**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   June 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 or
              organization)
            (I.R.S.
                Employer Identification
                No.)




**368
      HuShu Nan Road**


**HangZhou
      City, Zhejiang Province, China 310014**




(Address
      of Principal Executive Offices) (Zip Code)





**086-0571-88381700**


(Registrant’s
      telephone number, including area code)


______________________________________________________________________


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





Indicate
      by check whether the issuer (1) has filed all reports required to be filed
      by
      Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
      12 months (or for such shorter period that the registrant was required to file
      such reports), and (2) has been subject to such filing requirements for the
      past
      90 days.   Yes 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 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
      August 8, 2008 the registrant had 53,194,844  s hares
      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 June 30, 2008 (Unaudited) and December 31,
                2007
            2Consolidated
                Statements of Income for the Six Months Ended June 30, 2008 and 2007
                (Unaudited)
            3Consolidated
                Statements of Income for the Three Months Ended June 30, 2008 and
                2007
                (Unaudited)
            4Consolidated
                Statements of Cash Flows for the Six Months Ended June 30, 2008 and
                2007
                (Unaudited)
            5Consolidated
                Statement of Stockholders’ Equity for the Six Months Ended June 30, 2008
                (Unaudited) and the Year Ended December 31, 2007
            6Notes
                to Consolidated Financial Statements
            7
                -
                22Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            23Item
                3. Qualitative and Quantitative Disclosure about Market
                Risk
            26Item
                4T. Controls and Procedures
            28**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            28Item
                1A. Risk Factors
            28Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            33Item
                3. Defaults Upon Senior Securities
            33Item
                4. Submission of Matters to a Vote of Security Holders
            33Item
                5. Other Information
            33Item
                6. Exhibits
            33Signatures
            34










**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
      June 30, 2008 and the consolidated statements of operations for the six months
      ended June 30, 2008 & 2007 and consolidated statements of cash flows and
      shareholders equity for the six 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


August
      6,
      2008


1




**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET****S**


**AS
      OF JUNE 30, 2008 AND DECEMBER 31, 2007**




**6/30/2008**
            
            ******12/31/2007****ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            25,993,638
            
            $
            24,952,614Accounts
                receivable, net
            
            
            19,099,910
            
            
            8,077,533Inventory
            
            
            12,991,176
            
            
            6,725,371Advance
                to supplier
            
            
            2,478,134
            
            
            2,572,285Prepaid
                expenses
            
            
            147,185
            
            
            382,769Total
                Current Assets
            
            
            60,710,043
            
            
            42,710,572Property
                & equipment, net
            
            
            79,709
            
            
            89,414Goodwill
            
            
            20,348,278
            
            
            20,348,278Refundable
                deposits
            
            
            52,619
            
            
            48,541**Total
                Assets**
            
            $
            81,190,649
            
            $
            63,196,805**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                LiabilitiesAccounts
                payable and accrued expenses
            
            $
            5,210,024
            
            $
            3,108,235Income
                tax payable
            
            
            2,428,862
            
            
            2,684,487Total
                Current Liabilities
            
            
            7,638,886
            
            
            5,792,722**Stockholders'
                Equity**Common
                stock, $.001 par value, 100,000,000shares
                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
            
            
            4,694,974
            
            
            1,872,334Retained
                earnings
            
            
            42,154,044
            
            
            28,829,004Total
                Stockholders' Equity
            
            
            73,551,763
            
            
            57,404,083Total
                Liabilities and Stockholders' Equity
            
            $
            81,190,649
            
            $
            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**


**FOR
      THE SIX MONTHS ENDING JUNE 30, 2008 AND 2007**


**2008**
              
              **2007**Sales,
                  net
              
              $
              146,668,847
              
              $
              149,021,667Cost
                  of sales
              
              
              123,246,750
              
              
              123,651,187**Gross
                  profit**
              
              
              23,422,097
              
              
              25,370,480General
                  and administrative expenses
              
              
              6,312,088
              
              
              6,740,395**Income
                  from operations**
              
              
              17,110,009
              
              
              18,630,085Other
                  (Income) ExpenseInterest
                  income
              
              
              (65,567
              )
              
              (31,446
              )Other
                  (income) expense
              
              
              (311,929
              )
              
              5,693Gain
                  on asset disposal
              
              
              (2,161
              )
              
              -Total
                  Other (Income) Expense
              
              
              (379,657
              )
              
              (25,753
              )**Income
                  before income taxes**
              
              
              17,489,666
              
              
              18,655,838Provision
                  for income taxes
              
              
              4,164,627
              
              
              6,690,523**Net
                  income**
              
              $
              13,325,039
              
              $
              11,965,315**Net
                  income per share:**Basic
              
              $
              0.25
              
              $
              0.23Diluted
              
              $
              0.25
              
              $
              0.23**Weighted
                  average number of shares outstanding:**Basic
              
              
              52,673,938
              
              
              52,608,938Diluted
              
              
              53,073,938
              
              
              52,608,938**Comprehensive
                  Income**Net
                  Income
              
              $
              13,325,039
              
              $
              11,965,315Foreign
                  curreny translation adjustment
              
              
              2,822,640
              
              
              386,280Comprehensive
                  Income
              
              $
              16,147,679
              
              $
              12,351,595




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


3





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE THREE MONTHS ENDING JUNE 30, 2008 AND 2007**




**2008**
              
              **2007**Sales,
                  net
              
              $
              78,515,392
              
              $
              64,498,473Cost
                  of sales
              
              
              65,639,675
              
              
              53,060,275**Gross
                  profit**
              
              
              12,875,717
              
              
              11,438,198General
                  and administrative expenses
              
              
              3,326,044
              
              
              3,014,233**Income
                  from operations**
              
              
              9,549,673
              
              
              8,423,965Other
                  (Income) ExpenseInterest
                  income
              
              
              (29,472
              )
              
              (17,655
              )Other
                  (income) expense
              
              
              (326,904
              )
              
              (1,171
              )Total
                  Other (Income) Expense
              
              
              (356,376
              )
              
              (18,826
              )**Income
                  before income taxes**
              
              
              9,906,049
              
              
              8,442,791Provision
                  for income taxes
              
              
              2,354,054
              
              
              2,941,264**Net
                  income**
              
              $
              7,551,995
              
              $
              5,501,527**Net
                  income per share:**Basic
              
              $
              0.14
              
              $
              0.10Diluted
              
              $
              0.14
              
              $
              0.10**Weighted
                  average number of shares outstanding:**Basic
              
              
              52,673,938
              
              
              52,608,938Diluted
              
              
              53,073,938
              
              
              52,608,938**Comprehensive
                  Income**Net
                  Income
              
              **$**
              7,551,995
              
              $
              5,501,527Foreign
                  currency translation adjustment
              
              
              1,222,590
              
              
              393,131Comprehensive
                  Income
              
              $
              8,774,585
              
              $
              5,894,658





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 SIX MONTHS ENDED JUNE 30, 2008 AND 2007**





2008
            
            2007**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                Income
            
            $
            13,325,040
            
            $
            11,965,315Adjustments
                  to reconcile net income to net cashprovided by operating
                  activities:Depreciation
            
            
            20,069
            
            
            21,767Gain
                on asset disposition
            
            
            (2,161
            )
            
