**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





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




For
      the
      quarterly period ended   September 30, 2008





or





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





For
      the
      transition period from ____ to _____




Commission
      file number 000-28767




**China
      3C Group**


(Exact
      Name of Registrant as Specified in Its Charter)





**Nevada**
            
            **88-0403070**(State
                or other jurisdiction of incorporation ororganization)
            
            (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 x No o





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 o Accelerated filer x Non-accelerated filer (Do not check if a smaller reporting company) o Smaller
      reporting company o





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





As
      of
      November 7, 2008 the registrant had 53,194,844 shares of common stock
      outstanding.










**TABLE
      OF CONTENTS**


**PART
                  I. FINANCIAL INFORMATION**Item
                  1. Financial Statements:Report
                  of Independent Registered Public Accounting Firm
              1Consolidated
                  Balance Sheets as of September 30, 2008 (Unaudited) and December
                  31,
                  2007
              2Consolidated
                  Statements of Income for the Nine Months Ended September 30, 2008
                  and 2007
                  (Unaudited)
              3Consolidated
                  Statements of Income for the Three Months Ended September 30, 2008
                  and
                  2007 (Unaudited)
              4Consolidated
                  Statements of Cash Flows for the Nine Months Ended September 30,
                  2008 and
                  2007 (Unaudited)
              5Consolidated
                  Statement of Stockholders’ Equity for the Nine Months Ended September 30,
                  2008 (Unaudited) and the Year Ended December 31, 2007
              6Notes
                  to Consolidated Financial Statements
              7
                  -
                  17Item
                  2. Management’s Discussion and Analysis of Financial Condition and Results
                  of Operations
              18Item
                  3. Qualitative and Quantitative Disclosure About Market
                  Risk
              21Item
                  4. Controls and Procedures
              23**PART
                  II. OTHER INFORMATION**Item
                  1. Legal Proceedings
              23Item
                  1A. Risk Factors
              23Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              23Item
                  3. Defaults Upon Senior Securities
              23Item
                  4. Submission of Matters to a Vote of Security Holders
              23Item
                  5. Other Information
              24Item
                  6. Exhibits
              24Signatures
              25







**PART
      I. FINANCIAL
      INFORMATION**


**Item
      1.**  **Financial
      Statements.**




***MORGENSTERN,
      SVOBODA & BAER, CPA’s, P.C.***




*CERTIFIED
      PUBLIC ACCOUNTANTS*


40
      Exchange Place, Suite 1820


New
      York,
      NY 10005


TEL:
      (212)
      925-9490


FAX:
      (212)
      226-9134


E-MAIL:
      MORGENCPA@CS.COM





Report
      of Independent Registered Public Accounting Firm





Board
      of
      Directors and Stockholders of


China
      3C
      Group





We
      have
      reviewed the accompanying consolidated balance sheets of China 3C Group as
      of
      September 30, 2008 and the consolidated statements of operations for the nine
      months ended September 30, 2008 & 2007 and consolidated statements of cash
      flows and shareholders’ equity for the nine months then ended. These financial
      statements are the responsibility of the Company’s management.





We
      conducted our review in accordance with standards of the Public Company
      Accounting Oversight Board (United States). A review of interim financial
      information consists principally of applying analytical procedures and making
      inquiries of persons responsible for financial and accounting matters. It is
      substantially less in scope than an audit conducted in accordance with standards
      of the Public Company Accounting Oversight Board (United States), the objective
      of which is the expression of an opinion regarding the financial statements
      taken as a whole. Accordingly, we do not express such an opinion.





Based
      on
      our reviews, we are not aware of any material modifications that should be
      made
      to the accompanying interim financial statements referred to above for them
      to
      be in conformity with accounting principles generally accepted in the United
      States of America.





We
      have
      previously audited, in accordance with auditing standards of the Public Company
      Accounting Oversight Board (United States), the consolidated balance sheet
      of
      China 3C Group as of December 31, 2007 and the related consolidated statements
      of income retained earnings and comprehensive income, and consolidated
      statements of cash flows for the year then ended; and in our report dated March
      4, 2008 we expressed an unqualified opinion on those financial statements.
      In
      our opinion, the information set forth in the accompanying consolidated balance
      sheet as of December 31, 2007, is fairly stated, in all material respects,
      in
      relation to the consolidated balance sheet from which it has been
      derived.





Morgenstern,
      Svoboda & Baer, CPA’s, P.C.


