the Company in 2004 and whose contract was not renewed. The
Company is vigorously defending the lawsuit and believes that it will be
resolved with no material adverse effect on the Company or Ms. Chu.

There are no other legal proceedings that have been filed against the Company.

None of the Company's directors, officers or affiliates, or owner of record
of more than five percent (5%) of its securities, or any associate of any such
director, officer or security holder, is a party adverse to the Company or has a
material interest adverse to the Company in reference to pending litigation.

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

During the fiscal year ended December 31, 2005, there were no matters
submitted to the shareholders for approval.

On February 17, 2006, the Company held a special meeting to vote on the 2005
Employee Stock Option Compensation Plan. The record date for the determination
of shareholders entitled to vote was January 27, 2006. The plan was approved by
shareholder vote.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

(a) Market Prices of Common Stock

The Company's common stock is traded on the Over the Counter Bulletin Board
under the symbol "SOYO." The high and low bid intra-day prices of the common
stock were not reported on the OTCBB for the time periods indicated on the table
below. Accordingly, the Company has set forth the high and low closing prices of
our common stock as reported on the OTCBB over the last two years. Further, the
sales prices listed below represent prices between dealers without adjustments
for retail markups, breakdown or commissions and they may not represent actual
transactions.

Price Range
-----------
High Low
---- ---

Fiscal Year Ended December 31, 2004:

First Quarter $0.19 $0.11
Second Quarter 0.19 0.12
Third Quarter 0.26 0.12
Fourth Quarter 0.43 0.31

Fiscal Year Ended December 31, 2005:

First Quarter $ .98 $0.37
Second Quarter 0.88 0.60
Third Quarter 0.93 0.66
Fourth Quarter 0.89 0.55

(b) Shareholders

The Company's common shares are issued in registered form. Securities
Transfer Corporation, Dallas, Texas, is the registrar and transfer agent for the
Company's common stock. As of December 31, 2005 there were 48,681,511 shares of
the Company's common stock outstanding and the Company had over 85 shareholders
of record.

The Company has never declared or paid any cash dividends on our common
stock and it does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings, if any, to
finance operations and the expansion of its business. Any future determination
to pay cash dividends will be at the discretion of the board of directors and
will be based upon the Company's financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by any financing
arrangements and any other factors that the board of directors deems relevant.

During 2005 we declared no dividends on either the Class A or Class B
Preferred Stock outstanding. The dividends recognized and booked in 2005 were
the accreted dividends resulting from the valuation of the Series B Preferred
Stock at issuance. See "Recent Sales of Unregistered Securities." for more
information.

(d) Penny Stock

Until the Company's shares qualify for inclusion in the Nasdaq system, the
public trading, if any, of the Company's common stock will be on the OTC
Bulletin Board or the Pink Sheets. As a result, an investor may find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the common stock offered. The Company's common stock is subject to provisions of
Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), commonly referred to as the "penny stock rule." Section
15(g) sets forth certain requirements for transactions in penny stocks, and Rule
15g-9(d) incorporates the definition of "penny stock" that is found in Rule
3a51-1 of the Exchange Act. The SEC generally defines a "penny stock" to be any
equity security that has a market price less than $5.00 per share, subject to
certain exceptions. If the Company's common stock is deemed to be a penny stock,
trading in the shares will be subject to additional sales practice requirements
on broker-dealers who sell penny stock to persons other than established
customers and accredited investors. "Accredited investors" are persons with
assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
together with their spouse. For transactions covered by these rules,
broker-dealers must make a special suitability determination for the purchase of
such security and must have the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the first

transaction, of a risk disclosure document, prepared by the SEC, relating to the
penny stock market. A broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information for the penny stocks held in an account and
information on the limited market in penny stocks. Consequently, these rules
restrict the ability of broker-dealers to trade and/or maintain a market in the
Company's common stock and may affect the ability of the Company's shareholders
to sell their shares.

(e) Recent Sales of Unregistered Securities

During the calendar year 2005, the Company issued an aggregate of 8,681,511
unregistered shares of its common stock to various entities for various reasons.

On March 28, 2005 the Company announced that an accredited investor, Ever-Green
Technology (Hong Kong) Co., Ltd., purchased 500,000 unregistered shares of our
common stock, $0.001 par value per share (the "Shares") and common stock
purchase warrants to purchase 100,000 shares of our common stock exercisable at
$1.50 per share at any time until March 22, 2008 (the "Warrants"). The total
offering price was $500,000, which was paid in cash.

In March 2005, the Company issued 20,000 unregistered shares to its public
relations company, First Global Media, Inc. for services rendered. At the same
time, the Company issued 5,000 unregistered shares to Barrow Street Research for
services, and 5,000 unregistered shares to a business consultant as payment for
services.

In September 2005, the Company issued 1,286,669 shares of restricted common
stock to pay off a business loan of $913,750 plus accrued interest of $51,251 to
LGT Computer Inc.

In October 2005, the Company issued 1,219,512 shares of restricted common stock
for the liquidation of the 1,000,000 shares of Series A Preferred Stock that
were issued by the Company as part of the original purchase of the Company from
SOYO Taiwan in October 2002.

Throughout the year, 5,645,330 unregistered shares were issued to various
corporations and individuals to buy back the Company's trade debt.

(f) Equity Compensation Plan Information

common stock purchasable by them pursuant to common stock options granted under
our 2005 Stock Compensation Plan. The plan was approved by shareholder vote
during a special meeting of shareholders on February 17, 2006. However, since
Mr. Chok and Ms. Chu, husband and wife, are directors who own more than 50% of
the company, shareholder approval is essentially a formality, hence the grant
date of the stock options is July 22, 2005.

On July 22, 2005, the Company issued 2,889,000 option grants to employees at a
strike price of $.75. One third of those options will vest and be available for
purchase on July 22, 2006, one third on July 22, 2007, and one third on July 22,
2008. The grants will expire if unused on July 22, 2010. The options do not have
requisite service period nor market, performance, and service conditions.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial data of the Company is
presented as of and for each of the three years ended December 31, 2005, 2004,
and 2003 The selected financial data should be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto, and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations".

Selected Consolidated Statements of Operations Data:

Year Ended December 31,
----------------- ---------------- ---------------- ---------------- ---------------- ----------------
2005 2004 2003 2002 2001
----------------- ---------------- ---------------- ---------------- ---------------- ----------------

Net revenue $38,263,032 $32,426,414 $31,034,239 $49,644,417 $63,091,190

----------------- ---------------- ---------------- ---------------- ---------------- ----------------

Income 52,686 (3,913,683) (980,347) (10,892,574) (342,073)
(loss) from
operations

----------------- ---------------- ---------------- ---------------- ---------------- ----------------

Net Income $ (633,443) (4,143,978) (984,588) (10,733,458) (390,404)
(Loss)
attributable
to common
shareholders

----------------- ---------------- ---------------- ---------------- ---------------- ----------------

Net income (.01) (0.10) (0.02) (0.35) (0.01)
(loss) per
common share

----------------- ---------------- ---------------- ---------------- ---------------- ----------------

Selected Consolidated Balance Sheet Data:

----------------- ---------------- ---------------- ---------------- ---------------- ----------------
2005 2004 2003 2002 2001
----------------- ---------------- ---------------- ---------------- ---------------- ----------------

Total Assets $16,907,390 $ 7,500,437 $ 12,729,453 $ 20,914,784 $ 26,309,797

----------------- ----------------- --------------- ---------------- ---------------- ----------------
Long Term 0 0 12,000,000 12,000,000 0
Payable to
Soyo Taiwan
----------------- ----------------- --------------- ---------------- ---------------- ----------------

Shareholders' 1,477,703 (4,057,028) (12,136,783) (11,152,195) (418,737)
Equity
(Deficit)

----------------- ----------------- --------------- ---------------- ---------------- ----------------
Cash
dividends N/A N/A N/A N/A N/A
declared per
common share
----------------- ----------------- --------------- ---------------- ---------------- ----------------

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

This Annual Report on Form 10-K for the fiscal year ended December 31, 2005
contains "forward-looking" statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, including statements that include the words
"believes", "expects", "anticipates", or similar expressions. These
forward-looking statements may include, among others, statements concerning the
Company's expectations regarding its business, growth prospects, revenue trends,
operating costs, working capital requirements, facility expansion plans,
competition, results of operations and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar

expressions concerning matters that are not historical facts. The
forward-looking statements in this Annual Report on Form 10-K for the fiscal
year ended December 31, 2005 involve known and unknown risks, uncertainties and
other factors that could cause actual results, performance or achievements of
the Company to differ materially from those expressed in or implied by the
forward-looking statements contained herein.

Each forward-looking statement should be read in context with, and with an
understanding of, the various disclosures concerning the Company and its
business made elsewhere in this Annual Report on Form 10-K for the fiscal year
ended December 31, 2005, as well as other public reports filed with the United
States Securities and Exchange Commission. You should not place undue reliance
on any forward-looking statement as a prediction of actual results or
developments. The Company does not intend to update or revise any
forward-looking statement contained in this Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 to reflect new events or circumstances
except to the extent required by applicable law.

Background and Overview:

Incorporated in Nevada on October 22, 1998, SOYO Group, Inc. is a
distributor of consumer electronics, communications and computer parts. A
substantial portion of the products are manufactured in Taiwan and China.
Through SOYO Group, Inc. the Company offers a line of LCD televisions and
computer monitors, wireless headset devices, motherboards and related
peripherals for intensive multimedia applications, telecommunications services
and equipment. The product line also includes Bare Bone systems, flash memory as
well as small hard disk drives for corporate and mobile users, internal
multimedia reader/writer and wireless networking solutions products for any home
and office (SOHO) users.

SOYO Group's products are sold through an extensive network of authorized
distributors to resellers, system integrators, value-added resellers (VARs).
These products are also sold through major retailers, mail-order catalogs and
e-tailers to the consumers throughout North America and Latin America.

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

shares represented 51% of the outstanding shares of VWHC common stock. When the
transaction was complete, and control of the Company was transferred, SOYO
Nevada management owned 34,209,548 shares of the 40,000,000 outstanding shares
of the Company's common stock. Subsequent to the transaction, management
distributed 8,000,000 shares of common stock to various brokers, bankers and
other individuals that assisted with the transaction. No one individual or
corporation other than those named in Item 12 of this report ever owned more
than 5% of the common shares outstanding. As a result of this transaction, SOYO
Group management currently owns 26,209,548 of the 48,681,511 shares outstanding
as of December 31, 2005.

Subsequent to this transaction, SOYO Taiwan maintained an equity interest
in SOYO, and continued to be the primary supplier of inventory to SOYO, and was
the Company's major creditor. In addition, there was no change in the management
of SOYO and no new capital was invested. As a result, for financial reporting
purposes, this transaction was accounted for as a recapitalization of SOYO
Nevada, pursuant to which the accounting basis of SOYO Nevada continued
unchanged subsequent to the transaction date. Accordingly, the pre-transaction
financial statements of SOYO Nevada are now the historical financial statements
of the Company, and pro forma information has not been presented, as this
transaction is not a business combination.

In conjunction with this transaction, SOYO Nevada transferred $12,000,000
of accounts payable to SOYO Taiwan to long-term payable, without interest, due
December 31, 2005. (see "Liquidity and Capital Resources - December 31, 2005).

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

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

Ming Tung Chok, the Company's President, Chief Executive Officer and
Director and Nancy Chu, the Company's Chief Financial Officer, Secretary and
Director, are husband and wife, and are the primary members of SOYO Nevada
management referred to above. Andy Chu, the President and major shareholder of
SOYO Taiwan, is the brother of Nancy Chu.

The Company sells to both distributors and retailers. Revenues through such
distribution channels for each of the three years ended December 31, 2005, 2004
and 2003 are summarized as follows:

Year Ended December 31,
-------------- ------------- ------- ------------- ------- ------------ -------
2005 % 2004 % 2003 %
-------------- ------------- ------- ------------- ------- ------------ -------
Revenues
-------------- ------------- ------- ------------- ------- ------------ -------

Distributors $22,312,488 58.3 $14,704,452 45.3 $13,055,046 42.1

-------------- ------------- ------- ------------- ------- ------------ -------

Retailers $15,950,544 41.7 $17,721,962 54.7 $17,979,193 57.9

-------------- ------------- ------- ------------- ------- ------------ -------

Total $38,263,032 100.0 $32,426,414 100.0 $31,034,239 100.0

-------------- ------------- ------- ------------- ------- ------------ -------

Revenues by geographic segment are summarized as follows:

Year Ended December 31,
--------------- ------------- ------- ------------- ------- ------------- -------
2005 % 2004 % 2003 %
--------------- ------------- ------- ------------- ------- ------------- -------

Revenues
--------------- ------------- ------- ------------- ------- ------------- -------
United States $20,055,470 56.7 $25,936,978 80.0 $23,043,136 74.3
--------------- ------------- ------- ------------- ------- ------------- -------
Other N. 1,615,080 N/A N/A
America
--------------- ------------- ------- ------------- ------- ------------- -------
Central and $2,993,532 7.8 $ 6,317,907 19.5 $ 7,391,804 23.8
South
America
--------------- ------------- ------- ------------- ------- ------------- -------
Hong Kong $13,598,950 35.4 $ 171,529 0.5 $ 599,299 1.9
and other
locations
--------------- ------------- ------- ------------- ------- ------------- -------
Total $38,263,032 100.0 $32,426,414 100.0 $31,034,239 100.0
--------------- ------------- ------- ------------- ------- ------------- -------

During the years 2003 and 2004 segment data on the "Other N. America Business"
segment was not kept as it was very small in relation to the size of the United
States business at that time, no compilations of the data were made as there
were no internal decision process that would have been governed by such
information and the compilation of this information would have been impractical
and

make sales of computer components to a vendor in Hong Kong (E23). The sales had
relatively low margin, and not a business that the Company planned to be in long
term. Nevertheless, the sales of such products in 2005 represented a significant
portion of the Company's business.

Financial Outlook:

During early 2003, as a result of the Company changing its product mix to focus
on the sales of higher margin products and the decrease in market pressures on
the Company's gross margin resulting from the West Coast dock strike in
September and early October 2002, the Company's gross margin improved compared
to 2002. The Company incurred a net loss attributable to common stock in 2003 of
$984,588.

In 2004, the Company increased sales by 4.5 % over 2003 despite a significant
change in the core offerings for sale. The emphasis switched from motherboards
and hardware to peripherals, leading to a more diverse product offering. Also in
2004, the Company introduced its VoIP products. The Company incurred a net loss
in 2004 of $3,920,245.