            -Provision
                for bad debts
            
            
            17,445
            
            
            2,419Stock
                based compensation
            
            
            226,293
            
            
            851,400Amortization
                of deferred consulting expense
            
            
            
            
            
            -(Increase)
                / decrease in assets:Accounts
                receivables
            
            
            (11,039,822
            )
            
            726,962Inventory
            
            
            (6,265,805
            )
            
            (2,094,249
            )Prepaid
                expense
            
            
            9,291
            
            
            28,585Advance
                to supplier
            
            
            94,151
            
            
            (30,695
            )Deposits
            
            
            (4,078
            )
            
            (37,649
            )Increase
                / (decrease) in current liabilities:Accounts
                payable and accrued expenses
            
            
            2,101,789
            
            
            1,092,296Income
                tax payable
            
            
            (255,625
            )
            
            381,880Total
                Adjustments
            
            
            (15,098,453
            )
            
            942,716**Net
                cash provided by (used in) operating activities**
            
            
            (1,773,413
            )
            
            12,908,031**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchase
                of property & equipment
            
            
            (10,650
            )
            
            (62,253
            )Proceeds
                from asset sales
            
            
            2,447
            
            
            -**Net
                cash used in investing activities**
            
            
            (8,203
            )
            
            (62,253
            )**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
            
            
            2,822,640
            
            
            386,280Net
                change in cash and cash equivalents
            
            
            1,041,024
            
            
            8,732,058**Cash
                and cash equivalents, beginning balance**
            
            
            24,952,614
            
            
            6,498,450**Cash
                and cash equivalents, ending balance**
            
            $
            25,993,638
            
            $
            15,230,508**SUPPLEMENTAL
                DISCLOSURES:**Cash
                paid during the year for:Income
                tax payments
            
            $
            4,420,252
            
            $
            6,308,643Interest
                payments
            
            $
            -
            
            $
            -





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


5





**CHINA
      3C GROUP AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2008 AND THE YEAR ENDED DECEMBER 31,
      2007**





**Additional**
            
            **Other**
            
            
            
            
            
            
            
            **Total****Common
                Stock**
            
            **Paid-In**
            
            **Comprehensive**
            
            **Subscription**
            
            **Statutory**
            
            
            
            **Stockholders'****Shares**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Receivable**
            
            **Reserve**
            
            **Retained 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
                To statutory 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
            
            
            
            
            
            
            
            
            
            
            
            2,822,640
            
            
            
            
            
            
            
            
            
            
            
            2,822,640Income
                for the three months ended June 30, 2008
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,325,040
            
            
            13,325,040Balance
                June 30, 2008
            
            
            52,673,938
            
            $
            52,674
            
            $
            19,465,776
            
            $
            4,694,974
            
            $
            (50,000
            )
            $
            7,234,295
            
            $
            42,154,044
            
            $
            73,551,763




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


6





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





**Note
      1 -** **ORGANIZATION**





China
      3C
      Group 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 Wandga 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. 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 as previously
      disclosed, Capital has 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 (WOFE) 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 the company
      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
      June 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 Statement, all assets and liabilities
      were translated at the current exchange rate, stockholders equity are translated
      at the historical rates and income statement items are translated at the average
      exchange rate for the period. The resulting translation adjustments are reported
      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**


**JUNE
      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 & Harmony,
      and Sanhe, collectively referred to within 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**


**JUNE
      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 $128,017 and $103,803 as at June 30, 2008 and December 31, 2007,
      respectively.




Inventories





Inventories
      are valued at the lower of cost (determined on a weighted average basis) or
      market. The 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 June 30, 2008 and December 31, 2007 inventory consisted of finished
      goods valued at $12,991,176 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
      June 30, 2008 and December 31, 2007 Property, Plant & Equipment consist of
      the following:





2008
            
            2007Automobile
            
            $
            132,627
            
            $
            138,330Office
                equipment
            
            
            116,262
            
            
            105,612248,889
            
            
            243,942Accumulated
                depreciation
            
            
            (169,180
            )
            
            (154,528
            )$
            79,709
            
            $
            89,414




9





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**




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




Long-Lived
      Assets




Effective
      January 1, 2002, the Company adopted Statement of Financial Accounting Standards
      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  June
      30,
      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
      October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
      Compensation. SFAS No. 123 prescribes accounting and reporting standards for
      all
      stock-based compensation plans, including employee stock options, restricted
      stock, employee stock purchase plans and stock appreciation rights. SFAS No.
      123
      requires compensation expense to be recorded (i) using the new fair value method
      or (ii) using the existing accounting rules prescribed by Accounting Principles
      Board Opinion No. 25, Accounting for stock issued to employees (APB 25) and
      related interpretations with proforma disclosure of what net income and earnings
      per share would have been had the Company adopted the new fair value method.
      The
      Company uses the intrinsic value method prescribed by APB 25 and has opted
      for
      the disclosure provisions of SFAS No.123.




10




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      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 Statement of Financial
      Accounting Standards 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 Statement of Financial Accounting Standards 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**
 **JUNE
        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
 
 Statement
        of Financial Accounting Standards No. 131, Disclosure about Segments of an
        Enterprise and Related Information requires use of the management approach ̈
model for segment reporting. The management approach model is based on the
        way a
        company's management organizes segments within the company for making operating
        decisions and assessing performance. Reportable segments are based on products
        and services, geography, legal structure, management structure, or any other
        manner in which management disaggregates a company.
 
 Recent
        accounting pronouncements
 
 In
        December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment”,
        an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
        companies to recognize in the statement of operations the grant-date fair
        value
        of stock options and other equity-based compensation issued to employees.
        FAS
        No. 123R is effective beginning in the Company's first quarter of fiscal
        2006.
 
 In
        May
        2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
        This statement applies to all voluntary changes in accounting principle and
        requires retrospective application to prior periods' financial statements
        of
        changes in accounting principle, unless this would be impracticable. This
        statement also makes a distinction between "retrospective application" of
        an
        accounting principle and the "restatement" of financial statements to reflect
        the correction of an error. This statement is effective for accounting changes
        and corrections of errors made in fiscal years beginning after December 15,
        2005.
 
 In
        June
        2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
        Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides guidance
        on
        determining the amortization period for leasehold improvements acquired in
        a
        business combination or acquired subsequent to lease inception. The guidance
        in
        EITF 05-6 will be applied prospectively and is effective for periods beginning
        after June 29, 2005. EITF 05-6 is not expected to have a material effect
        on its
        consolidated financial position or results of operations.
  12
  **CHINA
        3C GROUP AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **JUNE
        30, 2008**
 
 **Note
        2 -** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**
  In
        June
        2005, the FASB Staff issued FASB Staff Position 150-5 (FSP 150-5), Issuers
        Accounting under FASB Statement No. 150 for Freestanding Warrants and Other
        Similar Instruments on Shares that are Redeemable. FSP 150-5 addresses
        whether freestanding warrants and other similar instruments on shares that
        are
        redeemable, either puttable or mandatorily redeemable, would be subject to
        the
        requirements of FASB Statement No. 150, Accounting for Certain Financial
        Instruments with Characteristics of Both Liabilities and Equity, regardless
        of
        the timing or the redemption feature or the redemption price. The FSP is
        effective after June 30, 2005.
 