**Certified
      Public Accountants**







New
      York,
      New York


November
      4, 2008





1




**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****S****AS
                OF SEPTEMBER 30, 2008 AND DECEMBER 31,
                2007**




**(Unaudited)**
            
            **(Audited)****ASSETS**
            
            **9/30/2008**
            
            **12/31/2007****Current
                Assets**Cash
                and cash equivalents
            
            $
            31,678,969
            
            $
            24,952,614Accounts
                receivable, net
            
            
            19,543,726
            
            
            8,077,533Inventory
            
            
            15,223,160
            
            
            6,725,371Advance
                to supplier
            
            
            1,455,775
            
            
            2,572,285Prepaid
                expenses
            
            
            107,537
            
            
            382,769Total
                Current Assets
            
            
            68,009,167
            
            
            42,710,572Property
                & equipment, net
            
            
            71,379
            
            
            89,414Goodwill
            
            
            20,348,278
            
            
            20,348,278Refundable
                deposits
            
            
            41,710
            
            
            48,541**Total
                Assets**
            
            $
            88,470,534
            
            $
            63,196,805**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                LiabilitiesAccounts
                payable and accrued expenses
            
            $
            5,973,337
            
            $
            3,108,235Income
                tax payable
            
            
            2,351,617
            
            
            2,684,487Total
                Current Liabilities
            
            
            8,324,954
            
            
            5,792,722**Stockholders’
                Equity**Common
                stock, $.001 par value, 100,000,000 shares authorized, 52,673,938
                and
                52,673,938 issued and outstanding
            
            
            52,674
            
            
            52,674Additional
                paid-in capital
            
            
            19,465,776
            
            
            19,465,776Subscription
                receivable
            
            
            (50,000
            )
            
            (50,000
            )Statutory
                reserve
            
            
            7,234,295
            
            
            7,234,295Other
                comprehensive income
            
            
            4,925,225
            
            
            1,872,334Retained
                earnings
            
            
            48,517,610
            
            
            28,829,004Total
                Stockholders’ Equity
            
            
            80,145,580
            
            
            57,404,083Total
                Liabilities and Stockholders’ Equity
            
            $
            88,470,534
            
            $
            63,196,805




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




2




**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF INCOME****(UNAUDITED)****FOR
                THE NINE MONTHS ENDING SEPTEMBER 30, 2008 AND
                2007**




**2008**
            
            **2007**Sales,
                net
            
            $
            225,725,603
            
            $
            206,918,528Cost
                of sales
            
            
            190,457,324
            
            
            168,764,661**Gross
                profit**
            
            
            35,268,279
            
            
            38,153,867General
                and administrative expenses
            
            
            10,043,055
            
            
            9,597,200**Income
                from operations**
            
            
            25,225,224
            
            
            28,556,667Other
                (Income) ExpenseInterest
                income
            
            
            (103,581
            )
            
            (57,423
            )Other
                (income)expense
            
            
            (690,905
            )
            
            12,794Gain
                on asset disposal
            
            
            (2,161
            )
            
            -Total
                Other (Income) Expense
            
            
            (796,647
            )
            
            (44,629
            )**Income
                before income taxes**
            
            
            26,021,871
            
            
            28,601,296Provision
                for income taxes
            
            
            6,333,265
            
            
            10,063,012**Net
                income**
            
            $
            19,688,606
            
            $
            18,538,284**Net
                income per share:**Basic
            
            $
            0.37
            
            $
            0.35Diluted
            
            $
            0.37
            
            $
            0.35**Weighted
                average number of shares outstanding:**Basic
            
            
            52,673,938
            
            
            52,608,938Diluted
            
            
            53,073,938
            
            
            52,608,938**Comprehensive
                Income**Net
                Income
            
            $
            19,688,606
            
            $
            18,538,284Foreign
                currency translation adjustment
            
            
            3,052,891
            
            
            750,404Comprehensive
                Income
            
            $
            22,741,497
            
            $
            19,288,688




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




3




**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF INCOME (UNAUDITED)****FOR
                THE THREE MONTHS ENDING SEPTEMBER 30, 2008 AND
                2007**




**2008**
            
            **2007**Sales,
                net
            
            $
            79,056,756
            
            $
            57,896,861Cost
                of sales
            
            
            67,210,574
            
            
            45,113,474**Gross
                profit**
            
            
            11,846,182
            
            
            12,783,387General
                and administrative expenses
            
            
            3,730,967
            
            
            2,856,805**Income
                from operations**
            
            
            8,115,215
            
            
            9,926,582Other
                (Income) ExpenseInterest
                income
            
            
            (38,014
            )
            
            (25,977
            )Other
                (income)/expense
            
            
            (378,976
            )
            
            7,101Total
                Other (Income) Expense
            
            
            (416,990
            )
            
            (18,876
            )**Income
                before income taxes**
            
            
            8,532,205
            
            
            9,945,458Provision
                for income taxes
            
            
            2,168,638
            
            
            3,372,489**Net
                income**
            
            $
            6,363,567
            
            $
            6,572,969**Net
                income per share:**Basic
            
            $
            0.12
            
            $
            0.12Diluted
            
            $
            0.12
            
            $
            0.12**Weighted
                average number of shares outstanding:**Basic
            
            
            52,673,938
            
            
            52,608,938Diluted
            
            
            53,073,938
            
            
            52,608,938**Comprehensive
                Income**Net
                Income
            
            $
            6,363,567
            
            $
            6,572,969Foreign
                currency translation adjustment
            
            
            230,251
            
            
            364,124Comprehensive
                Income
            
            $
            6,593,818
            
            $
            6,937,093




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




4




**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
                2007**


2008
              
              2007**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  Income
              
              $
              19,688,606
              
              $
              18,538,284Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              28,837
              
              
              31,257Gain
                  on asset disposition
              
              
              (2,161
              )
              
