UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q/A


(Amendment
No. 1)





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




For the
quarterly period ended   September 30, 2008





or





oTRANSITION 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 (Do not check if a smaller


reporting
company) o        Smaller
reporting company o





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). oYesxNo





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







EXPLANATORY
NOTE




We are
filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A to amend (a) Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations of Part I, (b) Item 4 Controls and Procedures, of Part I
and (c) the notes to the financial statements contained in the Report of
Independent Registered Public Accounting Firm.




Except as
specifically referenced herein, this Amendment No. 1 to Quarterly Report on Form
10-Q/A does not reflect any event occurring subsequent to November 10, 2008, the
filing date of the original report.





TABLE
OF CONTENTS





PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Report
      of Independent Registered Public Accounting Firm
                    1Consolidated
      Balance Sheets as of September 30, 2008 (Unaudited) and December 31,
      2007
                    2Consolidated
      Statements of Income for the Nine Months Ended September 30, 2008 and 2007
      (Unaudited)
                    3Consolidated
      Statements of Income for the Three Months Ended September 30, 2008 and
      2007 (Unaudited)
                    4Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2008 and
      2007 (Unaudited)
                    5Consolidated
      Statement of Stockholders’ Equity for the Nine Months Ended September 30,
      2008 (Unaudited) and the Year Ended December 31, 2007
                    6Notes
      to Consolidated Financial Statements
                    7 -
      19Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    20Item
      3. Qualitative and Quantitative Disclosure About Market
    Risk
                    30Item
      4. Controls and Procedures
                    32PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                    32Item
      1A. Risk Factors
                    32Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                    32Item
      3. Defaults Upon Senior Securities
                    32Item
      4. Submission of Matters to a Vote of Security Holders
                    32Item
      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
September 30, 2008 and the consolidated statements of operations for the nine
months ended September 30, 2008 & 2007 and consolidated statements of cash
flows and shareholders’ equity for the nine months then ended. These financial
statements are the responsibility of the Company’s management.





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





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





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





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


Certified
Public Accountants





New York,
New York


November
4, 2008


1





CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      OF SEPTEMBER 30, 2008 AND DECEMBER 31,
2007




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





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


2





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




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





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


3





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




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





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


4





CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
  2007




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





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





5





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




Additional
                          
                          
                          Other
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          TotalCommon
      Stock
                          
                          
                          Paid-In
                          
                          
                          Comprehensive
                          
                          
                          Subscription
                          
                          
                          Statutory
                          
                          
                          
                          
                          
                          Stockholders’Shares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Income
                          
                          
                          Receivable
                          
                          
                          Reserve
                          
                          
                          Retained
      Earnings
                          
                          
                          EquityBalance
      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
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,052,891
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3,052,891Income
      for  the nine months ending September  30,
      2008
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          19,688,606
                          
                          
                          
                          19,688,606Balance September
      30, 2008
                          
                          
                          52,673,938
                          
                          
                          $
                          52,674
                          
                          
                          $
                          19,465,776
                          
                          
                          $
                          4,925,225
                          
                          
                          $
                          (50,000
                          )
                          
                          $
                          7,234,295
                          
                          
                          $
                          48,517,610
                          
                          
                          $
                          80,145,580





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


6


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
1 - ORGANIZATION





China 3C
Group (the “Company”) was incorporated on August 20, 1998 under the laws of the
State of Nevada. Capital Future Developments Limited - BVI (“Capital”) was
incorporated on July 22, 2004 under the laws of the British Virgin Islands.
Zhejiang Yong Xin Digital Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin
Communication Ltd. (“Yiwu”), Hangzhou Wang Da Electronics Co., Ltd. (“Wang Da”),
Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and Shanghai Joy &
Harmony Electronics Company Limited (“Joy & Harmony”) were incorporated
under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997,
March, 30, 1998, April 12, 2004, and August 20, 2003, respectively.





On
December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
through a reverse merger. China 3C Group acquired all of the issued and
outstanding capital stock of Capital pursuant to a Merger Agreement dated as of
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 new
shares of its common stock to the shareholders of Capital, representing 93% of
the then issued and outstanding capital stock of China 3C Group and a cash
consideration of $500,000.





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





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





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


7








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





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





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


Translation
Adjustment





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


8


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Use of
Estimates





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





Principles of
Consolidation





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





Risks and
Uncertainties





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





Contingencies





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





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





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


9


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Cash and Cash
Equivalents





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





Accounts
Receivable





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




Inventories





Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market.  Management compares the cost of inventories with the market
value and allowance is made for writing down their inventories to market value,
if lower. As of September 30, 2008 and December 31, 2007, inventory consisted of
finished goods valued at $15,223,160 and $6,725,371, respectively.




