UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q/A


(Amendment
No. 1)





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




For the
quarterly period ended     March 31,
2009





or





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





For the
transition period from ____ to _____




Commission
file number  000-28767


China
3C Group


(Exact
Name of Registrant as Specified in Its Charter)




Nevada
            88-0403070(State or other jurisdiction of incorporation or organization)
            (I.R.S. Employer Identification No.)





368
HuShu Nan Road


HangZhou City, Zhejiang
Province, China 310014




(Address
of Principal Executive Offices) (Zip Code)





086-0571-88381700


(Registrant’s
telephone number, including area code)




______________________________________________________________________


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:   Yes xNo  ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  ̈No  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
accelerated filer  ̈Accelerated
filer xNon-accelerated
filer (Do not check if a smaller reporting company)  ̈   
Smaller reporting company   ̈





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





As of May
12, 2009 the registrant had 52,834,055 shares of common stock
outstanding.








EXPLANATORY
NOTE





We are
filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A to amend (a) Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations of Part I and (b) Item 4 Controls and Procedures of Part
I.





Except as
specifically referenced herein, this Amendment No. 1 to Quarterly Report on Form
10-Q/A does not reflect any event occurring subsequent to May 15, 2009, the
filing date of the original report.








TABLE
OF CONTENTS





PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Consolidated
      Balance Sheets as of March 31, 2009 (Unaudited) and December 31,
      2008
                          1Consolidated
      Statements of Income for the Three Months Ended March 31, 2009 and 2008
      (Unaudited)
                          2Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2009 and
      2008 (Unaudited)
                          3Notes
      to Consolidated Financial Statements
                          4 -
      15Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                          16Item
      3. Qualitative and Quantitative Disclosure about Market
    Risk
                          22Item
      4. Controls and Procedures
                          23PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                          23Item
      1A. Risk Factors
                          23Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                          23Item
      3. Defaults Upon Senior Securities
                          24Item
      4. Submission of Matters to a Vote of Security Holders
                          24Item
      5. Other Information
                          24Item
      6. Exhibits
                          24Signatures
                          25









CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS




March 31,
                    
                    
                    December
                      31,2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    28,667,084
                    
                    
                    $
                    32,157,831Accounts
      receivable, net
                    
                    
                    23,469,578
                    
                    
                    
                    23,724,587Inventories
                    
                    
                    11,339,434
                    
                    
                    
                    8,971,352Advances
      to suppliers
                    
                    
                    2,337,268
                    
                    
                    
                    2,491,518Prepaid
      expenses and other current assets
                    
                    
                    45,210
                    
                    
                    
                    87,773Total
      current assets
                    
                    
                    65,858,574
                    
                    
                    
                    67,433,061Property,
      plant and equipment, net
                    
                    
                    60,732
                    
                    
                    
                    64,100Goodwill
                    
                    
                    20,348,278
                    
                    
                    
                    20,348,278Deposit
      for acquisition of subsidiary
                    
                    
                    14,607,923
                    
                    
                    
                    7,318,501Refundable
      deposits
                    
                    
                    29,812
                    
                    
                    
                    32,076Total
      assets
                    
                    $
                    100,905,319
                    
                    
                    $
                    95,196,016LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                    
                    $
                    8,766,553
                    
                    
                    $
                    5,417,327Income
      tax payable
                    
                    
                    1,197,700
                    
                    
                    
                    2,140,624Total
      liabilities
                    
                    
                    9,964,253
                    
                    
                    
                    7,557,951Stockholders'
      equityCommon
      stock, $0.001 par value, 100,000,000 million sharesauthorized,
      52,834,055 and 52,673,938 issued and outstanding as ofMarch
      31, 2009 and December 31, 2008, respectively
                    
                    
                    52,834
                    
                    
                    
                    52,674Additional
      paid-in capital
                    
                    
                    19,465,616
                    
                    
                    
                    19,465,776Subscription
      receivable
                    
                    
                    (50,000
                    )
                    
                    
                    (50,000
                    )Statutory
      reserve
                    
                    
                    11,109,379
                    
                    
                    
                    11,109,379Other
      comprehensive income
                    
                    
                    5,135,530
                    
                    
                    
                    5,272,104Retained
      earnings
                    
                    
                    55,227,707
                    
                    
                    
                    51,788,132Total
      stockholders' equity
                    
                    
                    90,941,066
                    
                    
                    
                    87,638,065Total
      liabilities and stockholders' equity
                    
                    $
                    100,905,319
                    
                    
                    $
                    95,196,016





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


1




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 and 2008 (UNAUDITED)




2009
                  
                  
                  2008Net
      sales
                  
                  $
                  77,411,560
                  
                  
                  $
                  68,153,455Cost
      of sales
                  
                  
                  67,352,831
                  
                  
                  
                  57,607,075Gross
      profit
                  
                  
                  10,058,729
                  
                  
                  
                  10,546,380Selling,
      general and administrative expenses
                  
                  
                  5,486,276
                  
                  
                  
                  2,986,044Income
      from operations
                  
                  
                  4,572,453
                  
                  
                  
                  7,560,336Other
      (income) expenseInterest
      income
                  
                  
                  (29,108
                  )
                  
                  
                  (36,095
                  )Other
      income
                  
                  
                  (148,127
                  )
                  
                  
                  -Other
      expense
                  
                  
                  111,222
                  
                  
                  
                  12,813Total
      other (income) expense
                  
                  
                  (66,013
                  )
                  
                  
                  (23,282
                  )Income
      before income taxes
                  
                  
                  4,638,466
                  
                  
                  
                  7,583,618Provision
      for income taxes
                  
                  
                  1,198,891
                  
                  
                  
                  1,810,573Net
      income
                  
                  
                  3,439,575
                  
                  
                  
                  5,773,045Foreign
      currency translation adjustments
                  
                  
                  (136,574
                  )
                  
                  
                  1,600,050Comprehensive
      income
                  
                  $
                  3,303,001
                  
                  
                  $
                  7,373,095Net
      income available to common shareholders per share:Basic
                  
                  $
                  0.07
                  
                  
                  $
                  0.11Diluted
                  
                  $
                  0.07
                  
                  
                  $
                  0.11Weighted
      average shares outstanding:Basic
                  
                  
                  52,834,055
                  
                  
                  
                  52,673,938Diluted
                  
                  
                  52,834,055
                  
                  
                  
                  53,073,938





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


2




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE THREE MONTHS ENDED MARCH 31, 2009 and
2008  (UNAUDITED)





2009
                                        
                                        
                                        2008CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
                                        
                                        $
                                        3,439,575
                                        
                                        
                                        $
                                        5,773,045Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                                        
                                        
                                        6,648
                                        
                                        
                                        
                                        9,946Gain
      on asset disposition
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,161
                                        )Provision
      for bad debts
                                        
                                        
                                        -
                                        
                                        
                                        
                                        13,498Stock
      based compensation
                                        
                                        
                                        -
                                        
                                        
                                        
                                        117,557(Increase)
      / decrease in assets:Accounts
      receivable
                                        
                                        
                                        208,083
                                        
                                        
                                        
                                        (6,740,422
                                        )Other
      receivable
                                        
                                        
                                        25,736
                                        
                                        
                                        
                                        -Inventories
                                        
                                        
                                        (2,388,278
                                        )
                                        
                                        
                                        (4,251,886
                                        )Prepaid
      expenses and other current assets
                                        
                                        
                                        16,712
                                        
                                        
                                        
                                        587Refundable
      deposits
                                        
                                        
                                        2,186
                                        
                                        
                                        
                                        (5,927
                                        )Advance
      to suppliers
                                        
                                        
                                        149,449
                                        
                                        
                                        
                                        926,777Increase
      / (decrease) in current liabilities:Accounts
      payable and accrued expenses
                                        
                                        
                                        3,363,214
                                        
                                        
                                        
                                        1,869,349Income
      tax payable
                                        
                                        
                                        (939,604
                                        )
                                        
                                        
                                        (837,248
                                        )Net
      cash provided by operating activities
                                        
                                        
                                        3,883,721
                                        
                                        
                                        
                                        (3,126,885
                                        )CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                                        
                                        
                                        (2,763
                                        )
                                        
                                        
                                        (6,581
                                        )Proceeds
      from asset sales
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,447Deposit
      for acquisition of subsidiary
                                        
                                        
                                        (7,289,422
                                        )
                                        
                                        
                                        -Net
      cash used in investing activities
                                        
                                        
                                        (7,292,185
                                        )
                                        
                                        
                                        (4,134
                                        )Effect
      of exchange rate changes on cash and cash equivalents
                                        
                                        
                                        (82,283
                                        )
                                        
                                        
                                        1,600,050Net
      increase (decrease) in cash
                                        
                                        
                                        (3,490,747
                                        )
                                        
                                        
                                        (1,530,969
                                        )Cash,
      beginning of period
                                        
                                        
                                        32,157,831
                                        
                                        
                                        
                                        24,952,614Cash,
      end of period
                                        
                                        $
                                        28,667,084
                                        
                                        
                                        $
                                        23,421,645Supplemental
      disclosure of cash flow information:Interest
      paid
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -Income
      taxes paid
                                        
                                        $
                                        2,141,815
                                        
                                        
                                        $
                                        2,647,821




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


3




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





Note
1 - ORGANIZATION





China 3C
Group (the “Company”) was incorporated on August 20, 1998 under the laws of the
State of Nevada. Capital Future Developments Limited - BVI (“Capital”) was
incorporated on July 22, 2004 under the laws of the British Virgin Islands.
Zhejiang Yong Xin Digital Technology Company Limited (“Zhejiang”), Yiwu Yong Xin
Communication Limited (“Yiwu”), Hangzhou Wang Da Electronics Company Limited
(“Wang Da”), Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and
Shanghai Joy & Harmony Electronics Company Limited (“Joy & Harmony”)
were incorporated under the laws of Peoples Republic of China on July 11, 2005,
July 18, 1997, March, 30, 1998, April 12, 2004, and August 20, 2003,
respectively. On March 10, 2009 Zhejiang set up a new operating entity, Hangzhou
Letong Digital Technology Co., Ltd. (“Letong”) to establish an electronic retail
franchise operation for China 3C Group.