              -Provision
                  for bad debts
              
              
              24,666
              
              
              5,491Stock
                  based compensation
              
              
              336,668
              
              
              851,400(Increase)
                  / decrease in assets:Accounts
                  receivables
              
              
              (11,490,859
              )
              
              (1,304,612
              )Inventory
              
              
              (8,497,789
              )
              
              (2,941,188
              )Prepaid
                  expense
              
              
              (61,436
              )
              
              15,619Advance
                  to supplier
              
              
              1,116,510
              
              
              (2,153,952
              )Deposits
              
              
              6,831
              
              
              (42,480
              )Increase
                  / (decrease) in current liabilities:Accounts
                  payable and accrued expenses
              
              
              2,865,102
              
              
              46,850Income
                  tax payable
              
              
              (332,870
              )
              
              798,692Total
                  Adjustments
              
              
              (16,006,501
              )
              
              (4,692,923
              )**Net
                  cash provided by operating activities**
              
              
              3,682,105
              
              
              13,845,361**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Purchase
                  of property & equipment
              
              
              (11,088
              )
              
              (63,057
              )Proceeds
                  from asset sales
              
              
              2,447
              
              
              -**Net
                  cash used in Investing activities**
              
              
              (8,641
              )
              
              (63,057
              )**CASH
                FLOWS FROM FINANCING
                ACTIVITIES**Payments
                  of notes- other
              
              
              -
              
              
              (4,500,000
              )**Net
                  cash used in financing activities**
              
              
              -
              
              
              (4,500,000
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              3,052,891
              
              
              750,404Net
                  change in cash and cash equivalents
              
              
              6,726,355
              
              
              10,032,708**Cash
                  and cash equivalents, beginning balance**
              
              
              24,952,614
              
              
              6,498,450**Cash
                  and cash equivalents, ending balance**
              
              $
              31,678,969
              
              $
              16,531,158**SUPPLEMENTAL
                  DISCLOSURES:**Cash
                  paid during the year for:Income
                  tax payments
              
              $
              6,666,135
              
              $
              9,264,320Interest
                  payments
              
              $
              -
              
              $
              -




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




5




**CHINA
                3C GROUP AND SUBSIDIARIES****CONSOLIDATED
                STATEMENT OF STOCKHOLDERS’ EQUITY****(UNAUDITED)****FOR
                THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND THE YEAR ENDED DECEMBER
                31,
                2007**


**Common**
              
              
              
              **Additional**
              
              **Other**
              
              
              
              
              
              
              
              **Total****Stock**
              
              
              
              **Paid-In**
              
              **Comprehensive**
              
              **Subscription**
              
              **Statutory**
              
              **Retained**
              
              **Stockholders’****Shares**
              
              **Amount**
              
              **Capital**
              
              **Income**
              
              **Receivable**
              
              **Reserve**
              
              **Earnings**
              
              **Equity****Balance
                  December 31, 2006**
              
              
              52,488,938
              
              $
              52,489
              
              $
              17,352,691
              
              $
              427,616
              
              $
              (50,000
              )
              $
              3,320,755
              
              $
              9,822,844
              
              $
              30,926,395Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              1,444,718
              
              
              
              
              
              
              
              
              
              
              
              1,444,718Income
                  for the years ended December 31, 2007
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22,919,700
              
              
              22,919,700Stock
                  based compensation
              
              
              185,000
              
              
              185
              
              
              2,113,085
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,113,270Transferred
                  Tostatutory
                  reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,913,540
              
              
              (3,913,540
              )
              
              -**Balance
                  December 31, 2007**
              
              
              52,673,938
              
              
              52,674
              
              
              19,465,776
              
              
              1,872,334
              
              
              (50,000
              )
              
              7,234,295
              
              
              28,829,004
              
              
              57,404,083Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              3,052,891
              
              
              
              
              
              
              
              
              
              
              
              3,052,891Income
                  for the nine months ending September 30, 2008
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              19,688,606
              
              
              19,688,606**Balance
                  September 30, 2008**
              
              
              52,673,938
              
              $
              52,674
              
              $
              19,465,776
              
              $
              4,925,225
              
              $
              (50,000
              )
              $
              7,234,295
              
              $
              48,517,610
              
              $
              80,145,580


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





6




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**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 Co., Ltd. (“Zhejiang”), Yiwu Yong Xin
      Communication Ltd. (“Yiwu”), Hangzhou Wang Da Electronics Co., Ltd. (“Wang Da”),
      Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and Shanghai Joy &
Harmony Electronics Company Limited (“Joy & Harmony”) were incorporated
      under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997,
      March, 30, 1998, April 12, 2004, and August 20, 2003, respectively.





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
      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.





The
      Company is now engaged in the business of the resale and distribution of mobile
      phone, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players,
      iPods, electronic dictionaries, CD players, radios, Walkman, and audio
      systems.