Property, Plant &
Equipment




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





Furniture and Fixtures & Office Equipment
                  5 yearsAutomobile
                  5
      years




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





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


10


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008




Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Long-Lived
Assets




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




Fair Value of Financial
Instruments




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




Revenue
Recognition





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




Stock-Based
Compensation




In December 2002, the FASB issued SFAS
No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS 123.” This statement amended SFAS 123, “Accounting for
Stock-Based Compensation,” to provide alternative methods of transition for a
voluntary charge to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amended the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Effective for the year beginning January 1, 2006 the Company has adopted SFAS
123 (R), “Share-Based Payment” which supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees” and eliminates the intrinsic value
method that was provided in SFAS 123 for accounting of stock-based compensation
to employees. The Company made no employee stock-based compensation grants
before December 31, 2005 and therefore has no unrecognized stock compensation
related liabilities or expense unvested or vested prior to
2006.


11





CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008




Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Advertising





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




Income
Taxes




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




Basic and Diluted Earnings
per Share




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




Statement of Cash
Flows




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


12


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Concentration of Credit
Risk




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




Segment
Reporting





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





Recent Accounting
Pronouncements





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





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


13


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





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





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





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





On May 8,
2008, FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” which will provide framework for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy
for nongovernmental entities will move from auditing literature to accounting
literature.  The Company is currently assessing the impact of SFAS No. 162
on its financial position and results of operations.


14


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





Note
3 - ADVANCE TO
SUPPLIER




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





Note 4 -STOCK
WARRANTS, OPTIONS, AND COMPENSATION





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




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





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





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





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





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





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





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


15





CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





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





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





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





Expected
volatility is based on the historical volatility of the Company’s stock price.
The expected term represents the estimated average period of time that the
options remain outstanding. No dividend payouts were assumed, as the Company has
no plans to declare dividends during the expected term of the stock options. The
risk-free rate of return reflects the weighted average interest rate offered for
zero coupon treasury bonds over the expected term of the options. Based upon
this calculation and pursuant to ETIF 96-18, the company recorded a $336,668 and
a $899,952 expense for these warrants for the nine months ending September 30,
2008 and the year ending December 31, 2007, respectively.





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





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





Note
5 - COMPENSATED
ABSENCES




Regulation
45 of PRC labor laws entitles employees to annual vacation leave after 1 year of
service. In general all leave must be utilized annually, with proper
notification, any unutilized leave is cancelled.





Note
6 - INCOME
TAXES





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




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


16


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
6 - INCOME TAXES
(CONTINUED)




The
      following is a reconciliation of income tax expense:9/30/2008
                                                                                              U.S.
                                                                                              
                                                                                              State
                                                                                              
                                                                                              International
                                                                                              
                                                                                              TotalCurrent
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6,333,265
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6,333,265Deferred
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Total
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6,333,265
                                                                                              
                                                                                              
                                                                                              $
                                                                                              6,333,2659/30/2007
                                                                                              
                                                                                              U.S.
                                                                                              
                                                                                              
                                                                                              State
                                                                                              
                                                                                              
                                                                                              International
                                                                                              
                                                                                              
                                                                                              TotalCurrent
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              10,063,012
                                                                                              
                                                                                              
                                                                                              $
                                                                                              10,063,012Deferred
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -Total
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              10,063,012
                                                                                              
                                                                                              
                                                                                              $
                                                                                              10,063,012Reconciliation
      of the differences between the statutory U.S. Federal income tax rate and
      the effective rate is as follows:9/30/2008
                                                                                              
                                                                                              
                                                                                              9/30/2007US
      statutory tax rate
                                                                                              
                                                                                              
                                                                                              34
                                                                                              %
                                                                                              
                                                                                              
                                                                                              34
                                                                                              %Foreign
      income not recognized in US
                                                                                              
                                                                                              
                                                                                              -34
                                                                                              %
                                                                                              
                                                                                              
                                                                                              -34
                                                                                              %PRC
      income tax
                                                                                              
                                                                                              
                                                                                              25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              33
                                                                                              %Effective
      rate
                                                                                              
                                                                                              
                                                                                              25
                                                                                              %
                                                                                              
                                                                                              
                                                                                              33
                                                                                              %