In 2005, the Company completed its transition and revamped its core product
offerings. As a result, the consumer electronics division, featuring LCD
televisions and monitors, was responsible for over 30% of the Company's sales.
Late in the year, the Company publicized plans to introduce several new models
in 2006, including LCD panels as large as 47". The Company is now working with
multiple manufacturers of these products.

The VoIP division completed the development and testing cycle on products, and
entered into its first large contract with Arizona State University. The
division also made inroads into the market in mainland China, and purchased
fixed assets and equipment to support the product line in coming years. The VoIP
Division should add significantly to the Company's profitability in 2006.

As a general rule, the Company has been totally reliant upon the cash flows from
its operations to fund future growth. As noted above, the Company completed a
small private placement in 2005, began factoring invoices to improve cash flows,
and converted several million dollars of debt to equity, all of which improved
the Company's financial condition. However, throughout the year and as of the
date of this filing, the Company did not have any established credit facilities
in place, and had no reliable external sources of liquidity in place, other than
advances from officers, directors and shareholders.

The Company has begun and continues to implement the following steps to
increase its financial position, liquidity, and long term financial health:

- The Company has completely revised its product mix toward higher margin
products

- The Company has improved the number and credit quality of its customer
accounts.

- The Company has arranged additional supply sources and no longer purchases
inventory from SOYO Taiwan.

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

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

Critical Accounting
Policies:

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

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

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

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

Vendor Programs:

Funds received from vendors for price protection, product rebates, marketing and
training, product returns and promotion programs are generally recorded as
adjustments to product costs, revenue or sales and marketing expenses according
to the nature of the program. However, in 2005, the Company booked over $1.3
million received from such programs to prior years' purchase discounts and
allowances settled in 2005.

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

Accounts Receivable:

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

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

In order to determine the value of the Company's accounts receivable, the
Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on
historical experience and its evaluation of the collectibility of outstanding
accounts receivable.

Prior Year's Purchases and Discounts:

The company negotiated with its suppliers for discounts and allowances related
to purchases made in 2004. The company and its suppliers settled their
differences in 2005. The company accounted in 2005 for the settlement as a gain
contingency, in accordance with FAS 5, Accounting for Contingencies.

The company also accounted in 2005 for its settlement with suppliers of
discounts and allowances as a reduction of cost of goods sold because purchase
discounts and allowances are of a "character typical of the customary business
activities of the entity" in accordance with APB 9, as amended by APB 30,

Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions.

Inventories:

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

Income Taxes:

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

SALES INCENTIVES

The Company offers sales incentives to our customers in the form of co-op
advertising, price protection and sales discounts. All costs associated with
sales incentives are classified as a reduction to net revenues. The following is
a summary of the different types of sales incentives:

Co-operative advertising allowances are offered to customers as a reimbursement
towards their costs for advertising in which our product is featured on its own
or in conjunction with other companies' products. The amount offered is either a
fixed amount or is based upon a fixed percentage of sales revenue during a
specified time period.

Price protection is a concession given by the Company to compensate for the
difference between the price of the product paid by the customer and a
subsequent price reduction of the product by the Company.

Sales discounts are offered to customers at various times based on management's
discretion. Discounts could be used to increase sales of a certain model, move
stale inventory out of the warehouse, introduce new products, or for another
reason that management finds attractive.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company regularly analyzes customer balances, and, when it becomes evident a
specific customer will be unable to meet its financial obligations to the
Company, such as in the case of the deterioration in the customer's operating
results or financial position, a specific allowance for doubtful account is
recorded to reduce the related receivable to the amount that is believed
reasonably collectible. The Company also records allowances for doubtful
accounts for all other customers based on a variety of factors including the
length of time the receivables are past due, the financial health of the
customer and historical experience. If circumstances related to specific
customers change, estimates of the recoverability of receivables could be
further adjusted.

Results of Operations:

Years Ended December 31, 2005 and 2004-

Net Revenues. Net revenues increased by $5,836,618 or 18.0% to $38,263,032 in
2005 as compared to $32,426,414 in 2004. The increase in net revenues was
primarily attributable to the birth of the consumer products division, which
changed the core offerings for sale. The Company sold over $18.8 million in LCD
monitors and televisions in 2005.

On a comparable basis, revenues declined in N. America and Central America in
2005 vs. 2004. There were several reasons for this. During the first part of
2005, the Company had made a commitment to its new product lines, but did not
have much inventory to sell. While waiting for the initial inventory shipments,
the Company entered into a short term agreement to make sales of computer
components to a vendor in Hong Kong (E23). The sales had relatively low margin,
and not a business that the Company planned to be in long term. Nevertheless,
the sales of such products in 2005 represented a significant portion of the
Company's business. For this reason, sales to Hong Kong were very strong in
2005, where they had never been before. When the initial inventory of the
consumer electronics products began to arrive, the Company put its efforts into
selling those products and establishing those markets, which led to increased
sales throughout the rest 2005 and through the present. However, when taken on a
comparable basis, due to that period of inactivity, sales in 2005 decreased in
2005 vs. 2004 for the N. American and Central American markets.

During the years ended December 31, 2005 and 2004, the Company offered price
protection to certain customers under specific programs aggregating $140,828 and
$295,998 respectively, which reduced net revenues and accounts receivable
accordingly. Price protection offered to customers was significantly decreased
in 2005, as the new products did not require the same level of price protection
since the sales cycle was much quicker for the Company's customers.

Gross Margin. Gross margin was $4,692,970 or 12.3 % in 2005, as compared to
$2,216,372 or 6.8 % in 2004. Gross margin increased in 2005 as compared to 2004,
both on an absolute and percentage of revenue basis, as the Company changed its

core sales offerings from hardware, motherboards and barebones systems to a
greater emphasis on computer peripherals and consumer electronics. The demand
for the new products, specifically the LCD monitors and televisions, was great
enough that the Company was able to earn higher margins than in past years sales
of computer peripherals.

At the start of the year, the Company was holding inventory that had been
purchased during 2004 that was significantly different in appearance and
functionality than the products the Company had sought to purchase. For this
reason, the Company could not sell the products through normal sales channels.
The Company thus continued to negotiate with suppliers to return the products.
Subsequently, the negotiations were completed, and the Company booked the
results as prior years' purchase discounts and allowances. This decreased the
cost of revenues, thereby, increasing the gross margin.

The gross margin was a little over 4% before taking into account the settlement
of the prior year's purchase discounts and allowances. The Company believes that
gross margin increased by about 4% due to the settlement of the prior year's
purchase discounts and allowances, and that gross margin was over 8% because the
settlement was included in the calculation.

Sales and Marketing Expenses. Selling and marketing expenses decreased by
$666,570 or 42.2 %, to $911,039 in 2005, as compared to $1,577,609 in 2004. The
decrease was entirely due to an expensive Co-op marketing campaign run in 2004
that was not repeated in 2005.

General and Administrative Expenses.

General and administrative expenses increased by $98,628 or 2.8%, to $3,659,338
in 2005, as compared to $3,560,710 in 2004. There were several reasons for the
increase. First, the problems associated with the 2003 audit resulted in a cost
of over $400,000 in legal and accounting fees in 2004 that were not repeated.
However, the Company did spend over $150,000 in legal fees to defend itself
against the two legal cases filed against it, and described in section 4 of this
report. Additionally, the Company created an Employee Stock Option Plan in 2005
at a cost exceeding $25,000. The Company began factoring invoices to improve
cash flow in 2005. That resulted in higher expenses, but the Company obtained
the services of experts in evaluating customer credit, which led to a huge
reduction in bad debt expense. The set up and approval of the program cost the
Company over $25,000. As the Company redesigned itself primarily as a
distributor of electronics rather than consumer peripherals, the "launch costs"
of the new products, especially travel and entertainment, increased
significantly in 2005. The Company's travel and entertainment expenses for 2005
increased by over $100,000. Finally, the Company had a large turnover in
personnel relative to the new product offerings. By bringing in specialists to

manage the different departments and sell the new products, the Company
substantially upgraded its management and sales staffs, at an incremental cost
of approximately $90,000.

Provision for Doubtful Accounts. The provision for doubtful accounts was
decreased to $34,513 in 2005, as compared to $956,738 in 2004. The decrease is
due to the improved quality of the Company's credit accounts, and the increased
use of experts in evaluating customer credit applications.

Adjustment of Allowance- The Company did a thorough analysis of it's provision
for bad debts in 2005, and concluded that the allowance was too high. As a
result, the Company adjusted the allowance by $462,234, resulting in income of
the same amount.

Depreciation and Amortization. Depreciation and amortization of property and
equipment was $35,394 in 2005 as compared to $34,998 in 2004.

Income (Loss) from Operations. The income from operations was $514,920 for the
year ended December 31, 2005, as compared to a loss from operations of
$3,913,683 for the year ended December 31, 2004. The income from operations in
2005 was due to the Company's improved operations, successful new product lines,
streamlined expenses and the reversal of a portion of the allowance for bad
debts. In addition, the Company booked over $1.3 million of offsets to purchases
from vendors for price protection and product returns as prior years' purchase
discounts and allowances settled in 2005.

Interest Expense. Interest expense increased substantially to $129,567 in 2005,
as compared to $23,371 in 2004. The 454% increase is due to the Company
factoring receivables in 2005 to improve cash flow. There was no such activity
in 2004.

Interest Income. Interest income was $5,301 in 2005. There was no interest
income in 2004.

Other Income. Other income/miscellaneous revenue was $26,190 in 2005, as
compared to $17,609 in 2004.

Provision for Income Taxes. Provision for income taxes of $800 was booked for
both 2005 and 2004.

Net Income/Loss. The net income was $540,310 for the year ended December 31,
2005, as compared to a net loss of $3,920,245 for the year ended December 31,
2004. The reasons for the turnaround are discussed in detail in the above
paragraphs.

Preferred Stock Dividends. Accreted and deemed preferred stock dividends were
$1,173,753 in 2005, as compared to accreted and declared dividends of $223,733
in 2004. The accreted dividends were $174,753 during the year. Additionally, the
Company made a $999,000 adjustment to the carrying value of the Class A
preferred stock during the year. From the Company's inception, the Class A

preferred stock was carried on the books at its basis of $1,000. Prior to the
conditional redemption of the Class A preferred stock to common stock on October
24, 2005, the carrying value was adjusted to the face value of $1,000,000. This
resulted in an adjustment to the preferred stock account of $999,000, and the
offsetting journal entry to preferred stock dividends raised the amount recorded
during the year to $1,173,753.

Results of Operations:

Years Ended December 31, 2004 and 2003-

Net Revenues. Net revenues increased by $1,392,175 or 4.5% to $32,426,414 in
2004 as compared to $31,034,239 in 2003. The increase in net revenues was
primarily attributable to increased penetration in the Latin American market
while undergoing a radical change in our core offerings for sale.

During the years ended December 31, 2004 and 2003, the Company offered price
protection to certain customers under specific programs aggregating $295,999 and
$766,904 respectively, which reduced net revenues and accounts receivable
accordingly. Although price protection offered to customers was significantly
decreased in 2004, it was partially offset by an increase in marketing fees,
which increased G&A expenses.

Gross Margin (Deficit). Gross margin was $2,216,372 or 6.8 % in 2004, as
compared to $3,073,862 or 9.9 % in 2003. Gross margin decreased in 2004 as
compared to 2003, both on an absolute and percentage of revenue basis, as the
Company changed its core sales offerings from hardware, motherboards and
barebones systems to a greater emphasis on computer peripherals. Consequently,
sales at lower margins were made to reduce inventory levels, especially of older
inventory.

Sales and Marketing Expenses. Selling and marketing expenses increased by
$762,762 or 94 %, to $1,577,609 in 2004, as compared to $814,847 in 2003. The
increase was primarily due to marketing expenses on new product lines and higher
marketing expenses in new markets, as described in the Sales and Marketing
section of item 1 of this report..

General and Administrative Expenses. General and administrative expenses
increased by $727,592 or 25.7 %, to $3,560,710 in 2004, as compared to
$2,833,118 in 2003. There were several reasons for the increase. First, the
Company had accounting and legal fees increase by over $400,000 as a result of
the problems with the 2003 audit. The Company also paid over $300,000 to
contractors who were hired to assist with the 2003 audit and resolve the
internal control problems highlighted in the audit. The Company does not expect
those costs to recur in 2005.

Provision for Doubtful Accounts. The provision for doubtful accounts increased
to $956,738 in 2004, as compared to $390,555 in 2003, primarily as a result of
several large charge offs, including Dinastia for approximately $250,000 when
they declared bankruptcy.

Depreciation and Amortization. Depreciation and amortization of property and
equipment was $34,998 in 2004 as compared to $15,689 in 2003. The large increase
resulted from the large increase in depreciable assets following the move to
Ontario, California.

Loss from Operations. The loss from operations was $3,913,683 for the year ended
December 31, 2004, as compared to a loss from operations of $980,347 for the
year ended December 31, 2003.

Interest Expense. Interest expense decreased to $23,371 in 2004, as compared to
$26,248 in 2003.

Interest Income. Interest income was $0 in 2004, as compared to $26,252 in 2003.
Through the year, the Company had no balances in interest bearing accounts.

Other Income. Other income/expense was $17,609 in 2004, as compared to $(3,445)
in 2003.

Provision for Income Taxes. Provision for income taxes of $800 was booked for
both 2004 and 2003.

Net Loss. The net loss was $3,920,245 for the year ended December 31, 2004, as
compared to a net loss of $984,588 for the year ended December 31, 2003.

Preferred Stock Dividends. Preferred stock dividends were $1,173,753 in 2005,
$223,733 in 2004, and $0 in 2003.

Net Operating Loss Carryforwards:

As of December 31, 2005, the Company had federal and state net operating loss
carryforwards of approximately $4,500,000 and $70,000 respectively,, expiring in
various years through 2024, which can be used to offset future taxable income,
if any. The Company's net operating losses were reduced by $10,500,000 for the
forgiveness of debt for tax purposes. No deferred tax benefit for these
operating losses has been recognized in the consolidated financial statements
due to the uncertainty as to their realizability in future periods.

Net deferred tax assets of $1,570,000 at December 31, 2004 resulting from net
operating losses and other temporary differences have been offset by a 100%

valuation allowance since management cannot determine whether it is more likely
than not that such assets will be realized.