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





Basis
      of Presentation





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





Translation
      Adjustment





As
      of
      September 30, 2008 and December 31, 2007, the accounts of Zhejiang, Wang Da,
      Yiwu, Sanhe, and Joy & Harmony were maintained, and its financial statements
      were expressed, in Chinese Yuan Renminbi (“CNY”). Such financial statements were
      translated into U.S. Dollars (“USD”) in accordance with Statement of Financial
      Accounts Standards (“SFAS”) No. 52, “Foreign Currency Translation,” with the CNY
      as the functional currency. According to the SFAS No. 52, all assets and
      liabilities were translated at the current exchange rate, stockholders’ equity
      is translated at the historical rates and income statement items are translated
      at the average exchange rate for the period. The resulting translation
      adjustments are reported under other comprehensive income in accordance with
      SFAS No. 130, “Reporting Comprehensive Income,” as a component of shareholders’
equity. Transaction gains and losses are reflected in the income
      statement.




7




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





Use
      of
      Estimates





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





Principles
      of Consolidation





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





Risks
      and Uncertainties





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





Contingencies





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





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





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




8




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**





Cash
      and Cash Equivalents





Cash
      and
      cash equivalents include cash in hand and cash in time deposits, certificates
      of
      deposit and all highly liquid debt instruments with original maturities of
      three
      months or less.





Accounts
      Receivable





The
      Company maintains reserves for potential credit losses on accounts receivable.
      Management reviews the composition of accounts receivable and analyzes
      historical bad debts, customer concentrations, customer credit worthiness,
      current economic trends and changes in customer payment patterns to evaluate
      the
      adequacy of these reserves. Terms of the sales vary. Reserves are recorded
      primarily on a specific identification basis. Allowance for doubtful debts
      amounted to $128,469 and $103,803 as at September 30, 2008 and December 31,
      2007, 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 September 30, 2008 and December 31, 2007, inventory consisted of finished
      goods valued at $15,223,160 and $6,725,371, respectively.




Property,
      Plant & Equipment




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





Furniture
                and Fixtures & Office Equipment
            5
                yearsAutomobile
            5
                years




As
      of
      September 30, 2008 and December 31, 2007, Property, Plant & Equipment
      consist of the following:





2008
            
            2007Automobile
            
            $
            132,627
            
            $
            138,330Office
                equipment
            
            
            116,700
            
            
            105,612249,327
            
            
            243,942Accumulated
                depreciation
            
            
            (177,948
            )
            
            (154,528
            )$
            71,379
            
            $
            89,414




9




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**




Long-Lived
      Assets




Effective
      January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the
      Impairment or Disposal of Long-Lived Assets” (SFAS 144), which addresses
      financial accounting and reporting for the impairment or disposal of long-lived
      assets and supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived
      Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and
      reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations
      for a Disposal of a Segment of a Business.” The Company periodically evaluates
      the carrying value of long-lived assets to be held and used in accordance with
      SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived
      assets used in operations when indicators of impairment are present and the
      undiscounted cash flows estimated to be generated by those assets are less
      than
      the assets carrying amounts. In that event, a loss is recognized based on the
      amount by which the carrying amount exceeds the fair market value of the
      long-lived assets. Loss on long-lived assets to be disposed of is determined
      in
      a similar manner, except that fair market values are reduced for the cost of
      disposal. Based on its review, the Company believes that, as of September 31,
      2008, there were no significant impairments of its long-lived assets.




Fair
      Value of Financial Instruments




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




Revenue
      Recognition





The
      Company’s revenue recognition policies are in compliance with Staff Accounting
      Bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
      customers when a formal arrangement exists, the price is fixed or determinable,
      the delivery is completed, no other significant obligations of the Company
      exist
      and collectibility is reasonably assured. Payments received before all of the
      relevant criteria for revenue recognition are satisfied are recorded as unearned
      revenue.




Stock-Based
      Compensation




In
      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. Effective for the year beginning January 1,
      2006 the Company has adopted SFAS 123 (R), “Share-Based Payment” which
      supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and
      eliminates the intrinsic value method that was provided in SFAS 123 for
      accounting of stock-based compensation to employees. The Company made no
      employee stock-based compensation grants before December 31, 2005 and therefore
      has no unrecognized stock compensation related liabilities or expense unvested
      or vested prior to 2006.




10




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED** **)**





Advertising





Advertising
      expenses consist primarily of costs of promotion for corporate image and product
      marketing and costs of direct advertising. The Company expenses all advertising
      costs as incurred.




Income
      Taxes




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




Basic
      and Diluted Earnings per Share




Earnings
      per share are calculated in accordance with the SFAS No. 128 (SFAS No. 128),
      “Earnings per Share.” SFAS No. 128 superseded Accounting Principles Board
      Opinion No.15 (APB 15). Net loss per share for all periods presented has been
      restated to reflect the adoption of SFAS No. 128. Basic net loss per share
      is
      based upon the weighted average number of common shares outstanding. Diluted
      net
      loss per share is based on the assumption that all dilutive convertible shares
      and stock options were converted or exercised. Dilution is computed by applying
      the treasury stock method. Under this method, options and warrants are assumed
      to be exercised at the beginning of the period (or at the time of issuance,
      if
      later), and as if funds obtained thereby were used to purchase common stock
      at
      the average market price during the period.