Note
7 - COMMITMENTS




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





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





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




17


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2008





Note
8 - STATUTORY
RESERVE





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





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





Note
9 - OTHER
COMPREHENSIVE INCOME





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





Foreign
      Currency
                        Translation
                        Adjustment
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                        IncomeBalance
      at December 31, 2006
                      
                      $
                      427,616
                      
                      
                      $
                      427,616Change
      for 2007
                      
                      
                      1,444,718
                      
                      
                      
                      1,444,718Balance
      at December 31, 2007
                      
                      
                      1,872,334
                      
                      
                      
                      1,872,334Change
      for 2008
                      
                      
                      3,052,891
                      
                      
                      
                      3,052,891Balance
      at September 30, 2008
                      
                      $
                      4,925,225
                      
                      
                      $
                      4,925,225





Note 10 -CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS





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





Note
11 – MAJOR CUSTOMERS
AND CREDIT RISK





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


18


Note
12 -   SEGMENT INFORMATION





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





The
Company has identified four reportable segments required by SFAS 131: (1) mobile
phones, (2) home electronics, (3) office communication products, and (4)
consumer electronics.





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




Three Months Ended September
      30, 2008Mobile
                        Phones
                      
                      
                      Home
                        Electronics
                      
                      
                      Office
                        Communication
                        Products
                      
                      
                      Consumer
                        Electronics
                      
                      
                      Other
                      
                      
                      TotalSales,
      net
                      
                      $
                      26,990
                      
                      
                      $
                      17,266
                      
                      
                      $
                      16,553
                      
                      
                      $
                      18,248
                      
                      
                      $
                      -
                      
                      
                      $
                      79,057Cost
      of sales
                      
                      
                      22,006
                      
                      
                      
                      14,478
                      
                      
                      
                      14,252
                      
                      
                      
                      16,475
                      
                      
                      
                      -
                      
                      
                      
                      67,211Gross
      profit
                      
                      
                      4,984
                      
                      
                      
                      2,788
                      
                      
                      
                      2,301
                      
                      
                      
                      1,773
                      
                      
                      
                      -
                      
                      
                      
                      11,846Income
      from operations
                      
                      
                      3,612
                      
                      
                      
                      1,578
                      
                      
                      
                      1,818
                      
                      
                      
                      1,201
                      
                      
                      
                      (93)
                      
                      
                      
                      8,116Total
      assets
                      
                      $
                      25,941
                      
                      
                      $
                      21,919
                      
                      
                      $
                      19,694
                      
                      
                      $
                      19,500
                      
                      
                      $
                      1,416
                      
                      
                      $
                      88,470




Three Months Ended September
      30, 2007Mobile
                        Phone
                      
                      
                      Home
                        Electronics
                      
                      
                      Office
                        Communication
                        Product
                      
                      
                      Consumer
                        Electronics
                      
                      
                      Other
                      
                      
                      TotalSales,
      net
                      
                      $
                      17,269
                      
                      
                      $
                      14,242
                      
                      
                      $
                      14,129
                      
                      
                      $
                      12,257
                      
                      
                      $
                      -
                      
                      
                      $
                      57,897Cost
      of sales
                      
                      
                      13,758
                      
                      
                      
                      9,929
                      
                      
                      
                      11,403
                      
                      
                      
                      10,024
                      
                      
                      
                      -
                      
                      
                      
                      45,114Gross
      profit
                      
                      
                      3,511
                      
                      
                      
                      4,313
                      
                      
                      
                      2,726
                      
                      
                      
                      2,233
                      
                      
                      
                      -
                      
                      
                      
                      12,783Income
      from operations
                      
                      
                      2,962
                      
                      
                      
                      (678)
                      
                      
                      
                      2,241
                      
                      
                      
                      1,905
                      
                      
                      
                      3,497
                      
                      
                      
                      9,927Total
      assets
                      
                      $
                      13,901
                      
                      
                      $
                      14,734
                      
                      
                      $
                      11,681
                      
                      
                      $
                      14,430
                      
                      
                      $
                      1,727
                      
                      
                      $
                      56,473


19




Forward
Looking Statements





The
following discussion includes forward-looking statements.   In
some cases, these statements are identifiable through the use of words such as
“anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “project”,
“target”, “can”, “could”, “may”, “should”, “will”, “would”, and similar
expressions. You are cautioned not to place undue reliance on these
forward-looking statements. In addition, our management may make forward-looking
statements to analysts, investors, representatives of the media and others.
These forward-looking statements are not historical facts and represent only our
beliefs regarding future events, many of which, by their nature, are inherently
uncertain and beyond our control.  Our actual results may differ
significantly from those projected in the forward-looking statements. Factors
that may cause future results to differ materially from those projected in the
forward-looking statements include, but are not limited to, those discussed in
“Risk Factors” and elsewhere in this Form 10-Q/A.