Liquidity and Capital Resources - December 31, 2005:

Transactions involving SOYO Taiwan. Beginning with the formation of SOYO Nevada
in October 1998, the Company relied on the financial support from SOYO Taiwan
for inventory and capital to provide the resources necessary to conduct
operations. Through October 24, 2002, SOYO Nevada was a wholly-owned subsidiary
of SOYO Taiwan. Subsequent to that date, SOYO Taiwan continued to provide
inventory to SOYO, and agreed to continue to provide inventory to SOYO on an
open account basis through December 31, 2005. However, with the change in the
Company's direction in 2004, that agreement became moot. SOYO did not order nor
receive any inventory from SOYO Taiwan in 2005.

In conjunction with the October 2002 transaction, SOYO Nevada transferred
$12,000,000 of accounts payable to SOYO Taiwan to long-term payable, without
interest, due December 31, 2005. SOYO Taiwan also agreed to continue to provide
computer parts and components to SOYO on an open account basis at the quantities
required and on a timely basis to enable SOYO to continue to conduct its
business operations at budgeted 2003 levels, which was not less than a level
consistent with the operations of SOYO Nevada's business in 2001 and 2000. This
supply commitment was effective through December 31, 2005.

During the years ended December 31, 2004, 2003 and 2002, the Company purchased
inventory from SOYO Taiwan aggregating $14,004,259, $20,188,354, and $42,219,164
respectively. At December 31, 2004 and 2003, the Company had short-term accounts
payable to SOYO Taiwan of $1,314,910 and $6,557,253 respectively, and a
long-term payable to SOYO Taiwan of $0 and $12,000,000 respectively. As stated
earlier, the Company purchased no inventory from SOYO Taiwan in 2005, and had no
payables to SOYO Taiwan at December 31, 2005.

During the years ended December 31, 2004 and 2003, the Company received price
protection from SOYO Taiwan aggregating $0 and $651,215 respectively, which
reduced inventories and accounts payable to SOYO Taiwan accordingly. The Company
received no price protection from SOYO Taiwan in 2005.

Effective December 30, 2003, SOYO Taiwan entered into an agreement with an
unrelated third party to sell the $12,000,000 long-term payable due it by the
Company. As part of the agreement, SOYO Taiwan required that the purchaser would
be limited to collecting a maximum of $1,630,000 of the $12,000,000 from the
Company without the prior consent of SOYO Taiwan. SOYO Taiwan forgave debt in an
amount equal to the difference between $12,000,000 and the value of the
preferred stock. This forgiveness was treated as a capital transaction. Payment
was received by SOYO Taiwan in February and March 2004. An agreement was reached

in the first quarter of 2004 whereby 2,500,000 shares of Class B preferred stock
would be issued by the Company to the unrelated third party in exchange for the
long-term payable.

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

Based on the terms of the agreement between SOYO Taiwan and the third party, and
specifically the limitation on the purchaser not collecting more than $1,630,000
of the $12,000,000 from the Company without the prior consent of SOYO Taiwan,
the Company has determined that this transaction was in substance a capital
transaction. The Company recorded the issuance of the Class B preferred stock at
its fair market value on March 31, 2004 of $1,304,000, which was determined by
an independent investment banking firm. The $10,696,000 difference between the
$12,000,000 long term payable and the $1,304,000 fair market value of the Class
B preferred stock was credited to additional paid-in capital. The difference
between the fair market value and the liquidation value of the Class B preferred
stock is being recognized as an additional dividend to the Class B preferred
stockholder, and as an increase in the loss attributable to common stockholders,
and is being accreted from April 1, 2004 through December 31, 2008.

For the year ended December 31, 2005, the Company recorded aggregate dividends
of $1,173,753, based on the accretion of the discount on the Class B Convertible
Preferred Stock of $174,753, and the adjustment of $999,000 to the carrying
value of the Class A preferred stock, which is described above. The Company did
not declare or accrue any additional dividends on the Class B Preferred Stock.

For the year ended December 31, 2004, the Company recorded aggregate dividends
of $223,733, consisting of dividends based on the stated value of the Class B
convertible preferred stock of $114,195, which were declared and expensed
through the issuance of an additional 114,195 shares of Class B Convertible
Preferred Stock, and dividends based on the accretion of the discount on the
Class B Convertible Preferred Stock of $109,538.

Through March 31, 2006, none of the Class B preferred stock had been converted
to common stock, and the Company had not repurchased any of the shares of Class
B preferred stock.

Operating Activities. The Company utilized cash of $178,088 from operating
activities during the year ended December 31, 2005, as opposed to utilizing cash
of $183,925 from operating activities during the year ended December 31, 2004,
and compared to providing cash of $58,489 in operating activities during the
year ended December 31, 2003.

The reasons for the usage of cash in 2005 were the large increases in
inventories and receivables, partially offset by the decrease in payables, which
were settled with common stock. The primary reasons for the usage of cash in
2004 were the Company's large operating loss and the paydown of the balance due
to SOYO Taiwan. The usage of cash in 2003 was primarily a result of increased
payments to SOYO Taiwan for inventory purchases.

At December 31, 2005 the Company's cash and cash equivalents had decreased by
$460,057 to $828,294, as compared to $1,288,351 at December 31, 2004.

The Company had working capital of $689,141 at December 31, 2005, as compared to
a working capital deficit of $4,256,905 at December 31, 2004, resulting in
current ratios of 1.04 to 1 and .63:1 at December 31, 2005 and 2004,
respectively.

Accounts receivable increased to $7,278,520 at December 31, 2005, as compared to
$2,076,882 at December 31, 2004, an increase of $5,201,638. The large increase
was due to several factors. Most importantly, sales increased 18% during the
year, and a large part of the increase was in December. The demand for the
Company's LCD televisions and monitors was sufficient that the Company was able
to sell all of its inventory to retailers for the Christmas season, resulting in
large receivables over the year end period. We did not give discounts or other
considerations to retailers to sell any products prior to year end.

Inventories increased to $7,991,030 at December 31, 2005, as compared to
$3,862,911 at December 31, 2004, an increase of $4,128,119 or 107%. These
numbers are very deceptive, as inventory in transit at December 31, 2005 was
$2,686,298, and inventory shipped FOB destination but not yet received by
customers on December 31, 2005 was approximately $3.0 million. That means that
inventory in the warehouse was only $2,241,000. The inventory was very low due

to high sales volume, and correspondingly, the inventory in transit was very
high as the Company fills orders for products and attempts to stock consumer
products for future sales.

Accounts payable increased by $4,402,907 to $13,977,579 at December 31, 2005 as
compared to $9,574,672 at December 31, 2004. The reason for the increase is the
increased business volume. The increase partially offsets a large increase in
receivables for the same time period.

Accrued liabilities increased to $1,287,108 at December 31, 2005, as compared to
$829,043 at December Less than 1 2-3 4-5 years Over 5 31, 2004, an increase year
years years of $458,065 or 55%. The increase is due to the Company accruing
additional expenses over the year end period for expenses incurred in 2005 but
paid in 2006.

Investing Activities. The Company expended $621,970, $158,670, and $4,589 in
2005, 2004 and 2003 respectively, for the purchase of property and equipment.
The large expenditure in 2005 is for the purchase of telephone lines and
equipment in China to support the VoIP division, while the amount in 2004 is due
to the move to Ontario, California and the resulting leasehold improvements.

Financing Activities.

During March 2003, Nancy Chu, the Company's Chief Financial Officer, director
and major shareholder, made short-term advances to the Company of $360,000 for
working capital purposes, of which $120,000 was repaid during September 2003.
The remaining $240,000 was paid during 2005.

In October 2005, the Company borrowed $165,000 from an individual for working
capital purposes.

On March 29, 2004, LGT Computer, Inc. loaned the Company $213,750 pursuant to an
unsecured note payable due March 28, 2005, with interest at 4% per annum. On May
29, 2004, LGT Computer, Inc. loaned the Company an additional $700,000 pursuant
to an unsecured note payable due May 29, 2005, with interest at 4% per annum. On
March 28, 2005, by mutual agreement of the parties, the due dates of the notes
were extended one year at the same interest rate. On September 2, 2005, the two
loans and accrued interest of $51,251 were repaid through the issuance of
1,286,669 shares of our restricted common stock. On that date, the market price
of the stock was $0.75.

Principal Commitments:

A summary of the Company's contractual cash obligations as of December 31,
2005, is as follows:

---------------------------- ------------- ----------- ----------- --------------
Contractual Cash Less than 1 2-3 years 4-5 years Over 5 years
Obligations year
---------------------------- ------------- ----------- ----------- --------------

Operating Leases $210,983 $407,659 N/A N/A
---------------------------- ------------- ----------- ----------- --------------
Advances from Directors N/A N/A N/A N/A
---------------------------- ------------- ----------- ----------- --------------
Notes Payable/ Short $165,000 N/A N/A N/A
Term Loan
---------------------------- ------------- ----------- ----------- --------------
Purchase Commitments $119,013
---------------------------- ------------- ----------- ----------- --------------
Total $494,996 $407,659
---------------------------- ------------- ----------- ----------- --------------

At December 31, 2005, the Company did not have any long term purchase
commitment contracts to honor. The only purchase commitments were for
inventory already purchased and in transit of $119,013.

At December 31, 2005, the Company did not have any material commitments for
capital expenditures or have any transactions, obligations or relationships
that could be considered off-balance sheet arrangements. could be
considered off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

As the Company's debt obligations at December 31, 2005 and 2004 are primarily
short-term in nature and non-interest bearing, the Company does not have any
risk from an increase in interest rates. However, to the extent that the Company
arranges new interest-bearing borrowings in the future, an increase in current
interest rates would cause a commensurate increase in the interest expense
related to such borrowings.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

(a) Financial Statements

The following financial statements are set forth at the end hereof.

1. Report of Independent Registered Public Accounting Firm

2. Consolidated Balance Sheets as of December 31, 2005 and 2004

3. Consolidated Statements of Operations for the years ended December 31,
2005, 2004 and 2003

4. Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 2005, 2004 and 2003

5. Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004 and 2003

6. Notes to Consolidated Financial Statements.

SOYO Group, Inc. and Subsidiary
Index to Consolidated Financial Statements

Page
----

Report of Independent Registered Public Accounting Firm

- Vasquez & Company LLP 41
- Grobstein, Horwath & Company LLP 42

Consolidated Balance Sheets - December 31, 2005 and 2004 43-44

Consolidated Statements of Operations -
Years Ended December 31, 2005, 2004 and 2003 45

Consolidated Statements of Shareholders' Equity (Deficit) -
Years Ended December 31, 2005, 2004 and 2003 46

Consolidated Statements of Cash Flows -
Years Ended December 31, 2005, 2004 and 2003 47-48

Notes to Consolidated Financial Statements -
Years Ended December 31, 2005, 2004 and 2003 49-

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Soyo Group, Inc. and Subsidiary
Ontario, California

We have audited the accompanying consolidated balance sheets of Soyo Group,
Inc. and Subsidiary (the "Company") as of December 31, 2005 and 2004, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for each of the years in the two-year period 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 audits.

We conducted our audits in accordance with 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 financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 financial statement presentation. We believe that our audits 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
Soyo Group, Inc. and Subsidiary as of December 31, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
years in the two-year period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.

Vasquez & Company LLP

/s/ Vasquez & Company LLP

Los Angeles, California
March 13, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Soyo Group, Inc. and Subsidiary
Ontario, California

We have audited the accompanying consolidated balance sheets of Soyo Group,
Inc. and Subsidiary (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' deficiency and cash
flows for the years then ended. 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 audits.

We conducted our audits 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 audits 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
Soyo Group, Inc. and Subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
operating losses, has limited operating cash flows and working capital
resources, and has a shareholders' deficiency, which raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

As discussed in Note 5 to the consolidated financial statements, effective
January 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

/s/ Grobstein, Horwath & Company LLP

Sherman Oaks, California
May 12, 2004

SOYO Group, Inc. and Subsidiary
Consolidated Balance Sheets

December 31,
2005 2004
--------------------------------------------- ------------ ------------
ASSETS
--------------------------------------------- ------------ ------------
CURRENT
--------------------------------------------- ------------ ------------
Cash and cash equivalents $ 828,294 $ 1,288,351
--------------------------------------------- ------------ ------------
Accounts receivable, net of allowance for 7,278,520 2,076,882
doubtful accounts of $589,224 and
$1,074,550 at December 31, 2005 and 2004
respectively

--------------------------------------------- ------------ ------------
Inventories, including $0 and $1,893,442 7,991,030 3,862,911
purchased from SOYO Computer, Inc. in
2005 and 2004 respectively
--------------------------------------------- ------------ ------------
Prepaid Expenses 20,984 25,416
--------------------------------------------- ------------ ------------
Income tax refund receivable 0 47,000
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------
Total Current Assets 16,118,828 7,300,560
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------
Property and Equipment 867,122 245,153
--------------------------------------------- ------------ ------------
Less: accumulated depreciation and
amortization (115,480) (80,087)
--------------------------------------------- ------------ ------------
751,642 165,066
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------
Deposits 36,920 34,811
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------

Total Assets $ 16,907,390 $ 7,500,437

--------------------------------------------- ------------ ------------

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

December 31,
2005 2004
--------------------------------------------- ------------ ------------
LIABILITIES
--------------------------------------------- ------------ ------------
CURRENT
--------------------------------------------- ------------ ------------
Accounts payable - SOYO Computer, Inc $ 0 $ 1,314,910
--------------------------------------------- ------------ ------------
Accounts payable - Other 13,977,579 8,259,762
--------------------------------------------- ------------ ------------
Total Accounts Payable 13,977,579 9,574,672
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------

Accrued liabilities 1,287,108 829,043

--------------------------------------------- ------------ ------------
Advances from officers, directors and major
shareholder 0 240,000
--------------------------------------------- ------------ ------------
Business Loan 0 913,750
--------------------------------------------- ------------ ------------
Short Term Loan 165,000 0
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------

Current Liabilities 15,429,687 11,557,465
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------
Total Liabilities 15,429,687 11,557,465
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------
EQUITY
--------------------------------------------- ------------ ------------
Class A Preferred stock, $0.001 par value, 0 1,000
Issued and outstanding - 0 shares
(1,000,000 shares - 2004)
--------------------------------------------- ------------ ------------
Class B Preferred stock, $0.001 par value, 1,702,486 1,527,733
Issued and outstanding - 2,797,738 shares
in 2005, 2,614,195 shares in 2004
--------------------------------------------- ------------ ------------
Preferred Stock Backup Withholding (84,999) 0
--------------------------------------------- ------------ ------------
Common stock, $0.001 par value Authorized 48,682 40,000
- 75,000,000 shares, Issued and outstanding
- 48,681,511 shares (40,530,000 shares - 2004)
--------------------------------------------- ------------ ------------
Additional paid-in capital 17,225,738 11,155,000
--------------------------------------------- ------------ ------------

