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

FORM 10-QSB

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number 000-32585

SUNRISE REAL ESTATE GROUP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)


Texas
 
75-2713701
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

Suite 701, No. 333, Zhaojiabang Road
Shanghai, PRC 200032
(Address of principal executive offices)

Issuer's telephone number: +  86-21-6422-0505

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: November 10, 2006 - 23,001,614 shares of Common Stock

Transitional Small Business Disclosure Format (check one): Yes o No x




FORM 10-QSB
 
For the Quarter Ended September 30, 2006
 
INDEX  
   
Page
 
PART I. FINANCIAL INFORMATION  
   
3
 
Item 1.   Financial Statements  
   
3
 
Consolidated Balance Sheets  
   
3
 
Consolidated Statements of Operations  
   
4
 
Consolidated Statements of Cash Flows  
   
5
 
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations  
   
15
 
Item 3.   Controls and Procedures  
   
22
 
     
 
 
PART II. OTHER INFORMATION  
   
23
 
Item 1.   Legal Proceedings  
   
23
 
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds  
   
23
 
Item 3.   Defaults Upon Senior Securities  
   
23
 
Item 4.   Submission of Matters to a Vote of Security Holders  
   
23
 
Item 5.   Other Information  
   
23
 
Item 6.   Exhibits  
   
23
 
     
 
 
SIGNATURES  
   
24
 
 
2
 
PART I - FINANCIAL INFORMATION

ITEM 1. F INANCIAL STATEMENTS
 
Sunrise Real Estate Group, Inc.

Consolidated Balance Sheets
( Expressed in US Dollars)
   
September 30,
2006
 
December 31,
2006
 
   
(Unaudited)
 
ASSETS
             
               
Current assets
             
Cash and cash equivalents
 
$
878,637
 
$
855,588
 
Accounts receivable
   
3,139,678
   
1,359,246
 
Deposits for acquisition of properties (Note 7)
   
592,539
   
4,150,476
 
Promissory deposits (Note 3)
   
252,886
   
247,924
 
Amounts due from venturers (Note 10)
   
1,896,949
   
820,040
 
Other receivables and deposits (Note 4)
   
811,279
   
168,709
 
               
Total current assets
   
7,571,968
   
7,601,983
 
               
Plant and equipment - net (Note 5)
   
541,719
   
531,458
 
Deferred tax assets (Note 6)
   
189,467
   
144,333
 
Deposits for acquisitions of properties (Note 7)
   
12,869,620
   
7,488,899
 
Goodwill
   
204,849
   
187,783
 
               
Total assets
 
$
21,377,623
 
$
15,954,456
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
             
               
Current liabilities
             
Bank loans (Note 8)
 
$
1,385,556
 
$
1,073,650
 
Promissory notes payable (Note 9)
   
1,012,500
   
1,123,962
 
Accounts payable
   
28,847
   
73,522
 
Amounts due to venturers (Note 10)
   
2,072,810
   
-
 
Amount due to director (Note 11)
   
176,813
   
169,416
 
Other payables and accrued expenses (Note 12)
   
630,728
   
1,914,622
 
Other tax payable (Note 13)
   
172,185
   
158,439
 
Income tax payable
   
1,235,322
   
511,700
 
               
Total current liabilities
   
6,714,761
   
5,025,311
 
               
Commitments and contingencies (Note 15)
             
               
Long-term bank loans (Note 8)
   
4,723,826
   
5,306,506
 
               
Minority interest
   
261,619
   
223,580
 
               
Shareholders’ equity
             
Common stock, par value $0.01 per share; 200,000,000 shares authorized; 23,001,614 and 21,636,614 shares issued and outstanding as of September 30, 2006 and December 31, 2006, respectively
   
230,016
   
216,366
 
Additional paid-in capital
   
2,922,997
   
2,233,844
 
Statutory reserve (Note 16)
   
241,664
   
241,664
 
Retained earnings
   
5,941,851
   
2,559,836
 
  Accumulated other comprehensive income (Note 17)
   
340,889
   
147,349
 
               
Total shareholders’ equity
   
9,677,417
   
5,399,059
 
               
Total liabilities and shareholders’ equity
 
$
21,377,623
 
$
15,954,456
 

See accompanying notes to consolidated financial statements.
 
3
 
Sunrise Real Estate Group, Inc.

Consolidated Statements of Operations

(Expressed in US Dollars)
   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2006
 
2005
 
2006
 
2005
 
                   
       
(Unaudited)
     
                   
Net revenue
 
$
2,760,874
 
$
1,978,409
 
$
12,715,223
 
$
6,206,707
 
                           
Cost of revenue
   
(1,511,759
)
 
(759,297
)
 
(5,111,246
)
 
(2,017,725
)
                           
Gross profit
   
1,249,115
   
1,219,112
   
7,603,977
   
4,188,982
 
                           
Operating expenses
   
(259,381
)
 
(271,764
)
 
(697,128
)
 
(823,195
)
                           
General and administrative expenses
   
(720,890
)
 
(647,113
)
 
(2,071,733
)
 
(1,802,876
)
                           
Operating profit
   
268,844
   
300,235
   
4,835,116
   
1,562,911
 
                           
Interest income
   
2,478
   
2,353
   
5,559
   
7,630
 
                           
Other income, net
   
2,269
   
13,084
   
13,017
   
66,743
 
                           
Interest expenses
   
(137,202
)
 
(51,423
)
 
(393,955
)
 
(124,341
)
                           
Profit before income tax and minority interest
   
136,389
   
264,249
   
4,459,737
   
1,512,943
 
                           
Income tax
   
(149,933
)
 
(93,580
)
 
(1,045,457
)
 
(256,869
)
                           
(Loss)/profit before minority interest
   
(13,544
)
 
170,669
   
3,414,280
   
1,256,074
 
                           
Minority interest
   
25,339
   
(33,108
)
 
(32,265
)
 
(57,632
)
                           
Net profit
 
$
11,795
 
$
137,561
 
$
3,382,015
 
$
1,198,442
 
                           
Earnings per share
                         
- basic and fully diluted
 
$
0.00
 
$
0.01
 
$
0.15
 
$
0.06
 
                           
Weighted average common shares outstanding
                         
- basic and fully diluted
   
23,001,614
   
21,636,614
   
23,001,614
   
21,636,614
 

See accompanying notes to consolidated financial statements.