The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q/A.





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





Overview





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





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




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


20


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




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





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





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





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





Result
of Operations





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





Reportable
Operating Segments





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




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


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


c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”


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





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





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





All
amounts, except percentage of revenues, in thousands of U.S.
dollars.





Nine months ended
                          September 30,
                        
                        
                        PercentageYiwu
                        
                        2008
                        
                        
                        2007
                        
                        
                        ChangeRevenue
                        
                        $
                        47,002
                        
                        
                        $
                        48,744
                        
                        
                        
                        (3.57
                        )%Gross
      Profit
                        
                        $
                        7,099
                        
                        
                        $
                        7,440
                        
                        
                        
                        (4.58
                        )%Gross
      Margin
                        
                        
                        15.10
                        %
                        
                        
                        15.26
                        %
                        
                        
                        (0.16
                        )%Operating
      Income
                        
                        $
                        5,230
                        
                        
                        $
                        6,093
                        
                        
                        
                        (14.16
                        )%





Three months ended
                        September 30,
                      
                      
                      PercentageYiwu
                      
                      2008
                      
                      
                      2007
                      
                      
                      ChangeRevenue
                      
                      $
                      16,553
                      
                      
                      $
                      14,129
                      
                      
                      
                      17.16
                      %Gross
      Profit
                      
                      $
                      2,301
                      
                      
                      $
                      2,726
                      
                      
                      
                      (15.59
                      )%Gross
      Margin
                      
                      
                      13.90
                      %
                      
                      
                      19.29
                      %
                      
                      
                      (5.39
                      )%Operating
      Income
                      
                      $
                      1,818
                      
                      
                      $
                      2,241
                      
                      
                      
                      (18.88
                      )%


21


For the
nine months ended September 30, 2008, Yiwu generated revenue of $47,002
thousand, a decrease of $1,742 thousand or 3.57% compared to $48,744 thousand
for the nine months ended September 30, 2007. Gross profit decreased $341
thousand or 4.58% from $7,440 thousand for the nine months ended September 30,
2007 to $7,099 thousand for the nine months ended September 30, 2008. Operating
income was $5,230 thousand for the nine months ended September 30, 2008, a
decrease of $863 thousand or 14.16% compared to $6,093 thousand for the nine
months ended September 30, 2007. Such decreases in revenue, gross profit and
operating income were primarily due to the unprecedented snow storm in China
during the first two months of the year which created a backlog in our
distribution channels.





For the
three months ended September 30, 2008, Yiwu generated revenue of $16,553
thousand, an increase of $2,424 thousand or 17.16 % compared to $14,129 thousand
for the three months ended September 30, 2007. Gross profit decreased $425
thousand or 15.59% from $2,726 thousand for the three months ended September 30,
2007 to $2,301 thousand for the three months ended September 30, 2008. Operating
income was $1,818 thousand for the three months ended September 30, 2008, a
decrease of $423 thousand or 18.88% compared to $2,241 thousand for the three
months ended September 30, 2007.





Gross
profit margin decreased from 19.29% to 13.90% for the three months ended
September 30, 2008 compared to the same period in 2007.  Gross margin
decreased due to the decrease in unit sales price caused
by  promotional sales.





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





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





All
amounts, except percentage of revenues, in thousands of U.S.
dollars.





Nine months ended
                        September 30,
                      
                      
                      PercentageWang Da
                      
                      2008
                      
                      
                      2007
                      
                      
                      ChangeRevenue
                      
                      $
                      74,767
                      
                      
                      $
                      63,441
                      
                      
                      
                      17.85
                      %Gross
      Profit
                      
                      $
                      12,259
                      
                      
                      $
                      10,391
                      
                      
                      
                      17.98
                      %Gross
      Margin
                      
                      
                      16.40
                      %
                      
                      
                      16.38
                      %
                      
                      
                      0.02
                      %Operating
      Income
                      
                      $
                      8,530
                      
                      
                      $
                      8,629
                      
                      
                      
                      (1.15
                      )%





Three months ended
                        September 30,
                      
                      
                      PercentageWang
      Da
                      
                      2008
                      
                      
                      2007
                      
                      
                      ChangeRevenue
                      
                      $
                      26,990
                      
                      
                      $
                      17,269
                      
                      
                      