--------------------------------------------- ------------ ------------
Accumulated deficit (17,414,204) (16,780,761)
--------------------------------------------- ------------ ------------
Total Shareholders' Equity (Deficit) 1,477,703 (4,057,028)
--------------------------------------------- ------------ ------------
Total Liabilities plus Shareholders' Equity $ 16,907,390 $ 7,500,437
(Deficit)
--------------------------------------------- ------------ ------------

SOYO Group, Inc. and Subsidiary
Consolidated Statements of Operations

Year Ended December 31,
2005 2004 2003
-------------------------------------- ------------ ------------ ------------

Net revenues $ 38,263,032 $ 32,426,414 $ 31,034,239

-------------------------------------- ------------ ------------ ------------
Cost of revenues, including 34,905,874 30,210,042 27,960,377
inventory purchased from SOYO
Computer, Inc. of $0, $14,004,259
and $20,188,354 in 2005,2004 and 2003
respectively
-------------------------------------- ------------ ------------ ------------

Prior years' purchase discounts and
allowances settled in 2005 (1,335,812) 0 0
-------------------------------------- ------------ ------------ ------------
Gross margin 4,692,970 2,216,372 3,073,862

-------------------------------------- ------------ ------------ ------------
Costs and expenses:
-------------------------------------- ------------ ------------ ------------
Sales and marketing 911,039 1,577,609 814,847
-------------------------------------- ------------ ------------ ------------

General and administrative 3,659,338 3,560,710 2,833,118

-------------------------------------- ------------ ------------ ------------
Provision for doubtful accounts 34,513 956,738 390,555
-------------------------------------- ------------ ------------ ------------

Adjustment of Allowance (462,234) 0 0

-------------------------------------- ------------ ------------ ------------
Depreciation and amortization:
-------------------------------------- ------------ ------------ ------------
Property and equipment 35,394 34,998 15,689
-------------------------------------- ------------ ------------ ------------

-------------------------------------- ------------ ------------ ------------

Total costs and expenses 4,178,050 6,130,055 4,054,209
-------------------------------------- ------------ ------------ ------------
Income (Loss) from operations 514,920 (3,913,683) (980,347)

-------------------------------------- ------------ ------------ ------------
Other income (expense):
-------------------------------------- ------------ ------------ ------------
Interest income 5,301 0 26,252
-------------------------------------- ------------ ------------ ------------

Interest expense (129,567) (23,371) (26,248)
-------------------------------------- ------------ ------------ ------------
Other income (expense) 150,456 17,609 (3,445)
-------------------------------------- ------------ ------------ ------------
Other income (expense), net 26,190 (5,762) (3,441)
-------------------------------------- ------------ ------------ ------------
Income (Loss) before provision 541,110 (3,919,445) (983,788)
(benefit) for income taxes
-------------------------------------- ------------ ------------ ------------
Provision for income taxes 800 800 800
-------------------------------------- ------------ ------------ ------------
Net Income (loss) 540,310 (3,920,245) (984,588)
-------------------------------------- ------------ ------------ ------------

-------------------------------------- ------------ ------------ ------------
Less: Dividends on Convertible (1,173,753) (223,733) --
Preferred Stock
-------------------------------------- ------------ ------------ ------------
Net loss attributable to common (633,443) (4,143,978) $ (984,588)
shareholders
-------------------------------------- ------------ ------------ ------------
Net loss per common share - (.01) (0.10) (0.02)
Basic and diluted

-------------------------------------- ------------ ------------ ------------
Weighted average number of 48,511,681 40,000,000 40,000,000
shares of common stock
outstanding - Basic and diluted
-------------------------------------- ------------ ------------ ------------

SOYO Group, Inc. and Subsidiary
Consolidated Statements of Shareholders' Equity (Deficit)
Years Ended December 31, 2005, 2004 and 2003

Additional Total Total
Common Stock Preferred Stock Paid In Accumulated Shareholders
Shares Par Value Shares Par Value Capital Equity Deficit Equity Deficit

Balance, December 31, 2001 28,182,750 28,183 1,000,000 1,000 470,817 (918,737) (418,737)
------------ ------------ ------------ ------------ ------------ -------------- --------------

Shares of common stock
retained by
shareholders
in October 2002
transaction 11,817,250 11,817 -- -- (11,817) -- --
Net loss for the year
ended December 31, 2002 -- -- -- -- -- (10,733,458) (10,733,458)
------------ ------------ ------------ ------------ ------------ -------------- --------------
Balance, December 31, 2002 40,000,000 40,000 1,000,000 1,000 459,000 (11,652,195) (11,152,195)
------------ ------------ ------------ ------------ ------------ -------------- --------------
Net loss for the year
ended December 31, 2003 -- -- -- -- -- (984,588) (984,588)
------------ ------------ ------------ ------------ ------------ -------------- --------------
Balance, December 31, 2003 40,000,000 40,000 1,000,000 1,000 459,000 (12,636,783) (12,136,783)
------------ ------------ ------------ ------------ ------------ -------------- --------------
Issuance of Preferred
Stock for Long Term Debt -- -- 2,500,000 1,304,000 10,696,000 -- 12,000,000
Dividends -- -- 114,195 114,195 -- -- 114,195
Accretion of Discount -- -- -- 109,538 -- -- 109,538
Net loss for the year
ended December 31, 2004 -- -- -- -- -- (4,143,978) (4,143,978)
------------ ------------ ------------ ------------ ------------ -------------- --------------
Balance, December 31, 2004 40,000,000 40,000 3,614,195 1,528,733 11,155,000 (16,780,761) (4,057,028)
------------ ------------ ------------ ------------ ------------ -------------- --------------
Issuance of Common
Stock for Private Placement 500,000 500 -- -- 499,500 -- 500,000
Issuance of Common
Stock for Services 30,000 30 -- -- -- -- 30
Issuance of Common

Stock for Payment of
Accounts Payable 5,645,330 5,645 -- -- 3,608,744 -- 3,614,389

Issuance of Common
Stock for Payment of Loan 1,286,669 1,287 -- -- 963,714 -- 965,001
Issuance of Common
Stock for Coversion of
Preferred Stock 1,219,512 1,220 (1,000,000) (1,000) 998,780 -- 999,000
Accretion of Discount -- -- -- 174,753 -- -- 174,753
Preferred Stock Backup
Withholding -- -- -- (84,999) -- -- (84,999)
Net Income -- -- -- -- -- 540,310 540,310
Preferred Stock Dividends -- -- -- -- -- (1,173,753) (1,173,753)
------------ ------------ ------------ ------------ ------------ -------------- --------------
48,681,511 48,682 2,614,195 1,617,487 17,225,738 (17,414,204) 1,477,703
============ ============ ============ ============ ============ ============== ==============

SOYO Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows

Years Ended December 31,
2005 2004 2003
----------------------------------------------- ----------- ----------- -----------

OPERATING ACTIVITIES
----------------------------------------------- ----------- ----------- -----------

Net Income (loss) $ 540,310 $(3,920,245) $ (984,588)
----------------------------------------------- ----------- ----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
----------------------------------------------- ----------- ----------- -----------
Depreciation 35,394 34,998 15,689

----------------------------------------------- ----------- ----------- -----------
Provision for doubtful accounts 34,513 956,738 390,555
----------------------------------------------- ----------- ----------- -----------
Loss on disposition of fixed assets -- -- 7,600
----------------------------------------------- ----------- ----------- -----------
Changes in operating assets and
liabilities:
----------------------------------------------- ----------- ----------- -----------
(Increase) decrease in:
----------------------------------------------- ----------- ----------- -----------
Accounts receivable (5,236,151) 3,785,110 (483,860)
----------------------------------------------- ----------- ----------- -----------
Inventories (4,128,119) 1,173,214 7,322,130
----------------------------------------------- ----------- ----------- -----------
Prepaid expenses 51,432 18,557 6,741
----------------------------------------------- ----------- ----------- -----------
Deposits (2,109) (9,776) 24,965
----------------------------------------------- ----------- ----------- -----------
Increase (decrease) in:
----------------------------------------------- ----------- ----------- -----------

Accounts payable - SOYO Computer, Inc (1,314,910) (5,242,343) (6,246,682)

----------------------------------------------- ----------- ----------- -----------
Accounts payable - other 9,332,236 2,783,763 921,179
----------------------------------------------- ----------- ----------- -----------

Accrued liabilities 509,316 236,059 (915,240)
----------------------------------------------- ----------- ----------- -----------

----------------------------------------------- ----------- ----------- -----------
Net cash provided by (used in) (178,088) (183,925) 58,489
operating activities

----------------------------------------------- ----------- ----------- -----------

----------------------------------------------- ----------- ----------- -----------
INVESTING ACTIVITIES
----------------------------------------------- ----------- ----------- -----------

Purchase of property and equipment (621,970) (158,670) (4,589)
----------------------------------------------- ----------- ----------- -----------
Net cash used in investing activities (621,970) (158,670) (4,589)

----------------------------------------------- ----------- ----------- -----------

SOYO Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows (continued)

----------------------------------------------- ----------- ----------- -----------
FINANCING ACTIVITIES
----------------------------------------------- ----------- ----------- -----------
Net decrease in revolving note payable -- -- (1,200,000)
----------------------------------------------- ----------- ----------- -----------

Decrease in restricted cash -- -- 1,000,000

----------------------------------------------- ----------- ----------- -----------
Advances from officer, director and major 165,000 -- 360,000
shareholder
----------------------------------------------- ----------- ----------- -----------
Business Loan -- 913,750 --
----------------------------------------------- ----------- ----------- -----------
Repayment of advances to officer, director and (240,000) -- (120,000)
major shareholder
----------------------------------------------- ----------- ----------- -----------
Proceeds from issuance of common stock 500,000 -- --
----------------------------------------------- ----------- ----------- -----------
Payment of backup withholding taxes
on accreted dividends on preferred stock (84,999) -- --
----------------------------------------------- ----------- ----------- -----------
Net cash provided by financing activities 340,001 913,750 40,000
----------------------------------------------- ----------- ----------- -----------

----------------------------------------------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS:
----------------------------------------------- ----------- ----------- -----------
Net increase (decrease) (460,057) 571,155 93,900
----------------------------------------------- ----------- ----------- -----------
At beginning of year 1,288,351 717,196 623,296
----------------------------------------------- ----------- ----------- -----------

At end of year $ 828,294 $ 1,288,351 $ 717,196
----------------------------------------------- ----------- ----------- -----------

----------------------------------------------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
----------------------------------------------- ----------- ----------- -----------
Cash paid for interest 97,783 23,371 26,248
----------------------------------------------- ----------- ----------- -----------
Cash paid for income taxes 800 800 1,000
----------------------------------------------- ----------- ----------- -----------

----------------------------------------------- ----------- ----------- -----------

----------------------------------------------- ----------- ----------- -----------
NON-CASH INVESTING AND FINANCING ACTIVITIES
----------------------------------------------- ----------- ----------- -----------
Settlement of business loan of $913,750 and
accrued interest of $51,251 through issuance
of common stock 965,001 -- --
----------------------------------------------- ----------- ----------- -----------
Settlement of accounts payable
through issuance of common stock 3,614,419 -- --
----------------------------------------------- ----------- ----------- -----------
Conversion of Class A preferred
stock to common stock 1,000 -- --
----------------------------------------------- ----------- ----------- -----------
Accretion of discount on Class B 174,753 109,538 --
preferred stock
----------------------------------------------- ----------- ----------- -----------
Deemed dividend on Class A 999,000 -- --
preferred stock
----------------------------------------------- ----------- ----------- -----------
Noncash dividend on Class B
preferred stock -- 114,195 --

----------------------------------------------- ----------- ----------- -----------

SOYO Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2004 and 2003

1. Organization and Business

a. Organization

Subsequent to this transaction, SOYO Taiwan maintained an equity
interest in SOYO, continued to be the primary supplier of inventory to
SOYO, and was a major creditor. In addition, there was no change in the
management of SOYO and no new capital invested, and there was a continuing
family relationship between the management of SOYO and SOYO Taiwan. As a
result, this transaction was accounted for as a recapitalization of SOYO
Nevada, pursuant to which the accounting basis of SOYO Nevada continued
unchanged subsequent to the transaction date. Accordingly, the
pre-transaction financial statements of SOYO Nevada are now the historical
financial statements of the Company, and pro forma information has not been
presented, as this transaction is not a business combination.

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

Based on the terms of the agreement between SOYO Taiwan and the third party, and
specifically the limitation on the purchaser collecting no more than $1,630,000
of the $12,000,000 from the Company without the prior consent of SOYO Taiwan,
the Company has determined that this transaction was in substance a capital
transaction. The Company recorded the issuance of the Class B preferred stock at
its fair market value on March 31, 2004 of $1,304,000, which was determined by
an independent investment banking firm. The $10,696,000 difference between the
$12,000,000 long term payable and the $1,304,000 fair market value of the Class
B preferred stock was credited to additional paid-in capital. The difference
between the fair market value and the liquidation value of the Class B preferred
stock is being recognized as an additional dividend to the Class B preferred
stockholder, and as an increase in the loss attributable to common stockholders,
and is being accreted from April 1, 2004 through December 31, 2008.

At the time of the transaction, SOYO Taiwan also agreed to continue to
provide computer parts and components to SOYO on an open account basis at the
quantities required and on a timely basis to enable SOYO to continue to conduct
its business operations at budgeted 2003 levels, which is not less than a level
consistent with the operations of SOYO Nevada's business in 2001 and 2000.This
supply commitment was effective through December 31, 2005.

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

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

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

b. Nature of Business

SOYO Group, Inc. is a distributor of consumer electronics, communications
services and computer products. The Company radically changed its core offerings
for sale in 2004. Through the consumer electronics division, SOYO offers a full
line of LCD display televisions and monitors, as well as Bluetooth wireless
devices. Through the communications division, SOYO offers discount telephone
service through VoIP protocol. The services can be purchased through different
types of plans and rates, making the service very flexible for the user. The
hardware to create and run VoIP services is also available for sale. Lastly, the
Company offers a full line of designer motherboards and related peripherals for
intensive multimedia applications, corporate alliances, telecommunications and
specialty market requirements. The breadth of the product line also includes
Bare Bone systems, flash memory as well as small hard disk drives for corporate
and mobile users, internal multimedia reader/writer and wireless networking
solutions products for any home and office (SOHO) users.

SOYO Group's products are sold through an extensive network of authorized
distributors to resellers, system integrators, and value-added resellers (VARs).

These products are also sold through major retailers, mail-order catalogs and
e-tailers to consumers throughout North America and Latin America.