4

Sunrise Real Estate Group, Inc.
Consolidated Statements of Cash Flows
Increase/(Decrease) in Cash and Cash Equivalents
(Expressed in US Dollars)
   
Nine Months Ended September 30,
 
   
2006
 
2005
 
   
(Unaudited)
 
Cash flows from operating activities
 
 
 
 
 
Net income
 
$
3,382,015
 
$
1,198,442
 
Adjustments to reconcile net income to
           
net cash provided by/(used in) operating activities
             
Depreciation of plant and equipment
   
108,469
   
98,559
 
Loss on disposal of fixed assets
   
2,108
   
12,243
 
Deferred tax credit
   
(42,245
)
 
-
 
Minority interest
   
32,265
   
57,632
 
Change in:
             
Accounts receivable
   
(3,983,594
)
 
821,765
 
Promissory deposits
   
-
   
126,865
 
Other receivables and deposits
   
(629,480
)
 
(37,617
)
Accounts payable
   
(45,586
)
 
(191,172
)
Amounts with venturers
   
992,247
   
-
 
Deferred commission income
   
278,207
   
-
 
Other payables and accrued expenses
   
(595,580
)
 
(1,274,960
)
Interest payable on promissory notes
   
12,500
   
-
 
Interest payable on amount due to director
   
7,397
   
-
 
Other tax payable
   
10,446
   
(86,702
)
Income tax payable
   
704,710
   
1,858
 
Net cash provided by operating activities
   
233,879
   
726,913
 
               
Cash flows from investing activities
             
Acquisition of plant and equipment
   
(110,335
)
 
(65,775
)
Proceeds from disposal of plant and equipment
   
-
   
4,777
 
Deposits paid for acquisition of properties
   
(2,085,936
)
 
(798,826
)
Refund of deposits paid for acquisition of properties
   
2,488,916
   
-
 
Acquisition of equity interest in subsidiary
   
(60,000
)
 
39,714
 
Net cash provided by/(used in) investing activities
   
232,645
   
(820,110
)
               
Cash flows from financing activities
             
Bank loan obtained
   
2,085,936
   
(195,434
)
Bank loans repayment
   
(2,479,572
)
 
-
 
Repayment of promissory note
   
(723,962
)
 
-
 
Proceeds from promissory note
   
600,000
   
120,824
 
Capital contribution from minority interest
   
47,469
   
12,082
 
Advances from director
   
-
   
106,432
 
Net cash (used in)/provided by financing activities
   
(470,129
)
 
43,904
 
               
Effect of exchange rate changes on cash and cash equivalents
   
26,654
   
1,521
 
                         
Net increase/(decrease) in cash and cash equivalents
   
23,049
   
(47,772
)
Cash and cash equivalents at beginning of period
   
855,588
   
969,913
 
Cash and cash equivalents at end of period
 
$
878,637
 
$
922,141
 
               
Supplemental disclosure of cash flow information
             
Cash paid during the period:
             
Income tax paid
   
364,914
   
253,679
 
Interest paid
   
381,455
   
117,362
 
Non-cash activities (Note 20)
             
 
See accompanying notes to consolidated financial statements.
 
5
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in US Dollars)

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Sunrise Real Estate Development Group, Inc. (“CY-SRRE”) was established in the Cayman Islands on April 30, 2004 as a limited liability company. CY-SRRE was wholly owned by Ace Develop Properties Limited (“Ace Develop”), of which Lin Chi-Jung, an individual, is the principal and controlling shareholder. Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”) was established in the People’s Republic of China (the “PRC”) on August 14, 2001 as a limited liability company. SHXJY was originally owned by a Taiwanese company, of which the principal and controlling shareholder was Lin Chi-Jung. On June 8, 2004, all the fully paid up capital of SHXJY was transferred to CY-SRRE. On June 25, 2004 SHXJY and two individuals established a subsidiary, namely, Suzhou Xin Ji Yang Real Estate Consultation Company Limited (“SZXJY”) in the PRC, at which point in time, SHXJY held a 90% equity interest in SZXJY. On December 24, 2004, SHXJY acquired 85% of equity interest in Beijing Xin Ji Yang Real Estate Consultation Company Limited (“BJXJY”), a PRC company incorporated on April 16, 2003 with limited liability. On August 9, 2005, SHXJY sold a 10% equity interest in SZXJY to a company owned by a director of SZXJY, and transferred a 5% equity interest in SZXJY to CY-SRRE. Following the disposal and the transfer, CY-SRRE effectively holds 80% equity interest in SZXJY.

LIN RAY YANG Enterprise Ltd. (“LRY”) was established in the British Virgin Islands on November 13, 2003 as a limited liability company. LRY was owned by Ace Develop, Planet Technology Corporation (“Planet Tech”) and Systems & Technology Corporation (“Systems Tech”). On February 5, 2004, LRY established a wholly owned subsidiary, Shanghai Shang Yang Real Estate Consultation Company Limited (“SHSY”) in the PRC as a limited liability company. On January 10, 2005, LRY and a PRC third party established a subsidiary, Suzhou Gao Feng Hui Property Management Company Limited (“SZGFH”), in the PRC, with LRY holding 80% of the equity interest in SZGFH. On May 8, 2006, LRY acquired 20% of the equity interest in SZGFH from the third party. Following the acquisition, LRY effectively holds 100% of the equity interest in SZGFH.

SHXJY, SZXJY, BJXJY, SHSY and SZGFH commenced operations in November 2001, June 2004, January 2004, February 2004 and January 2005, respectively. Each of SXJY, SZXJY, BJXJY, SHSY and SZGFH has been granted a twenty-year operation period from the PRC, which can be extended with approvals from relevant PRC authorities.

On August 31, 2004, Sunrise Real Estate Group, Inc. (“SRRE”), CY-SRRE and Lin Chi-Jung, an individual and agent for the beneficial shareholder of CY-SRRE, i.e., Ace Develop, entered into an exchange agreement under which SRRE issued 5,000,000 shares of common stock to the beneficial shareholder or its designees, in exchange for all outstanding capital stock of CY-SRRE. The transaction closed on October 5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the President of CY-SRRE and the principal and controlling shareholder of Ace Develop.

Also on August 31, 2004, SRRE, LRY and Lin Chi-Jung, an individual and agent for beneficial shareholders of LRY, i.e., Ace Develop, Planet Tech and Systems Tech, entered into an exchange agreement under which SRRE issued 10,000,000 shares of common stock to the beneficial shareholders, or their designees, in exchange for all outstanding capital stock of LRY. The transaction was closed on October 5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the President of LRY and the principal and controlling shareholder of Ace Develop. Regarding the 10,000,000 shares of common stock of SRRE issued in this transaction, SRRE issued 8,500,000 shares to Ace Develop, 750,000 shares to Planet Tech and 750,000 shares to Systems Tech.

As a result of the acquisition, the former owners of CY-SRRE and LRY hold a majority interest in the combined entity. Generally accepted accounting principles require in certain circumstances that a company whose shareholders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” arrangement whereby CY-SRRE and LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes. All shares and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of CY-SRRE and LRY.

6
 
SRRE was initially incorporated in Texas on October 10, 1996, under the name of Parallax Entertainment, Inc. (“Parallax”). On December 12, 2003, Parallax changed its name to Sunrise Real Estate Development Group, Inc. On April 25, 2006, Sunrise Estate Development Group, Inc. filed Articles of Amendment with the Texas Secretary of State, changing the name of Sunrise Real Estate Development Group, Inc. to Sunrise Real Estate Group, Inc., effective from May 23, 2006.

SRRE and its subsidiaries, namely, CY-SRRE, LRY, SHXJY, SZXJY, BJXJY, SHSY and SZGFH are sometimes hereinafter collectively referred to as “the Company.”

The principal activities of the Company are the provision of property brokerage services, real estate marketing services, property leasing services and property management services in the PRC .
 
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting and Principles of Consolidation

The consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America and present the financial statements of SRRE and its subsidiaries, CY-SRRE, LRY, SHXJY, SZXJY, BJXJY, SHSY and SZGFH. All inter-company transactions and balances have been eliminated.