                      56.29
                      %Gross
      Profit
                      
                      $
                      4,984
                      
                      
                      $
                      3,511
                      
                      
                      
                      41.95
                      %Gross
      Margin
                      
                      
                      18.47
                      %
                      
                      
                      20.33
                      %
                      
                      
                      (1.86
                      )%Operating
      Income
                      
                      $
                      3,612
                      
                      
                      $
                      2,962
                      
                      
                      
                      21.94
                      %





For the
nine months ended September 30, 2008, Wang Da generated revenue of $74,767
thousand, an increase of $11,326 thousand or 17.85% compared to $63,441 thousand
for the nine months ended September 30, 2007. Gross profit increased $1,868
thousand or 17.98% from $10,391 thousand for the nine months ended September 30,
2007 to $12,259 thousand for the nine months ended September 30, 2008. Operating
income was $8,530 thousand for the nine months ended September 30, 2008, a
decrease of $99 thousand or 1.15 % compared to $8,629 thousand for the nine
months ended September 30, 2007. The increase in revenue and gross profit were
due to the expansion of Wang Da’s distribution networks, as well as opening of
new stores, offset by the negative effect of  the unprecedented snow
storm in China during the first two months of the year which created a backlog
in our distribution channels.


22


For the
three months ended September 30, 2008, Wang Da generated revenue of $26,990
thousand, an increase of $9.721 thousand or 56.29% compared to $17,269 thousand
for the three months ended September 30, 2007. Gross profit increased $1,473
thousand or 41.95% from $3,511 thousand for the three months ended September 30,
2007 to $4,984 thousand for the three months ended September 30, 2008. Operating
income was $3,612 thousand for the three months ended September 30, 2008, an
increase of $650 thousand or 21.94% compared to $2,962 thousand for the three
months ended September 30, 2007. The increase in revenue and gross profit were
primarily due to the expansion of Wang Da’s distribution networks, as well as
opening of new stores.





Gross
profit margin decreased from 20.33% in the three months ended September 30, 2007
to 18.47% in the three months ended September 30, 2008, a decrease of
1.86%  The decrease was a result of a slight increase in promotional
sales on cell phones within the Wang Da’s store in store locations.





c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”





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





All
amounts, except percentage of revenues, in thousands of U.S.
dollars.





Nine months ended
                            September 30,
                          
                          
                          PercentageSanhe
                          
                          2008
                          
                          
                          2007
                          
                          
                          ChangeRevenue
                          
                          $
                          52,404
                          
                          
                          $
                          48,503
                          
                          
                          
                          8.04
                          %Gross
      Profit
                          
                          $
                          9,272
                          
                          
                          $
                          12,446
                          
                          
                          
                          (25.50
                          )%Gross
      Margin
                          
                          
                          17.69
                          %
                          
                          
                          25.66
                          %
                          
                          
                          (7.97
                          )%Operating
      Income
                          
                          $
                          5,841
                          
                          
                          $
                          5,107
                          
                          
                          
                          14.37
                          %





Three
      months ended
                          September
      30,
                        
                        
                        PercentageSanhe
                        
                        2008
                        
                        
                        2007
                        
                        
                        ChangeRevenue
                        
                        $
                        17,266
                        
                        
                        $
                        14,242
                        
                        
                        
                        21.23
                        %Gross
      Profit
                        
                        $
                        2,788
                        
                        
                        $
                        4,313
                        
                        
                        
                        (35.36
                        )%Gross
      Margin
                        
                        
                        16.15
                        %
                        
                        
                        30.28
                        %
                        
                        
                        (14.13
                        )%Operating
      Income
                        
                        $
                        1,578
                        
                        
                        $
                        (678
                        )
                        
                        
                        332.74
                        %





For the
nine months ended September 30, 2008, Sanhe generated revenue of $52,404
thousand, an increase of $3,901 thousand or 8.04% compared to $48,503 thousand
for the nine months ended September 30, 2007. Gross profit decreased $3,174
thousand or 25.50% from $12,446 thousand for the nine months ended September 30,
2007 to $9,272 thousand for the nine months ended September 30, 2008. Operating
income was $5,841 thousand for the nine months ended September 30, 2008, an
increase of $734 thousand or 14.37 % compared to $5,107 thousand for the nine
months ended September 30, 2007. The increase in revenue and operating income
were due to the expansion of Sanhe’s distribution networks, as well as opening
of new stores, offset by the negative effect of  the unprecedented
snow storm in China during the first two months of the year which created a
backlog in our distribution channels. Gross profit decreased due to a more
competitive sales environment on home electronics which caused the unit sales
price to decrease.