Statement
      of Cash Flows




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




11




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**




Concentration
      of Credit Risk




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




Segment
      Reporting





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





Recent
      Accounting Pronouncements





In
      July
      2006, the FASB issued Interpretation No. 48, “ Accounting
      for Uncertainty in Income Taxe *s* -
      an
      Interpretation of FASB Statement 109 *”* (“FIN
      No.
      48”) *.* FIN No.
      48 clarifies the accounting for Income Taxes by prescribing the minimum
      recognition threshold a tax position is required to meet before being recognized
      in the financial statements. It also provides guidance on derecognition,
      measurement, classification, interest and penalties, accounting in interim
      periods, disclosure and transition and clearly scopes income taxes out of SFAS
      No. 5, “A ccounting
      for Contingencies.” FIN No.
      48 is effective for fiscal years beginning after December 15, 2006. The adoption
      of this statement had no impact on the Company’s consolidated financial
      statements.





In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements.” This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (“GAAP”), and expands disclosures
      about fair value measurements. This statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      statement will change current practice. This statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The adoption of this statement
      had no impact on the Company’s consolidated financial statements.





12




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





In
      September 2006, the Securities and Exchange Commission issued Staff Accounting
      Bulletin No. 108 (SAB 108). SAB 108 was issued to provide interpretive guidance
      on how the effects of the carryover reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. The provisions of
      SAB
      108 are effective for the Company for its December 31, 2006 year-end. The
      adoption of SAB 108 had no impact on the Company’s consolidated financial
      statements.





In
      February 2007, 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 is 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 impact
      on
      the Company’s consolidated financial statements.





In
      December 2007, 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. SFAS No. 160 is effective for the Company’s fiscal year
      beginning October 1, 2009. Management is currently evaluating the effect of
      this
      pronouncement on financial statements.





In
      March
      2008, FASB issued FASB Statement 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. Management is
      currently evaluating the effect of this pronouncement on financial
      statements.





On
      May 8,
      2008, FASB issued FASB Statement 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 U.S. generally accepted accounting principles (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.  The Company is currently assessing the impact of SFAS No. 162
      on its financial position and results of operations.




13




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**Note
      2 -** **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





In
      May
      2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance
      Contracts.” SFAS No. 163 clarifies how SFAS No. 60, “Accounting and Reporting by
      Insurance Enterprises,” applies to financial guarantee insurance contracts
      issued by insurance enterprises, and addresses the recognition and measurement
      of premium revenue and claim liabilities. It requires expanded disclosures
      about
      contracts, and recognition of claim liability prior to an event of default
      when
      there is evidence that credit deterioration has occurred in an insured financial
      obligation. It also requires disclosure about (a) the risk-management activities
      used by an insurance enterprise to evaluate credit deterioration in its insured
      financial obligations, and (b) the insurance enterprise’s surveillance or watch
      list. The Company is currently evaluating the impact of
      SFAS No. 163.





**Note
      3 -** **ADVANCE
      TO SUPPLIER**




Advances
      to suppliers represent payments to suppliers for payments of finished goods.
      As
      of September 30, 2008 and December 31, 2007 the Company had paid $1,455,775
      and
      $2,572,285, respectively, as advances to suppliers.




**Note
      4 -** **STOCK
      WARRANTS, OPTIONS, AND COMPENSATION**





On
      December 20, 2005, the Company issued a warrant for 4,000,000 shares to two
      individuals with an exercise price of $0.10. The warrants were issued for
      consulting services to be provided from December 20, 2005 to December 19, 2006.
      The warrant was exercisable immediately and was exercised on December 30,
      2005.




The
      Company is amortizing the fair value of the warrants, $400,000, over the period
      of the agreement. The fair value of the warrants was calculated assuming 293%
      volatility, term of the warrant of 3 years ,
      risk
      free rate of 4% and dividend yield of 0%. For the year ended December 31, 2006
      and December 31, 2005, $387,945 and $12,055 of consulting fee was expensed
      relating to the warrants, respectively.





On
      December 8, 2006 the company issued to Ken Berents, a newly appointed Board
      member, an option grant (incentive Stock Options) to purchase 50,000 shares
      of
      common stock at the closing price as of December 7, 2006. Options expire 10
      years from issuance.





On
      January 2, 2007, the company issued to Todd Mavis, a newly appointed Board
      member, an option grant to purchase 50,000 shares of common stock at the closing
      price as of January 2, 2007. Options expire 10 years from issuance. As of
      December 17, 2007, Todd Mavis resigned.





On
      May 7,
      2007 the Board of Directors appointed Joseph Levinson to serve as a member
      of
      the Board of Directors of the Company. As compensation his services, Mr.
      Levinson receives:





·
            A
                monthly grant of 1,000 shares of the Company’s Common Stock;
                and





·
            An
                annual grant of Stock Options to purchase 300,000 shares of common
                stock
                of the Company. The annual grant of Stock Options vests immediately
                upon
                issuance. The exercise price of the initial grant of Stock Options
                shares
                was based on the closing price of the common stock of the Company
                on May
                7, 2007.




On
      December 8, 2007 the Company issued, to Ken Berents, an option grant (incentive
      Stock Options) to purchase 30,000 shares of common stock at the closing price
      as
      of December 7, 2007. Options expire 10 years from issuance.