Foreign Currency Translation and Transactions

The functional currency of SRRE, CY-SRRE and LRY is United States Dollars (“US$”) and the financial records are maintained and the financial statements prepared in US$. The functional currency of SHXJY, SZXJY, BJXJY, SHSY and SZGFH is Renminbi (“RMB”) and the financial records are maintained and the financial statements prepared in RMB.

Foreign currency transactions during the period are translated into each company’s denominated currency at the exchange rates ruling at the transaction dates. Gain and loss resulting from foreign currency transactions are included in the consolidated statement of operations. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated into each company’s denominated currency at period end exchange rates. All exchange differences are dealt with in the consolidated statements of operations.

The financial statements of the Company’s operations based outside of the United States have been translated into US$ in accordance with SFAS 52. Management has determined that the functional currency for each of the Company’s foreign operations is its applicable local currency. When translating functional currency financial statements into US$, period-end exchange rates are applied to the consolidated balance sheets, while average period rates are applied to consolidated statements of operations. Translation gains and losses are recorded in translation reserve as a component of shareholders’ equity.

Exchange rate between US$ and RMB had a little fluctuation during the periods presented. The rates ruling as of September 30, 2006 and December 31, 2005 are US$1: RMB7.9087 and US$1: RMB8.067, respectively.

Plant, Equipment and Depreciation

Plant and equipment are stated at cost. Depreciation is computed using the straight-line method to allocate the cost of depreciable assets over the estimated useful lives of the assets as follows:

 
Estimated Useful Life (in years)
 
     
Furniture and fixtures
5-10
 
Computer and office equipment
5
 
Motor vehicles
5
 

Maintenance, repairs and minor renewals are charged directly to the statement of operations as incurred. Additions and improvements are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in the statement of operations.
 
7
 
Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Advertising Costs

All advertising costs incurred in the promotion of the Company’s real estate projects are expensed as incurred.

Revenue Recognition

Agency commission revenue from property brokerage is recognized when the property developer and the buyer complete a property sales transaction, which is normally at the time when the property developer receives from the buyer a portion of the sales proceeds in accordance with the terms of the relevant property sales agreement, or when we can confirm that the balance of the bank loan to the buyer has been approved, or recognized under the sales schedule of agency sales agreement with developer.

Commission revenue from underwriting service is recognized when the property developer and the buyer complete a property sales transaction, which is normally at the time when the property developer has confirmed that the predetermined level of sales proceeds have been received from buyers.

Revenue from marketing consultancy services is recognized when services are provided to clients.

Net Earnings per Common Share

The Company computes net earnings per share in accordance with SFAS No. 128, “Earnings per Share.” Under the provisions of SFAS No. 128, basic net earnings per share is computed by dividing the net earnings available to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net earnings per share gives effect to common stock equivalents, however; potential common stock in the diluted EPS computation is excluded in net loss periods, as their effect is anti-dilutive.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Guarantees

The Company accounts for its liability for its obligations under a guarantee in accordance with FASB Interpretation No. 45, (FIN45) Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others. FIN 45 requires that guarantors recognize a liability for certain guarantees at the fair value of the guaranteed obligation at the inception of the guarantee, even if the likelihood of performance under the guarantee is remote.

Non-employee stock based compensation

The cost of stock based compensation awards issued to non-employees for services are recorded at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in Emerging Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18").

8
 
NOTE 3 - PROMISSORY DEPOSITS

The balance includes the deposits of $252,886 placed with several property developers in respect of a number of real estate projects where the Company is appointed as sales agent.


NOTE 4 - OTHER RECEIVABLES AND DEPOSITS

   
September 30, 2006
 
December 31, 2005
 
   
(unaudited)
 
Advances to staff
 
$
255,954
 
$
13,322
 
Rental deposits
   
52,475
   
54,580
 
Prepayments
   
133,417
   
-
 
Prepaid rental
   
148,288
   
-
 
Other receivables
   
221,145
   
100,807
 
   
$
811,279
 
$
168,709
 


NOTE 5 - PLANT AND EQUIPMENT, NET

   
 
 
 
 
   
September 30, 2006
 
December 31, 2005
 
   
(unaudited)
 
Furniture and fixtures
 
$
59,411
 
$
57,811
 
Computer and office equipment
   
215,761
   
182,867
 
Motor vehicles
   
619,001
   
532,887
 
     
894,173
   
773,565
 
Less: Accumulated depreciation
   
(352,454
)
 
(242,107
)
   
$
541,719
 
$
531,458
 


NOTE 6 - DEFERRED TAX ASSETS

The components of deferred tax assets are as follows:

   
Tax effect on deferred commission income (Note 7)
 
   
(unaudited)
 
        
The balance of deferred tax assets on December 31, 2005
 
$
144,333
 
Tax effect on deferred commission income for the period
   
42,245
 
Effect on change in exchange rate
   
2,889
 
The balance of deferred tax assets on September 30, 2006
 
$
189,467
 

9
 
NOTE 7 - DEPOSITS FOR ACQUISITION OF PROPERTIES

   
September 30, 2006
 
December 31, 2005
 
   
(unaudited)
 
Deposits paid for acquisition of properties
 
$
14,725,269
 
$
12,601,596
 
Less: Deferred commission income from properties acquired
   
(1,263,110
)
 
(962,221
)
   
$
13,462,159
 
$
11,639,375
 

During the past two years, the Company entered into sales and purchase agreements to acquire two floors and nine units of a commercial building at an aggregate consideration of $14,725,269, which is under development in Suzhou, the PRC. As of September 30, 2006, all the deposits have been paid to the property developer. As the Company acts as that property developer’s sole distribution agent and earns commission income, the corresponding commission income of $1,263,110 generated from the properties purchased by the Company was therefore deferred and offset against the deposits paid. The properties under development were completed on March 31, 2006, and title to these properties has not been transferred to the Company as of September 30, 2006. The Company decided that three units will be held for sale, one floor will be held for the Company’s own use, and the remaining properties will be held for long-term investment purposes. Accordingly, deposits of $849,009 paid for the properties available for sale were classified as current assets.


NOTE 8 - BANK LOANS

Bank loans are guaranteed by the property developer mentioned in Note 7 above, bear interest at prevailing rates ranging from 5.85% to 6.435% per annum, and are repayable within five years by monthly installments. The bank loans will be secured by the properties as mentioned in Note 7 above when the title of the properties is transferred to the Company.


NOTE 9 - PROMISSORY NOTES PAYABLE

The balance includes a promissory note of $400,000 and accrued interest of $5,000 thereon. The promissory note of $400,000 bears interest at a rate of 5% per annum. The promissory note is unsecured and the term of repayment is not specifically defined .

The balance includes a promissory note of $300,000 and accrued interest of $3,750 thereon. This promissory note of $300,000 bears interest at a rate of 5% per annum. This promissory note is unsecured and the term of repayment is not specifically defined .

The balance includes another promissory note of $300,000 and accrued interest of $3,750 thereon. This promissory note of $300,000 bears interest at a rate of 15% per annum. This promissory note is unsecured and will be repayable before December 27, 2006 .