For the
three months ended September 30, 2008, Sanhe generated revenue of $17,266
thousand, an increase of $3,024 thousand or 21.23% compared to $14,242 thousand
for the three months ended September 30, 2007. Gross profit decreased $1,525
thousand or 35.36% from $4,313 thousand for the three months ended September 30,
2007 to $2,788 thousand for the three months ended September 30, 2008. Operating
income was $1,578 thousand for the three months ended September 30, 2008, an
increase of $2,256 thousand or 332.74% compared to $(678) thousand for the three
months ended September 30, 2007. Gross profit decreased due to a more
competitive sales environment on home electronics which caused the unit sales
price to decrease.




23




Gross
profit margin decreased from 30.28% in the three months ended September 30, 2007
to 16.15% in the three months ended September 30, 2008, a decrease of
14.13%.  Gross profit decreased due to a more competitive sales
environment on home electronics which caused the unit sales price to
decrease.


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





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





All
amounts, except percentage of revenues, in thousands of U.S.
dollars.





Nine
      months ended
                                      September
      30,
                                    
                                    
                                    PercentageJoy
      & Harmony
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    ChangeRevenue
                                    
                                    $
                                    51,533
                                    
                                    
                                    $
                                    46,231
                                    
                                    
                                    
                                    11.47
                                    %Gross
      Profit
                                    
                                    $
                                    6,639
                                    
                                    
                                    $
                                    7,877
                                    
                                    
                                    
                                    (15.72
                                    )%Gross
      Margin
                                    
                                    
                                    12.88
                                    %
                                    
                                    
                                    17.04
                                    %
                                    
                                    
                                    (4.16
                                    )%Operating
      Income
                                    
                                    $
                                    4,958
                                    
                                    
                                    $
                                    6,770
                                    
                                    
                                    
                                    (26.77
                                    )%





Three
      months ended
                                        September
      30,
                                      
                                      
                                      PercentageJoy
      & Harmony
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      ChangeRevenue
                                      
                                      $
                                      18,248
                                      
                                      
                                      $
                                      12,257
                                      
                                      
                                      
                                      48.88
                                      %Gross
      Profit
                                      
                                      $
                                      1,773
                                      
                                      
                                      $
                                      2,233
                                      
                                      
                                      
                                      (20.60
                                      )%Gross
      Margin
                                      
                                      
                                      9.72
                                      %
                                      
                                      
                                      18.22
                                      %
                                      
                                      
                                      (8.50
                                      )%Operating
      Income
                                      
                                      $
                                      1,201
                                      
                                      
                                      $
                                      1,905
                                      
                                      
                                      
                                      (36.96
                                      )%





For the
nine months ended September 30, 2008, Joy & Harmony generated revenue of
$51,533 thousand, an increase of $5,302 thousand or 11.47% compared to $46,231
thousand for the nine months ended September 30, 2007. Gross profit decreased
$1,238 thousand or 15.72% from $7,877 thousand for the nine months ended
September 30, 2007 to $6,639 thousand for the nine months ended September 30,
2008. Operating income was $4,958 thousand for the nine months ended September
30, 2008, a decrease of $1,812 thousand or 26.77% compared to $6,770 thousand
for the nine months ended September 30, 2007. Such increase in revenue was
primarily due to the expansion of Joy & Harmony’s distribution networks, as
well as opening of new stores. Gross profit and operation income decreased as a
result of a slight increase in promotional sales.





For the
three months ended September 30, 2008, Joy & Harmony generated revenue of
$18,248 thousand, an increase of $5,991 thousand or 48.88% compared to $12,257
thousand for the three months ended September 30, 2007. Gross profit decreased
$460 thousand or 20.60% from $2,233 thousand for the three months ended
September 30, 2007 to $1,773 thousand for the three months ended September 30,
2008. Operating income was $1,201 thousand for the three months ended September
30, 2008, a decrease of $704 thousand or 36.96% compared to $1,905 thousand for
the three months ended September 30, 2007. The increase in revenue was due to
the expansion of Joy & Harmony’s distribution networks, as well as opening
of new stores. Gross profit and operation income decreased as a result of a
slight increase in promotional sales.





Gross
profit margin decreased from 18.22% in the three months ended September 30, 2007
to 9.72% in the three months ended September 30, 2008, a decrease of 8.5%. The
lower gross profit margin was due to increasing unit purchase prices and unit
sales prices that did not increase as much as purchases. It was also
attributable to the promotional sales that caused the unit sales price to
decrease.