14




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**Note
      4 -** **STOCK
      WARRANTS, OPTIONS, AND COMPENSATION (CONTINUED)**





Stock
      options—The three stock options 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.


Nine
                  Months endedSeptember
                  30, 2008Expected
                  Volatility
              153%Expected
                  term (in years)Todd
                  L. Mavis
              9Kenneth
                  T. Berents
              9Joseph
                  Levinson
              9Expected
                  dividends
              -Risk-free
                  rate of return (weighted average)
              3%Weighted
                  average grant-date fair value
              3.8-6.15




Expected
      volatility is based on the historical volatility of the Company’s stock price.
      The expected term represents the estimated average period of time that the
      options remain outstanding. 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 ETIF 96-18, the company recorded a $336,668
      and
      a $899,952 expense for these warrants for the nine months ending September
      30,
      2008 and the year ending December 31, 2007, respectively.





The
      Company did not grant any options during the period ending September 30,
      2008:





AggregateExercise
            
            Remaining
            
            IntrinsicTotal
            
            Price
            
            Life
            
            ValueOutstanding,
                December 31, 2007
            
            
            400,000Granted
                in 2008
            
            
            -Exercised
                in 2008
            
            
            -Outstanding,
                September 30, 2008
            
            
            400,000




**Note
      5 -** **COMPENSATED
      ABSENCES**




Regulation
      45 of PRC labor laws 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
      6 -** **INCOME
      TAXES**





The
      Company, through its subsidiaries, Zhejiang, Wang Da, Sanhe, and Yiwu, is
      governed by the Income Tax Laws of the PRC. Operations in the United States
      of
      America have incurred net accumulated operating losses of approximately
      $2,300,000 as of December 31, 2007 for income tax purposes. However, a hundred
      percent allowance has been created on the deferred tax asset of approximately
      $920,000 due to uncertainty of its realization.




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




15




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**





**Note
      6 -** **INCOME
      TAXES (CONTINUED)**


The
        following is a reconciliation of income tax expense:




9/30/2008
            
            U.S.
            
            State
            
            International
            
            TotalCurrent
            
            $
            -
            
            $
            -
            
            $
            6,333,265
            
            $
            6,333,265Deferred
            
            
            -
            
            
            -Total
            
            $
            -
            
            $
            -
            
            $
            6,333,265
            
            $
            6,333,265




9/30/2007
            
            U.S.
            
            State
            
            International
            
            TotalCurrent
            
            $
            -
            
            $
            -
            
            $
            10,063,012
            
            $
            10,063,012Deferred
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            -
            
            $
            -
            
            $
            10,063,012
            
            $
            10,063,012


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




9/30/2008
            
            9/30/2007US
                statutory tax rate
            
            
            34
            %
            
            34
            %Foreign
                income not recognized in US
            
            
            -34
            %
            
            -34
            %PRC
                income tax
            
            
            25
            %
            
            33
            %Effective
                rate
            
            
            25
            %
            
            33
            %




**Note
      7 -** **COMMITMENTS**




The
      Company leases various office facilities under operating leases that terminate
      thru 2011. The Company also has management agreements that terminated in 2007.
      Rent expense for the nine months ending September 30, 2008 and 2007 was $155,011
      and $96,323, respectively. The future minimum obligations under these agreements
      are as follows:




2009
            $ 133,3272010
            $   46,7932011
            $  
24,063




In
      addition, the Company is committed to pay $140,003 under an advertising
      agreement expiring March 31, 2009.




16




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**SEPTEMBER
      30, 2008**




**Note
      8 -** **STATUTORY
      RESERVE**





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





Statutory
      Reserve funds are restricted for set off against losses, expansion of production
      and operation or increase in register capital of the respective company.
      Statutory public welfare fund is restricted to the capital expenditures for
      the
      collective welfare of employees. These reserves are not transferable to the
      Company in the form of cash dividends, loans or advances. These reserves are
      therefore not available for distribution except in liquidation. As of September
      30, 2008 and December 31, 2007, the Company had allocated $7,234,295 to these
      non-distributable reserve funds.




**Note
      9 -** **OTHER
      COMPREHENSIVE INCOME**




Balances
      of related after-tax components comprising accumulated other comprehensive
      income, included in stockholders’ equity, at September 30, 2008 and December 31,
      2007 are as follows:




Foreign
                Currency Translation Adjustment
            
            Accumulated
                Other Comprehensive IncomeBalance
                at December 31, 2006
            
            $
            427,616
            
            $
            427,616Change
                for 2007
            
            
            1,444,718
            
            
            1,444,718Balance
                at December 31, 2007
            
            
            1,872,334
            
            
            1,872,334Change
                for 2008
            
            
            3,052,891
            
            
            3,052,891Balance
                at September30,
                2008
            
            $
            4,925,225
            
            $
            4,925,225




****


**Note
      10**  **-** **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
      11 -** **MAJOR
      CUSTOMERS AND CREDIT RISK**





During
      the period ended September 30, 2008, no customer accounted for more than 10%
      of
      the Company’s sales or accounts receivable. At September 30, 2008 no vendor
      comprised more than 10% of the Company’s purchase or accounts payable.




17




**Forward
      Looking Statements**





The
      following discussion includes forward-looking statements. 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. 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.