 On
        February 16, 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid
        Financial Instruments. SFAS No. 155 amends SFAS No 133, Accounting for
        Derivative Instruments and Hedging Activities, and SFAF No. 140, Accounting
        for
        Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
        SFAS No. 155, permits fair value re-measurement for any hybrid financial
        instrument that contains an embedded derivative that otherwise would require
        bifurcation, clarifies which interest-only strips and principal-only strips
        are
        not subject to the requirements of SFAS No. 133, establishes a requirement
        to
        evaluate interest in securitized financial assets to identify interests that
        are
        freestanding derivatives or that are hybrid financial instruments that contain
        an embedded derivative requiring bifurcation, clarifies that concentrations
        of
        credit risk in the form of subordination are not embedded derivatives, and
        amends SFAS No. 140 to eliminate the prohibition on the qualifying
        special-purpose entity from holding a derivative financial instrument that
        pertains to a beneficial interest other than another derivative financial
        instrument. This statement is effective for all financial instruments acquired
        or issued after the beginning of the Company’s first fiscal year that begins
        after September 15, 2006.
 
 
 In
        March
        2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
        Financial Assets - an amendment to FASB Statement No. 140. Statement 156
        requires that an entity recognize a servicing asset or servicing liability
        each
        time it undertakes an obligation to service a financial asset by entering
        into a
        service contract under certain situations. The new standard is effective
        for
        fiscal years beginning after September 15, 2006. The Company does not
        expect its adoption of this new standard to have a material impact on its
        financial position, results of operations or cash flows.
 
 In
        July
        2006, the FASB issued Interpretation No. 48, Accounting
        for uncertainty in Income Taxe *s* -
        an
        interpretation of FASB Statement 109 ** (FIN
        48) *.* FIN 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, Accounting
        for Contingencies *.* FIN 48
        is effective for fiscal years beginning after December 15, 2006. We did not
        have
        a material impact on our consolidated financial position, results of operations
        or cash flows.
 
 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 statements 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 management is currently
        evaluating the effect of this pronouncement on financial
        statements.




13




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





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





In
      September 2006, FASB issued SFAS No. 158, Employers’ Accounting for Defined
      Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
      No. 87, 88, 106, and 132(R). This statement improves financial reporting by
      requiring an employer to recognize the over funded or under funded status of
      a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded statues in the year in which the changes occur through
      comprehensive income of a business entity or changes in unrestricted net assets
      of a not-for-profit organization. This statement also improves financial
      reporting by requiring an employer to measure the funded status of a plan as
      of
      the date of its year-end statement of financial position, with limited
      exceptions. An employer with publicly traded equity securities is required
      to
      initially recognize the funded status of a defined benefit postretirement plan
      and to provide the required disclosures as of the end of the fiscal year ending
      after December 15, 2006. An employer without publicly traded equity securities
      is required to recognize the funded status of a defined benefit postretirement
      plan and to provide the required disclosures as of the end of the fiscal year
      ending after June 15, 2007. However, an employer without publicly traded equity
      securities is required to disclose the following information in the notes to
      financial statements for a fiscal year ending after December 15, 2006, but
      before June 16, 2007, unless it has applied the recognition provisions of this
      statement in preparing those financial statements.





a.
            A
                brief description of the provisions of this
                statement


b.
            The
                date that adoption is required


c.
            The
                date the employer plans to adopt the recognition provisions of this
                statement, if earlier.





The
      requirement to measure plan assets and benefit obligations as of the date of
      the
      employer’s fiscal year-end statement of financial position is effective for
      fiscal years ending after December 15, 2008.





The
      Company believes that the adoption of these standards will have no material
      impact on its financial statements.





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 FABS 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 management is currently evaluating the
      effect of this pronouncement on financial statements.





In
      December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
      Consolidated Financial Statements. This Statement amends ARB 51 to establish
      accounting and reporting standards for the noncontrolling (minority) interest
      in
      a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
      a
      noncontrolling 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.





14




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





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





In
      March
      2008, the FASB issued FASB 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.





In
      May,
      2008, the FASB issue SFAS No. 162, The Hierarchy of Generally Accepted
      Accounting Principles, which will provide framework for selecting accounting
      principles to be used in preparing financial statements that are presented
      in
      conformity with 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.




In
      May
      2008, the 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**




Advance
      to suppliers represents payments to suppliers for payments of finished goods.
      As
      of June 30, 2008 and December 31, 2007 the Company had paid $ 2,478,134 and
      $2,572,285, respectively as advances to suppliers.




**Note
      4 -** **COMMON
      STOCK**




On
      December 20, 2005, the Company completed a private offering of 1,000,000 shares
      of its common stock at a per share price of $0.10 to an unaffiliated individual,
      resulting in gross proceeds to the Company of $100,000. The proceeds were to
      be
      used for the Company’s proposed plan to identify and complete a merger or
      acquisition with private entities.





On
      December 20, 2005, the Company issued a warrant to purchase 4,000,000
      shares of its common stock to two individuals at $0.10 per share, which was
      the
      fair value of the shares at the date of issuance. The warrant was issued as
      consideration for financial consulting services to be provided from December
      20,
      2005 to December 19, 2006. The warrants were exercised on December 30, 2005.
      The
      shares were issued subsequently in 2006.





On
      December 21, 2005, the Company agreed to purchase all of the issued and
      outstanding shares of Capital from its shareholders for approximately $500,000
      in cash and 35,000,000 shares of the Company’s common stock, or approximately
      93% of the total issued and outstanding shares.


15


**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





**Note
      4 -** **COMMON
      STOCK (CONTINUED)**





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





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





On
      March
      6, 2007, the Company issues 180,000 shares of common stock, $.001 par value,
      issuable pursuant to the China 3C Group amended 2005 Equity Incentive Plan.
      Under Rule 405 and Rule 144, of the Securities Act of 1933, as amended, these
      securities are deemed “restricted securities”.





On
      December 21, 2005, the Company issued 2,256,795 shares of the Company’s common
      stock to a company for guarantee fees related to the acquisition of Capital.
      The
      guarantee was valued at $225,680, which was the fair value of the shares issued
      at the date of the transaction and was expensed as consulting fees in the
      statement of operations.





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





Pursuant
      to share exchange agreement, dated November 28, 2006, the company 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.





**Note
      5 -** **ACQUISITIONS**





**(a)
      Hangzhou Sanhe Electronic Technology Ltd.**





On
      August
      3, 2006, the Company completed the acquisition of a 100% interest in Hangzhou
      Sanhe Electronic Technology Ltd. ("HSET") for a cash and stock transaction
      valued at approximately US$8.75 million (“HSET Share Exchange Transaction”).
      This amount is included in the cost of net assets and goodwill
      purchased.




The
      stock
      consideration consisted of 915,751 newly issued shares of the Company’s common
      stock, which were divided proportionally among the HSET shareholders in
      accordance with their respective ownership interests in HSET immediately before
      the completion of the HSET Share Exchange Transaction. The cash consideration
      consisted of $5,000,000 in cash, again divided proportionally among the HSET
      shareholders in accordance with their respective ownership interests in HSET
      immediately before the completion of the HSET Share Exchange Transaction and
      payable no later than the first anniversary of the Merger Transaction, as
      defined elsewhere in this Quarterly Report on Form 10-Q. The obligation to
      pay
      the cash consideration is evidenced by two interest-free promissory notes
      between the Company and each of the HSET shareholders. The form of the
      promissory note is attached as an exhibit to the Share Exchange
      Agreement.