Net
Sales





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


24


Cost
of Sales





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





Gross
Profit Margin





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




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


25


General
and Administrative Expenses





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




Income
from Operations





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





Provision
for Income Taxes





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





Net
Income





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




Liquidity
and Capital Resources





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


26


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





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)Net
      cash (used in) provided by  operating activities
                    
                    $
                    3,682
                    
                    
                    $
                    13,845Net
      cash (used in) investing activities
                    
                    $
                    (9
                    )
                    
                    $
                    (62
                    )Net
      cash (used in) financing activities
                    
                    $
                    -
                    
                    
                    $
                    (4,500
                    )Effect
      of exchange rate change on cash and cash equivalents
                    
                    $
                    3,053
                    
                    
                    $
                    750Net
      increase in cash and cash equivalents
                    
                    $
                    6,726
                    
                    
                    $
                    10,033Cash
      and cash equivalents at beginning of period
                    
                    $
                    24,953
                    
                    
                    $
                    6,498Cash
      and cash equivalents at end period
                    
                    $
                    31,679
                    
                    
                    $
                    16,531





Operating
Activities





Net cash
generated from operating activities decreased from $13,845 thousand for the nine
months ended September 30, 2007 to $3,682 thousand for the nine months ended
September 30, 2008, approximately a 73.41% decrease.  The decrease was
mainly attributable to several factors, including (i) the substantial increase
in accounts receivable of $11,491 thousand in the nine months ended September
30, 2008; (ii) the increase in inventory of $8,498 thousand in the nine months
ended September 30, 2008; and (iii) the increase in income tax payable of $333
thousand in the nine months ended September 30, 2008, offset by the increase in
accounts payable and accrued expenses of $2,865 thousand and decrease in advance
to suppliers of $1,117 thousand.





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)Sales
      Net
                    
                    $
                    79,057
                    
                    
                    $
                    57,897





In view
of increase in market competition, the Company successfully maintained a
moderate increase in net sales, even though the repayment period from accounts
receivable treads are  longer than before which resulted in a decrease
in net cash generated from operating activities.





Nine months endedSeptember 30,
                      2008
                    
                    September 30,
                      2007(in
      thousands)
                    
                    (in
      thousands)a)
      Increase in inventory
                    
                    $
                    8,498
                    
                    
                    $
                    2,491b)
      Increase in Accounts Receivable
                    
                    $
                    11,491
                    
                    
                    $
                    1,305c)
      Increase in inventory and accountsreceivables as a whole a) + b)
                    
                    $
                    20,989
                    
                    
                    $
                    3,796


27


On the
control side of distribution of products, the focus is always on the holding
cost of inventory and the value of accounts receivable as a whole comparing to
net sales.





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)d)
      Accounts payable and accrued charges
                    
                    $
                    2,865
                    
                    
                    $
                    47





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





The
Company maintained its market and sales for the nine months ended September 30,
2008 and obtained the continued support from creditors in increasing in credits
from them, the Company generated net cash from operating activities of $3,682
thousand for the nine months ended September 30, 2008.





Investing
Activities





Net cash
used in investing activities decreased to $9 thousand during the nine months
ended September 30, 2008 from $63 thousand during the nine months ended
September 30, 2007, primarily due to the combined effect of decrease in purchase
of additional office equipments and increase in proceeds from asset
sales.





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)Net
      cash (used in) investment activities
                    
                    $
                    (9
                    )
                    
                    $
                    (63
                    )





The
Company’s activities focused on the distribution of products.  As a
result, investment in fixed assets was moderate and hence there is little effect
to the utilization of cash resources over the period.





Financing
Activities





Net cash
used in financing activities during the nine months ended September 30, 2007 was
$4,500 thousand which was payment for acquisition of Shanghai Joy and Harmony
Electronics Co. Ltd. The Company did not carry out any financing activities
during the nine month ended September 30, 2008.





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)Net
      cash (used in) financing activities
                    
                    $
                    (0
                    )
                    
                    $
                    (4,500
                    )





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)Net
      change in cash and cash equivalents
                    
                    $
                    6,726
                    
                    
                    $
                    10,033


28





Nine months endedSeptember 30,
                      2008
                    
                    
                    September 30,
                      2007(in
      thousands)
                    
                    
                    (in
      thousands)Cash
      and cash equivalent at September 30, 2008 and 2007
                    
                    $
                    31,679
                    
                    
                    $
                    16,531





With
effective internal control systems in place the Company maintained healthy net
cash flows over period and achieved a healthy cash position of $31,679 thousand
at September 30, 2008.