During the years that the Company operated through October 24, 2002, SOYO
Nevada was a wholly-owned subsidiary of SOYO Taiwan.

In 2003, the Company was selling only computer equipment, although the plans to
expand the product lines were being developed.

In 2004, the emphasis switched from motherboards and hardware to
peripherals. Also in 2004, the Company introduced its VoIP products, which was
part of the reason for the improved performance in 2005.

The Company sold over LCD monitors and televisions in 2005.

Through December 31, 2004, the Company has been totally reliant upon the
cash flows from its operations. Through 2004, the Company did not have any
external sources of liquidity, other than advances from an officer, director,
major shareholder, and LGT Computers, Inc.

The Company has been totally reliant upon the cash flows from its operations to
fund future growth. As noted above, the Company completed a small private
placement in 2005, began factoring invoices to improve cash flows, and converted
several million dollars of debt to equity, all of which improved the Company's
financial condition. However, throughout the year and as of the date of this
filing, the Company did not have any established credit facilities in place, and
had no reliable external sources of liquidity in place, other than advances from
officers, directors and shareholders.

The Company has begun and continues to implement the following steps to
increase its financial position, liquidity, and long term financial health:

- The Company has completely revised its product mix toward higher margin
products

- The Company has improved the number and credit quality of its customer
accounts.

- The Company has arranged additional supply sources and no longer purchases
inventory from SOYO Taiwan.

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

2. Basis of Presentation and Summary of Significant Accounting Policies

a. Presentation

The consolidated financial statements include the accounts of SOYO and SOYO
Nevada. All significant intercompany accounts and transactions have been
eliminated in consolidation. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.

b. Use of Estimates

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

Estimates recorded for warranties are based on historical data. The number and
percentage of customers applying for warranties differs based on the price and
sophistication of the product sold. For example, the number of customers
applying for a warranty on a $1,000 television will always exceed the number of
customers applying for warranty coverage on a $40 memory storage device. As
such, that historical data is analyzed by management, and accruals to account
for warranty costs are booked based on the relevant data, and adjusted if
necessary to account for any special situations that may arise, such as
aggressive sales incentive programs, or any special warranty programs that might
have been offered.

Company policy is not to enter into guaranteed sales contracts, and the Company
does not offer a refund policy for returned merchandise. For a period of one
year, SOYO will replace any defective parts or workmanship, or at the Company's
option, replace any defective product with a new product. After one year, SOYO
will assist the customer by repairing or replacing any necessary parts, at the
customer's expense.

If a special situation exists, and the Company agrees to accept merchandise back
from a customer for credit, that credit is booked as a reduction to net
revenues.

Amounts for sales incentives are booked based upon the type of sales incentive
being offered. The Company offers three types of sales incentives to customers:
Co-op advertising credits, price protection, and sales discounts. In each case,
the exact amount of the incentive is known up front, and the amount of the
incentive is booked as a reduction to net revenues.

SOYO's return policy is similar for all consumer electronics and computer parts.
For a period of one year, SOYO will replace any defective parts or workmanship,
or at the Company's option, replace any defective product with a new product.
After one year, SOYO will assist the customer by repairing or replacing any
necessary parts, at the customer's expense.

c. Cash and Cash Equivalents

Cash and cash equivalents include all highly-liquid investments with an
original maturity of three months or less at the date of purchase. The Company
minimizes its credit risk by investing its cash and cash equivalents with major
banks and financial institutions located primarily in the United States.

d. Inventories

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

During the years ended December 31, 2005, 2004 and 2003, the Company
wrote-down the value of its inventory by $0, $47,084 and $429,230 respectively.

e. Property and Equipment

Property and equipment are stated at cost. Major renewals and improvements
are capitalized; minor replacements and maintenance and repairs are charged to
operations. Depreciation is provided on the straight-line method over the
estimated useful lives of the respective assets (three to seven years).
Leasehold improvements are amortized over the shorter of the useful life of the
improvement or the life of the related lease.

f. Impairment or Disposal of Long-Lived Assets

Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Company assesses potential impairments to
its long-lived assets when events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. If required, an

impairment loss is recognized as the difference between the carrying value and
the fair value of the assets. No impairment losses associated with the Company's
long-lived assets were recognized during the years ended December 31, 2005 and
2004.

g. Revenue Recognition

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

The Company recognizes product sales generally at the time the product is
shipped, although under certain circumstances the Company recognizes product
sales at the time the product reaches its destination. Concurrent with the
recognition of revenue, the Company provides for the estimated cost of product
warranties and reduces revenue for estimated product returns. Sales incentives
are generally classified as a reduction of revenue and are recognized at the
later of when revenue is recognized or when the incentive is offered. When other
significant obligations remain after products are delivered, revenue is
recognized only after such obligations are fulfilled. Shipping and handling
costs are included in cost of goods sold.

Our revenue recognition policy for our consumer electronics, computer
peripherals, and communications hardware businesses is designed to recognize
revenue when it is earned. To that end, the Company recognizes revenue when
there is evidence of an arrangement, title and risk of loss have passed,
delivery has occurred, the sales price is fixed and collection of the related
receivable is reasonably assured. Based on the contracts with each customer, the
point where title is transferred is either at shipment or when the goods are
received by the customer.

The Company offers price protection to its customers where SOYO Group, Inc. has
published a Price List which reflects a reduced cost. Price Protection will be
available for current inventory only which is on hand on the effective date of
the price reduction, and for those products which maybe in- transit and for
those products which have been invoiced directly from SOYO Group, Inc. within
the Prior thirty (30) calendar days period. In these cases, the amount of price
protection is calculated and recognized as a reduction of revenue.

Our revenue recognition policy differs for our communications equipment. The
Company acts as an agent when it sells phone minutes and phone cards. The
Company recognizes net revenue as an agent under EITF 99-19, Reporting Revenue
Gross as a Principal versus Net as an Agent. Revenue from phone minutes and
phone cards amounted to $616,946 in 2005 and is not considered material. The
Company will make revenue policy disclosure specific to this business when it
becomes material.

h. Vendor Programs

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

Price protection is a concession given by a vendor to the Company to compensate
for the difference between the price of the product paid by the Company and a
subsequent price reduction of the product. Price protection is an adjustment to
product cost and accounts payable. Price protection is accrued when the price
reduction of the product is determinable.

Rebate is a concession given by a vendor to the Company based on sales volume.
Rebate is an adjustment to product cost and accounts payable. Rebate is accrued
when the sales volume is attained.

Product returns pertain to the return of defective merchandise, customer
dissatisfaction returns, and product returns per the return of product provision
under the vendor agreement. Product returns is an adjustment to product cost and
accounts payable. Product return is matched with the period when the product was
purchased, including estimates to be incurred in the subsequent period.

Cooperative advertising and marketing are concessions given by a vendor to the
Company in accordance with an agreement. Cooperative advertising and marketing
are adjustments to marketing expenses and accounts payable.

i. Warranties

The Company's suppliers generally warrant the products distributed by the
Company and allow returns of defective products, including those that have been
returned to the Company by its customers. The Company does not independently
warrant the products that it distributes, but it does provide warranty services
on behalf of the supplier.

j. Concentration of Cash and Credit Risk

The Company maintains its cash in bank accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts to date. Management believes that the Company is not exposed to any
significant risk on the Company's cash balances.

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company performs ongoing credit evaluations with respect to the financial
condition of its debtors, but does not require collateral. The Company maintains
credit insurance for a portion of this credit risk.

k. Advertising

Advertising costs are charged to expense as incurred. The Company has not
incurred direct advertising costs. However, the Company may participate in
cooperative advertising programs with certain of its customers by paying a
stipulated percentage of the sales invoice price. Cooperative advertising costs
paid for the years ended December 31, 2005, 2004, and 2003 were $849,897,
$1,481,441, and $728,488 respectively, and are presented under sales and
marketing costs in the accompanying consolidated statements of operations.

l. Income Taxes

The Company accounts for income taxes using the asset and liability method
whereby deferred income taxes are recognized for the tax consequences of
temporary differences by applying statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of certain assets and liabilities. Changes in deferred tax assets and
liabilities include the impact of any tax rate changes enacted during the year.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.

m. Income (Loss) Per Common Share

Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS"). Basic income (loss) per share is computed by
dividing net income (loss) available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted income
per share gives effect to all dilutive potential common shares outstanding
during the period. Potentially dilutive securities consist of the outstanding
shares of preferred stock. These potentially dilutive securities were not

included in the calculation of loss per share for the years ended December 31,
2005, 2004 and 2003 because the Company incurred a loss attributable to common
shareholders during such periods and their effect would have been anti-dilutive.
Accordingly, basic and diluted loss per share is the same for the years ended
December 31, 2005, 2004 and 2003.

n. Comprehensive Income

The Company displays comprehensive income or loss, its components and
accumulated balances in its consolidated financial statements. Comprehensive
income or loss includes all changes in equity except those resulting from
investments by owners and distributions to owners. The Company did not have any
items of comprehensive income or loss for the years ended December 31, 2005,
2004 and 2003.

o. Fair Value of Financial Instruments

The Company believes that the carrying value of its cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities as of
December 31, 2005 approximate their respective fair values due to the short-term
nature of those instruments.

p. Stock-Based Compensation

In December 2004, SFAS No. 123R, "Share-based Payment" was issued
and replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
and supersedes Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." SFAS 123R requires the
measurement of all employee share-based payments, including grants of
employee stock options, using a fair-value based model. Deferred
compensation calculated under the fair value method would then be
amortized into income over the respective vesting period of the stock
option. The accounting provisions of SFAS 123R are effective for
reporting periods beginning after June 15, 2005.

The Company currently accounts for employee stock-based compensation
using the intrinsic value method supplemented by pro forma disclosures
in accordance with APB 25 and SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Under the intrinsic value
method, the Company has recognized stock-based compensation common
stock on the date of grant..

If the fair value based method under FAS 123 had been applied in
measuring stock-based compensation expense for the years ended
December 31, 2005 and 2004, the pro forma on net loss and net loss per
share would have been as follows:

December 31,
2005
------------

Net loss attributable to common shareholders, as $ (633,443)
reported

Add: Stock based employee compensation
expense included in reported net loss,
net of related tax effects --

Deduct: Total Stock-based employee
compensation expense determined under
fair-value based method for all awards not
included in net loss (238,103)
------------

Pro-forma net loss attributable to common shareholders $ (871,546)
============

Loss per share:
Basic and diluted - as reported $ (0.01)
Basic and diluted - pro-forma $ (0.02)

Through December 31, 2004, the Company did not have any Equity
Compensation Plans. On March 7, 2005, the Company registered its 2005
Stock Compensation Plan on Form S-8 with the Securities and Exchange
Commission, registering on behalf of our employees, officers,
directors and advisors up to 5,000,000 shares of our common stock
purchasable by them pursuant to common stock options granted under our
2005 Stock Compensation Plan. The plan was approved by shareholder
vote during a special meeting of shareholders on February 17, 2006.
However, since Mr. Chok and Ms. Chu, husband and wife, are directors
who own more than 50% of the company, shareholder approval is
essentially a formality, hence the grant date of the stock options is
July 22, 2005.

On July 22, 2005, the Company issued 2,889,000 option grants to
employees at a strike price of $.75. One third of those options will
vest and be available for purchase on July 22, 2006, one third on July
22, 2007, and one third on July 22, 2008. The grants will expire if
unused on July 22, 2010.

The options do not have requisite service period nor market,
performance, and service conditions.

q. Significant Risks and Uncertainties

r. Recent Accounting Pronouncements

In May 2005, FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
154 applies to all voluntary accounting principle changes as well as the
accounting for and reporting of such changes. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.

SFAS 154 requires voluntary changes in accounting principle be
retrospectively applied to financial statements from previous periods unless
such application is impracticable. Changes in depreciation, amortization, or
depletion for long-lived, non-financial assets are accounted for as a change in
accounting estimate that is affected by a change in accounting principle, under
the newly issued standard.

SFAS 154 replaces APB Opinion No. 20 and SFAS 3. SFAS 154 carries forward
many provisions of Opinion 20 and SFAS 3 without change including those
provisions related to reporting a change in accounting estimate, a change in
reporting entity, correction of an error and reporting accounting changes in
interim financial statements. The FASB decided to completely replace Opinion 20
and SFAS 3 rather than amending them in keeping to the goal of simplifying U.S.
GAAP. The provisions of SFAS No. 154 are not expected to have a material effect
on the Company's consolidated financial position or results of operation.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". SFAS 153 addresses the measurement
of exchanges of nonmonetary assets. It eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange.

The exception under APB 29 required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. SFAS 153
eliminates the exception to fair value for exchanges of similar productive
assets and replaces it with a general exception for exchange transactions that
do not have commercial substance--that is, transactions that are not expected to
result in significant changes in the cash flows of the reporting entity.

SFAS 153 is effective on January 1, 2006. The adoption of SFAS 153 is not
expected to have an impact on the Company's consolidated financial statements or
disclosures.

On December 16, 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
("SFAS 123R") which is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Statement 123R supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in SFAS 123R is similar to the approach
described in SFAS 123. SFAS 123R requires all share-based payments to employees
to be recognized in the income statement based on their grant date fair values
over the corresponding service period and also requires an estimation of
forfeitures when calculating compensation expense. The Company must adopt SFAS
123R no later than January 1, 2006. SFAS 123R permits public companies to adopt
its requirements using one of three methods: the "modified prospective" method,
the "modified retrospective" method to January 1, 2005, or the "modified
retrospective" method to all prior years for which SFAS 123 was effective. The
Company has not yet determined which adoption method it will utilize.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . .
under some circumstances, items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." SFAS 151 requires that those items
be recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, SFAS 151 requires that allocation of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities.

SFAS 151 is effective on January 1, 2006. Earlier application is permitted
for inventory costs incurred beginning January 1, 2005. The provisions of SFAS
151 shall be applied prospectively. The adoption of SFAS 151 is not expected to
have an impact on the Company's consolidated financial statements or
disclosures.