HSET
      is a
      home electronics retail chain in Eastern China. It has 200 retail stores in
      Shanghai City, Zhejiang Province and Jiangsu Province. HSET specializes in
      the
      sale of home electronics, including DVD players, audio systems, speakers,
      televisions and air conditioners.





16





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





**Note
      5 -** **ACQUISITIONS
      (CONTINUED)**


The
      main
      purpose of the acquisition of the 100% interest in HSET is to increase the
      Company’s presence, distribution markets, and increase product lines. The
      purchase price was determined based on arms' length negotiations between China
      3C and Hangzhou Sanhe Electronic Technology, Ltd.





The
      acquisition had been accounted for as a purchase business combination and the
      results of operations from the acquisition date have been included in the
      Company's consolidated financial statements in accordance with SFAS 94. The
      allocation of the purchase price is as follows:





Cash
                acquired
            
            $
            1,235,283Other
                tangible assets acquiredAccounts
                Receivable
            
            
            1,207,653Inventory
            
            
            667,504Trade
                Deposits
            
            
            694,695Prepaid
                Expenses
            
            
            2,333Property
                Plant & Equipment
            
            
            966Goodwill
            
            
            5,854,096Total
                assets acquired
            
            
            9,662,530Liabilities
                assumedAccounts
                & Income Taxes payable
            
            
            626,091Statutory
                reserves
            
            
            286,439Total
            
            $
            8,750,000





The
      excess of purchase price over tangible assets acquired and liabilities assumed
      of $5,854,096 was recorded as goodwill. At the time of the acquisition no
      identifiable intangibles assets existed under the contractual-legal or the
      separability criterion as required under SFAS 141.





Prior
      to
      the acquisition, Hangzhou Sanhe Electronic Technology, Ltd. prepared its
      financial statements under accounting principles generally accepted in the
      United States of America.




**(b)
      Shanghai Joy & Harmony Electronics Company Limited**





On
      November 28, 2006, the Company completed the acquisition of a 100% interest
      in
      Shanghai Joy & Harmony Electronics Company Limited (“Joy & Harmony”) for
      a cash and stock transaction valued at approximately US$18.5 million (“Joy &
Harmony Share Exchange Transaction”). This amount is included in the cost of net
      assets and goodwill purchased.




The
      stock
      consideration consisted of 2,723,110 shares of the Company’s common stock, which
      were divided proportionally among the Joy & Harmony shareholders in
      accordance with their respective ownership interests in Joy & Harmony
      immediately before the completion of the Joy & Harmony Share Exchange
      Transaction. The cash consideration consisted of $7,500,000 in cash, again
      divided proportionally among the Joy & Harmony shareholders in accordance
      with their respective ownership interests in Joy & Harmony immediately
      before the completion of the Joy & Harmony Share Exchange Transaction. The
      cash component was payable by the Company as follows: $3,000,000 within 10
      business days after the closing and $4,500,000 is payable six months after
      the
      closing as evidenced by a promissory note.





17




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





**Note
      5 -** **ACQUISITIONS
      (CONTINUED)**





Joy
&
      Harmony is engaged in the business of distributing MP3 and MP4 players, iPods,
      electronic dictionaries, CD players, radios, Walkman, and audio systems and
      speakers at company maintained shops at various retail
      establishments.





The
      main
      purpose of the acquisition of the 100% interest in Joy & Harmony is to
      increase the Company’s presence, distribution markets, and increase product
      lines. The purchase price was determined based on arms' length negotiations
      between China 3C and Shanghai Joy & Harmony Electronics Company
      Limited.





The
      acquisition had been accounted for as a purchase business combination and the
      results of operations from the acquisition date have been included in the
      Company's consolidated financial statements in accordance with SFAS 94. The
      allocation of the purchase price is as follows:




Cash
                acquired
            
            $
            214,561Other
                tangible assets acquiredAccounts
                Receivable
            
            
            3,599,680Inventory
            
            
            1,021,435Trade
                Deposits
            
            
            300,304Prepaid
                Expenses
            
            
            4,387Property
                Plant & Equipment
            
            
            11,342Goodwill
            
            
            14,494,182Total
                assets acquired
            
            
            19,645,891Liabilities
                assumedAccounts
                & Income Taxes payable
            
            
            767,277Statutory
                reserves
            
            
            378,614Total
            
            $
            18,500,000





The
      excess of purchase price over tangible assets acquired and liabilities assumed
      of $14,494,182 was recorded as goodwill. At the time of the acquisition no
      identifiable intangibles assets existed under the contractual-legal or the
      separability criterion as required under SFAS 141.





Prior
      to
      the acquisition, Joy & Harmony prepared its financial statements under
      accounting principles generally accepted in the United States of
      America.





The
      results of operations for Hangzhou Sanhe Electronic Technology Ltd. and Shanghai
      Joy & Harmony Electronics Company Limited have been included in the
      Company’s consolidated statements of operations since the completion of the
      acquisitions during the year ended December 31, 2006. The following
      unaudited pro forma financial information presents the combined results of
      the
      Company and the 2006 acquisitions as if the acquisitions had occurred at the
      beginning of 2005 (in thousands, except per share amounts):


**Year Ended**
              
              **Year Ended****December 31,**
              
              **December 31,****2006**
              
              **2005**Net
                  revenues
              
              $
              193,591
              
              $
              58,768Net
                  income (loss)
              
              $
              15,457
              
              $
              3,538Net
                  income (loss) per share — basic
              
              $
              .33
              
              $
              .09Net
                  income (loss) per share — diluted
              
              $
              .33
              
              $
              .09




18


**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





**Note
      6 -** **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 fees were expensed relating to the warrants,
      respectively.





On
      December 8, 2006, the Company issued, to 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. The options expire 10 years from
      issuance.





On
      January 2, 2007, the Company issued, to an other newly appointed Board member,
      an option grant (incentive stock options) to purchase 50,000 shares of common
      stock at the closing price as of January 2, 2007. The options expire 10 years
      from issuance. As of December 17, 2007, the Board member 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. Mr. Levinson has been named chairman
      of
      the Nominating Committee of the Company. In addition, Mr. Levinson is in charge
      of investor relations for the Company.


As
      compensation for the services set forth herein, Mr. Levinson
      receives:





·
            A
                monthly grant during his Term of 1,000 shares of the Company’s Common
                Stock,





·
            An
                annual grant of Stock Options to purchase 300,000 shares of common
                stock
                of the Company. The annual grant of Stock Options shall vest immediately
                upon issuance. The exercise price of the initial grant of Stock Options
                shares shall be based on the closing price of the common stock of
                the
                Company on May 7, 2007. On May 7, 2008, Mr. Levinson became vested
                in an
                additional grant of Stock Options to purchase an additional 300,000
                shares
                of common stock of the Company based on the closing price of the
                common
                stock on May 7, 2008 of $1.82.