NOTE 10 - AMOUNTS DUE FROM/TO VENTURERS

The Company has entered into co-operation agreements with two venturers (one of them is an independent third party; the other is the Company’s ex-director, Chang Shu-Ching) to jointly carry out a property underwriting project for a commercial building under development in Suzhou, the PRC. According to the agreements, the Company, Chang Shu-Ching and the other venturer are entitled to share 65%, 10% and 25% of the net results of the project, respectively.

10
 
NOTE 11 - RELATED PARTY

A related party is an entity that can control or significantly influence the management or operating policies of another entity to the extent one of the entities may be prevented from pursuing its own interests. A related party may also be any party the entity deals with that can exercise that control.

Amount due to director
Prior to April 25, 2005, the amount due to one of the directors was interest-free. Thereafter, the amount due to this director has borne interest at a rate of 9.6% per annum. As of September 30, 2006, the balance includes principal of $159,026 and accrued interest of $17,787 thereon. The principal is unsecured and the term of repayment is not specifically defined .
 
 
NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES

   
September 30,
2006
 
December 31,
2005
 
   
(unaudited)
 
Accrued staff commission & bonus
 
$
304,007
 
$
1,022,333
 
Accrued consulting services fees
   
-
   
693,600
 
Rental deposits received
   
149,858
   
-
 
Other payables
   
176,863
   
198,689
 
   
$
630,728
 
$
1,914,622
 


NOTE 13 - OTHER TAX PAYABLE

Other tax payable represents PRC business tax which is charged at a rate of 5% on the revenue from services rendered.
 
 
NOTE 14 - EARNINGS PER COMMON SHARE

Basic earnings per common share is computed by dividing net income to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share includes the effect of our outstanding warrants, if including such instruments is dilutive.

   
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2006
 
2005
 
2006
 
2005
 
                   
                   
Weighted average shares outstanding used to compute basic earnings per share
   
23,001,614
   
21,636,614
   
23,001,614
   
21,636,614
 
                           
Diluted effect of warrants
   
-
   
-
   
-
   
-
 
                           
Total weighted average shares of dilutive securities outstanding used to compute diluted earnings per share
   
23,001,614
   
21,636,614
   
23,001,614
   
21,636,614
 

For the three months and the nine months ended September 30, 2006, 15,000 common shares potentially issuable under our warrants were excluded from diluted weighted average shares outstanding as their effects were anti-dilutive (i.e., increased the net income per share) .

11
 
NOTE 15- COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

During the nine months ended September 30, 2006 and 2005, the Company incurred lease expenses amounting to $233,481 and $249,942, respectively. As of September 30, 2006, the Company had commitments under operating leases, requiring annual minimum rentals as follows:

   
September 30,
2006
 
December 31,
2005
 
   
(unaudited)
 
Within one year
 
$
145,734
 
$
183,816
 
Two to five years
   
-
   
46,169
 
Operating lease commitments
 
$
145,734
 
$
229,985
 

In order to distribute the properties of the property underwriting project mentioned in Note 7 above, during the year of 2005, the Company launched a promotional package by entering into leasing agreements with certain buyers to lease the properties for them. In accordance with the leasing agreements, the owners of the properties can enjoy an annual rental return of 8.5% and 8.8% per annum for a period of 5 years and 8 years, respectively. The leasing period started in the second quarter, 2006, and the Company has the right to sublease the leased properties to cover these lease commitments in the leasing period. As of September 30, 2006, 29 sub-leasing agreements have been signed, the area of these sub-leasing agreements represented 27% of total area under these lease commitments.

As of September 30, 2006, the lease commitments under the above promotional package are as follows:

   
September 30,
2006
 
December 31,
2005
 
   
(unaudited)
 
Within one year
 
$
2,803,857
 
$
1,630,983
 
Two to five years
   
9,602,361
   
9,210,256
 
Over five years
   
2,891,495
   
4,216,715
 
Operating lease commitments arising from the promotional package
 
$
15,297,713
 
$
15,057,954
 

According to the leasing agreements, the Company has an option to terminate any agreement by paying a predetermined amount of compensation. As of September 30, 2006, the compensation to terminate all leasing agreements is $3,325,579. As of September 30, 2006, the management of the Company considers that no provision should be made for the Company’s obligations under the foregoing guarantees.

Other commitments

One of the buyers of the properties of the property underwriting project mentioned above appointed the Company as an agent to sell the properties held by him. As of September 30, 2006, the Company has sold 30% of total area of these properties at a consideration of $1,423,142. In accordance with this agreement with the buyer, the Company must sell the remaining properties on or before November 30, 2006; otherwise, the Company has to acquire the properties at a consideration of $3,605,435 or pay compensation of $849,032 to the buyer. We expect we can sell out all these properties on or before November 30, 2006.


NOTE 16 - STATUTORY RESERVE

According to the relevant corporation laws in the PRC, a PRC company is required to transfer a least 10% of its profit after taxes, as determined under accounting principles generally accepted in the PRC, to the statutory reserve until the balance reaches 50% of its registered capital. The statutory reserve can be used to make good on losses or to increase the capital of the relevant company.


NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME

As of September 30, 2006, the only component of accumulated other comprehensive income was translation reserve.
 
12
 
NOTE 18 - WARRANTS

On June 15, 2006, the Company entered into a Placement Agent Agreement (the “Placement Agent Agreement”) with Midtown Partners & Co., LLC (“Midtown”) whereby the Company engaged Midtown as the Company’s exclusive placement agent, for a four month period expiring on October 14, 2006. Upon execution of the Placement Agent Agreement, the Company issued to Midtown as an engagement fee 5,000 unregistered shares of common stock and 15,000 underlying warrants. The warrants were issued with an exercise price of $2.25 per share with a 5-year term from issuance and valued at $203. The warrants are considered an equity instrument, and all ot her criteria in EITF 00-19 required for the instrument to be accounted for as an equity instrument have been fulfilled.


NOTE 19 - CONCENTRATION OF CUSTOMERS

During the three months and nine months ended September 30, 2006 and 2005, respectively, the following customer accounted for more than 10% of total net revenue:

   
Percentage of
Net Sales
Three Months
Ended September 30,
 
Percentage of
Net Sales
Nine Months
Ended September 30,
 
Percentage of
Accounts Receivable
as of September 30,
 
   
2006
 
2005
 
2006
 
2005
 
2006
 
2005
 
                           
Customer A
   
31
%
 
13
%
 
68
%
 
32
%
 
82
%
 
65
%
Customer B
   
18
%
 
*
   
*
   
*
   
*
   
*
 
Customer C
   
*
   
24
%
 
*
   
15
%
 
*
   
*
 
Customer D
   
*
   
12
%
 
*
   
12
%
 
*
   
17
%
Customer E
   
*
   
11
%
 
*
   
11
%
 
*
   
*
 

* less than 10%



During the nine months ended September 30, 2006, deposits for the acquisition of properties were settled by the accounts receivable from the property developer from whom the properties were acquired, and accrued consulting services fees were settled by the issuance of common stock.