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




On August
3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a
cash and stock transaction valued at approximately $8,750,000. The consideration
consisted of 915,751 newly issued shares of the Company’s common stock and
$5,000,000 in cash.




On
November 28, 2006, Capital completed the acquisition of a 100% interest in Joy
& Harmony for a cash and stock transaction valued at approximately
$18,500,000. The consideration consisted of 2,723,110 shares of the Company’s
common stock and $7,500,000 in cash.




On August
15, 2007, the Company changed its ownership structure. As a result, instead of
Capital owning 100% of Zhejiang, Capital entered into contractual agreements
with Zhejiang whereby Capital owns a 100% interest in the revenues of Zhejiang.
Capital does not have an equity interest in Zhejiang, but enjoys all the
economic benefits. Under this structure, Zhejiang is now a wholly foreign owned
enterprise of Capital. The contractual agreements give Capital and its equity
owners an obligation, and having ability to absorb, any losses, and rights to
receive returns. Capital will be unable to make significant decisions about the
activities of Zhejiang and cannot carry out its principal activities without
financial support. These characteristics as defined in Financial Accounting
Standards Board (“FASB”) Interpretation 46, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of Zhejiang to be
consolidated with Capital and ultimately with China 3C Group. Zhejiang owns 90%
of the issued and outstanding capital stock of each of Wang Da and
Yiwu.


4









The
Company is engaged in the business of resale and distribution of third party
products and generates approximately 100% of our revenue from resale of items
such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3
and MP4 players, iPods, electronic dictionaries, CD players, radio Walkmans and
audio systems.




On
December 19, 2008, China 3C Group’s subsidiaries, Zhejiang and Yiwu entered into
an acquisition agreement (the “Jinhua Agreement”) with Jinhua Baofa Logistic
Ltd., a company organized under the laws of the People’s Republic of China
(“Jinhua”) and the shareholders of Jinhua, who own 100% of the equity interest
in Jinhua in the aggregate. Pursuant to the Jinhua Agreement Zhejiang will
acquire 90% and Yiwu will acquire 10% of the entire equity interests in Jinhua
from the shareholders of Jinhua for a total purchase price of RMB 120,000,000
payable as follows: (i) RMB 50,000,000, within 10 business days after the
execution of the Jinhua Agreement; (ii) RMB 50,000,000 within 10 business days
following the completion of the audit of Jinhua’s financial statements for the
fiscal year ending December 31, 2008, in accordance with generally accepted
accounting principles in the U.S. (the “Audit”), which Audit shall be completed
no later than March 31, 2009; and (iii) the remaining RMB 20,000,000 no later
than three months after the completion of Jinhua’s Audit. The source of the cash
to be used for the purchase of 100% of the equity of Jinhua will be from working
capital of China 3C Group.





Jinhua
was founded in 2001 and is a well-known transportation logistics company in
Eastern China and has been a long time transportation provider for China 3C
Group. Jinhua has approximately 280 customers and operates a fleet of more than
70 trucks and transports freight including electronics, machinery and equipment,
metal products, chemical materials, garments and handicraft goods, in more than
20 cities in Eastern China. Its transportation service covers many of the most
developed cities in the Eastern China region such as Shanghai, Hangzhou and
Nanjing.





On April
4, 2009, Zhejiang and Yiwu entered into an amendment to the Jinhua Agreement
(the “Amended Agreement”) with the shareholders of Jinhua. The Amended Agreement
changed from March 31, 2009 to June 30, 2009 the date by which the parties have
agreed that the Audit is required to be completed. In the event that the audit
is not completed by June 30, 2009, the Agreement may be terminated.




Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





The
accompanying condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America (“US GAAP”).  The Company’s functional currency is the Chinese
Renminbi, however the accompanying condensed consolidated financial statements
have been translated and presented in United States Dollars.





Principles of
Consolidation





The
condensed consolidated financial statements include the accounts of China 3C
Group and its wholly owned subsidiaries Capital, Wang Da, Yiwu, Joy &
Harmony, and Sanhe and variable interest entity Zhejiang, collectively referred
to as the Company. All material intercompany accounts, transactions and profits
have been eliminated in consolidation.


5




Currency
Translation





The
accounts of Zhejiang, Wang Da, Yiwu, Sanhe, and Joy & Harmony were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with Statement of Financial Accounts Standards (“SFAS”)
No. 52, “Foreign Currency Translation,” with the CNY as the functional currency.
According to SFAS No. 52, all monetary assets and liabilities were translated at
the ending exchange rate, non-monetary assets and stockholders’ equity are
translated at the historical rates and income statement items are translated at
the average exchange rate for the period. The resulting translation adjustments
are reported as other comprehensive income in accordance with SFAS No. 130,
“Reporting Comprehensive Income,” as a component of shareholders’ equity.
Transaction gains and losses are reflected in the condensed consolidated income
and comprehensive income statement.





Use of
Estimates





The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.





Risks and
Uncertainties





The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.





Contingencies





Certain
conditions may exist as of the date the financial statements are issued, which
could result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company’s management assesses
such contingent liabilities, and such assessment inherently involves an exercise
of judgment. In assessing loss contingencies related to legal proceedings that
are pending against the Company or unasserted claims that may result in such
proceedings, the Company’s management evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought.





If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability is accrued in the Company’s financial statements. If the
assessment indicates that a potential material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, then the
nature of the contingent liability, together with an estimate of the range of
possible loss if determinable and material would be disclosed.





Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.




Accounts
Receivable





The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts was
$362,700 (unaudited) and $365,318 as of March 31, 2009 and December 31, 2008,
respectively.




Inventories





Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market.  Management compares the cost of inventories with the market
value and allowance is made for writing down their inventories to market value,
if lower. As of March 31, 2009 and December 31, 2008, inventory consisted
entirely of finished goods valued at $11,339,434 (unaudited) and $8,971,352,
respectively.


6




Property, Plant &
Equipment, net




Property,
plant and equipment are stated at cost. Expenditures for maintenance and repairs
are charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:





Automotive
                    5
      yearsOffice
      Equipment
                    5
      years




As of
March 31, 2009 and December 31, 2008, property and equipment consisted of the
following:





2009
                                  
                                  
                                  2008(Unaudited)Automotive
                                  
                                  $
                                  132,627
                                  
                                  
                                  $
                                  132,627Office
      equipment
                                  
                                  
                                  119,980
                                  
                                  
                                  
                                  116,700Sub
      Total
                                  
                                  
                                  252,607
                                  
                                  
                                  
                                  249,327Less:
      accumulated depreciation
                                  
                                  
                                  (191,875
                                  )
                                  
                                  
                                  (185,227
                                  )Total
                                  
                                  $
                                  60,732
                                  
                                  
                                  $
                                  64,100




Long-Lived
Assets




The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market values
are reduced for the cost of disposal. Based on its review, the Company believes
that, as of March 31, 2009 and December 31, 2008, there were no significant
impairments of its long-lived assets.




Fair Value of Financial
Instruments




SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires the
Company to disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.




Revenue
Recognition





In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) 104, the Company recognizes revenues when there is persuasive
evidence of an arrangement, product delivery and acceptance have occurred, the
sales price is fixed and determinable, and collectability of the resulting
receivable is reasonably assured.





The
Company records revenues when title and the risk of loss pass to the
customer.  Generally, these conditions occur on the date the customer
takes delivery of the product.  Revenue is generated from sales of
China 3C products through two main revenue streams:





1.
            Retail. Approximately
      68% and 65% of the Company's revenue comes from sales to individual
      customers at outlets installed inside department stores etc. (i.e. store
      in store model) during the three months ended March 31, 2009 and 2008,
      respectively and is mainly achieved through two broad
      categories:





a.
            Purchase contracts.
      Sales by purchase contracts have terms of thirty days from the transfer of
      goods to the customer. Under this method, the Company delivers goods to
      places designated by the customers and receives confirmation of delivery.
      At that time, ownership and all risks associated to the goods are
      transferred to the customers and payment is made within 30 days. The
      Company relieves its inventory and recognizes revenue upon receipt of
      confirmation from the customer.





b.
            Point of sale transfer of
      ownership. Under this method, the Company’s products are placed in
      third party stores and sold by the Company’s sales people. Upon purchase
      of the item by the customer, the Company relieves its inventory and
      recognizes revenue related to that
item.