Stock
      options—The three stock option grants 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


Six Months endedJune 30 2008Expected
                  Volatility
              
              
              153
              %Expected
                  term (in years)Todd
                  L. Mavis
              
              
              2Kenneth
                  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


19


**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





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





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 $226,293
      and
      a $899,952 service period expense for these warrants for the six months ending
      June 30, 2008 and the year ending December 31, 2007.




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




**Note
      7 -** **STOCK** ****** **EXCHANGE
      AGREEMENT**





On
      December 21, 2005 Capital Future Developments Ltd - BVI became a wholly owned
      subsidiary of China 3C Group through a reverse merger. China 3C Group acquired
      all of the issued and outstanding capital stock of Capital Future Developments
      Ltd. - BVI pursuant to a Merger Agreement dated at December 21, 2005 by and
      among China 3C Group, XY Acquisition Corporation, Capital Future Developments
      Ltd. - BVI and the shareholders of Capital Future Developments Ltd - BVI (the
      "Merger Agreement"). Pursuant to the Merger Agreement, Capital Future
      Developments Ltd. - BVI became a wholly owned subsidiary of China 3C Group
      and,
      in exchange for the Capital Future Developments Ltd.





BVI
      shares, China 3C Group issued 35,000,000 shares of its common stock to the
      shareholders of Capital Future Developments Ltd. - BVI, representing 93% of
      the
      issued and outstanding capital stock of China 3C Group at that time and a cash
      consideration of $500,000.  As
      a
      result of the exchange agreement, the reorganization was treated as an
      acquisition by the accounting acquirer 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 were retroactively restated.





**Note
      8 -** **COMPENSATED
      ABSENCES**




Regulation
      45 of local PRC labor law entitles employees to annual vacation leave after
      one
      year of service. In general all leave must be utilized annually, with proper
      notification, any unutilized leave is cancelled.





**Note
      9 -** **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, the Enterprise Income Tax (“EIT) is at a statutory
      rate of 25%, which is comprises of 22% national income tax and 3% local income
      tax.





20




**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**


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





The
                following is a reconciliation of income tax
                expense:




6/30/2008
            
            U.S.
            
            State
            
            International
            
            TotalCurrent
            
            $
            -
            
            $
            -
            
            $
            4,164,627
            
            $
            4,164,627Deferred
            
            
            -
            
            
            -Total
            
            $
            -
            
            $
            -
            
            $
            4,164,627
            
            $
            4,164,627




6/30/2007
            
            U.S.
            
            State
            
            International
            
            TotalCurrent
            
            $
            -
            
            $
            -
            
            $
            6,690,523
            
            $
            6,690,523Deferred
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            -
            
            $
            -
            
            $
            6,690,523
            
            $
            6,690,523




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




6/30/2008
            
            6/30/2007US
                statutory tax rate
            
            
            34
            %
            
            34
            %Foreign
                income not recognized in US
            
            
            (34
            )%
            
            (34
            )%PRC
                income tax
            
            
            25
            %
            
            34
            %Effective
                rate
            
            
            25
            %
            
            34
            %




**Note
      10 -** **COMMITTMENTS**




The
      Company leases various office facilities under operating leases that terminate
      thru 2011. The Company also has management agreements that terminated in 2007
      and were subsequently renewed in 2008. Rent expense for the six months ending
      June 30, 2008 and 2007 was $99,181 and $59,377 respectively. The future minimum
      obligations under these agreements are as follows:


2009
              
              $
              135,8752010
              
              $
              59,3042011
              
              $
              27,9352012
              
              $
              4,373





In
      addition, the Company is committed to pay $111,516 under a advertising agreement
      expiring March 31, 2009.


21


**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**JUNE
      30, 2008**





**Note
      11 -** **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 June
      30,
      2008 and December 31, 2007, the Company had allocated $7,234,295 to these
      non-distributable reserve funds.





**Note
      12 -** **OTHER
      COMPREHENSIVE INCOME**





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




*Foreign*
              *Currency*
              *Translation*
              *Adjustment*
            
            *Accumulated*
              *Other*
              *Comprehensive*
              *Income*Balance
                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
            
            
            2,822,640
            
            
            2,822,640Balance
                at June 30, 2008
            
            $
            4,694,974
            
            $
            4,694,974




**Note
      13**  **-** **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 and 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
      14 –** **MAJOR
      CUSTOMERS AND CREDIT RISK**





During
      the period ended June 30, 2008, no customer accounted for more than 10% of
      the
      Company’s sales or accounts receivable. At June 30, 2008 four (4) vendors
      comprised more than 57% of the Company’s accounts payable. No vendors accounted
      for more than 10% of the Company’s purchases during 2008.


22


**Forward
      Looking Statements**





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





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





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





**Overview**





China
      3C
      Group was incorporated on August, 20, 1998 under the laws of the State of
      Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
      22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
      Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
      Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
      Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
      Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
      Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
      2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and
      CFDL own 100% of the capital stock of SJHE and HSET. Until August 14, 2007,
      when
      it made the change to its ownership structure described in the next paragraph
      in
      order to comply with certain requirements of PRC law, CFDL owned 100% of the
      capital stock of Zhenjiang.. Zhejiang owns 90% and Yiwu owns 10% of HWDA.
      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 CFDL 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 CFDL pursuant to a Merger Agreement dated at December 21, 2005 by
      and
      among China 3C Group, XY Acquisition Corporation, CFDL and the shareholders
      of
      CFDL (the “Merger Agreement”). Pursuant to the Merger Agreement, CFDL became a
      wholly owned subsidiary of China 3C Group and, in exchange for the CFDL shares,
      China 3C Group issued 35,000,000 shares of its common stock to the shareholders
      of CFDL, representing 93% of the issued and outstanding capital stock of China
      3C Group at that time and a cash consideration of $500,000. On August 15, 2007,
      in order to comply with the requirements of PRC law, the Company recapitalized
      its ownership structure. As a result, instead of CFDL owning 100% of Zhejiang
      as
      previously was the case, CFDL entered into contractual agreements with Zhejiang
      whereby CFDL owns a 100% interest in the revenues of Zhejiang. CFDL does not
      have an equity interest in Zhejiang, but is deemed to have all the economic
      benefits and liabilities by contract. Under this structure, Zhejiang is now
      a
      wholly foreign owned enterprise (WOFE) of CFDL. The contractual agreements
      give
      CFDL and its’ equity owners an obligation to absorb, any losses, and rights to
      receive revenue. CFDL will be unable to make significant decisions about the
      activities of Zhejiang and can not carry out its principal activities without
      financial support. These characteristics as defined in Financial Accounting
      Standards Board (FASB) interpretation 46, Consolidation of Variable Interest
      Entities (VIEs), qualifies the business operations of (Zhejiang) to be
      consolidated with (CFDL) and ultimately with China 3C Group.




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




23




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




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





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





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





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





**Result
      of Operations**





**For
      the Six and Three Months Ended June 30, 2008 and 2007**





**Net
      Sales**





Net
      sales
      for the six months ended June 30, 2008 decreased by 2%, to $146,668,847 as
      compared to $149,021,667 for the six months ended June 30, 2007. Net sales
      for
      the three months ended June 30, 2008 increased by 22%, to $78,515,392 as
      compared to $64,498,473 for the three months ended June 30, 2007. Management
      believes that the lower sales were a result of various factors including a
      slowdown in the retail markets in general, a significant snowstorm in China
      during the first two months of 2008 which created a backlog in our distribution
      channels, and the pressure of increased competition within the markets in which
      we operate.