The non-cash financial information is as follows:

   
Nine months
Ended
September 30,
2006
 
Deposits for acquisition of properties
 
$
2,251,676
 
Accrued consulting services fees
   
702,803
 
   
$
2,954,479
 
Satisfied by:
       
Accounts receivable
 
$
2,251,676
 
Issuance of common stock
   
702,803
 
   
$
2,954,479
 

13

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand Sunrise Real Estate Group, Inc. (“SRRE”). MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes.

OVERVIEW

In October 2004, the former shareholders of Sunrise Real Estate Development Group, Inc. (Cayman Islands) (“CY-SRRE”) and LIN RAY YANG Enterprise Ltd. (“LRY”) acquired a majority of our voting interests in a merger, and the transaction was treated as a reverse acquisition, with CY-SRRE and LRY treated as the acquirer for accounting purposes. Before the completion of the merger, SRRE had no continuing operations and its historical results would not be meaningful if combined with the historical results of CY-SRRE, LRY and their subsidiaries.

As a result of the acquisition, the former owners of CY-SRRE and LRY hold a majority interest in the combined entity. Generally accepted accounting principles require in certain circumstances that a company whose shareholders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes. Accordingly, the acquisition has been accounted for as a “reverse acquisition” arrangement whereby CY-SRRE and LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity and the Registrant for Securities and Exchange Commission reporting purposes. The historical financial statements prior to October 5, 2004 are those of CY-SRRE and LRY and their subsidiaries. All shares and per share data prior to the acquisition have been restated to reflect the stock issuance as a recapitalization of CY-SRRE and LRY.

SRRE and its subsidiaries, namely, CY-SRRE, LRY, Shanghai Xin Ji Yang Real Estate Consultation Company Limited (“SHXJY”), Suzhou Xin Ji Yang Real Estate Consultation Company Limited (“SZXJY”), Beijing Xin Ji Yang Real Estate Consultation Company Limited (“BJXJY”), Shanghai Shangyang Real Estate Consultation Company Limited (“SHSY”), and Suzhou Gao Feng Hui Property Management Company Limited (“SZGFH”) are sometimes hereinafter collectively referred to as “the Company,” “our,” or “us”. The principal activities of the Company are real estate agency sales, real estate marketing services, property leasing services and property management services in the PRC .


RECENT DEVELOPMENTS

Before 2004, our major business was an agency business, whereby our only subsidiary then, SHXJY, contracted with property developers to market and sells their newly developed property units; in return we earned a commission fee calculated as a percentage of the sales price. SHXJY has focused its sales on the whole China market, especially at the secondary city level. To expand our agency business, SHXJY has established branches in NanChang, YangZhou, ZhenJiang, NanJing and ChongQing; subsidiaries in Suzhou and Beijing; and we also plan to establish a new subsidiary in Suzhou, named Suzhou Shangyang Real Estate Agency Co., Ltd. (“SZSY”). Because of our diverse market locations, our performance did not decline in the first three quarters of 2006 under the current macro economic policies, and we plan to continue this stable growth trend in 2006. Our business operations in SHXJY have demonstrated revenue growth in 2006.

In 2004, through another subsidiary, SHSY, we ventured into a higher risk business model (the “Underwriting Model”) whereby our commission was not calculated as a percentage of the sales price. Instead, our commission revenue is equal to the price difference between the final sales price and the underwriting price. In this model, we negotiate with the developer for an underwriting price that is as low as possible, with the guarantee that all units will be sold by a specific date. In return, we have the flexibility to establish the final sales price, and earn the price difference between the final sales price and the underwriting price. The risk in this kind of agreement is that, if there are any unsold units on the expiry date, we may have to absorb the unsold units from developers at the underwriting price, and hold these units in our inventory or as investments.

14
 
SHSY has entered into a Property Underwriting Agreement with an independent property developer to underwrite the Sovereign Building Project, a commercial building located in the Suzhou Industry Park in Suzhou, PRC, at a fixed underwriting price. Being the sole distribution agent for the foregoing office building, SHSY committed to a sales target of $52.21 million, we started selling units in the building in December 2004, and as of September 30, 2006, we achieved the sales target by selling 46,223 square meters with a total sales price of $68.91 million. The properties under development were completed on March 31, 2006, and title to the properties has been transferred to the respective buyers. However, there are still unsold properties with floor area of 869 square meters, which represents 2% of total floor area underwritten, as of September 30, 2006. We plan to sell the unsold properties out in the fourth quarter of 2006.

For the past two years, we have also made some property investments in Suzhou by acquiring two floors and nine units of the aforesaid building at an aggregate consideration of $14,725,269. The Company decided that three units will be held for sale, one floor will be held for the Company’s own use, and the remaining properties will be held for long-term investment purpose. As of September 30, 2006, all the deposits have been paid to the property developer. The properties under development have been completed on March 31, 2006, and the title of these properties has not been transferred to the Company as of September 30, 2006. We also plan to sell out three units under current assets in the fourth quarter of 2006.

In order to distribute all the properties of the aforesaid property underwriting project, during the year of 2005, SZGFH launched a promotional package by entering into leasing agreements with certain buyers to lease the properties for them. In accordance with the leasing agreements, the owners of the properties can enjoy an annual rental return at 8.5% and 8.8% per annum for a period of 5 years and 8 years, respectively. The leasing period started in the second quarter, 2006, and as of September 30, 2006, 29 sub-leasing agreements have been signed. The area of these sub-leasing agreements represents 27% of total area under these lease commitments. As of October 20, 2006, 35 sub-leasing agreements have been signed, the area of these sub-leasing agreements represent 30% of total area under these lease commitments. We expect the income from the sub-leasing business will cover the lease commitments for the leasing period as a whole.


RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB

In addition to historical information, this Form 10-QSB contains forward-looking statements. Forward-looking statements are based on our current beliefs and expectations, information currently available to us, estimates, projections about our industry, and certain assumptions made by our management. These statements are not historical facts. We use words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", "estimates", and similar expressions to identify our forward-looking statements, which include, among other things, our anticipated revenue and cost of our agency and investment business.

Because we are unable to control or predict many of the factors that will determine our future performance and financial results, including future economic, competitive, and market conditions, our forward-looking statements are not guarantees of future performance. They are subject to risks, uncertainties, and errors in assumptions that could cause our actual results to differ materially from those reflected in our forward-looking statements. We believe that the assumptions underlying our forward-looking statements are reasonable. However, you should not place undue reliance on these forward-looking statements. They only reflect our view and expectations as of the date of this Form 10-QSB. We undertake no obligation to publicly update or revise any forward-looking statement in light of new information, future events, or other occurrences.

There are several risks and uncertainties, including those relating to our ability to raise money and grow our business and potential difficulties in integrating new acquisitions with our current operations, especially as they pertain to foreign markets and market conditions. These risks and uncertainties can materially affect the results predicted. The Company’s future operating results over both the short and long term will be subject to annual and quarterly fluctuations due to several factors, some of which are outside our control. These factors include but are not limited to fluctuating market demand for our services, and general economic conditions.