The
      following discussion should be read in conjunction with the Consolidated
      Financial Statements and Notes thereto appearing 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 (“Capital”) was incorporated on July
      22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
      Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
      Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
      Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
      Development Co., Ltd. (“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 25, 2003, respectively. China 3C Group owns 100% of Capital
      and Capital own 100% of the capital stock of Joy & Harmony 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,
      Capital 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.
      Collectively the six corporations are referred to herein as the
      Company.





On
      December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
      through a merger with a wholly owned subsidiary of the Company (“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 15, 2007, in order to comply with the
      requirements of PRC law, the Company recapitalized its ownership structure.
      As a
      result, instead of Capital owning 100% of Zhejiang as previously was the case,
      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 is deemed to have all the economic benefits and
      liabilities by contract. Under this structure, Zhejiang is now a wholly foreign
      owned enterprise of Capital. The contractual agreements give Capital and its’
equity owners an obligation to absorb, any losses, and rights to receive
      revenue. Capital 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 Capital 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:




18




(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 Limited. The shares were valued at $3,750,000, which was the fair
      value of the shares at the date of the exchange agreement. This amount is
      included in the cost of net assets and goodwill purchased.





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





The
      Company is engaged in the business of 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.





**Result
      of Operations**





**For
      the Nine and Three Months Ended September 30, 2008 and
      2007**





**Net
      Sales**





Net
      sales
      for the nine months ended September 30, 2008 increased by 9%, to $225,725,603
      as
      compared to $206,918,528 for the nine months ended September 30, 2007. Net
      sales
      for the three months ended September 30, 2008 increased by 37%, to $79,056,756
      as compared to $57,896,861 for the three months ended September 30, 2007.
      Management believes that the higher sales were a result of various factors
      including the successful introduction of new products, a better-trained sales
      force leading to higher sales, and more effective targeted marketing of the
      company's products towards the company's intended demographics.





**Cost
      of Sales**





Cost
      of
      sales for the nine months ended September 30, 2008 totaled $190,457,324 as
      compared to $168,764,661 for the nine months ended September 30, 2007, an
      increase of 13%. Cost of sales for the three months ended September 30, 2008
      totaled $67,210,574 as compared to $45,113,474 for the three months ended
      September 30, 2007, an increase of 49%. The increased cost of sales for the
      nine
      months was a direct result of the increase in net sales during the same period.





**Gross
      Profit Margin**





Gross
      profit margin for the nine months ended September 30, 2008 was 15.6% as compared
      to 18.4% for the nine months ended September 30, 2007. Gross profit margin
      for
      the three months ended September 30, 2008 was 15.0% as compared to 22.1% for
      the
      three months ended September 30, 2007. The lower gross profit margin was due
      to
      increased cost of sales for units purchased and unit sales prices that did
      not
      increase in line with increasing inflation in China. With the increasing
      competition, we could not offset the cost of sales with higher selling prices.




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 profit 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. The Company includes costs
      related to its distribution network in General and Administrative
      Expenses.




19




**General
      and Administrative Expenses**





General
      and administrative expenses for the nine months ended September 30, 2008 totaled
      $10,043,055 or approximately 4% of net sales, as compared to $9,597,200 or
      approximately 5% of net sales for the nine months ended September 30, 2007,
      an
      increase of 5%. General and administrative expenses for the three months ended
      September 30, 2008 totaled $3,730,967 or approximately 5% of net sales, as
      compared to $2,856,805 or approximately 5% of net sales for the three months
      ended September 30, 2007, an increase of 31%. The decrease was primarily due
      to
      strengthening cost controls such as a rationalization of management structure
      and increasingly sophisticated use of computerized systems.




**Income
      from Operations**





Income
      from operations for the nine months ended September 30, 2008 was $25,225,224
      or
      11% of net sales as compared to income from operations of $28,556,667 or 14%
      of
      net sales for the nine months ended September 30, 2007, a decrease of 12%.
      Income from operations for the three months ended September 30, 2008 was
      $8,115,215 or 10% of net sales as compared to income from operations of
      $9,926,582 or 17% of net sales for the three months ended September 30, 2007,
      a
      decrease of 18%. Lower sales, higher product costs, and logistical costs, such
      as higher distribution costs, were the key factors for the decrease in income
      from operations during the nine months ended September 30, 2008.





**Provision
      for Income Taxes**





The
      provision for income taxes for the nine months ended September 30, 2008 was
      $6,333,265 as compared to $10,063,012 for the nine months ended September 30,
      2007. The provision for income taxes for the three months ended September 30,
      2008 was $2,168,638 as compared to $3,372,489 for the three months ended
      September 30, 2007. The decrease was mainly attributed to the lower statutory
      tax rates effective for 2008 in China.





**Net
      Income**





Net
      income was $19,688,606 or 8.7% of net sales for the nine months ended September
      30, 2008 as compared to $18,538,284 or 9.0% of net sales for the nine months
      ended September 30, 2007, an increase of 6%. Net income was $6,363,567 or 8.0%
      of net sales for the three months ended September 30, 2008 as compared to
      $6,572.969 or 11.3% of net sales for the three months ended September 30, 2007,
      a decrease of 3%. Lower statutory tax rates and strengthening cost controls
      were
      the critical factors which contributed to the increase in net income for the
      nine months ended September 30, 2008. For the decrease in the comparative
      three-month period, the major factors was the vendor rebates which occurred
      in
      the third quarter of 2007 which did not similarly occur in the third quarter
      of
      2008.