7




2.
            Wholesale. Approximately
      32% and 35% of the Company's revenue comes from wholesale during the three
      months ended March 31, 2009 and 2008, respectively. Recognition of
      wholesale income is based on the contract terms. In 2009, the main
      contract terms on wholesale were that payments be paid 10 days after
      receipt of goods and that ownership and all risks associated with the
      goods are transferred to the customers on the date of goods
      received





Sales
revenue is therefore recognized on the following basis:





1.
            Store
      in store model:





a.
            For
      goods sold under sales and purchase contracts, revenue is recognized when
      goods are received by customers.





b.
            For
      goods at customer outlets which the Company’s sales people operate, and
      inventory of goods is under joint control by the customers and the
      Company, revenue is recognized at the point of sale to the end
      buyer.





During
public holidays or department store celebration periods, we provide certain
sales incentives to retail customers to increase sales, such as gift giving and
price reductions. These are the only temporary incentives during the specified
periods. Sales made to our retail customers as a result of incentives are
immaterial as a percentage of total sales revenue.





2.
            Wholesales:





a.
            Revenue
      is recognized at the date of goods are received by wholesale customers. We
      operate our wholesale business by selling large volume orders to
      second-tier distributors and large department stores. Revenues from
      wholesale are recognized as net sales after confirmation with
      distributors. Net sales already take into account revenue dilution as they
      exclude inventory credit, discount fro early payment, product obsolescence
      and return of products and other allowances. Net sales also take into
      account the return of products in accordance with relevant laws and
      regulations in China.





Return
policies





Our
return policy complies with China’s laws and regulations on consumer’s rights
and product quality. In accordance with Chinese law, consumers can return or
exchange used products within seven days only if the goods do not meet safety
and health requirements, endanger a person’s property, or do not meet the
advertised performance. If the conditions and requirements as set out in the
relevant laws and regulations are met, the retail stores are entitled to accept
a return of the goods from the consumer. In such cases, the Company shall accept
the returns unconditionally. Goods returned will be redirected to the production
factory or supplier who shall bear all losses on the returns in accordance the
laws and regulations. Consumer returns or exchanges of products that have not
been used, where the packaging has not been damaged, are honored if such return
or exchange is within seven days. If a consumer returns a product, the Company
must refund the invoice price to the consumer. The Company will then be
responsible for returning the goods to the production factory or supplier. At
that time the Company can recover the price based on the purchase and sale
contract with the producer or supplier. However, when goods are returned, the
Company loses the gross margin that it records when revenue is recognized,
regardless of whether the production factory or supplier takes the product back
or not.





The
return rights granted to wholesale customers are similar to the rights granted
to retail customers. Once wholesale customers purchase the products, they follow
the same return policy as retail customers. We do not honor any return from
wholesale customers other than if the products don’t meet laws and regulations
or quality requirements. If the wholesale customers have a high inventory level
or product obsolescence caused by lower market demands or other operational
issues, the wholesale customers bear their own losses. When a wholesale customer
returns products, the Company will return the products to the suppliers or
manufacturers. A sales return and allowance is recorded at the sales price.
Meanwhile, a purchase return and allowance entry is recorded at the invoice
price because the suppliers or manufacturers bear the losses. The net effect is
that the Company derecognizes the gross profit when a return takes place, but
does not record any loss on the cost of the returned item back to the supplier
or manufacturer.





In light
of the aforesaid PRC laws and regulations and the Company's arrangements with
suppliers, we do not provide an accrual for any estimated losses on subsequent
sale of the return of products.  As a result we do not engage in assessing
levels of inventory in the distribution channel, product obsolescence and/or
introductions of new products, as none of those factors have any impact on us
with respect to estimating losses on subsequent sale of returned goods. 
Third party market research report and consumer demand study is not used to make
estimates of goods returned.


8




Cost of
Sales





Cost of
sales consists of actual product cost, which is the purchase price of the
product less any discounts.  Cost of sales excludes freight charges,
purchase and delivery costs, internal transfer, freight charges and the other
costs of the Company’s distribution network, which are identified in general and
administrative expenses.





General and Administrative
Expenses





General
and administrative expenses are comprised principally of payroll and benefits
costs for retail and corporate employees, occupancy costs of corporate
facilities, lease expenses, management fees, traveling expenses and other
operating and administrative expenses, including freight charges, purchase and
delivery costs, internal transfer freight charges and other distribution
costs.





Because
the Company does not include the costs related to its distribution network in
cost of sales, its gross profit and gross profit as a percentage of net sales
(“gross margin”) may not be comparable to those of other retailers that may
include all costs related to their distribution network in cost of sales and in
the calculation of gross profit and gross margin.





Shipping and handling
fees





The
Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for
Shipping and Handling Fees and Costs.  The Company does not charge its
customers for shipping and handling. The Company classifies shipping and
handling fees as part of general and administrative expenses which were $53,705
and $59,875 for the three months ended March 31, 2009 and 2008,
respectively.





Vendor
Discounts





The
Company has negotiated preferred pricing arrangements with certain vendors on
certain products. These arrangements are not contingent on any levels of volume
and are considered vendor discounts as opposed to rebates. The Company records
these discounts along with the purchase of the discounted items, resulting in
lower inventory cost and a corresponding lower cost of sales as the products are
sold.





Management fees paid to the
department stores under “store in store” model





Under the
“store in store” business operation model, the Company may pay management fees
to the department stores, which are in the form of service charges or “selling
at an allowance (discount)”. The management fees are accounted for (1) in the
form of service charges which are reflected in general and administrative
expenses, or (2) in the form of “selling at an allowance (discount)”, as a
deduction of sales, which means, the expenses are directly deducted at a certain
percentage on sales. Such management fees were $485,520 and $218,400 in general
and administrative expenses and deductions of $2,364,934 and $2,110,394 in sales
for the three months ended March 31, 2009 and 2008, respectively.




Share Based
Payment




In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123.” This statement
amended SFAS 123, “Accounting for Stock-Based Compensation,” to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amended the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.





Advertising





Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense was $56,836 and $107,353 for the three
months ended March 31, 2009 and 2008.




Other
Income




Other
income was $148,127 for the three months ended March 31, 2009. Other income
consists of the following:




Advertising
      service income
                          
                          $
                          103,220Repair
      service income
                          
                          
                          14,756Commission
      income from China Unicom
                          
                          
                          30,151Total
      other income
                          
                          $
                          148,127




9




Advertising
service income is the fee we receive from electronic product manufacturers when
we advertise their products in our retail locations. Commission income from
China Unicom is derived from the sales of China Unicom’s wireless service and
products, i.e. rechargeable mobile phone cards.





Income
Taxes




The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.




Basic and Diluted Earnings
per Share




Earnings
per share are calculated in accordance with SFAS No. 128, “Earnings per Share.”
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period. If
convertible shares and stock options are anti-dilutive, the impact of conversion
is not included in the diluted net income per share. Excluded from the
calculation of diluted earnings per share for the three months ended March 31,
2009 was 50,000 options, as they were not dilutive.




Statement of Cash
Flows




In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the functional currency, in our
case the CNY. As a result, amounts related to changes in assets and liabilities
reported on the statement of cash flows will not necessarily agree with the
changes in the corresponding balances on the balance sheet.




Concentration of Credit
Risk




Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance
is limited.




Segment
Reporting





SFAS No.
131, “Disclosure about Segments of an Enterprise and Related Information,”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. The Company operates in four segments (see Note
13).





Recent Accounting
Pronouncements




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115.” This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is
expected to expand the use of fair value measurement, which is consistent with
the Board’s long-term measurement objectives for accounting for financial
instruments. This statement was effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007. The adoption of this
statement had no effect on the Company’s consolidated financial
statements.


10




In
December 2007, FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS 141R changes how a reporting enterprise accounts for
the acquisition of a business. SFAS 141R requires an acquiring entity to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value, with limited exceptions, and applies to a wider
range of transactions or events. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008 and early adoption and
retrospective application is prohibited. Effective January 1, 2009, the Company
adopted SFAS 141(R). The adoption of SFAS 141(R) had no impact on the Company’s
condensed consolidated financial statements but will have a material impact on
future acquisitions. We will account for future business acquisitions in
accordance with these standards.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements.” This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. The Company adopted SFAS 160 on January 1, 2009. The
adoption of this statement had no effect on the Company’s consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.” The new standard is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity’s financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The new
standard also improves transparency about the location and amounts of derivative
instruments in an entity’s financial statements; how derivative instruments and
related hedged items are accounted for under Statement 133; and how derivative
instruments and related hedged items affect its financial position, financial
performance, and cash flows. The Company adopted SFAS 161 on January 1, 2009.
The adoption of this statement had no effect on the Company’s consolidated
financial statements.