15

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement of Financial Accounting Standard (“SFAS”) No. 123, (“SFAS 123R”) “Accounting for Stock-Based Payment”. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity, equity instruments or that may be settled by the issuance of those equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R does not change the accounting guidance for share-based payment transactions with parties other than employees provided in SFAS 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. SFAS 123R does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, “Employers Accounting for Employee Stock Ownership Plans.” For small business issuers, SFAS 123R is effective for fiscal years beginning after December 15, 2005. The adoption of SFAS 123R has no material impact on our financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes in an enterprise’s financial statements in accordance with SFAS 109. FIN 48 provides a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, although earlier application of the provisions of the interpretation is encouraged. The Company has not yet determined what the implications of its adoption, if any, will be on the consolidated financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements regarding fair value measurement. This statement simplifies and codifies fair value related guidance previously issued and is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not believe that SFAS No. 157 will significantly impact its financial statements.
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year unadjusted errors in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires registrants to apply the new guidance the first time that it identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006 by correcting those errors through a one-time cumulative effect adjustment to beginning-of-year retained earnings. The Company does not believe that SAB 108 will significantly impact its financial statements.


APPLICATION OF CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical accounting policies for us include impairment of goodwill, accounting for income taxes and revenue recognition.

16
 
Goodwill

SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill be tested for impairment on an annual basis (December 31 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of a company. Application of the goodwill impairment test requires judgment, including the determination of the fair value of a company. The fair value of a company is estimated using a discounted cash flow methodology. This requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, and the determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or goodwill impairment for a company.

Income Taxes

SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position or results of our operations.

Revenue Recognition

Agency commission revenue from property brokerage is recognized when the property developer and the buyer complete a property sales transaction, which is normally at the time when the property developer receives from the buyer a portion of the sales proceeds in accordance with the terms of the relevant property sales agreement, or when we can confirm that the balance of the bank loan to the buyer has been approved, or recognized under the sales schedule of agency sales agreement with developer.

Commission revenue from underwriting service is recognized when the property developer and the buyer complete a property sales transaction, which is normally at the time when the property developer has confirmed that the predetermined level of sales proceeds have been received from buyers.

Revenue from marketing consultancy services is recognized when services are provided to clients.

Warrants

During the third quarter of 2006, we adopted EITF 96-18. Accordingly, we have expensed the cost for the warrants issued for services at either the fair value of the services rendered or the fair value at the warrant grant dates.

17
 
RESULTS OF OPERATIONS

We provide the discussion and analysis of our changes in financial condition and results of operations for the three and nine months ended September 30, 2006, with comparisons to the historical three and nine months ended September 30, 2005.

Revenue

The following table shows the net revenue detail by line of business:

   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2006
 
% to total
 
2005
 
% to total
 
% change
 
2006
 
% to total
 
  2005
 
% to total
 
  % change
 
Agency sales
   
1,859,642
   
67.4
   
1,713,609
   
87
   
9
   
4,362,515
   
34.3
   
4,196,603
   
68
   
4
 
Underwriting sales
   
876,438
   
31.7
   
264,800
   
13
   
231
   
8,322,479
   
65.5
   
2,010,104
   
32
   
314
 
Property Management
   
24,794
   
0.9
   
-
   
-
   
n/a
   
30,229
   
0.2
   
-
   
-
   
n/a
 
Net revenue
   
2,760,874
   
100
   
1,978,409
   
100
   
40
   
12,715,223
   
100
   
6,206,707
   
100
   
105
 

The net revenue of the third quarter, 2006 was $2,760,874, which increased 40% from $1,978,409 of the third quarter, 2005. The total net revenue of the first three quarters of 2006 was $12,715,223, which increased 105% from $6,206,707 of the first three quarters of 2005. In the third quarter of 2006, agency sales represented 67.4% of the total net revenue, underwriting sales represented 31.7% and property management represented 0.9%. In the first three quarters of 2006, agency sale represented 34.3% of the total net revenue, underwriting sales represented 65.5% and property management represented 0.2%. The increase in net revenue in the third quarter and first three quarters, 2006 was mainly due to the increase in our underwriting sales revenues.

Agency sales

In the third quarter and first three quarters of 2006, 67.4% and 34.3%, respectively, of our net revenue was due to agency sales, which were from the business activities of SHXJY and its subsidiaries. As compared with same period in 2005, net revenue of agency sales in the third quarter and first three quarters of 2006 increased 9% and 4% respectively.

The main reasons for the increase in the third quarter and first three quarters of 2006 were:

i)  
In the first three quarters of 2006, there were 31 agency sales projects that contributed net revenue to the Company, compared with 25 projects in the same period in 2005.

ii)  
The net revenue of SZXJY and its branch increased 40% in the first three quarters of 2006, as compared to the same period in 2005.

iii)  
SHXJY successfully closed a project in the third quarter of 2006, and contributed net revenue of $850,091 to the Company.

Because of our diverse market location and our professional performance in our agency sales business, the current macro economic policies have had little impact on our agency sales performance. We have kept this stable growth trend in our agency sales business in 2006.

18
 
Underwriting sales

In February 2004, SHSY entered into an agreement to underwrite an office building in Suzhou, known as Suzhou Sovereign Building. Being the sole distribution agent for the foregoing office building, SHSY committed to a sales target of $52.21 million. Property underwriting sales is comparatively a higher risk business model compared to our pure commission based agency business. Under this higher risk business model, the Underwriting Model, our commission is not calculated as a percentage of the selling price; instead, our commission revenue is equivalent to the price difference between the final selling price and underwriting price. We negotiate with a developer for an underwriting price as low as possible, with the condition that we guarantee all unsold units will be acquired within a certain period. In return, we are given the flexibility to establish the final selling price and earn the price difference between the final selling price and the underwriting price. The risk of this kind of arrangement is that, if there is any unsold unit upon the expiry period, we may have to absorb the unsold property units from developers at the underwriting price and hold them in our inventory or as an investment.

We started selling units in the building in December, 2004, and as of September 30, 2006, we have achieved the sales target by selling 46,223 square meters with a total sales price of $68.91 million and this underwriting project has contributed a total net revenue of $12,861,237 to the Company. However, there are still unsold properties with floor area of 869 square meters, which represents 2% of total floor area underwritten, as of September 30, 2006. We expect we can sell the unsold properties out in the fourth quarter of 2006. As we approach the completion of this project, the property developer will gradually receive all sales proceeds from the buyers; at that time, we can recognize the total underwriting sales revenue of this project.

Property Management

In order to distribute all the properties of the aforesaid underwriting project, during the year of 2005, SZGFH launched a promotional package by entering into leasing agreements with certain buyers to lease the properties for them. The leasing period started in the second quarter of 2006, and in the leasing period SZGFH has the right to sublease the leased properties to earn the rental income. As of September 30, 2006, 29 sub-leasing agreements have been signed, the area of these sub-leasing agreements represented 27% of total area under these leasing agreements. We expect the income from the sub-leasing business can keep a stable growth trend in 2006 and can cover the lease commitments in the leasing period as a whole.