**Cost
      of Sales**





Cost
      of
      sales for the six months ended June 30, 2008 totaled $123,246,750 as compared
      to
      $123,651,187 for the six months ended June 30, 2007, a decrease of 0.3%. Cost
      of
      sales for the three months ended June 30, 2008 totaled $65,639,675 as compared
      to $53,060,275 for the three months ended June 30, 2007, an increase of 24%.
      The
      decreased cost of sales for the six months was a direct result of the decrease
      in the number of sales during the same period.





**Gross
      Profit Margin**





Gross
      profit margin for the six months ended June 30, 2008 was 16.0% as compared
      to
      17.0% for the six months ended June 30, 2007. Gross profit margin for the three
      months ended June 30, 2008 was 16.4% as compared to 17.7% for the three months
      ended June 30, 2007. The lower gross profit margin was due to increasing unit
      purchase prices 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 operations with higher selling prices.




24




**General
      and Administrative Expenses**





General
      and administrative expenses for the six months ended June 30, 2008 totaled
      $6,312,088 or approximately 4% of net sales, as compared to $6,740,395 or
      approximately 5% of net sales for the six months ended June 30, 2007, an
      decrease of 6%. General and administrative expenses for the three months ended
      June 30, 2008 totaled $3,326,044 or approximately 4% of net sales, as compared
      to $3,014,233 or approximately 5% of net sales for the three months ended June
      30, 2007, an increase of 10%. The decrease was primarily due to strengthening
      cost controls such as a rationalization of management structure and increasingly
      sophisticated use of computerized systems.




**I** **ncome
      from Operations**





Income
      from operations for the six months ended June 30, 2008 was $17,110,009 or 12%
      of
      net sales as compared to income from operations of $18,630,085 or 13% of net
      sales for the six months ended June 30, 2007, a decrease of 8%. Income from
      operations for the three months ended June 30, 2008 was $9,549,673 or 12% of
      net
      sales as compared to income from operations of $8,423,965 or 13% of net sales
      for the three months ended June 30, 2007, an increase of 13%. 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
      six
      months ended June 30, 2008.





**Provision
      for Income Taxes**





The
      provision for income taxes for the six months ended June 30, 2008 was $4,164,627
      as compared to $6,690,523 for the six months ended June 30, 2007. The provision
      for income taxes for the three months ended June 30, 2008 was $2,354,054 as
      compared to $2,941,264 for the three months ended June 30, 2007. The decrease
      was mainly attributed to the lower statutory tax rates effective for 2008 in
      China.





**Net
      Income**





Net
      income was $13,325,039 or 9.1% of net sales for the six months ended June 30,
      2008 as compared to $11,965,315 or 8.0% of net sales for the six months ended
      June 30, 2007, an increase of 11%. Net income was $7,551,995 or 9.6% of net
      sales for the three months ended June 30, 2008 as compared to $5,501,527 or
      8.5%
      of net sales for the three months ended June 30, 2007, an increase of 37%.
      Strengthening cost controls and lower statutory
      tax rates were
      the
      critical factors which contributed to the increase in net income.




**Liquidity
      and Capital Resources**





Operations
      and liquidity needs are funded primarily through cash flows from operations.
      Cash and cash equivalents were $25,993,638 at June 30, 2008, as compared to
      $15,230,508 at June 30, 2007, and compared to $24,952,614 at December 31,
      2007.




25




Under
      the
      Joy & Harmony share exchange agreement, dated November 28, 2006, in exchange
      of surrendering all their ownership in Joy & Harmony, the Joy & Harmony
      shareholders received both stock consideration and cash consideration. The
      cash
      consideration consisted of $7,500,000 in cash is payable as follows: $3,000,000
      within 10 business days after the closing of the transaction, and $4,500,000
      payable six months after the closing of the transaction as evidenced by
      promissory notes issued by us to the Joy & Harmony’s shareholders. The
      $4,500,000 loan was repaid in the second quarter of 2007.




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 six months of 2008 were $10,650 for purchase
      of fixed assets **** as
      compared to $62,353 for the first six 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 June 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.




26





**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 June 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.




27




**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
      4T. 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 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, such
      disclosure controls and procedures were effective to detect the inappropriate
      application of US GAAP. The Public Company Accounting Oversight Board has
      defined a material weakness as a “significant deficiency or combination of
      significant deficiencies that results in more than a remote likelihood that
      a
      material misstatement of the annual or interim financial statements will not
      be
      prevented or detected.”




**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.**





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





**Item
      1A. Risk Factors.**





**Risks
      Associated With Our Common Stock**





***There
      is a limited public market for our common stock.*** **** There
      is
      currently a limited public market for the common stock. Holders of our common
      stock may, therefore, have difficulty selling their common stock, should they
      decide to do so. In addition, there can be no assurances that such markets
      will
      continue or that any shares of common stock, which may be purchased may be
      sold
      without incurring a loss. Any such market price of the common stock may not
      necessarily bear any relationship to our book value, assets, past operating
      results, financial condition or any other established criteria of value, and
      may
      not be indicative of the market price for the common stock in the future.
      Further, the market price for the common stock may be volatile depending on
      a
      number of factors, including business performance, industry dynamics, news
      announcements or changes in general economic conditions.




28




***Our
      common stock may be deemed penny stock with a limited trading
      market*** . Our
      common stock is currently listed for trading in the Over-The-Counter Market
      on
      the NASD Electronic Bulletin Board, which is generally considered to be a less
      efficient markets than markets such as NASDAQ or other national exchanges,
      and
      which may cause difficulty in conducting trades and difficulty in obtaining
      future financing. Further, our securities are subject to the “penny stock rules”
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934,
      as
      amended (the “Exchange Act”). The penny stock rules apply to non-NASDAQ
      companies whose common stock trades at less than $5.00 per share or which have
      tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
      operating for three or more years). Such rules require, among other things,
      that
      brokers who trade “penny stock” to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
      provide investors with certain information concerning trading in the security,
      including a risk disclosure document and quote information under certain
      circumstances. Many brokers have decided not to trade “penny stock” because of
      the requirements of the penny stock rules and, as a result, the number of
      broker-dealers willing to act as market makers in such securities is limited.
      In
      the event that we remain subject to the “penny stock rules” for any significant
      period, there may develop an adverse impact on the market, if any, for our
      securities. Because our securities are subject to the “penny stock rules,”
investors will find it more difficult to dispose of our securities. Further,
      for
      companies whose securities are traded in the Over-The-Counter Market, it is
      more
      difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for
      significant news events because major wire services, such as the Dow Jones
      News
      Service, generally do not publish press releases about such companies, and
      (iii)
      to obtain needed capital.




***We
      do not intend to pay dividends on our common stock.*** The
      Company’s two operating subsidiaries in China paid $525,460 in dividends during
      2005, but there are no plans for paying dividends in the foreseeable future.
      We
      intend to retain earnings, if any, to provide funds for the implementation
      of
      our new business plan.  We do not intend to declare or pay any dividends in
      the foreseeable future.  Therefore, there can be no assurance that holders
      of common stock will receive any additional cash, stock or other dividends
      on
      their shares of common stock until we have funds, which the Board of Directors
      determines, can be allocated to dividends.