In May
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) APB 14-1, Accounting for Convertible Debt Instruments That May
Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB
14-1 clarifies that convertible debt instruments that may be settled in cash
upon either mandatory or optional conversion (including partial cash settlement)
are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP
APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the
entity’s non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted FSP APB 14-1 beginning in the first
quarter of 2009, and this standard must be applied on a retroactive basis. This
Statement did not have an effect on the Company’s consolidated financial
statements.





On May 8,
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” which will provide framework for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with US GAAP for nongovernmental entities. With the issuance of SFAS
No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing
literature to accounting literature.  Management does not expect that this
statement will have an effect on the Company’s consolidated financial
statements.





On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities,” to address the question of whether instruments
granted in share-based payment transactions are participating securities prior
to vesting. As provided in the FSP, unvested share-based payment awards that
contain rights to dividend payments should be included in earnings per share
calculations. The guidance will be effective commencing in the year ended
December 31, 2009. We are currently evaluating the requirements of EITF 03-6-1
as well as the impact of the adoption on our condensed consolidated financial
statements.





In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. This
Statement did not have an effect on the Company’s condensed consolidated
financial statements.





In April
2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board Opinion
(“APB”) 28-1, "Interim Disclosures about Fair Value of Financial Instruments",
or FSP 107-1, which will require that the fair value disclosures required for
all financial instruments within the scope of SFAS 107, "Disclosures about Fair
Value of Financial Instruments", be included in interim financial statements.
This FSP also requires entities to disclose the method and significant
assumptions used to estimate the fair value of financial instruments on an
interim and annual basis and to highlight any changes from prior periods. FSP
107-1 will be effective for interim periods ending after June 15, 2009. The
adoption of FSP 107-1 is not expected to have a material affect.


11





Note
3 – ADVANCES TO
SUPPLIERS




Advances
to suppliers represent advance payments to suppliers for the purchase of
inventory. As of March 31, 2009 and December 31, 2008, the Company paid
$2,337,268 and $2,491,518, respectively, as advances to suppliers.




Note 4 - COMMON
STOCK




On
December 21, 2005, the Company announced a plan named the China 3C Group 2005
Equity Incentive Plan (the “2005 Plan”) for providing incentives to attract,
retain and motivate eligible persons whose presence and potential contributions
are important to the success of the Company. 5,000,000 shares of the Company’s
common stock were allocated to the 2005 Plan.





On
December 21, 2005, the Company agreed to issue 4,980,000 shares under the
2005 Plan to a number of consultants who were engaged to provide various
services to the Company during the period from January 1, 2005 to December 20,
2005. These shares were valued at $0.10 per share, or $498,000, and were
expensed as consulting fees in the statements of operations. The shares were
issued subsequently in 2006.





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





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





The
Company appointed Joseph Levinson to serve as a member of the Company’s Board of
Directors on May 7, 2007. Joseph Levinson resigned as a member of the Company’s
Board of Directors on January 27, 2009.  There were no disagreements
between Mr. Levinson and the Company on any matter related to the Company’s
operations, policies or practices which resulted in his
resignation.  Pursuant to the Agreement dated May 3, 2007 the Company
agreed to issue to Mr. Levinson, as compensation for his services, a monthly
grant of 1,000 shares of the Company’s common stock.  The Company has
issued 20,000 shares in total to M. Levinson representing the 1,000 share per
month payments.  In addition, the Company agreed to grant Mr. Levinson
the following awards under the 2005 Plan: (i) an initial annual grant of a stock
option to purchase 300,000 shares of the Company’s common Stock, with an
exercise price of $6.15 per share (the “2007 Stock Option”); and (ii) a
subsequent annual grant of a stock option to purchase an additional 300,000
shares of the Company’s common stock, with an exercise price of $1.82 (the “2008
Stock Option”).  It was later determined that due to the expiration of
the 2005 Plan on December 31, 2006, the 2007 Stock Option and the 2008 Stock
Option could not be validly granted.  Pursuant to the terms of the
Compensation Agreement dated as of November 27, 2008 between Mr. Levinson and
the Company, Mr. Levinson acknowledged that the 2007 Stock Option and the 2008
Stock Option were not and could  not be granted and,  in
consideration for his services as a Director accepted the issuance of 125,000
shares of the Company’s common stock.





On
January 15, 2009, the Company’s Board of Directors adopted the China 3C Group,
Inc. 2008 Omnibus Securities and Incentive Plan (the “2008
Plan”).  The 2008 Plan provides for the granting of distribution
equivalent rights, incentive stock options, non-qualified stock options,
performance share awards, performance unit awards, restricted stock awards,
stock appreciation rights, tandem stock appreciation rights, unrestricted stock
awards or any combination of the foregoing, as may be best suited to the
circumstances of the particular employee, director or
consultant.  Under the 2008 Plan 2,000,000 shares of the Company’s
common stock are available for issuance for awards.  Each award shall
remain exercisable for a term of ten (10) years from the date of its grant. The
price at which a share of common stock may be purchased upon exercise of an
option shall not be less than the closing sales price of the common stock on the
date such option is granted.  The 2008 Plan shall continue in effect,
unless sooner terminated, until the tenth anniversary of the date on which it is
adopted by the Board.





Note
5 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION




The
Company appointed Kenneth T. Berents to serve as a member of the Company’s Board
of Directors on December 8, 2006.  Under the Board of Directors
Agreement between the Company and Mr. Berents, dated December 8, 2006, the
Company agreed to issue to Mr. Berents as a compensation for his services under
the 2005 Plan, an initial grant of a stock option to purchase 50,000 shares of
the Company’s common stock upon execution of the Board of Directors Agreement
and an option to purchase 30,000 shares of the Company’s common stock on each
anniversary of the Board of Directors Agreement , provided Mr. Berents is a
member of the Board of Directors at such time.  It was later
determined that due to the expiration of the 2005 Plan on December 31, 2006 the
grants of stock options to Mr. Berents could not be validly
granted.  In order to meet its obligations under the Board of
Directors Agreement, the Company entered into the following agreements with Mr.
Berents (i) Stock Option Agreement - Director Non-Qualified Stock Option dated
as of December 1, 2008 and effective as of January 15, 2009 for the issuance of
50,000 shares of the Company’s common stock, with an exercise price of $4.29 per
share under the Company’s 2008 Plan to Mr. Berents, (ii) Stock Option Agreement
- Director Non-Qualified Stock Option dated as of December 1, 2008 and effective
as of January 15, 2009 for the issuance of 30,000 shares of the Company’s common
stock, with an exercise price of $4.27 per share under the Company’s 2008 Plan
to Mr. Berents, and (iii) Stock Option Agreement - Director Non-Qualified Stock
Option dated as of December 1, 2008 and effective as of January 15, 2009 for the
issuance of 30,000 shares of the Company’s common stock, with an exercise price
of $0.90 per share under the Company’s 2008 Plan to Mr. Berents.





The
Company appointed Todd L. Mavis to serve as a member of the Company’s Board of
Directors on January 2, 2007. Mr. Mavis resigned as a member of the Board of
Directors effective as of December 17, 2007.  There were no
disagreements between Mr. Mavis and the Company on any matter related to the
Company’s operations, policies or practices which resulted in his
resignation.   As a compensation for his services,  the
Company agreed to issue to Mr. Mavis under the 2005 Plan, an initial annual
grant of a stock option to purchase 50,000 shares of the Company’s common stock,
with an exercise price of $3.80 per share (the “Mavis Stock
Option”).  Under the Board of Directors Agreement between the Company
and Mr. Mavis, dated January 2, 2007, in the event that Mr. Mavis is no longer a
member of the Board of Directors, his exercise period for all vested options is
twenty-four months from the anniversary date of his departure from the Board of
Directors.  It was later determined that due to the expiration of the
2005 Plan on December 31, 2006 the Mavis Stock Option could not be validly
granted.  Pursuant to the terms of the Stock Option Agreement with
Todd L. Mavis dated as of April 21, 2009 between Mr. Mavis and the Company, Mr.
Mavis was granted an option to purchase 50,000 shares of the Company’s common
stock (the “New Mavis Stock Option”), for an exercise price per share of common
stock equal to $3.46.  All or any part of the New Mavis Stock Option
may be exercised by Mr. Mavis, no later than December 17, 2009.





Stock
options— All options issued have a ten-year life and were fully vested upon
issuance. The option holder has no voting or dividend rights. The grant price
was equal the market price at the date of grant. The Company records the expense
of the stock options over the related vesting period. The options were valued
using the Black-Scholes option-pricing model at the date of grant stock option
pricing.





The
expected term represents the estimated average period of time that the options
remain outstanding. The expected volatility is based on the historical
volatility of the Company’s stock price. No dividend payouts were assumed, as
the Company has no plans to declare dividends during the expected term of the
stock options. The risk-free rate of return reflects the weighted average
interest rate offered for zero coupon treasury bonds over the expected term of
the options. Based upon this calculation and pursuant to EITF 96-18, the Company
recorded expenses of $117,557 for the three months ending March 31,
2008.