Since
December 31, 2007, our accounts receivable balance increased due to a slow down
in accounts receivable turnover, which was partly due to the impact of a
slowdown in the global economy, so there has been a general decrease in
customers’ ability to make payments quickly, it could have had an effect on our
bad debt allowances. However, although such turnover slowed in comparison to
prior periods, we took good control of accounts receivable by changing the
contract terms only for our retail department store customers, where we maintain
a store in-store model, to extend the period for repayment from 15 days to 30
days. The extension of repayment terms has lead to the increase in accounts
receivable, but considering the extension is only for an additional 15 days, we
don’t expect these accounts receivables to be long-term compared to other
accounts receivable. For customers who want to further extend the repayment
terms, we will carefully review customers’ credit, percentage of sales and
payment history to determine whether we should extend the terms. If there is a
high risk that the account receivables become uncollectible, we will not extend
the repayment terms.





Collection
of debt is based on the terms of legal binding documents. We have not changed
our policy on reserving for bad debt, but have found a means to accommodate
customers given the financial crisis by extending payment terms. Since December
31, 2007, the account receivable department has periodically reviewed the
allowance for doubtful accounts. The estimate of bad debt allowance is based on
the aging of the receivables, the credit history and credit quality of the
customers, the term of the contracts as well as the balance outstanding. If an
account receivable item is considered highly probable that it is uncollectible,
then it will be charged to bad debt immediately in that period. Since then we
have not found any abnormal increase in bad debt.





As a
result of the unprecedented snow storm in China in 2008, there was a shortage of
inventory available to our stores during the first quarter 2008.  This
shortage had a negative impact on our first quarter sales for
2008.  As a precautionary measure, the Company decided to increase its
level of inventory in order to maintain an adequate level for all stores in the
event of other unexpected incidents.  The Company has adopted a policy
to appropriately increase its inventory to ensure sufficient product
turnover  to meet customer’s demand and avoid a shortage of
goods.  The increase in inventory has had a negative impact on cash
flows and liquidity.  However, the Company firmly believes that the
benefits of this change in policy outweighs the losses.  The Company
believes that an appropriate increase in inventory level is a beneficial policy
enhancing individual stores ability to response to sales change and in return
building up the Company’s goodwill thereby securing sales growth. This change in
inventory policy will reduce the Company’s cash liquidity in the short term but
it will not affect the future cash flow in the long term.  The current
economic environment will not affect the Company’s ability to sell inventory
currently in hand because the Company has high inventory turnover. Days
inventory on hand is approximately 38 days. Therefore, even if the economy
environment changes, the Company can still sell inventory currently in hand
within a short period.





Capital
Expenditures





Total
capital expenditures for the first nine months of 2008 were $11,088 for purchase
of fixed assetsas
compared to $63,057 for the first nine months of 2007.


29





Working Capital Requirements





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


Off-Balance
Sheet Arrangements





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




Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Foreign
Currency Exchange Rate Risk





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





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


30


Interest
Rate Risk





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





Inflation





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





Currency
Exchange Fluctuations





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





Concentration
of Credit Risk





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





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





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





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


31


Seasonality
and Quarterly Fluctuations





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




Item
4. Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures as of September 30, 2008,
as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
the Company’s disclosure controls and procedures were not effective as of such
date to ensure that information required to be disclosed by us in our Exchange
Act reports is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required
disclosures.  Our management identified that the ineffectiveness was
due to not having internal personnel with sufficient expertise and knowledge of
the requirements for disclosure of the information that have been collected and
reported, as required under the securities laws and disclosures required under
U.S. GAAP.





We plan
to take the following steps to remediate the deficiencies in disclosure controls
and procedures that are identified above:





·
            Management
      will provide additional training to our staff, and in particular to our
      key accounting personnel, with respect to the disclosure requirements
      under securities law and U.S. GAAP.





Changes
in Internal Control over Financial Reporting




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




PART II.   OTHER INFORMATION





Item 1.   Legal
Proceedings.





None.





Item
1A. Risk Factors.





None.





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





None.





Item 3.    Defaults Upon Senior
Securities.




None.





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





None.


32


Item 5.   Other
Information.





None.





Item 6.   Exhibits.




Exhibit
                      No.
                    
                    Document
      Description31.1
                    
                    Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of the 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 7th day of
May, 2009.




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




34




Exhibit
Index





Exhibit
                      No.
                    
                    Document
      Description31.1
                    
                    Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of the 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).


35