***If
      we are unable to successfully integrate the businesses we acquire, our ability
      to expand our product offerings and geographic reach may be significantly
      limited.*** In
      order
      to expand our product offerings and grow our customer base by reaching new
      customers through expanded geographic coverage, we may continue to acquire
      businesses that we believe are complimentary to our growth strategy.
      Acquisitions involve numerous risks, including difficulties in the assimilation
      of acquired operations, loss of key personnel, distraction of management’s
      attention from other operational concerns, failure to maintain supplier
      relationships, inability to maintain goodwill of customers from acquired
      businesses, and the inability to meet projected financial results that supported
      how much was paid for the acquired businesses.





***Our
      business will be harmed if we are unable to maintain our supplier alliance
      agreements with favorable terms and conditions.*** We
      have
      licensing/distribution agreements with key suppliers in a number of major
      product categories. Our business will be harmed if we are unable to maintain
      these favorable agreements or are limited in our ability to gain access to
      additional like agreements with our key suppliers.




***It
      is very difficult to predict the sales cycle for our
      products*** . ***If
      we are unable to successfully select and introduce new products or fail to
      keep
      pace with the rapid advances in technology, our business condition will be
      negatively impacted.*** The
      duration and product selection involved in our sales cycle is dependent on
      a
      number of factors, including immediate product availability, pricing, features,
      product complexity, economic environment, and customer financial condition.
      If
      potential customers take longer than we expect to decide to purchase our
      products, or if our customers decide on a different product/feature set than
      available from our existing supplier agreements, the financial condition and
      results of our operations will be adversely affected.





***Because
      our operating/business model continues to evolve it is difficult to predict
      our
      future performance, and our business is difficult to evaluate.*** Our
      business model continues to evolve over time. We do not have an extensive
      operating history upon which you can easily and accurately evaluate our
      business, or our ongoing financial condition. As our model evolves over time
      and
      due to our numerous acquisitions, we face risks and challenges due to a lack
      of
      meaningful historical data upon which we can develop budgets and make
      forecasts.




29




***Future
      acquisitions may result in potentially dilutive issuances of equity securities,
      the incurrence of further indebtedness, and increased amortization expense.*** Our
      growth model has in the past and most probably in the future will involve
      acquisitions that may result in potentially dilutive issuances of equity
      securities or the incurrence of debt and unknown liabilities. Such acquisitions
      may result in significant write-offs and increased amortization expenses that
      could adversely affect our business and the results of our
      operations.





***If
      our products fail to perform properly our business could suffer significantly.*** Although
      we do not currently develop or manufacturer our existing products, should they
      fail to perform we may suffer lost sales and customer goodwill, ongoing
      liability claims, license terminations, severe harm to our brand and overall
      reputation, unexpected costs, and reallocation of resources to resolve product
      issues.





***Rapid
      and substantial growth is the key to our overall strategy, if we are unable
      to
      manage our growth profitably and effectively, we may incur unexpected expenses
      and be unable to meet our financial and customer obligations.*** In
      order
      for us to meet our financial objectives we will need to substantially expand
      our
      operations to achieve necessary market share. We cannot be certain that our
      IT
      infrastructure, financial controls, systems, and processes will be adequate
      to
      support our expansion. Our future results will depend on the ability of our
      officers and key employees to manage changing business conditions in
      administration, reporting, controls, and operations.





***If
      we are unable to obtain additional financing for our future needs we may be
      unable to respond to competitive pressures and our business may be impaired.*** We
      cannot
      be certain that financing with favorable terms, or at all, will be available
      for
      us to pursue our expansion initiatives. We may be unable to take advantage
      of
      favorable acquisitions or to respond to competitive pressures. This inability
      may harm our operations or financial results.




***If
      we are forced to lower our prices to compete, our financial performance may
      be
      negatively impacted.*** We
      derive
      our sales from the resale of products from a number of our suppliers. If we
      are
      forced to lower our prices due to added competition, inferior feature offerings,
      excess inventory, pressure for cash, declining economic climate, or any other
      reason, our business may become less profitable.





***If
      we are unable to maintain existing supplier relationships or form new ones,
      our
      business and financial condition may suffer.*** We
      rely
      on our current suppliers along with new suppliers to provide us access to
      competitive products for resale. If we are unable to gain access to suppliers
      with needed product with favorable terms our business may be negatively
      impacted.




***If
      we incur costs that exceed our existing insurance coverage in lawsuits brought
      to us in the future, it could adversely affect our business and financial
      condition.*** We
      maintain third party insurance coverage against liability risks associated
      with
      lawsuits. While we believe these arrangements are an effective way to insure
      against liability, the potential liabilities associated with such risks or
      other
      events could exceed the coverage provided by such insurance.





**Risks
      Related to Doing Business in China**





***Our
      business operations take place primarily in China. Because Chinese laws,
      regulations and policies are continually changing, our Chinese operations will
      face several risks summarized below.***





***Limitations
      on Chinese economic market reforms may discourage foreign investment in Chinese
      businesses.*** The
      value
      of investments in Chinese businesses could be adversely affected by political,
      economic and social uncertainties in China. The economic reforms in China in
      recent years are regarded by China’s central government as a way to introduce
      economic market forces into China. Given the overriding desire of the central
      government leadership to maintain stability in China amid rapid social and
      economic changes in the country, the economic market reforms of recent years
      could be slowed, or even reversed.




30




***Any
      change in policy by the Chinese government could adversely affect investments
      in
      Chinese businesses.*** Changes
      in policy could result in imposition of restrictions on currency conversion,
      imports or the source of suppliers, as well as new laws affecting joint ventures
      and foreign-owned enterprises doing business in China. Although China has been
      pursuing economic reforms for the past two decades, events such as a change
      in
      leadership or social disruptions that may occur upon the proposed privatization
      of certain state-owned industries could significantly affect the government’s
      ability to continue with its reform.





***We
      face economic risks in doing business in China.*** ** As
      a
      developing nation, China’s economy is more volatile than that of developed
      Western industrial economies. It differs significantly from that of the U.S.
      or
      a Western European Country in such respects as structure, level of development,
      capital reinvestment, resource allocation and self-sufficiency. Only in recent
      years has the Chinese economy moved from what had been a command economy through
      the 1970s to one that during the 1990s encouraged substantial private economic
      activity. In 1993, the Constitution of China was amended to reinforce such
      economic reforms. The trends of the 1990s indicate that future policies of
      the
      Chinese government will emphasize greater utilization of market forces. For
      example, in 1999 the Government announced plans to amend the Chinese
      Constitution to recognize private property, although private business will
      officially remain subordinated to the state-owned companies, which are the
      mainstay of the Chinese economy. However, there can be no assurance that, under
      some circumstances, the government’s pursuit of economic reforms will not be
      restrained or curtailed. Actions by the central government of China could have
      a
      significant adverse effect on economic conditions in the country as a whole
      and
      on the economic prospects for our Chinese operations.