12




Note
6 - COMPENSATED
ABSENCES




Regulation
45 of the labor laws in the People’s Republic of China (PRC) entitles employees
to annual vacation leave after 1 year of service. In general all leave must be
utilized annually, with proper notification, any unutilized leave is
cancelled.





Note
7 - INCOME
TAXES





The
Company, through its subsidiaries, Zhejiang, Wang Da, Sanhe, Joy & Harmony
and Yiwu, is governed by the Income Tax Laws of the PRC. The US entity, China 3C
Group, Inc, has incurred net accumulated operating losses of approximately
$2,503,752 of public company expenses as of March 31, 2009 for income tax
purposes. However, a 100% allowance has been recorded on the deferred tax asset
of approximately $851,000 due to the fact that the US entity does not have any
operations and only incurs public expenses every year and it is more likely than
not that all of the Company’s deferred tax assets will not be
realized.




FIN 48
provides guidance on interest and penalties on unrecognized deferred tax
benefit. The Company’s policy is to recognize interest and penalties accrued on
any unrecognized tax benefits as a component of income tax expense. The Company
did not have any unrecognized tax benefit, and therefore, no accrued interest or
penalties associated with any unrecognized tax benefits was
recorded.





Pursuant
to the PRC Income Tax Laws, from January 1, 2008, the Enterprise Income Tax
(“EIT) is at a statutory rate of 25%.




The
following is a reconciliation of income tax expense:





March
      31, 2009
                              
                              U.S.
                              
                              
                              State
                              
                              
                              International
                              
                              
                              TotalCurrent
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,198,891Deferred
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,198,891




March
      31, 2009
                              
                              U.S.
                              
                              
                              State
                              
                              
                              International
                              
                              
                              TotalCurrent
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,810,573Deferred
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              1,810,573





Reconciliation
of the differences between the statutory U.S. Federal income tax rate and the
effective rate is as follows:




For
      the three months ended
                                    March
      31,2009
                                  
                                  
                                  2008US
      statutory tax rate
                                  
                                  
                                  34
                                  %
                                  
                                  
                                  34
                                  %Tax
      rate difference
                                  
                                  
                                  (9
                                  )%
                                  
                                  
                                  (9
                                  )%Increase
      in valuation allowance
                                  
                                  
                                  0.8
                                  %
                                  
                                  
                                  (1
                                  )%Effective
      rate
                                  
                                  
                                  25.8
                                  %
                                  
                                  
                                  24
                                  %




Note
8 - COMMITMENTS




The
Company leases office facilities under operating leases that terminate through
2011. Rent expense for the three months ended March 31, 2009 and 2008 was
$51,174 and $62,799, respectively. The future minimum obligations under these
agreements are as follows by years as of March 31, 2009:




2009
                      
                      $
                      274,0002010
                      
                      
                      72,4002011
                      
                      
                      16,400





Note
9 - STATUTORY
RESERVE





In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprise’s income, after the payment of the PRC income taxes, shall
be allocated to the statutory surplus reserves and statutory public welfare
fund. Prior to January 1, 2006, the proportion of allocation for reserve was 10
percent of the profit after tax to the surplus reserve fund and additional 5-10
percent to the public affair fund. The public welfare fund reserve was limited
to 50 percent of the registered capital. Effective January 1, 2006, there is now
only one fund requirement. The reserve is 10 percent of income after tax, not to
exceed 50 percent of registered capital.


13




Statutory
reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of March 31,
2009 and December 31, 2008, the Company had allocated $11,109,379 to these
non-distributable reserve funds.





Note
10 - OTHER
COMPREHENSIVE INCOME





The
detail of other comprehensive income as included in stockholders’ equity at
March 31, 2009 (unaudited) and December 31, 2008 are as follows is as
follows:




Foreign
                                    Currency
                                    Translation
                                    Adjustment
                                  
                                  
                                  Total
                                    Accumulated
                                    Other
                                    Comprehensive
                                    IncomeBalance
      at December 31, 2007
                                  
                                  $
                                  1,872,334
                                  
                                  
                                  $
                                  1,872,334Change
      for 2008
                                  
                                  
                                  3,399,770
                                  
                                  
                                  
                                  3,399,770Balance
      at December 31, 2008
                                  
                                  $
                                  5,272,104
                                  
                                  
                                  $
                                  5,272,104Change
      for first quarter 2009
                                  
                                  
                                  (136,574
                                  )
                                  
                                  
                                  (136,574
                                  )Balance
      at March 31, 2009
                                  
                                  $
                                  5,135,530
                                  
                                  
                                  $
                                  5,135,530





Note 11 -CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS





The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.





Note
12 - MAJOR CUSTOMERS
AND CREDIT RISK





During
the three months ended March 31, 2009, no customer accounted for more than 10%
of the Company’s sales or accounts receivable. At March 31, 2009 two (2)vendors comprised
approximately 29% of the Company’s accounts payable.





During
the three months ended March 31, 2008, no customer accounted for more than 10%
of the Company’s sales or accounts receivable. At March 31, 2008 three (3)vendors comprised
approximately 35% of the Company’s accounts payable.





Note
13 -   SEGMENT
INFORMATION





We
separately operate and prepare accounting and other financial reports to
management for four major business organizations (Wang Da, Sanhe, Yiwu and Joy
& Harmony). Each of the individual operating companies corresponds to
different product groups.  Wang Da is mainly operating mobile phones,
Sanhe is mainly operating home appliances, Yiwu is mainly operating office
communication products, and Joy & Harmony is mainly operating consumer
electronics. All segments are accounted for using the same principals as
described in Note 2.





We have
identified four reportable segments required by SFAS 131: (1) mobile phone, (2)
home electronics, (3) office communication product, and (4) consumer
electronics.


14





The
following tables present summarize information by segment (in
thousands):





Quarter Ended March 31, 2009Mobile
                  Phones
                
                
                Home
                  Electronics
                
                
                Office
                  Communication
                  Products
                
                
                Consumer
                  Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                25,744
                
                
                
                16,593
                
                
                $
                15,802
                
                
                $
                19,273
                
                
                $
                -
                
                
                $
                77,412Cost
      of sales
                
                
                22,784
                
                
                
                13,344
                
                
                
                14,105
                
                
                
                17,120
                
                
                
                -
                
                
                
                67,353Gross
      profit
                
                
                2,960
                
                
                
                3,249
                
                
                
                1,697
                
                
                
                2,153
                
                
                
                -
                
                
                
                10,059Income
      from operations
                
                
                1,116
                
                
                
                1,138
                
                
                
                502
                
                
                
                1,279
                
                
                
                537
                
                
                
                4,572Total
      assets
                
                $
                16,679
                
                
                $
                17,746
                
                
                $
                16,598
                
                
                $
                16,069
                
                
                $
                33,813
                
                
                $
                100,905





Quarter Ended March 31, 2008Mobile
                  Phones
                
                
                Home
                  Electronics
                
                
                Office
                  Communication
                  Products
                
                
                Consumer
                  Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                21,782
                
                
                $
                16,890
                
                
                $
                13,117
                
                
                $
                16,364
                
                
                $
                -
                
                
                $
                68,153Cost
      of sales
                
                
                18,228
                
                
                
                13,912
                
                
                
                11,285
                
                
                
                14,182
                
                
                
                -
                
                
                
                57,607Gross
      profit
                
                
                3,554
                
                
                
                2,978
                
                
                
                1,832
                
                
                
                2,182
                
                
                
                -
                
                
                
                10,546Income
      from operations
                
                
                2,547
                
                
                
                1,864
                
                
                
                1,190
                
                
                
                1,660
                
                
                
                299
                
                
                
                7,560Total
      assets
                
                $
                21,294
                
                
                $
                18,269
                
                
                $
                14,452
                
                
                $
                16,818
                
                
                $
                769
                
                
                $
                71,602


15





Forward
Looking Statements





We have
included, and from time–to-time may make in our public filings, press releases
or other public statements, certain statements, including, without limitation,
those under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 2.  In some cases, these statements are
identifiable through the use of words such as “anticipate”, “believe”,
“estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”,
“may”, “should”, “will”, “would”, and similar expressions. You are cautioned not
to place undue reliance on these forward-looking statements.  In addition,
our management may make forward-looking statements to analysts, investors,
representatives of the media and others.  These forward-looking statements
are not historical facts and represent only our beliefs regarding future events,
many of which, by their nature, are inherently uncertain and beyond our
control.





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





Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.





Overview





China 3C
Group was incorporated on August, 20, 1998 under the laws of the State of
Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and
CFDL own 100% of the capital stock of SJHE and Sanhe. Until August 14, 2007,
when it made the change to its ownership structure described in the next
paragraph in order to comply with certain requirements of PRC law, CFDL owned
100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of
Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009
Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co.,
Ltd. (“Letong”) to establish an electronic retail franchise operation for China
3C Group. Collectively the seven corporations are referred to herein as the
Company.