3. Accounts Receivable

The Company's accounts receivable at December 31, 2005 and 2004 are summarized
as follows:

December 31,
-------------------------------------- ----------- -----------
2005 2004
-------------------------------------- ----------- -----------
Accounts receivable $ 7,867,744 $ 3,151,432
-------------------------------------- ----------- -----------
Less: allowance for doubtful accounts (589,224) (1,074,550)
-------------------------------------- ----------- -----------
$ 7,278,520 $ 2,076,882
-------------------------------------- ----------- -----------

Changes in the allowance for doubtful accounts for the years ended December
31, 2005 and 2004 are summarized as follows:

------------------------------------------- ----------- -----------
2005 2004
------------------------------------------- ----------- -----------
Balance, beginning of year $ 1,074,550 $ 856,386
------------------------------------------- ----------- -----------
Add: Amounts provided during the year 34,513 956,738
------------------------------------------- ----------- -----------
Less: Amounts written off during the year (57,605) (738,574)
------------------------------------------- ----------- -----------

Less: Adjustment based on current estimate (462,234) --

------------------------------------------- ----------- -----------
Balance, end of year $ 589,224 $ 1,074,550
------------------------------------------- ----------- -----------

The Company's management believes that the balance of the allowance for doubtful
accounts at December 31, 2005 was sufficient to cover any past due accounts
whose collection was considered doubtful.

During 2005, the Company began factoring its invoices to improve cash flow. As a
result of this activity, the Company obtained the services of credit experts to
evaluate its new and existing customer base. Based on the expert evaluations,
and several deals struck with creditors to pay off debt in manageable
installments, the Company believes that its 2005 provision for doubtful accounts
is adequate, as was the provision for 2004.

As mentioned above, the Company began factoring its invoices in 2005 to improve
cash flow. At December 31, 2005, $580,363 of the Company's receivables had been
factored and were owned by Wells Fargo.

Prior to 2005, management would book a certain percentage of sales each quarter
to the allowance for doubtful accounts. During 2005, the Company hired a
consultant to analyze the allowance. The result of this analysis was that the
allowance was more than triple the amount the Company considered uncollectible.
As a result, a reversal was made to bring the allowance in line with the
estimate of uncollectible accounts, plus an additional reserve to account for
unexpected losses. Since that time, management continues to review the account
quarterly, and the allowance is maintained to represent the estimate of
uncollectible accounts, plus an additional reserve to account for unexpected
losses.

There were significant changes to the aging of accounts receivable between 2004
and 2005. The amount of past due receivables has dropped substantially, and two
customers whose accounts had been considered uncollectible in 2004 began making
payments in 2005, thereby changing the status of those accounts back to
collectable. Additionally, the Company changed its product mix in 2005,
resulting in a large number of new customers. As a result, the Company is now
selling to many more customers, thereby reducing its credit risk.

The biggest change to the entire process from 2004 to 2005 is the way customer
credit was evaluated. In 2004, the Company did all of the evaluation of customer
credit internally. In 2005, the Company began factoring its invoices to improve
cash flow. As a result, the factor buying the invoices began analyzing the
Company's customers. The Company received a substantial benefit from this
arrangement, as all customers credit was analyzed by external experts. As a
result of getting this information from the experts, and the widely enhanced
customer base, the Company believes that it improved the management of its
receivables in 2005.

All of our receivables are sold with recourse. As such, the Company continues to
evaluate each of these receivables monthly in regard to its allowance for bad
debts. The original factor, Wells Fargo, bought all accounts without recourse.
When they switched over to Accord, those transactions were "with recourse".

4. Property and Equipment

At December 31, 2005 and 2004, property and equipment consisted of the
following:

December 31,
----------------------------------------------------- --------- ---------
2005 2004
----------------------------------------------------- --------- ---------
Computer and Equipment $ 744,176 $ 62,255
----------------------------------------------------- --------- ---------
Furniture and Fixtures 27,943 24,333
----------------------------------------------------- --------- ---------
Leasehold Improvements 83,928 149,890
----------------------------------------------------- --------- ---------
Automobiles 11,075 8,675
----------------------------------------------------- --------- ---------
Less: Accumulated Depreciation (115,480) (80,087)
----------------------------------------------------- --------- ---------
Total $ 751,642 $ 165,066
----------------------------------------------------- --------- ---------

For the years ended December 31, 2005, 2004 and 2003, depreciation and
amortization expense related to property and equipment was $35,394, $34,998 and
$15,689 respectively.

5. Goodwill

Goodwill represents the excess of the purchase price over the fair value of
the identifiable net assets acquired in an acquisition in 1999, accounted for
using the purchase method. Goodwill was being amortized on the straight-line
basis over a three year period.

Effective January 1, 2002, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", which eliminated the amortization of goodwill. No impairment was
recorded upon the adoption of this accounting standard. At January 1, 2002,
goodwill was $1,251,325, less accumulated amortization of $862,018. At December
31, 2002, goodwill was reviewed for impairment and the remaining balance of
$389,307 was charged to operations.

6. Advances from Officer, Director and Major Shareholder

During March 2003, Nancy Chu, the Company's Chief Financial Officer,
director and major shareholder, made short-term advances to the Company of
$360,000 for working capital purposes, of which $120,000 was repaid during
September 2003. The remaining $240,000 was paid during 2005.

In October 2005, the Company borrowed $165,000 from an individual for working
capital purposes.

7. Business Loan

On March 29, 2004, LGT Computer, Inc. loaned the Company $213,750 pursuant
to an unsecured note payable due March 28, 2005, with interest at 4% per annum.
On May 28, 2004, LGT Computer, Inc. loaned the Company an additional $700,000
pursuant to an unsecured note payable due May 27, 2005, with interest at 4% per
annum. On March 28, 2005, by mutual agreement of the parties, the due dates of
the notes were extended one year at the same interest rate. On September 2,
2005, the two loans and accrued interest of $51,251 were repaid through the
issuance of 1,286,669 shares of our restricted common stock. On that date, the
market price of the stock was $0.75.

8. Commitments and Contingencies

a. Operating Lease

The Company leases its office and warehouse premises under a five-year
non-cancelable operating lease that expires on November 30, 2008, with a five
year renewal option. The lease provides for monthly payments of base rent and an
unallocated portion of building operating costs. The minimum future lease
payments are as follows:

Years Ending December 31,
-------------------------

2006 210,983
2007 212,692
2008 194,967

Rent expense for the years ended December 31, 2005, 2004 and 2003 was
$238,836, $229,718 and $276,044 respectively.

b. Legal Proceedings

On August 2, 2004, a lawsuit was filed in California Superior Court
entitled Gerry Normandan. et al, v. Soyo Inc. Case No. RCV 082128. The case
seeks class action status and alleges defects in motherboards which Soyo
distributes, and that the Company misrepresented and omitted material facts
concerning the motherboards. The plaintiff seeks restitution and disgorgement of
all amounts obtained by defendant as a result of alleged misconduct, plus
interest, actual damages, punitive damages and attorneys' fees. The Company is
vigorously defending the lawsuit and believes that it will be resolved with no
material adverse effect on the Company.

There are no other legal proceedings that have been filed against the Company.

9. Income Taxes

For the year ended December 31, 2005, the Company believes that all income
taxes due are offset by federal and state net operating loss carryforwards. For
the years ended December 31, 2004 and 2003, the Company incurred net losses and
accordingly, had no tax liability, other than minimum state franchise taxes.

As of December 31, 2005, the Company had federal and state net operating
loss carryforwards of $4,500,000 and $70,000 respectively, expiring in various
years through 2024, which can be used to offset future taxable income, if any.
The Company's net operating losses were reduced by $10,500,000 for the
forgiveness of debt for tax purposes. No deferred tax benefit for these
operating losses has been recognized in the consolidated financial statements
due to the uncertainty as to their realizability in future periods.

The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:

Year ended
December 31,
------------------------------------------------ --------------- --------------

2004 2005
------------------------------------------------ --------------- --------------
Federal income tax 34% 34%
------------------------------------------------ --------------- --------------
State income tax 9% 9%
------------------------------------------------ --------------- --------------
Effect of net operating loss and net operating
loss carry forward (43%) (43%)
------------------------------------------------ --------------- --------------
Effective income tax rate 0% 0%
------------------------------------------------ --------------- --------------

10. Significant Concentrations

a. Customers

The Company sells to both distributors and retailers. Revenues through such
distribution channels for the years ended December 31, 2005, 2004 and 2003 are
summarized as follows:

Year Ended December 31,
-------------- ------------- ------- ------------- ------- ------------- -------
2005 % 2004 % 2003 %
-------------- ------------- ------- ------------- ------- ------------- -------
Revenues
-------------- ------------- ------- ------------- ------- ------------- -------

Distributors $22,312,488 58.3 $14,704,452 45.3 $13,055,046 42.1
-------------- ------------- ------- ------------- ------- ------------- -------
Retailers $15,950,544 41.7 $17,721,962 54.7 $17,979,193 57.9
-------------- ------------- ------- ------------- ------- ------------- -------
Total $38,263,032 100.0 $32,426,414 100.0 $31,034,239 100.0
-------------- ------------- ------- ------------- ------- ------------- -------

During the year ended December 31, 2005, the Company had one customer (E23) that
accounted for revenues of $13,552,324, equivalent to 35% of net revenues.

During the year ended December 31, 2004, the Company had one customer (SYX
Distribution, Inc., otherwise known as Tiger Direct) that accounted for revenues
of $8,591,711, equivalent to 26% of net revenues. During the year ended December
31, 2003, the same customer accounted for revenues of $9,943,855, equivalent to
32% of net revenues.

b. Geographic Segments

Revenues by geographic segment are summarized as follows:

Year Ended December 31,
----------------- ------------- ------- ------------- ------- ------------- -------
2005 % 2004 % 2003 %
----------------- ------------- ------- ------------- ------- ------------- -------

Revenues
----------------- ------------- ------- ------------- ------- ------------- -------
United States $20,055,470 56.7 $25,936,978 80.0 $23,043,136 74.3
----------------- ------------- ------- ------------- ------- ------------- -------
Other N. America 1,615,080 N/A N/A
----------------- ------------- ------- ------------- ------- ------------- -------
Central and $2,993,532 7.8 $6,317,907 19.5 $7,391,804 23.8
South
America
----------------- ------------- ------- ------------- ------- ------------- -------
Hong Kong $13,598,950 35.4 $171,529 0.5 $599,299 1.9
and other
locations
----------------- ------------- ------- ------------- ------- ------------- -------
Total $38,263,032 100.0 $32,426,414 100.0 $31,034,239 100.0
----------------- ------------- ------- ------------- ------- ------------- -------

Revenues by product line are summarized as follows:

Year Ended December 31,
--------------------- ------------- ------- ------------- ------- ------------- -------
2005 % 2004 % 2003 %
--------------------- ------------- ------- ------------- ------- ------------- -------

Revenues
--------------------- ------------- ------- ------------- ------- ------------- -------
Consumer Electronics $18,739,719 49.0 N/A N/A
--------------------- ------------- ------- ------------- ------- ------------- -------
Computer parts and 18,906,367 49.4 N/A N/A
peripherals
--------------------- ------------- ------- ------------- ------- ------------- -------
Voice and 616,946 1.6 N/A N/A
Communication
--------------------- ------------- ------- ------------- ------- ------------- -------
Total $38,263,032 100.0 $32,426,414 $31,034,239
--------------------- ------------- ------- ------------- ------- ------------- -------

The breakdowns to segregate sales by product line is not available for years
prior to 2005. During the years prior to 2005, the Company sold primarily
computer parts and peripherals. The dollar volume of sales of Both consumer

electronics and voice and communication products were very small and immaterial
in the scope of the Company's business. As sales of consumer electronics and
voice and communication products have grown, the Company has begun recognizing
the sales in each category, and will continue to segregate the sales for
reporting purposes in the future.

During the first part of 2005, the Company had made a commitment to its new
product lines, but did not have much inventory to sell. While waiting for the
initial inventory shipments, the Company entered into a short term agreement to
make sales of computer components to a vendor in Hong Kong. The sales had
relatively low margin, and not a business that the Company planned to be in long
term.

c. Suppliers

During the year ended December 31, 2005, the Company did not purchase any
products from SOYO Taiwan. As of December 31, 2005, no more than 39% of the
products distributed by the SOYO Group are supplied by any one supplier. As
started in 2004, SOYO Group, Inc. is aggressively establishing new partnerships
with other OEM manufacturers in the North America and Asia Pacific Regions in
order to provide innovative products for consumers.

The following is a summary of the Company's transactions and balances with
SOYO Taiwan as of and for the years ended December 31, 2005, 2004 and 2003:

December 31,
--------------------------------- ---------- ----------------- -----------------
2005 2004 2003
--------------------------------- ---------- ----------------- -----------------
Accounts payable to SOYO Taiwan $0 $1,314,910 $ 6,557,253
--------------------------------- ---------- ----------------- -----------------
Long-term payable to SOYO Taiwan $0 $0 $12,000,000
--------------------------------- ---------- ----------------- -----------------

Years Ended December 31,
--------------------------------- ---------- ----------------- -----------------
2005 2004 2003
--------------------------------- ---------- ----------------- -----------------
Purchases from SOYO Taiwan $0 $14,004,259 $20,188,354
--------------------------------- ---------- ----------------- -----------------
Payments to SOYO Taiwan $873,050 $19,154,603 $18,842,244
--------------------------------- ---------- ----------------- -----------------

During the years ended December 31, 2005, 2004 and 2003, the Company
received price protection from SOYO Taiwan of $0, $0, and $651,215,
respectively, which reduced inventory and accounts payable accordingly.

11. Shareholders' Equity

a. Common Stock

As of December 31, 2002, the Company had authorized 75,000,000 shares of
common stock with a par value of $0.001 per share.

Effective October 24, 2002, the Company issued 28,182,750 shares of common
stock to Ming Tung Chok and Nancy Chu, who are members of SOYO Nevada management
(see Note 1). The shares of common stock were valued at par value, since the
transaction was deemed to be a recapitalization of SOYO Nevada. During October
2002, the management of SOYO Nevada also separately purchased 6,026,798 shares
of the 11,817,250 shares of common stock of VWHC outstanding prior to VWHC's
acquisition of SOYO Nevada, for $300,000 in personal funds. The 6,026,798 shares
represented 51% of the outstanding shares of common stock. When the transaction
was complete, and control of the Company was transferred, SOYO Nevada management
owned 34,209,548 shares of the 40,000,000 outstanding shares of the Company's
common stock. Subsequent to the transaction, management distributed 8,000,000
shares of common stock to various brokers, bankers and other individuals that
assisted with the transaction. No one individual or corporation other than those
named in Item 12 of this report ever owned more than 5% of the common shares
outstanding. As a result of this transaction, SOYO Group management currently
owns 26,209,548 of the 48,681,511 shares outstanding as of December 31, 2005.

b. Preferred Stock

As of December 31, 2005, the Company had authorized 10,000,000 shares of
preferred stock with a par value $0.001 per share.

The Board of Directors is vested with the authority to divide the
authorized shares of preferred stock into series and to determine the relative
rights and preferences at the time of issuance of the series.