**Liquidity
      and Capital Resources**





Operations
      and liquidity needs are funded primarily through cash flows from operations.
      Cash and cash equivalents were $31,678,969 at September 30, 2008, as compared
      to
      $16,531,158 at September 30, 2007, and compared to $24,952,614 at December
      31,
      2007.




20




We
      believe that the funds available to us are adequate to meet our operating needs
      for the remainder of 2008.





**Capital
      Expenditures**





Total
      capital expenditures for the first nine months of 2008 was $11,088 for purchase
      of fixed assets **** as
      compared to $63,057 for the first nine months of 2007.





**Working
      Capital Requirements**





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





**Off-Balance
      Sheet Arrangements**





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





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**





**Foreign
      Currency Exchange Rate Risk**





Fluctuations
      in the rate of exchange between the U.S. dollar and foreign currencies,
      primarily the Chinese Renminbi, could adversely affect our financial results.
      During the fiscal quarter ended September 30, 2008, approximately all of our
      sales were denominated in foreign currencies. We expect that foreign currencies
      will continue to represent a similarly significant percentage of our sales
      in
      the future. Selling, marketing and administrative costs related to these sales
      are largely denominated in the same respective currency, thereby mitigating
      our
      transaction risk exposure. We therefore believe that the risk of a significant
      impact on our operating income from foreign currency fluctuations is not
      substantial. However, for sales not denominated in U.S. dollars, if there is
      an
      increase in the rate at which a foreign currency is exchanged for U.S. dollars,
      it will require more of the foreign currency to equal a specified amount of
      U.S.
      dollars than before the rate increase. In such cases and if we price our
      products in the foreign currency, we will receive less in U.S. dollars than
      we
      did before the rate increase went into effect. If we price our products in
      U.S.
      dollars and competitors price their products in local currency, an increase
      in
      the relative strength of the U.S. dollar could result in our price not being
      competitive in a market where business is transacted in the local
      currency.





All
      of
      our sales denominated in foreign currencies are denominated in the Chinese
      Renminbi. Our principal exchange rate risk therefore exists between the U.S.
      dollar and this currency. Fluctuations from the beginning to the end of any
      given reporting period result in the re-measurement of our foreign
      currency-denominated receivables and payables, generating currency transaction
      gains or losses that impact our non-operating income/expense levels in the
      respective period and are reported in other (income) expense, net in our
      combined consolidated financial statements. We do not currently hedge our
      exposure to foreign currency exchange rate fluctuations. We may, however, hedge
      such exposure to foreign currency exchange rate fluctuations in the
      future.




21




**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**





During
      the quarter ended September 30, 2008, inflation had an impact on net
      income. We were unable to offset the increased costs of operations
      resulting from higher inflation by increasing the prices of our
      products.





**Currency
      Exchange Fluctuations**





All
      of
      the Company’s revenues are denominated in Chinese Renminbi, and its expenses are
      denominated primarily in Chinese Renminbi. The value of the Renminbi-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 the new currency rate system has been in operation, 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:





·
            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.




22




**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 September 30, 2008,
      as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934. 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 in our Exchange
      Act reports is recorded, processed, summarized, and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and forms,
      and that such information is accumulated and communicated to our management,
      including our principal executive officer and principal financial officer,
      as
      appropriate, to allow timely decisions regarding required
      disclosures.





The
      Company strives to continue to enhance its disclosure controls and procedures
      by:





(1)
      Arranging for senior management to undertake professional training to enhance
      awareness and understanding of standards and principles for accounting and
      financial reporting; and





(2)
      Reviewing its current policies, practices, and controls related to the
      preparation of periodical reports and providing education and training to those
      who implement those policies and processes.




**Changes
      in Internal Control over Financial Reporting**




There
      was
      no change in our internal control over financial reporting that occurred during
      the fiscal quarter of 2008 covered by this Quarterly Report on Form 10-Q that
      has materially affected, or is reasonably likely to materially affect, our
      internal control over financial reporting.





**PART
      II.**  **OTHER
      INFORMATION**




**Item
      1.**  **Legal
      Proceedings.**





None.




**Item
      1A. Risk Factors.**





None.





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





None.




**Item
      3.**  **Defaults
      Upon Senior Securities.**




None.




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





None.




23




**Item
      5.**  **Other
      Information.**





None.




**Item
      6.**  **Exhibits.**




**Exhibit**
              **No.**
            
            **Document
                Description**31.1
            
            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 Principal 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 Principal 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 10 th day of
      November, 2008.




**CHINA
                3C GROUP**By:
            /s/ Zhenggang
              WangName:  
                Zhenggang WangTitle:
                Chief Executive Officer and
                Chairman





25




**Exhibit
      Index**


**Exhibit**
                **No.**
              
              **Document
                  Description**31.1
              
              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 Principal 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 Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002).


26