On
December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group
through a merger with a wholly owned subsidiary of the Company. China 3C Group
acquired all of the issued and outstanding capital stock of CFDL pursuant to a
Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY
Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger
Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned
subsidiary of China 3C Group and, in exchange for the CFDL shares, China 3C
Group issued 35,000,000 shares of its common stock to the shareholders of CFDL,
representing 93% of the issued and outstanding capital stock of China 3C Group
at that time and a cash consideration of $500,000. On August 15, 2007, in order
to comply with the requirements of PRC law, the Company recapitalized its
ownership structure. As a result, instead of CFDL owning 100% of Zhejiang as
previously was the case, CFDL entered into contractual agreements with Zhejiang
whereby CFDL owns a 100% interest in the revenues of Zhejiang. CFDL does not
have an equity interest in Zhejiang, but is deemed to have all the economic
benefits and liabilities by contract. Under this structure, Zhejiang is now a
wholly foreign owned enterprise (WOFE) of CFDL. The contractual agreements give
CFDL and its’ equity owners an obligation to absorb, any losses, and rights to
receive revenue. CFDL will be unable to make significant decisions about the
activities of Zhejiang and can not carry out its principal activities without
financial support. These characteristics as defined in Financial Accounting
Standards Board (FASB) interpretation 46, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of (Zhejiang) to be
consolidated with (CFDL) and ultimately with China 3C Group.




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





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




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





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


16




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





The
Company is engaged in the business of the resale and distribution of mobile
phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players,
iPods, electronic dictionaries, CD players, radios, Walkmans, and audio systems.
We sell and distribute these products through retail stores and secondary
distributors.




On
December 19, 2008, China 3C Group’s subsidiaries, Zhejiang and Yiwu entered into
an acquisition agreement (the “Jinhua Agreement”) with Jinhua Baofa Logistic
Ltd., a company organized under the laws of the People’s Republic of China
(“Jinhua”) and the shareholders of Jinhua, who own 100% of the equity interest
in Jinhua in the aggregate. Pursuant to the Jinhua Agreement Zhejiang will
acquire 90% and Yiwu will acquire 10% of the entire equity interests in Jinhua
from the shareholders of Jinhua for a total purchase price of RMB 120,000,000
payable as follows: (i) RMB 50,000,000, within 10 business days after the
execution of the Jinhua Agreement; (ii) RMB 50,000,000 within 10 business days
following the completion of the audit of Jinhua’s financial statements for the
fiscal year ending December 31, 2008, in accordance with generally accepted
accounting principles in the U.S. (the “Audit”), which Audit shall be completed
no later than March 31, 2009; and (iii) the remaining RMB 20,000,000 no later
than three months after the completion of Jinhua’s Audit. The source of the cash
to be used for the purchase of 100% of the equity of Jinhua will be from working
capital of China 3C Group.





Jinhua
was founded in 2001 and is a well-known transportation logistics company in
Eastern China and has been a long time transportation provider for China 3C
Group. Jinhua has approximately 280 customers and operates a fleet of more than
70 trucks and transports freight including electronics, machinery and equipment,
metal products, chemical materials, garments and handicraft goods, in more than
20 cities in Eastern China. Its transportation service covers many of the most
developed cities in the Eastern China region such as Shanghai, Hangzhou and
Nanjing.





On April
4, 2009, Zhejiang and Yiwu entered into an amendment to the Jinhua Agreement
(the “Amended Agreement”) with the shareholders of Jinhua. The Amended Agreement
changed from March 31, 2009 to June 30, 2009 the date by which the parties have
agreed that the Audit is required to be completed. In the event that the audit
is not completed by June 30, 2009, the Agreement may be terminated.




Result
of Operations





For
the Three Months Ended March 31, 2009 and 2008





Reportable
Operating Segments





The
Company reports financial and operating information in the following four
segments:




a) 
         Yiwu Yong Xin Telecommunication Company,
Limited or “Yiwu”


b)           Hangzhou
Wang Da Electronics Company, Limited or “Wang Da”


c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”


d)           Shanghai
Joy & Harmony Electronics Company Limited or “SJHE”





All
dollar amounts reported here are in thousands:





a)           Yiwu
Yong Xin Telecommunication Company Limited or “Yiwu”





Yiwu
focuses on the selling, circulation and modern logistics of fax machines and
cord phone products.





Three months ended March
                  31,
                
                
                PercentageYiwu
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                15,802
                
                
                $
                13,117
                
                
                
                20.47
                %Gross
      Profit
                
                $
                1,697
                
                
                $
                1,832
                
                
                
                (7.37
                )%Gross
      Margin
                
                
                10.74
                %
                
                
                13.97
                %
                
                
                (3.23
                )%Operating
      Income
                
                $
                502
                
                
                $
                1,190
                
                
                
                (57.81
                )%





For the
three months ended March 31, 2009, Yiwu generated revenue of $15,802 , an
increase of $2,685  or 20.47% compared to $13,117  for the
three months ended March 31, 2008.





Gross
profit decreased $135  or 7.37% from $1,832  for the three
months ended March 31, 2008 to $1,697  for the three months ended
March 31, 2009. Gross profit margin decreased 3.23% from 13.97% in the three
months ended March 31, 2008 to 10.74% in the three months ended March 31, 2009.
The decrease was a result of lower unit sales price of fax machines and
telephones due to a more competitive sales market.





Operating
income was $502 for the three months ended March 31, 2009, a decrease of
$688  or 57.81% compared to $1,190  for the three months
ended March 31, 2008. Operating income decreased primarily due to decreased
gross profit and increased operating expenses. The increase in operating
expenses was primarily due to an increase in base salary for all staff. Other
factors include an increase in marketing expenses, an increase in management
fees paid to the department stores as well as additional expenses incurred to
upgrade the sales counters in retail stores to enhance the business
image.





b)           Hangzhou
Wang Da Electronics Company Limited or “Wang Da”





Wang Da
focuses on the selling, circulation and modern logistics of cell phones, cell
phones products, and digital products, including digital cameras, digital
camcorders, PDAs, flash disks, and removable hard disks.


17




Three months endedMarch
                  31,
                
                
                PercentageWang Da
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                25,744
                
                
                $
                21,782
                
                
                
                18.18
                %Gross
      Profit
                
                $
                2,960
                
                
                $
                3,554
                
                
                
                (16.71
                )%Gross
      Margin
                
                
                11.50
                %
                
                
                16.32
                %
                
                
                (4.82
                )%Operating
      Income
                
                $
                1,116
                
                
                $
                2,547
                
                
                
                (56.18
                )%





For the
three months ended March 31, 2009, Wang Da generated revenue of $25,744 , an
increase of $3,962  or 18.18% compared to $21,782  for the
three months ended March 31, 2008.





Gross
profit decreased $594  or 16.71% from $3,554  for the three
months ended March 31, 2008 to $2,960  for the three months ended
March 31, 2009. Gross profit margin decreased from 16.32% in the three months
ended March 31, 2008 to 11.50% in the three months ended March 31, 2009, a
decrease of 4.82%.  The decrease was a result of lower unit sales
price of cell phones due to a more competitive sales market.





Operating
income was $1,116  for the three months ended March 31, 2009, a
decrease of $1,431  or 56.18% compared to $2,547  for the
three months ended March 31, 2008. Operating income decreased primarily due to
decreased gross profit and increased operating expenses. The increase in
operating expenses was primarily due to an increase in base salary for all
staff. Other factors include an increase in marketing expenses, an increase in
management fees paid to the department stores as well as additional expenses
incurred to upgrade the sales counters in retail stores to enhance the business
image.





c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”





Sanhe
focuses on the selling, circulation and modern logistics of home electronics,
including DVD players, audio systems, speakers, televisions and air
conditioners.





Three months endedMarch
                  31,
                
                
                PercentageSanhe
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                16,593
                
                
                $
                16,890
                
                
                
                (1.76
                )%Gross
      Profit
                
                $
                3,249
                
                
                $
                2,978
                
                
                
                9.10
                %Gross
      Margin
                
                
                19.58
                %
                
                
                17.63
                %
                
                
                1.95
                %Operating
      Income
                
                $
                1,138
                
                
                $
                1,864
                
                
                
                (38.96
                )%





For the
three months ended March 31, 2009, Sanhe generated revenue of $16,593 , a
decrease of $297  or 1.76% compared to $16,890  for the
three months ended March 31, 2008.





Gross
profit increased $271  or 9.10% from $2,978  for the three
months ended March 31, 2008 to $3,249  for the three months ended
March 31, 2009. Gross profit margin increased from 17.63% in 2008 to 19.58% in
2009, an increase of 1.95%. The increase was a result of higher sales volume of
DVD players and speakers which have higher gross margin compared to other home
electronics products such as televisions and air conditioners.





Operating
income was $1,138  for the three months ended March 31, 2009, a
decrease of $726  or 38.96% compared to $1,864  for the
three months ended March 31, 2008. Operating income decreased primarily due to
higher operating expenses in the first quarter of 2009. The increase in
operating expenses was primarily due to an increase in base salary for all
staff. Other factors include an increase in marketing expenses, an increase in
management fees paid to the department stores as well as additional expenses
incurred to upgrade the sales counters in retail stores to enhance the business
image.





d)           Shanghai
Joy & Harmony Electronics Company Limited or “SJHE”





SJHE
focuses on the selling, circulation and modern logistics of consumer
electronics, including MP3 players, MP4 players, iPod, electronic dictionary,
radios, and Walkman.