Effective October 24, 2002, the Company issued 1,000,000 shares of Class A
convertible preferred stock to SOYO Taiwan (see Note 1) with a stated
liquidation value of $1.00 per share. The shares of Class A preferred stock were

valued at par value, since the transaction was deemed to be a recapitalization
of SOYO Nevada. Each share of Class A preferred stock has one vote per share.
The Class A preferred stock has no stated dividend rate. The shares of Class A
preferred stock are convertible, in whole or in part, into common stock at any
time during the three-year period subsequent to their issuance, based on the
average closing bid price of the common stock for a period of five business days
prior to conversion. On October 24, 2005, the one million shares of preferred
stock were converted to 1,219,512 shares of common stock. The price of our
common stock on that day was $0.82.

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

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

Taiwan, the Company has determined that this transaction is in substance a
capital transaction. Accordingly, the Company recorded the issuance of the Class
B preferred stock at its fair market value in 2004, with the difference between
the $12,000,000 long-term payable and the fair market value of the Class B
preferred stock credited to additional paid-in capital. The difference between
the fair market value and the liquidation value of the Class B preferred stock
will be recognized as an additional dividend to the Class B preferred
stockholder, and will be accreted through December 31, 2008.

c. Stock Options and Warrants

As of December 31, 2005, the only warrants outstanding were those issued to
Evergreen Technology as part of the private placement completed in March 2005,
and described above. The Company has created a stock option plan, but as of
December 31, 2005, the plan had not yet been approved by the shareholders, and
no options granted under the plan had vested.

12. Quarterly Results (Unaudited)

Presented below is a summary of the quarterly results of operations for the
years ended December 31, 2005 and 2004.

Three months ended:
------------------ ---------------- --------------- --------------- -------------- -------------
March 31, 2005 June 30, 2005 Sept 30, 2005 Dec 31, 2005 Total
------------------ ---------------- --------------- --------------- -------------- -------------

Net revenues $3,962,520 $8,494,311 $9,233,430 $16,572,771 $38,263,032

------------------ ---------------- --------------- --------------- -------------- -------------
Gross margin $1,522,035 $1,054,872 $206,771 $1,909,292 $4,692,970

------------------ ---------------- --------------- --------------- -------------- -------------
Income (loss) $308,724 $36,760 ($944,641) $651,843 $52,686
from
Operations
------------------ ---------------- --------------- --------------- -------------- -------------
Other Income $77,951 $65,359 $582,449 ($237,335) $488,424
(Expense), Net
------------------ ---------------- --------------- --------------- -------------- -------------
Income (loss) $386,675 $102,119 ($362,192) $414,508 $541,110
before taxes
------------------ ---------------- --------------- --------------- -------------- -------------
Income taxes 800 800

------------------ ---------------- --------------- --------------- -------------- -------------
Net Income $386,675 $102,119 ($362,192) $413,708 $540,310
(loss)
------------------ ---------------- --------------- --------------- -------------- -------------

------------------ ---------------- --------------- --------------- -------------- -------------
Dividends $39,213 $42,458 $42,935 $1,049,147 $1,173,753
------------------ ---------------- --------------- --------------- -------------- -------------
Net $347,462 $59,661 ($405,127) ($635,439) ($633,443)
Income(Loss)
Attributable to
Common
Shareholders

------------------ ---------------- --------------- --------------- -------------- -------------
Net income
(loss) per
common share -
Basic

Diluted .01 -- (.01) (.01) (.01)
.01 -- (.01) (.01) (.01)

------------------ ---------------- --------------- --------------- -------------- -------------
Weighted
average
number of
common
shares
outstanding -

Basic 48,681,511 48,681,511 48,681,511 48,681,511 48,681,511
Diluted 52,736,204 52,736,204 48,681,511 48,681,511 48,681,511

------------------ ---------------- --------------- --------------- -------------- -------------

------------------ ---------------- --------------- --------------- -------------- -------------
March 31, 2004 June 30, 2004 Sept 30, 2004 Dec 31, 2004 Total
------------------ ---------------- --------------- --------------- -------------- -------------
Net revenues $8,594,302 $10,194,388 $9,347,427 $4,290,297 $32,426,414
------------------ ---------------- --------------- --------------- -------------- -------------
Gross margin 1,113,168 398,972 307,513 396,719 2,216,372
------------------ ---------------- --------------- --------------- -------------- -------------
Income (loss) 94,705 (924,036) (809,416) (2,274,936) (3,913,683)
from
Operations
------------------ ---------------- --------------- --------------- -------------- -------------

Other Income -- (4,745) (4,745) 3,728 (5,762)
(Expense), Net

------------------ ---------------- --------------- --------------- -------------- -------------
Income (loss) 94,705 (928,781) (814,161) (2,271,208) (3,919,445)
before taxes
------------------ ---------------- --------------- --------------- -------------- -------------
Income taxes
------------------ ---------------- --------------- --------------- -------------- -------------
Net Income 94,705 (928,781) (814,161) (2,271,208) (3,919,445)
(loss)
------------------ ---------------- --------------- --------------- -------------- -------------
Net income
(loss) per
common share -
Basic $ -- ($.02) ($.02) ($.06) ($.10)
Diluted $ -- ($.02) ($.02) ($.06) ($.10)
------------------ ---------------- --------------- --------------- -------------- -------------
Weighted
average
number of
common
shares
outstanding -
Basic 40,000,000 40,000,000 40,000,000 40,000,000
Diluted 40,000,000 40,000,000 40,000,000 40,000,000
------------------ ---------------- ---------------- --------------- ---------------- ----------

During the year, the Company booked approximately $1,000,000 in the first
quarter and $300,000 in the second quarter to miscellaneous income. During the
fourth quarter, the Company determined that the correct classification of the
amounts was as a reduction to cost of sales, and not to miscellaneous income.
The amounts are placed above as they should have been booked, which will not
agree with the 10Q reports issued as of March 31, June 30, and September 30,
2005.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Effective July 23, 2004, the Company dismissed Grobstein, Horwath & Company
LLP ("Grobstein"), as the Company's independent registered public accounting
firm. Effective July 26, 2004, the Company engaged Vasquez & Company LLP
("Vasquez") as the Company's new independent registered public accounting firm.
The dismissal of Grobstein and the engagement of Vasquez were approved by the
Company's Board of Directors.

During the year ended December 31, 2003, and the subsequent interim period
from January 1, 2004 through July 26, 2004, neither the Company, nor anyone on
its behalf, consulted with Vasquez regarding; (i) either the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements and no written report or oral advice was provided that Vasquez
concluded was an important factor considered by the Company in reaching a
decision as to the accounting, auditing or financial reporting issue; or (ii)
any matter that was either the subject of a disagreement as defined at Item
304(a)(1)(iv) or a reportable event as defined at Item 304 (a)(1)(iv) of
Regulation S-K.

Grobstein audited the Company's financial statements for the fiscal years
ended December 31, 2002 and 2003. Grobstein's reports for these periods did not
contain an adverse opinion or a disclaimer of opinion, nor were they qualified
or modified as to audit scope or accounting principles, except that such reports
contained a modification paragraph that indicated that as a result of the
Company's losses from operations there was substantial doubt about the Company's
ability to continue as a going concern.

During the fiscal years ended December 31, 2002 and 2003, and the interim
period from January 1, 2004 through July 23, 2004, there were no disagreements
with Grobstein on any matter of accounting principles or practices, financial

statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Grobstein, would have caused such firm to
make reference to the subject matter of the disagreements in connection with its
reports on the Company's financial statements. In addition, there were no such
events as described under Item 304(a)(1)(v) of Regulation S-K during the fiscal
years ended December 31, 2002 and 2003 and the interim period from January 1,
2004 through July 23, 2004, except that (a) as described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003(Item 9A) and
Quarterly Report on Form 10-Q for the quarterly period ended March31, 2004 (Item
4), the Company's disclosure controls and procedures were not adequate, (b) by
letter dated July 15, 2004, Grobstein stated that it noted certain deficiencies
involving internal controls that Grobstein considered to be significant
deficiencies that, in the aggregate, constitute material weaknesses under
standards established by the American Institute of Certified Public Accountants.
Grobstein discussed the significant deficiencies and material weaknesses set
forth in the above mentioned letter with the Company's Board of Directors.

Effective February 10, 2003, the Company, dismissed Gerald R. Perlstein,
CPA ("Perlstein"), as the Company's independent accountant. Effective February
10, 2003, the Company engaged Grobstein, Horwath & Company LLP, ("Grobstein") as
the Company's new independent accountants. Perlstein had been retained by the
Company as its independent accountant on January 31, 2000. The dismissal of
Perlstein and the engagement of Grobstein were approved by the Company's Board
of Directors.

Prior to Grobstein becoming the independent accountants for the Company,
neither the Company, nor anyone on its behalf, consulted with Grobstein
regarding either the application of accounting principles to a specific
completed or proposed transaction, or the type of audit opinion that might be
rendered on the Company's financial statements; or any matter that was the
subject of a disagreement or event as defined at Item 304 (a) (1)(iv) of
Regulation S-K.

Perlstein audited the Company's financial statements for the fiscal years
ended July 31, 2001 and 2002. During his engagement, Perlstein's reports for
these periods did not contain an adverse opinion or a disclaimer of opinion, nor
were they qualified as to audit scope or accounting principles, however,
Perlstein's report for these fiscal years was modified to reflect uncertainty
with respect to the Company's ability to continue as a going concern.

During the fiscal years ended July 31, 2001 and 2002 and the interim period
from August 1, 2002 through February 10, 2003, there were no disagreements with
Perlstein on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Perlstein, would have caused such firm to
make reference to the subject matter of the disagreements in connection with its

report on the Company's financial statements. In addition, there were no such
events as described under Item 304(a)(1)(iv)(B) of Regulation S-K during the
fiscal years ended July 31, 2001 and 2002 and the interim period from August 1,
2002 through February 10, 2003.

Effective February 13, 2003, the Company, dismissed Malone & Bailey PLLC
("M & B"), as the independent accountants of its wholly-owned subsdiary, SOYO
Nevada, Inc. The dismissal of M & B and the engagement of Grobstein were
approved by the Company's Board of Directors.

Prior to Grobstein becoming the independent accountants for the Company,
neither the Company, nor anyone on its behalf, consulted with Grobstein
regarding either the application of accounting principles to a specific or
contemplated transaction, or the type of audit opinion that might be rendered on
the Company's financial statements; or any matter that was the subject of a
disagreement or event as defined at Item 304 (a)(1)(iv) of Regulation S-K.

M & B audited the Company's financial statements for the fiscal years ended
December 31, 2000 and 2001. M & B's reports for these periods did not contain an
adverse opinion or a disclaimer of opinion, nor were they qualified as to audit
scope or accounting principles.

During the fiscal years ended December 31, 2000 and 2001 and the interim
period from January 1, 2001 through February 13, 2003, there were no
disagreements with M & B on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of M & B, would have caused
such firm to make reference to the subject matter of the disagreements in
connection with its report on the Company's financial statements. In addition,
there were no such events as described under Item 304(a)(1)(IV)(B) of regulation
S-K during the fiscal years ended December 31, 2000 and 2001 and the interim
period from January 1, 2001 through February 13, 2003.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures:

The Company's Chief Executive Officer and its Chief Financial Officer
reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e) as of
the end of the period covered by this Form 10-K and have concluded, based
on that evaluation, that as of such dates, the Company's disclosure
controls and procedures were not effective. In addition, the Company's
automated financial reporting systems are overly complex, poorly integrated
and inconsistently implemented.

The Company's Chief Executive Officer and Chief Financial Officer arrived
at this conclusion based on a number of factors, including the fact that
the Company's system of internal control requires considerable manual
intervention to do the following: (1) properly record accounts payable to
vendors for purchases of inventory, (2)to properly record adjustments to
inventory per the general ledger to physical inventory balances, (3) to
properly record inventory adjustments to the lower of cost or market using
the average inventory method, (4) to have adequate controls over interim
physical inventory procedures, and (5) to generate timely and accurate
financial information to allow for the preparation of timely and complete
financial statements. The Company did not have an adequate financial
reporting process because of the aforementioned material weaknesses,
including the difficulty in identifying and assembling all relevant
contemporaneous documentation for ongoing business transactions, and
significant turnover in the Company's financial staff. Accordingly, the
Company's Chief Executive Officer and Chief Financial Officer concluded
that there were significant deficiencies, including material weaknesses, in
the Company's internal controls over its financial reporting at the end of
the period ended December 31, 2005.

A significant deficiency should be classified as a material weakness if, by
itself or in combination with other control deficiencies, it results in
more than a remote likelihood that a material misstatement in the company's
annual or interim financial statements will not be prevented or detected.

To address these significant deficiencies and material weaknesses, the
Company took the following corrective actions:

While the Company is searching for a new accounting manager, the Company
has retained a financial consultant and former CPA to oversee the day to
day management of the accounting department. The Company has recently added
additional personnel to complete the day to day accounting tasks. The
Company needs and is seeking to immediately hire an Accounting Manager and
additional personnel to focus on financial accounting and reporting issues.

Each month, the Company's Accounting Manager supervises the reconciliation
of the accounts payable subsidiary ledgers with the general ledger, and
approves adjustments to inventory based on reconciliation of the general
ledger to physical inventory counts. Each quarter, the Accounting Manager

records inventory adjustments to the lower of cost or market. These tasks
will be supervised by the financial consultant until the new Accounting
Manager is hired.

Every month, the Accounting Manager reconciles the bank accounts and
compares the bank reconciliation with the balance per general ledger and
the daily cash report, reviews the recording of accounts payable to vendors
for purchases of inventory, and prepares financial statements with a
complete set of adjustments. These tasks will be supervised by the
financial consultant until the new Accounting Manager is hired.

A complete inventory is physically counted and reconciled at the end of
every month.

(b) Changes in internal control over financial reporting:

In conjunction with the audit of the Company's financial statements for the
year ended December 31, 2005, the Company's Chief Executive Officer and its
Chief Financial Officer reviewed and evaluated the corrective actions
listed above. The officers believed that such corrective actions minimize
the risk of material misstatement, but the corrective actions continued to
have significant deficiencies.

The Company is working quickly to hire an Accounting Manager and additional
finance personnel. The Chief Executive Officer and the Chief Financial
Officer are satisfied that with the personnel in place, and with the
additional efforts of the Financial Consultant/ CPA, that the books and
records portray a completely accurate picture of the Company's financial
position and that all transactions are being captured and reported as
required. The Company believes that once the new software is installed and
operational, and the new Accounting Manager is hired, all significant
deficiencies will have been addressed and corrected.