Cost of Revenue

The following table shows the cost of revenue detail by line of business:

   
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
   
2006
 
% to total
 
2005
 
% to total
 
% change
 
2006
 
% to total
 
2005
 
% to total
 
% change
 
Agency sales
   
808,753
   
54
   
666,049
   
88
   
21
   
1,889,946
   
37
   
1,595,552
   
79
   
18
 
Underwriting sales
   
65,417
   
4
   
93,248
   
12
   
(30
)
 
2,317,114
   
45
   
422,173
   
21
   
449
 
Property Management
   
637,589
   
42
   
-
   
-
   
n/a
   
904,186
   
18
   
-
   
-
   
n/a
 
Cost of revenue
   
1,511,759
   
100
   
759,297
   
100
   
99
   
5,111,246
   
100
   
2,017,725
   
100
   
153
 

The cost of revenue for the third quarter of 2006 was $1,511,759, which increased 99% from $759,297 for the third quarter of 2005. The total cost of revenue for the first three quarters of 2006 was $5,111,246, which increased 153% from $2,017,725 for the first three quarters of 2005. In the third quarter of 2006, agency sales represented 54% of the total cost of revenue, underwriting sales represented 4% and property management represented 42%. In the first three quarters of 2006, agency sale represented 37% of the total cost of revenue, underwriting sales represented 45% and property management represented 18%. The increase in cost of revenue in the third quarter and first three quarters of 2006 was mainly due to the increase in our underwriting sales and property management.

Agency sales

The cost of revenue for agency sales in the third quarter and first three quarters of 2006 increased 21% and 18%, respectively, from the same period in 2005. The primary reason was the increase of cost of revenue of SZXJY and its branch in 2006, as the net revenue of SZXJY and its branch in the first three quarters of 2006 increased 40% from the same period in 2005, the cost of revenue of SZXJY and its branch increased 83% relatively to support the increase of net revenue.
 
19
 
Underwriting sales

The Company has entered into co-operation agreements with two venturers to jointly carry out the underwriting project mentioned above. According to the agreements, the venturers are entitled to share 35% of the net results of the underwriting project.

A significant factor contributing to the increase of the cost of underwriting sales was that in the first three quarters of 2006, we recognized the profit sharing as the cost of the underwriting project of $2,047,618, which represented 88% of total underwriting sales cost in the first three quarters of 2006, and there was no such cost in the same period of 2005.

Property Management

In order to distribute all the properties of the aforesaid underwriting project, during the year of 2005, SZGFH launched a promotional package by entering into leasing agreements with certain buyers to lease the properties for them. In accordance with the leasing agreements, the owners of the properties can enjoy an annual rental return at 8.5% and 8.8% per annum for a period of 5 years and 8 years, respectively. The leasing period started in the second quarter, 2006, and we recognized the rental return under these leasing agreements as our cost in the second and third quarter of 2006.

Operating Expenses

The following table shows operating expenses detail by line of business:

   
Three Months Ended September 30, 2006
 
Nine Months Ended September 30, 2006
 
   
2006
 
% to total
 
2005
 
% to total
 
% change
 
2006
 
% to total
 
2005
 
% to total
 
% change
 
Agency sales
   
204,325
   
79
   
248,806
   
92
   
(18
)
 
602,689
   
87
   
746,928
   
90
   
(19
)
Underwriting sales
   
18,460
   
7
   
17,510
   
6
   
5
   
50,567
   
7
   
70,819
   
9
   
(29
)
Property Management
   
36,596
   
14
   
5,448
   
2
   
572
   
43,872
   
6
   
5,448
   
1
   
705
 
Operating Expenses
   
259,381
   
100
   
271,764
   
100
   
(5
)
 
697,128
   
100
   
823,195
   
100
   
(15
)

The operating expenses for the third quarter of 2006 were $259,381, which decreased 5% from $271,764 for the third quarter of 2005. The total operating expenses for the first three quarters of 2006 were $697,128, which decreased 15% from $823,195 for the first three quarters of 2005. In the third quarter of 2006, agency sales represented 79% of the total operating expenses, underwriting sales represented 7% and property management represented 14%. In the first three quarters of 2006, agency sale represented 87% of the total operating expenses, underwriting sales represented 7% and property management represented 6%. This decrease was mainly due to our efficient cost control performed in the Company.

Agency sales

The operating expenses for agency sales in the first three quarters of 2006 decreased 19% from the same period in 2005. This decrease was mainly due to the decrease in the staff cost and travel expenses of SHXJY and its subsidiaries and branches in the first three quarters of 2006; comparing to the same period in 2005, the decrease of such expenses was $112,718.

Underwriting sales

The operating expenses for underwriting sales in the first three quarters of 2006 decreased 29% from the same period in 2005. This decrease was mainly due to the decrease in the staff cost, travel expenses and official expenses of SHSY in the first three quarters of 2006; comparing to the same period in 2005, the decrease of such expenses was $19,403.

20
 
Property management

The operating expenses for property management in the first three quarters of 2006 increased 705% from the same period in 2005. This increase was mainly due to the increase in the agency commissions of SZGFH in the first three quarters of 2006; comparing to the same period in 2005, the increase of such expenses was $25,079. With the continued development of SZGFH, the operating expenses will be increased to support the business of property management.

General and Administrative Expenses

The general and administrative expenses in the third quarter of 2006 were $720,890, increasing 11% from $647,113 in the third quarter of 2005. The general and administrative expenses in the first three quarters of 2006 were $2,071,733, increasing 15% from $1,802,876 in the first three quarters of 2005. The increase in general and administrative expenses was mainly due to:

i)  
The increase in professional fees for the maintenance of the Company’s listing status, e.g., audit, legal and other professional fees in the first three quarters of 2006; comparing to the same period in 2005, the increase of such expenses was $122,529.

ii)  
The expansion of our agency sales business to diversified market locations also increased the general and administrative expenses of agency sales business in the first three quarter of 2006; compared to the same period in 2005, the increase of such expenses was $95,934.

iii)  
SZGFH launched its business in the second quarter of 2006, which also increased the general and administrative expenses of SZGFH in the first three quarter of 2006; compared to the same period in 2005, the increase of such expenses was $35,238.

Interest Expenses

Interest expenses in the third quarter of 2006 were $137,202, increasing 167% from $51,423 in the same period in 2005. Interest expenses in the first three quarters of 2006 were $393,955, increasing 217% from $124,341 in the same period in 2005. The interest expenses were mainly incurred for bank loans and promissory notes payable. The increase was mainly due to increases in interest on bank loans for the acquisition of properties.

LIQUIDITY AND CAPITAL RESOURCES
 
The Company meets its working capital and capital investment requirements mainly by using operating cash flows and, to a limited extent, bank loans.

Our accounts receivable balance at September 30, 2006 was $3,139,678.

We ended the period with a cash position of $878,637. We had positive operating cash flow of $233,879. This was primarily attributable to the increase in amount with venturers.

The Company’s investing activities provided cash resources of $232,645 for the nine months ended September 30, 2006, which was mainly devoted to the refund of deposits paid for acquisition of properties.

The Company’s financing activities used cash resources of $470,129 for the nine months ended September 30, 2006, which was primarily attributable to the repayment of bank loans and promissory notes.

We anticipate that our current available funds, cash inflows from providing property agency services and underwriting services and sales proceeds from disposal of properties acquired will be sufficient to meet our anticipated needs for working capital expenditures, business expansion and the potential cash needs through 2006. We also expect SZGFH can contribute cash flow to the Company as it started its property management business in the second quarter of 2006.