18




Three months endedMarch
                  31,
                
                
                PercentageSJHE
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                19,273
                
                
                $
                16,364
                
                
                
                17.78
                %Gross
      Profit
                
                $
                2,153
                
                
                $
                2,182
                
                
                
                (1.33
                )%Gross
      Margin
                
                
                11.17
                %
                
                
                13.33
                %
                
                
                (2.16
                )%Operating
      Income
                
                $
                1,279
                
                
                $
                1,660
                
                
                
                (22.97
                )%





For the
three months ended March 31, 2009, SJHE generated revenue of $19,273 , an
increase of $2,909  or 17.78% compared to $16,364  for the
three months ended March 31, 2008.





Gross
profit decreased $29  or 1.33% from $2,182  for the three
months ended March 31, 2008 to $2,153  for the three months ended
March 31, 2009. Gross profit margin decreased from 13.33% in 2008 to 11.17% in
2009, a decrease of 2.16%.  The slight decrease was due to a more
competitive market in consumer digital products which caused the unit sales
price to fall in the first quarter of 2009.





Operating
income was $1,279  for the three months ended March 31, 2009, a
decrease of $381  or 22.97% compared to $1,660  for the
three months ended March 31, 2008. Operating income decreased primarily due to
higher operating expenses in the first quarter 2009. The increase in operating
expenses was primarily due to an increase in base salary for all staff. Other
factors include an increase in marketing expenses , an increase in management
fees paid to the department stores as well as additional expenses incurred to
upgrade the sales counters in retail stores to enhance the business
image.





Net
Sales





Net sales
for the three months ended on March 31, 2009 increased by 13.58%, to $77,412
compared with $68,153 for the three months ended March 31, 2008. We had a
significant snowstorm in China during the first two months of 2008 which created
a backlog in our distribution channels. Therefore, we had fewer sales in the
first quarter 2008. Management believes that the sales revenue for the three
months ended on March 31, 2009 is considered at a normal level.





Cost
of Sales





Cost of
sales for the three months ended on March 31, 2009 totaled $67,353compared to
$57,607 for the three months ended on March 31, 2008, an increase of 16.92%. The
increased cost of sales was a direct result of the increase in
sales.





Gross
Profit Margin





Gross
profit margin for the three months ending March 31, 2009 was 12.99% compared to
15.47% for the three months ending March 31, 2008. The lower gross profit margin
was because the unit sales prices for many electronic products decreased due to
the highly competitive market environment but the purchase prices remained
flat.





Selling,
General and Administrative Expenses





Selling,
general and administrative expenses for the three months ending March 31, 2009
totaled $5,486 or approximately 7% of net sales, compared to $2,986 or
approximately 4% of net sales for the three months ended March 31, 2008, an
increase of 83.73%. The increase in operating expenses was primarily due to an
increase in base salary for all staff. Other factors include an increase in
marketing expenses, an increase in management fees paid to the department stores
as well as additional expenses incurred to upgrade the sales counters in retail
stores to enhance the business image.





Income
from Operations





Income
from operations for the three months ended March 31, 2009 was $4,572 or 5.91% of
net sales as compared to income from operations of $7,560 or 11.09% of net sales
for the three months ending March 31, 2008, a decrease of 39.52%. Lower gross
margin and higher operating expenses were the key factors for the decrease in
income from operations.





Provision
for Income Taxes





The
provision for income taxes for the three months ended March 31, 2009 was $1,199
as compared with $1,811 for the three months ended March 31, 2008. The decrease
was attributed to the decrease in taxable income.


19




Net
Income





Net
income was $3,440 or 4.44% of net sales for the three months ended on March 31,
2009 compared to $5,773 or 8.47% of net sales for the three months ended on
March 31, 2008, a decrease of 40.42%. Lower gross margin and high operating
expenses were the critical factors which contributed to the decrease in net
income.




Liquidity
and Capital Resources





Operations
and liquidity needs are funded primarily through cash flows from operations.
Cash and cash equivalents were $28,667 at March 31, 2009, as compared to $23,422
at March 31, 2008, and compared to $32,158 at December 31, 2008.




We
believe that the funds available to us are adequate to meet our operating needs
for the remainder of 2009.





Three months endedMarch 31,
                      2009
                    
                    
                    March 31,
                      2008Net
      cash (used in) provided by operating activities
                    
                    $
                    3,883
                    
                    
                    $
                    (3,127
                    )Net
      cash (used in) investing activities
                    
                    $
                    (7,292
                    )
                    
                    $
                    (4
                    )Effect
      of exchange rate change on cash and cash equivalents
                    
                    $
                    (82
                    )
                    
                    $
                    1,600Net
      increase (decrease) in cash and cash equivalents
                    
                    $
                    (3,491
                    )
                    
                    $
                    (1,531
                    )Cash
      and cash equivalents at beginning of period
                    
                    $
                    32,158
                    
                    
                    $
                    24,953Cash
      and cash equivalents at end period
                    
                    $
                    28,667
                    
                    
                    $
                    23,422





Operating
Activities





Net cash
generated from operating activities was $3,883  for the three months
ended March 31, 2009 compared to net cash used in operating activities of
$3,127  for the three months ended March 31, 2008, approximately a
224.20% increase.  The increase was mainly attributable to several
factors, including (i) net income of 3,440; (ii) the substantial increase in
accounts payable and accrued expenses of $3,363; (iii) decrease in accounts
receivable of $208, offset by the increase in inventory of $2,388  and
decrease in income taxes payable of $940  in the three months ended
March 31, 2009.




Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008a)
      Increase in accounts payable and accrued charges
                      
                      $
                      3,363
                      
                      
                      $
                      1,869





The
Company has developed its own brand name over the past years and has been
successful in receiving support from its creditors.




Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008b)
      Increase (decrease) in accounts receivable
                      
                      $
                      (208
                      )
                      
                      $
                      6,740




At year
end 2008, the contract terms were i) 30 days from the transfer of goods to the
customers on retail and ii) 10 days after receipt of goods on
wholesale.





Beginning
in March 2009, the Company has renewed the contracts with customers and new
terms were negotiated as follows: i) 45 days from the transfer of goods to the
customers on retail and ii) 15 days after receipt of goods on
wholesale.





At March
31, 2009, the accounts receivable balance was $23,470, which represented a one
percent decrease compared to $23,725 at December 31, 2008. However, sales in the
first quarter of 2009 decreased $7,507 or 8.8%.





Accounts
receivable did not decrease in line with the decrease in sales due to the fact
that the Company began extending the payment terms of its customers in late
March 2009. The extension in payment terms resulted in an increase in accounts
receivable which offset the decrease in accounts receivable caused by the
decline in sales.





Collection
of debt is based on the terms of legal binding documents. Our account receivable
department has periodically reviewed the allowance for doubtful accounts. The
estimate of bad debt allowance is based on the aging of the receivables, the
credit history and credit quality of the customers, the term of the contracts as
well as the balance outstanding. If an account receivable item is considered
highly probable that it is uncollectible, then it will be charged to bad debt
immediately in that period.




In 2008,
the accounts receivable turnover was approximately 12 times per year. At March
31, 2009, the accounts receivable turnover was approximately 9 times per year.
The accounts receivable turnover ratio is in line with contract terms.
Management assessed the collectability of accounts receivable and determined
that all accounts remained collectible. No bad debt provision was necessary
during the first quarter 2009 for the current accounts
receivables.


20




Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008c)
      Increase in inventory
                      
                      $
                      2,388
                      
                      
                      $
                      4,252




As a
result of the unprecedented snow storm in 2008, there was a shortage of
inventory available to our stores during the first quarter 2008.  As a
precautionary measure, the Company decided to increase its level of inventory in
order to maintain an adequate level for all stores in the event of other
unexpected incidents.  Therefore, inventory increased
$4,252  in the first quarter 2008. During the first quarter 2009,
inventory increased $2,388, the increased inventory balance at March 31, 2009
was due to the slowdown in sales after the Chinese New Year
holiday.




At
December 31, 2008, inventory level of $9 million was relatively low because it
is the peek season for holiday shopping and we have high inventory turnover
during the holiday season.  At March 31, 2009, inventory was $11.3
million. Sales slowed down after the Chinese New Year in late February and March
2009 which caused inventory  turnover to slow down, and the Company
needed some time to adjust the inventory to a normal level.





The
Company did not change its inventory policy in 2009 and the inventory turnover
remained approximately 15 days.





As a
result of the factors above, the Company generated $3,884  in
operating activities for the three months ended March 31, 2009.





Investing
Activities





Net cash
used in investing activities increased to $7,292  in the first quarter
2009 from $4  in 2008. The significant increase was due to the second
installment payment for acquisition of Jinhua Baofa Logistic Ltd, pursuant to
the acquisition agreement dated December 29, 2008. The Company made the second
installment payment in advance of its due date in order to change the business
license registration of Jinhua.





Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008Net
      cash (used in) investment activities
                      
                      $
                      (7,292
                      )
                      
                      $
                      (4
                      )




The
source of the cash to be used for the purchase of 100% of the equity of Jinhua
will be from working capital of China 3C Group.




Financing
Activities





The
Company did not carry out any financing activities during the three months ended
March 31, 2009 and 2008.





Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008Net
      change in cash and cash equivalents
                      
                      $
                      (3,491
                      )
                      
                      $
                      (1,531
                      )





Three months endedMarch 31,
                        2009
                      
                      
                      March 31,
                        2008(in
                        thousands)
                      
                      
                      (in
                        thousands)Cash
      and cash equivalent at March 31, 2009 and 2008
                      
                      $
                      28,667
                      
                      
                      $
                      23,421





With
effective internal control systems in place the Company maintained healthy net
cash flows over period and achieved a healthy cash position of $28,667 thousand
at March 31, 2009.





Capital
Expenditures





Total
capital expenditures for the first three months of 2009 were $3 for purchase of
fixed assetsas
compared to $7 for the first three months of 2008.





Working Capital
Requirements





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


21




Off-Balance
Sheet Arrangements





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





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Foreign
Currency Exchange Rate Risk





Our
financial statements are expressed in U.S. dollars but the functional currency
of our operating subsidiaries is RMB. The value of stockholders’ investment in
our stock will be affected by the foreign exchange rate between U.S. dollars and
RMB. To the extent we hold assets denominated in U.S. dollars any appreciation
of the RMB against the U.S. dollar could result in a change to our statement of
operations and a reduction in the value of our U.S. dollar denominated assets.
On the other hand, a decline in the value of RMB against the U.S. dollar could
reduce the U.S. dollar equivalent amounts of our financial results, the value of
stockholders’ investment in our company and the dividends we may pay in the
future, if any, all of which may have a material adverse effect on the price of
our stock.





Our
exposure to foreign exchange risk primarily relates to currency gains or losses
resulting from timing differences between signing of sales contracts and
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the foreign exchange rate at the end of the period. Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in our statement of shareholders’ equity. We have not used
any forward contracts, currency options or borrowings to hedge our exposure to
foreign currency exchange risk. We cannot predict the impact of future exchange
rate fluctuations on our results of operations and may incur net foreign
currency losses in the future.





Interest
Rate Risk





Changes
in interest rates may affect the interest paid (or earned) and therefore affect
our cash flows and results of operations. However, we do not believe that this
interest rate change risk is significant.





Inflation





Inflation
has not had a material impact on the Company’s business in recent
years.





Currency
Exchange Fluctuations





All of
the Company’s revenues are denominated in Chinese Renminbi, as are expenses. The
value of the RMB-to-U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Since 1994, the conversion of Renminbi into foreign currencies, including U.S.
dollars, has been based on rates set by the People’s Bank of China, which are
set daily based on the previous day’s inter-bank foreign exchange market rates
and current exchange rates on the world financial markets. Since 1994, the
official exchange rate for the conversion of Renminbi to U.S. dollars had
generally been stable and the Renminbi had appreciated slightly against the U.S.
dollar. However, on July 21, 2005, the Chinese government changed its policy of
pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy,
Chinese Renminbi may fluctuate within a narrow and managed band against a basket
of certain foreign currencies. Recently there has been increased political
pressure on the Chinese government to decouple the Renminbi from the United
States dollar. At the recent quarterly regular meeting of People’s Bank of
China, its Currency Policy Committee affirmed the effects of the reform on
Chinese Renminbi exchange rate. Since February 2006, the new currency rate
system has been operated; the currency rate of Renminbi has become more flexible
while basically maintaining stable and the expectation for a larger appreciation
range is shrinking. The Company has never engaged in currency hedging operations
and has no present intention to do so.





Concentration
of Credit Risk





Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions as described below:


22





·
            The Company’s business is
      characterized by rapid technological change, new product and service
      development, and evolving industry standards and regulations. Inherent in
      the Company’s business are various risks and uncertainties, including the
      impact from the volatility of the stock market, limited operating history,
      uncertain profitability and the ability to raise additional
      capital.





·
            All of the Company’s revenue is
      derived from Asia and Greater China. Changes in laws and regulations, or
      their interpretation, or the imposition of confiscatory taxation,
      restrictions on currency conversion, devaluations of currency or the
      nationalization or other expropriation of private enterprises could have a
      material adverse effect on our business, results of operations and
      financial condition.





·
            If the Company is unable to
      derive any revenues from Greater China, it would have a significant,
      financially disruptive effect on the normal operations of the
      Company.





Seasonality
and Quarterly Fluctuations





Our
businesses experience fluctuations in quarterly performance. Traditionally, the
first quarter from January to March has a higher number of sales reflected by
our electronics business due to the New Year holidays in China occurring during
that period.





Item
4. Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures as of March 31, 2009, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
the Company’s disclosure controls and procedures were effective as of such date
to ensure that information required to be disclosed by us in our Exchange Act
reports is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosures.





Changes
in Internal Control over Financial Reporting




There
were material changes in the Company’s internal control over financial reporting
during the first quarter of 2009. .During the first quarter of 2009, the Company
took the following actions to remediate the deficiencies identified at December
31, 2008:





·
            The
      Company hired new accounting staff who is familiar with US GAAP and PCAOB
      requirements during the first quarter of 2009 to assist in the preparation
      of the Company’s financial statements in accordance with US GAAP. The
      Company also consults with its auditing firm to ensure the completeness
      and accuracy of the required
disclosures.


·
            The
      Company enhanced its internal control over financial reporting by
      implementing a routine review process to be performed by its principal
      accounting officer which will:


§
            Clearly
      establish the date when the sale of merchandise occurs as the sales
      cut-off date, instead of the date of receipt of payment for the sold
      merchandise;


§
            Include
      reviews of sales recorded near the fiscal period end to ensure sales are
      recorded in the correct period; and


§
            Include
      approval by the principal accounting officer of all sales cut-off
      adjustment entries to assure
accuracy.


·
            The
      Company provided training to its accounting staff to explain the
      differences between US GAAP and Chinese Accounting Standards which caused
      the accounting error in sales
cut-off.





PART II. OTHER INFORMATION





Item 1. Legal
Proceedings.





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





Item
1A. Risk Factors.





None.





Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds.





The
Company appointed Joseph Levinson to serve as a member of the Company’s Board of
Directors on May 7, 2007. Joseph Levinson resigned as a member of the Company’s
Board of Directors on January 27, 2009.  There were no disagreements
between Mr. Levinson and the Company on any matter related to the Company’s
operations, policies or practices which resulted in his
resignation.  Pursuant to the Agreement dated May 3, 2007 the Company
agreed to issue to Mr. Levinson, as compensation for his services, a monthly
grant of 1,000 shares of the Company’s common stock.  The Company has
issued 20,000 shares in total to M. Levinson representing the 1,000 share per
month payments.  In addition, the Company agreed to grant Mr. Levinson
the following awards under the China 3C Group 2005 Equity Incentive Plan (the
“2005 Plan”): (i) an initial annual grant of a stock option to purchase 300,000
shares of the Company’s common Stock, with an exercise price of $6.15 per share
(the “2007 Stock Option”); and (ii) a subsequent annual grant of a stock option
to purchase an additional 300,000 shares of the Company’s common stock, with an
exercise price of $1.82 (the “2008 Stock Option”).  It was later
determined that due to the expiration of the 2005 Plan on December 31, 2006, the
2007 Stock Option and the 2008 Stock Option could not be validly
granted.  Pursuant to the terms of the Compensation Agreement dated as
of November 27, 2008 between Mr. Levinson and the Company, Mr. Levinson
acknowledged that the 2007 Stock Option and the 2008 Stock Option were not and
could  not be granted and,  in consideration for his
services as a Director accepted the issuance of 125,000 shares of the Company’s
common stock.


23




Item 3.  Defaults Upon Senior
Securities.




Not
Applicable.





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





None.





Item 5. Other
Information.





None.





Item 6. Exhibits.




Exhibit
                No.
              
              Document Description31.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of the Chief Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
              
              Certification
      of Chief Accounting and Financial Officer pursuant to 18 U.S.C. 1350
      (Section 906 of the Sarbanes-Oxley Act of
2002).


24




SIGNATURES





Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Company has
duly caused this  report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 24th day of December,
2009.




CHINA
      3C GROUPBy:
                  /s/
      Zhenggang WangName:  
      Zhenggang WangTitle:
      Chief Executive Officer and
Chairman




By:
                /s/
      Jian ZhangName:  
      Jian ZhangTitle:
      Chief Financial Officer (Principal
                  Accounting
      and Financial
Officer)


25




Exhibit
Index




Exhibit
                No.
              
              Document Description31.1
              
              Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
              
              Certification
      of the Chief Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
              
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
              
              Certification
      of Chief Accounting and Financial Officer pursuant to 18 U.S.C. 1350
      (Section 906 of the Sarbanes-Oxley Act of
2002).


26