ITEM 9B. OTHER INFORMATION- NONE

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and text sets forth the names and ages of all the
Company's directors and executive officers and the key management personnel as
of March 31, 2006. The Company's Board of Directors is comprised of only one
class. All of the directors serve until the next annual meeting of stockholders
and until their successors are elected and qualified, or until their earlier
death, retirement, resignation or removal. Executive officers serve at the
discretion of the Board of Directors, and are appointed to serve until the first
Board of Directors meeting following the annual meeting of stockholders. Also
provided is a brief description of the business experience of each director and
executive officer and the key management personnel during the past five years
and an indication of directorships held by each director in other companies
subject to the reporting requirements under the Federal securities laws.

--------------------------- -------- -------------------------------------------
Name Age Position Held
--------------------------- -------- -------------------------------------------

Ming Tung Chok 45 Chief Executive Officer and Director
--------------------------- -------- -------------------------------------------
Nancy Chu 49 Chief Financial Officer, Secretary and
Director
--------------------------- -------- -------------------------------------------
Paul F. Risberg 44 Director
--------------------------- -------- -------------------------------------------
Chung Chin Keung 39 Director
--------------------------- -------- -------------------------------------------
Zhi Yang Wu 35 Director

--------------------------- -------- -------------------------------------------

Ming Tung Chok has served as the President, Chief Executive Officer and
Director of the Company since October 25, 2002. Prior to serving in this
capacity, Mr. Chok was the Vice President of Engineering of SOYO Group, Inc. for
the past five years. Mr. Chok received his Bachelor Degree in Electrical
Engineering from the California State University, Long Beach. Mr. Chok is
married to Ms. Nancy Chu who is a Director, the Chief Financial Officer and the
Secretary of the Company.

Nancy Chu has served as the Chief Financial Officer, the Secretary and
Director of the Company since October 25, 2002. Prior to serving in this
capacity, Ms. Chu was the Vice President of Operations of SOYO Group, Inc. for
the past 5 years. Ms. Chu holds a Bachelor Degree in Accounting & Statistics
from the Sji Jiang College, Taiwan R.O.C. Ms. Chu is married to Mr. Chok who is
the President, Chief Executive Officer and a Director of the Company.

Chung Chin Keung was appointed in October 2005 as an independent
non-executive director and audit committee member. Mr. Chung has more than 14
years commercial experience, including more than 10 years in accounting and
finance for publicly listed companies in various countries. Mr. Chung is
currently the chief finance officer of KPI Co. Ltd. (0605, Hong Kong Stock
Exchange), a listed company in Hong Kong. Mr. Chung holds a Master of Business
Administration from the University of Manchester, England.

Paul F. Risberg was appointed in October 2005 as an independent non-executive
director and audit committee member. Mr. Risberg has more than 13 years of
investment banking and securities market expertise. He is currently the
president of Altenergy Inc., an alternative energy service company that retails
and installs energy Equipment. From 1998 until 2002, Mr. Risberg served as
divisional vice president of Fahnestock & Co. Inc. (now known as Oppenheimer &
Co.), one of the oldest New York Stock Exchange firms.

Zhi Yang Wu was appointed in October 2005 as an independent non-executive
director and compensation committee member. Mr. Wu is the vice chairman of Qiao
Xing Universal Telephone Inc. (Nasdaq: XING), one of China's largest
manufacturers and distributors of telecommunication products. Mr. Wu currently
also serves as chairman & CEO of CEC Telecom, one of the largest mobile phone
manufacturers in China and a subsidiary of Qiao Xing. Mr. Wu currently oversees

CEC Telecom with annual sales in excess of $200 million. Mr. Wu received a
Diploma in Business Management from Huizhou University of China, and has
completed graduate studies in business management at Beijing University.

Daniel Hou was appointed in October 2005 as an independent non-executive
director and audit compensation member. Mr. Hou has served as the president of
Reyes Electronics Inc., a computer peripheral supplier he founded in 1986. Mr.
Hou received a B.A. degree in chemistry from National Chung-Hsing University,
Taiwan, in 1973 and a master's degree in material science from the University of
Utah in 1978. Mr. Hou resigned from the Board of Directors effective December
31, 2005 for medical reasons.

Each Director received 10,000 unregistered shares of the Company's common stock
in 2005. The Directors receive no other compensation for serving on the Board of
Directors, but are reimbursed for any out-of-pocket expenses incurred in
attending board meetings, and may be compensated for other work done on the
Company's behalf.

Family Relationships.

Ming Tung Chok, President and CEO, and Nancy Chu, CFO and Secretary, are
husband and wife. Andy Chu, the President and majority shareholder of SOYO
Taiwan, is the brother of Nancy Chu.

Involvement in Legal Proceedings.

To the best of the Company's knowledge, during the past five years, none of
the following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any type
of business, securities or banking activities; and (4) being found by a court of
competent jurisdiction (in a civil action), the SEC or the Commodities Futures
Trading Commission to have violated a federal or state securities or commodities
law, and the judgment has not been reversed, suspended or vacated.

Section 16(a) Beneficial Ownership Compliance.

The Company does not have any shares registered under Section 12 of the
Securities Act and therefore the owners of the Company's equity securities are
not required to report their beneficial ownership under Section 16(a) of the
Exchange Act.

Audit Committee

The Audit Committee of the Board of Directors is comprised of Mr. Risberg and
Mr. Keung. The first Audit Committee meeting is scheduled to coincide with the
Company's 2006 Annual meeting, the date of which has not yet been set.

Communications with the Board

Any shareholder may communicate directly with the Board of Directors. The
Board of Directors has established the following system to receive, track and
respond to communications from shareholders addressed to the Company's Board of
Directors and its committees and members. Any shareholder may address his or her
communication to the Board of Directors, or an individual Board member and send
the communication addressed to the recipient group or individual, care of SOYO
Group, Inc., Corporate Secretary, 1420 South Vintage Ave., Ontario, CA 91761.
The Corporate Secretary will review all communications and deliver the
communications to the appropriate party in the Corporate Secretary's discretion.
The Corporate Secretary may take additional action or respond to communications
in accordance with instructions from the recipient of the communication.

Code of Ethics

We believe that good corporate governance practices promote the principles
of fairness, transparency, accountability and responsibility and will ensure
that our Company is managed for the long-term benefit of its shareholders.
During the past year, we have continued to review our corporate governance
policies and practices and to compare them to those suggested by various
authorities in corporate governance and the practices of other public companies.
Accordingly, in March 2004, the Board adopted a Code of Ethics and Conduct. You
may obtain a copy of the Code of Ethics and Conduct and other information
regarding our corporate governance practices by writing to the Corporate
Secretary, 1420 South Vintage Ave., Ontario, CA 91761.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid during fiscal year
ended December 31, 2005, 2004 and 2003 to the Company's Chief Executive Officer
and Chief Financial Officer.

SUMMARY COMPENSATION TABLE

------------------------ ---- -------- ----- ------------------
Name Year Salary Bonus Other Compensation
------------------------ ---- -------- ----- ------------------
Ming Tung Chok 2005 $144,000 N/A N/A
President and CEO 2004 $144,000
2003 $144,000
------------------------ ---- -------- ----- ------------------
Nancy Chu 2005 $120,000
Chief Financial 2004 $120,000
Officer 2003 $120,000
------------------------ ---- -------- ----- ------------------

Through December 31, 2004, the Company did not maintain any employee
benefit plans. On March 7, 2005, the Company registered its 2005 Stock
Compensation Plan on Form S-8 with the Securities and Exchange Commission,
registering on behalf of our employees, officers, directors and advisors up to
5,000,000 shares of our common stock purchasable by them pursuant to common
stock options granted under our 2005 Stock Compensation Plan.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth the number of shares of common stock
beneficially owned as of March 31, 2006 by (i) those persons or groups known to
the Company who beneficially own more than 5% of the Company's common stock;
(ii) each director and director nominee; (iii) each executive officer whose
compensation exceeded $100,000 in the fiscal year ended December 31, 2005; and,
(iv) all directors and executive officers as a group. The information is
determined in accordance with Rule 13(d)-3 promulgated under the Exchange Act
based upon information furnished by persons listed or contained in filings made
by them with the Securities and Exchange Commission by information provided by
such persons directly to the Company. Except as indicated below, the
stockholders listed possess sole voting and investment power with respect to
their shares.

----------------------------- ------------------------ -------------------------
Name/Title/Address(1) Total Number of Shares Percentage Ownership(2)
----------------------------- ------------------------ -------------------------
Ming Tung Chok 12,000,000 24.50%
----------------------------- ------------------------ -------------------------
Nancy Chu 14,209,548 29.00%
----------------------------- ------------------------ -------------------------
Paul F. Risberg 19,000 .04%
----------------------------- ------------------------ -------------------------
Chung Chin Keung 10,000 .02%
----------------------------- ------------------------ -------------------------
Zhi Yang Wu 10,000 .02%
----------------------------- ------------------------ -------------------------
All officers and directors 26,248,548 53.58%
as a group (3)
----------------------------- ------------------------ -------------------------
Urmston Capital (4) 4,054,693 8.28%
----------------------------- ------------------------ -------------------------

(1) Unless otherwise provided, the addresses of these holders is 1420 S.
Vintage Ave. Ontario California 91761.

(2) The percentage ownership is based upon 48,987,511 shares outstanding on
March 30, 2006.

(3) Since Ming Tung Chok and Nancy Chu are husband and wife, they are
considered beneficial owners of each others common stock. Collectively, they own
26,209,548 shares and are each considered beneficial owners of 26,209,548
shares.

(4) The address for Urmston Capital is 148 Xinglung Road, Sec. 3, WenShan
District, Taipei, Taiwan R.O.C.

As the result of an agreement between SOYO Taiwan and an unrelated third
party in 2004 2,500,000 shares of Class B preferred stock were issued by the
Company to the unrelated third party in exchange for the forgiveness of a
$12,000,000 long term payable.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Ming Tung Chok, the President and Chief Executive Officer of the Company,
is married to Nancy Chu, the Chief Financial Officer of the Company. Andy Chu,
the President and majority shareholder of SOYO Taiwan, is the brother of Nancy
Chu.

The following is a summary of the Company's transactions and balances with
SOYO Taiwan as of and for the years ended December 31, 2005, 2004 and 2003:

December 31,
----------------------------------------------- ---------- ----------
2005 2004
----------------------------------------------- ---------- ----------
Accounts payable to SOYO Taiwan $0 $1,314,910
----------------------------------------------- ---------- ----------
Long-term payable to SOYO Taiwan $0 $0
----------------------------------------------- ---------- ----------

Years Ended December 31,
------------------------------------- ----------- ----------- -----------
2004 2003 2002
------------------------------------- ----------- ----------- -----------
Purchases from SOYO Taiwan $0 $14,004,259 $20,188,354
------------------------------------- ----------- ----------- -----------
Payments to SOYO Taiwan $873,050 $19,154,603 $18,842,244
------------------------------------- ----------- ----------- -----------

During the years ended December 31, 2005, 2004 and 2003, the Company
received price protection from SOYO Taiwan of $0, $0 and $651,215 respectively,
which reduced inventory and accounts payable accordingly.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Independent Accountant Fees

The following table sets forth the fees for professional audit services
rendered by Vasquez & Company LLP for the audit of the Company's annual
financial statements for the fiscal years 2005 and 2004.

------------------------------------- --------- ---------
2005 2004
------------------------------------- --------- ---------

Audit Fees (1) $ 107,000 $ 143,510
------------------------------------- --------- ---------
Tax Fees 13,000 15,640

------------------------------------- --------- ---------
All Other
Fees
------------------------------------- --------- ---------

Total $ 120,000 $ 159,150
Fees

------------------------------------- --------- ---------

(1) Includes annual audit fees and fees for preissuance review of quarterly
filings.

Grobstein, Horwath & Company, the Company's predecessor auditors, charged $6,000
each year for a review and reissuance of the Company's 2003 audit report.

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference.

Exhibit Description
Number

3.1 Articles of Incorporation, Incorporated herein by reference to the
Definitive Schedule 14A File No. 333-42036, filed on September 27,
2002.

3.2 Bylaws, Incorporated herein by reference to the Definitive Schedule
14A File No. 333-42036, filed on September 27, 2002.

4.1 Agreement and Plan of Reorganization, Incorporated herein by reference
to the Form 8-K, File No. 333-42036, filed on October 30, 2002.

10.1 Commitment Supply Agreement dated October 15, 2002, , Incorporated
herein by reference to the Form 10-K, File No. 333-42036, filed on
April 15, 2003

10.2 Accounts Payable Deferral Agreement dated October 24,2002,
Incorporated herein by reference to the Form 10-K, File No. 333-42036,
filed on April 15, 2003

10.3 Exclusive Distribution Agreement dated October 24, 2002, Incorporated
herein by reference to the Form 10-K, File No. 333-42036, filed on
April 15, 2003

10.4 SOYO Group Agreement with China Unicom dated February 1, 2004

10.5 Office Lease at 140 S. Vintage Ave., Ontario, CA dated August 21, 2003

21.1 Subsidiaries of the Company, Incorporated herein by reference to the
Form 10-K, File No. 333-42036, filed on April 15, 2003

23.1 Consent of Independent Registered Public Accounting Firm, Vasquez &
Company LLP

23.2 Consent of Independent Registered Public Accounting Firm, Grobstein,
Horwath & Company LLP

31.1 CERTIFICATION REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(d) AND UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002*

31.2 CERTIFICATION REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(d) AND UNDER
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

99.1 Sarbanes-Oxley Act Section 906 Certification

*Filed herein

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

SOYO GROUP, INC.

Dated: February 26, 2007 By /s/ Ming Tung Chok
---------------------------------------------
Name: Ming Tung Chok
Title: President and Chief Executive Officer

In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

Dated: February 26, 2007 By /s/ Ming Tung Chok
---------------------------------------------
Name: Ming Tung Chok
Title: President, Chief Executive Officer and
Director

Dated: February 26, 2007 By /s/ Nancy Chu
---------------------------------------------
Name: Nancy Chu
Title: Chief Financial Officer, Secretary and

Dated: February 26, 2007 By /s/ Paul F. Risberg
---------------------------------------------
Name: Paul F. Risberg
Title: Director

Dated: February 26, 2007 By /s/ Chung Chin Keung
---------------------------------------------
Name: Chung Chin Keung
Title: Director

Dated: February 26, 2007 By /s/ Zhi Yang Wu
---------------------------------------------
Name: Zhi Yang Wu
Title: Director