21
 
We also plan to raise additional funds in the future in order to fund acquisitions, develop new projects, or if our business otherwise grows more rapidly than we currently predict, through the issuance of additional shares of our equity securities in one or more public or private offerings, or through credit facilities obtained with lending institutions. On June 15, 2006, the Company engaged Midtown Partners & Co., LLC as the Company’s exclusive placement agent, for a four month period expiring on October 14, 2006, in connection with a proposed placement in the United States of up to $5,000,000 of the Company’s securities upon the terms and conditions set forth in Exhibit 10.3 (Placement Agent Agreement dated June 15, 2006 between the Company and Midtown Partners & Co., LLC). The exclusive period of this Placement Agent Agreement expired on October 14, 2006. As of November 15, 2006, the Company has not received any proceeds from this financing activity. There can be no guarantee that we will be able to obtain such funding, whether through the issuance of debt or equity, on terms satisfactory to management and our board of directors.


ITEM 3. CONTROLS AND PROCEDURES

Based on the most recent evaluation, which was completed as of the end of the period covered by this Form 10-QSB, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective at September 30, 2006, to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2006, that have materially affected, or are reasonably likely to materially affect, our internal controls for financial reporting.
 
22
 
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings of a material nature.

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

None.


ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.   OTHER INFORMATION

None.
ITEM 6. EXHIBITS
 
Exhibit Number
Description
   
2.1
Exchange Agreement dated as of August 31, 2004 by and among Lin Ray Yang Enterprise Ltd., Lin Chi-Jung, as agent for the beneficial shareholders of such company, and the Company, incorporated by reference to our Current Report on Form 8-K filed on September 8, 2004.

2.2
Exchange Agreement dated as of August 31, 2004 by and among Sunrise Real Estate Development Group, Inc., a Cayman Islands company, Lin Chi-Jung, as agent for the beneficial shareholder of such company, and the Company, incorporated by reference to our Current Report on Form 8-K filed on September 8, 2004.
   
3.1 Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Form-10 QSB filed on April 23, 2001.
   
3.1a Amendments to the Articles of Incorporation incorporated by reference to Exhibits 3.1a and 3.1b to Form-10-KSB for the fiscal year ended December 31,2003 filed on April 14, 2004.
3.1b   Articles of Amendment to the Articles of Incorporation dated April 25, 2006; filed herewith.
3.2 Bylaws, incorporated by reference to Exhibit 3.2 of Form-10SB filed on April 23, 2001.
10.1 Financial Advisory Agreement dated January 15, 2006 between Sunrise Real Estate Group, Inc. and Marco Partners, Inc., incorporated by reference to Exhibit 10.1 to Form SB-2 filed on February 13, 2006.
10.2 Consultancy Service Agreement dated January 15, 2006 between Sunrise Real Estate Group, Inc. and Chiang Hui Hsiung, incorporated by reference to Exhibit 10.2 to Form SB-2 filed on February 13, 2006.
10.3 Placement Agent Agreement dated June 15, 2006 between Sunrise Real Estate Group, Inc. and Midtown Partners & Co., LLC.
 
14   Code of Ethics
 
21.1 Subsidiaries of the Company, incorporated by reference to Exhibit 21.1 to Form SB-2 filed on February 13, 2006.
   
31.1 Section 302 Certification by the Corporation's Chief Executive Officer.
   
31.2 Section 302 Certification by the Corporation's Chief Financial Officer.
   
32.1 Section 1350 Certification by the Corporation's Chief Executive Officer and Corporation's Chief Financial Officer.
 
23
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
SUNRISE REAL ESTATE GROUP, INC.
 
     
Date: November 14, 2006
By:   /s/ Lin, Chi-Jung
 
Lin, Chi-Jung, Chief Executive Officer
   
 
     
Date: November 14, 2006
By:   /s/ /s/ Art Honanyan
 
Art Honanyan, Chief Financial Officer
   
 
24
 
Exhibit 3.1b

ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION OF SUNRISE REAL ESTATE
DEVELOPMENT GROUP, INC.

Pursuant to the provisions of Article 4.04 of the Texas Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to the Articles of Incorporation:

ARTICLE ONE
 
The name of the Corporation is Sunrise Real Estate Development Group, Inc.

ARTICLE TWO

The following amendment to the Articles of Incorporation was adopted on April 15, 2006 by the Board of Directors and by consent of the majority shareholders of the Corporation for the purpose of changing the name of the Corporation to “Sunrise Real Estate Group, Inc.”

Article One is hereby deleted in its entirety and replaced by the following language:

“Article One

A.   The name of the Corporation is Sunrise Real Estate Group, Inc.”

ARTICLE THREE

The number of shares of the Corporation outstanding at the time of such adoption was 22,996,614; and the number of shares entitled to vote thereon was 22,996,614.

ARTICLE FOUR

The holders of a majority of the shares of common stock outstanding and entitled to vote on said amendment have signed a consent in writing pursuant to Article 9.10 of the Texas Business Corporation Act adopting such amendment and any written notice to shareholders required by Article 9.10 has been given.

ARTICLE FIVE

This amendment to the Articles of Incorporation of the Corporation has been approved in the manner required by the Texas Business Corporation Act and by the constituent documents of the Corporation.
 
 
-1-
 
 
ARTICLE SIX
This amendment to the Articles of Incorporation of the Corporation shall be effective on May 23, 2006.
 
Dated: April 25, 2006    
     
  Sunrise Real Estate Development Group, Inc.
 
  		 
  		 
 
  By:   /s/ Lin, Chi-Jung
 
Lin, Chi-Jung
President and Chief Executive Officer
 
 
-2-
 
EXHIBIT 31.1

Rules 13a−15(e) and 15d−15(e) and Rules 13a−15(f) Certification of Chief Executive Officer

I, Lin, Chi−Jung, certify that:

1. I have reviewed this quarterly report for the three and nine months ended September 30, 2006 on Form 10−QSB of SUNRISE REAL ESTATE GROUP, INC.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the small business issuer and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
     
Date: Date: November 14, 2006
By:   /s/ Lin, Chi-Jung
 
Lin, Chi-Jung, Chief Executive Officer
 
 
EXHIBIT 31.2
Rules 13a−15(e) and 15d−15(e) and Rules 13a−15(f) Certification of Chief Financial Officer

I, Art, Honanyan, certify that:

1. I have reviewed this quarterly report for the three and nine months ended September 30, 2006 on Form 10−QSB of SUNRISE REAL ESTATE GROUP, INC.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statement were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a−15(e) and 15d−15(e)) for the small business issuer and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's I board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
     
Date: November 14, 2006
By:   /s/ Art Honanyan
 
Art Honanyan, Chief Financial Officer
   
 
EXHIBIT 32.1
Section 1350 Certification

In connection with the Quarterly Report of SUNRISE REAL ESTATE GROUP, INC. (the "Company") on Form 10−QSB for the three and nine months ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer and Chief Financial Officer of the Company certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes−Oxley Act of 2002 that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
 
     
Date: November 14, 2006
By:   /s/ Lin, Chi-Jung
 
Lin, Chi-Jung, Chief Executive Officer
   
 
     
Date: November 14, 2006
By:   /s/ Art Honanyan
 
Art Honanyan, Chief Financial Officer