***The
      Chinese legal and judicial system may negatively impact foreign
      investors.*** ** In 1982,
      the National People’s Congress amended the Constitution of China to authorize
      foreign investment and guarantee the “lawful rights and interests” of foreign
      investors in China. However, China’s system of laws is not yet comprehensive.
      The legal and judicial systems in China are still rudimentary, and enforcement
      of existing laws is inconsistent. Many judges in China lack the depth of legal
      training and experience that would be expected of a judge in a more developed
      country. Because the Chinese judiciary is relatively inexperienced in enforcing
      the laws that do exist, anticipation of judicial decision-making is more
      uncertain than would be expected in a more developed country. It may be
      impossible to obtain swift and equitable enforcement of laws that do exist,
      or
      to obtain enforcement of the judgment of one court by a court of another
      jurisdiction. China’s legal system is based on written statutes; a decision by
      one judge does not set a legal precedent that is required to be followed by
      judges in other cases. In addition, the interpretation of Chinese laws may
      be
      varied to reflect domestic political changes.




The
      promulgation of new laws, changes to existing laws and the pre-emption of local
      regulations by national laws may adversely affect foreign investors. However,
      the trend of legislation over the last 20 years has significantly enhanced
      the
      protection of foreign investment and allowed for more control by foreign parties
      of their investments in Chinese enterprises. There can be no assurance that
      a
      change in leadership, social or political disruption, or unforeseen
      circumstances affecting China’s political, economic or social life, will not
      affect the Chinese government’s ability to continue to support and pursue these
      reforms. Such a shift could have a material adverse effect on our business
      and
      prospects.





The
      practical effect of the People’s Republic of China legal system on our business
      operations in China can be viewed from two separate but intertwined
      considerations. First, as a matter of substantive law, the Foreign Invested
      Enterprise laws provide significant protection from government interference.
      In
      addition, these laws guarantee the full enjoyment of the benefits of corporate
      Articles and contracts to Foreign Invested Enterprise participants. These laws,
      however, do impose standards concerning corporate formation and governance,
      which are not qualitatively different from the general corporation laws of
      the
      several states. Similarly, the People’s Republic of China accounting laws
      mandate accounting practices, which are not consistent with U.S. Generally
      Accepted Accounting Principles. China’s accounting laws require that an annual
“statutory audit” be performed in accordance with People’s Republic of China
      accounting standards and that the books of account of Foreign Invested
      Enterprises are maintained in accordance with Chinese accounting laws. Article
      14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
      requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
      reports and statements to designated financial and tax authorities, at the
      risk
      of business license revocation. Second, while the enforcement of substantive
      rights may appear less clear than United States procedures, the Foreign Invested
      Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered
      companies, which enjoy the same status as other Chinese registered companies
      in
      business-to-business dispute resolution. Generally, the Articles of Association
      provide that all business disputes pertaining to Foreign Invested Enterprises
      are to be resolved by the Arbitration Institute of the Stockholm Chamber of
      Commerce in Stockholm, Sweden applying Chinese substantive law. Any award
      rendered by this arbitration tribunal is, by the express terms of the respective
      Articles of Association, enforceable in accordance with the “United Nations
      Convention on the Recognition and Enforcement of Foreign Arbitral Awards
      (1958).” Therefore, as a practical matter, although no assurances can be given,
      the Chinese legal infrastructure, while different in operation from its United
      States counterpart, should not present any significant impediment to the
      operation of Foreign Invested Enterprises.




31




***Economic
      Reform Issues***





***China
      is a country that has been undergoing a process of privatization for much of
      the
      past three decades.*** Although
      the Chinese government owns the majority of productive assets in China, in
      the
      past several years the government has implemented economic reform measures
      that
      emphasize decentralization and encourage private economic activity. Because
      these economic reform measures may be inconsistent or ineffectual, there are
      no
      assurances that:




·
            We
                will be able to capitalize on economic
                reforms;


·
            The
                Chinese government will continue its pursuit of economic reform
                policies;


·
            The
                economic policies, even if pursued, will be
                successful;


·
            Economic
                policies will not be significantly altered from time to time;
                and


·
            Business
                operations in China will not become subject to the risk of
                nationalization.





Since
      1979, the Chinese government has reformed its economic systems. Because many
      reforms are unprecedented or experimental, they are expected to be refined
      and
      improved. Other political, economic and social factors, such as political
      changes, changes in the rates of economic growth, unemployment or inflation,
      or
      in the disparities in per capita wealth between regions within China, could
      lead
      to further readjustment of the reform measures. This refining and readjustment
      process may negatively affect our operations.




Over
      the
      last few years, China’s economy has registered a high growth rate. Recently,
      there have been indications that rates of inflation have increased. In response,
      the Chinese government recently has taken measures to curb this excessively
      expansive economy. These measures have included devaluations of the Chinese
      currency, the Renminbi (RMB), restrictions on the availability of domestic
      credit, reducing the purchasing capability of certain of its customers, and
      limited re-centralization of the approval process for purchases of some foreign
      products. These austerity measures alone may not succeed in slowing down the
      economy’s excessive expansion or control inflation, and may result in severe
      dislocations in the Chinese economy. The Chinese government may adopt additional
      measures to further combat inflation, including the establishment of freezes
      or
      restraints on certain projects or markets.





To
      date
      reforms to China’s economic system have not adversely impacted our operations
      and are not expected to adversely impact operations in the foreseeable future;
      however, there can be no assurance that the reforms to China’s economic system
      will continue or that we will not be adversely affected by changes in China’s
      political, economic, and social conditions and by changes in policies of the
      Chinese government, such as changes in laws and regulations, measures which
      may
      be introduced to control inflation, changes in the rate or method of taxation,
      imposition of additional restrictions on currency conversion and remittance
      abroad, and reduction in tariff protection and other import
      restrictions.




32




**Risk
      Factors Associated with Our Business**




***Non-performance
      by our suppliers may adversely affect our operations by delaying delivery or
      causing delivery failures, which may negatively affect demand, sales and
      profitability.*** We
      purchase various types of products from our suppliers.  We would be
      materially and adversely affected by the failure of our suppliers to perform
      as
      expected.  We could experience delivery delays or failures caused by
      production issues or delivery of non-conforming products if its suppliers failed
      to perform, and we also face these risks in the event any of its suppliers
      becomes insolvent or bankrupt.





***We
      depend on the continued services of our executive officers and the loss of
      key
      personnel could affect our ability to successfully grow our business.*** We
      are highly dependent upon the services of our senior management team,
      particularly Zhenggang Wang, our Chairman and Chief Executive Officer and
      Weidong Huang, our Chief Financial Officer. The permanent loss for any of our
      key executives, could have a material adverse effect upon our operating results.
      We may not be able to locate suitable replacements for our executives if their
      services were lost. We do not maintain key man life insurance on any of these
      individuals.




***With
      the markets being highly competitive, we may not be able to compete
      successfully.*** Many
      of
      our competitors have substantially greater revenues and financial resources
      than
      we do. We may not be able to compete favorably and increased competition may
      substantially harm our business, business prospects and results of operations.
      If we are not successful in our target markets, our sales could decline, our
      margins could be negatively impacted and we could lose market share, any of
      which could materially harm our business, results of operations and
      profitability.





**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.





I **tem
      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)




33




**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 11 th day of
      August, 2008.




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




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