UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q/A


(Amendment
No. 2)





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




For the
quarterly period ended   June 30, 2008





or





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





For the
transition period from ____ to _____




Commission
file number  000-28767


China
3C Group


(Exact
Name of Registrant as Specified in Its Charter)




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




368
HuShu Nan Road


HangZhou City, Zhejiang
Province, China 310014




(Address
of Principal Executive Offices) (Zip Code)





086-0571-88381700


(Registrant’s
telephone number, including area code)


______________________________________________________________________


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





Indicate
by check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.   Yes x No o





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





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





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





As of
August 8, 2008 the registrant had  53,194,844 shares of common stock
outstanding.




EXPLANATORY
NOTE




We are
filing this Amendment No. 2 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. 2 to Quarterly Report on Form
10-Q/A does not reflect any event occurring subsequent to August 11, 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 June 30, 2008 (Unaudited) and December 31,
      2007
                  
                  2Consolidated
      Statements of Income for the Six Months Ended June 30, 2008 and 2007
      (Unaudited)
                  
                  3Consolidated
      Statements of Income for the Three Months Ended June 30, 2008 and 2007
      (Unaudited)
                  
                  4Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007
      (Unaudited)
                  
                  5Consolidated
      Statement of Stockholders’ Equity for the Six Months Ended June 30, 2008
      (Unaudited) and the Year Ended December 31, 2007
                  
                  6Notes
      to Consolidated Financial Statements
                  
                  7 -
      24Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                  
                  25Item
      3. Qualitative and Quantitative Disclosure about Market
    Risk
                  
                  34Item
      4. Controls and Procedures
                  
                  35PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                  
                  35Item
      1A. Risk Factors
                  
                  35Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                  
                  40Item
      3. Defaults Upon Senior Securities
                  
                  40Item
      4. Submission of Matters to a Vote of Security Holders
                  
                  40Item
      5. Other Information
                  
                  40Item
      6. Exhibits
                  
                  40Signatures
                  
                  41








PART
I. FINANCIAL
INFORMATION





Item 1.   Financial
Statements.




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




CERTIFIED
PUBLIC ACCOUNTANTS


40
Exchange Place, Suite 1820


New York,
NY 10005


TEL:
(212) 925-9490


FAX:
(212) 226-9134


E-MAIL:
MORGENCPA@CS.COM





Report of Independent
Registered Public Accounting Firm





Board of
Directors and Stockholders of


China 3C
Group





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





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





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





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





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


Certified
Public Accountants




New York,
New York


August 6,
2008


1




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET
S


AS
OF JUNE 30, 2008 AND DECEMBER 31, 2007




6/30/2008
                      
                      
                      12/31/2007ASSETSCurrent
      AssetsCash
      and cash equivalents
                      
                      $
                      25,993,638
                      
                      
                      $
                      24,952,614Accounts
      receivable, net
                      
                      
                      19,099,910
                      
                      
                      
                      8,077,533Inventory
                      
                      
                      12,991,176
                      
                      
                      
                      6,725,371Advance
      to supplier
                      
                      
                      2,478,134
                      
                      
                      
                      2,572,285Prepaid
      expenses
                      
                      
                      147,185
                      
                      
                      
                      382,769Total
      Current Assets
                      
                      
                      60,710,043
                      
                      
                      
                      42,710,572Property
      & equipment, net
                      
                      
                      79,709
                      
                      
                      
                      89,414Goodwill
                      
                      
                      20,348,278
                      
                      
                      
                      20,348,278Refundable
      deposits
                      
                      
                      52,619
                      
                      
                      
                      48,541Total
      Assets
                      
                      $
                      81,190,649
                      
                      
                      $
                      63,196,805LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                      
                      $
                      5,210,024
                      
                      
                      $
                      3,108,235Income
      tax payable
                      
                      
                      2,428,862
                      
                      
                      
                      2,684,487Total
      Current Liabilities
                      
                      
                      7,638,886
                      
                      
                      
                      5,792,722Stockholders'
      EquityCommon
      stock, $.001 par value, 100,000,000shares authorized, 52,673,938
      and 52,673,938 issued and outstanding
                      
                      
                      52,674
                      
                      
                      
                      52,674Additional
      paid in capital
                      
                      
                      19,465,776
                      
                      
                      
                      19,465,776Subscription
      receivable
                      
                      
                      (50,000
                      )
                      
                      
                      (50,000
                      )Statutory
      reserve
                      
                      
                      7,234,295
                      
                      
                      
                      7,234,295Other
      comprehensive income
                      
                      
                      4,694,974
                      
                      
                      
                      1,872,334Retained
      earnings
                      
                      
                      42,154,044
                      
                      
                      
                      28,829,004Total
      Stockholders' Equity
                      
                      
                      73,551,763
                      
                      
                      
                      57,404,083Total
      Liabilities and Stockholders' Equity
                      
                      $
                      81,190,649
                      
                      
                      $
                      63,196,805





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


2





CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


FOR
THE SIX MONTHS ENDING JUNE 30, 2008 AND 2007





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




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


3


CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


FOR
THE THREE MONTHS ENDING JUNE 30, 2008 AND 2007





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





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


4





CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


FOR
THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007





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





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





5




CHINA
3C GROUP AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


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





Additional
                
                
                Other
                
                
                
                
                
                
                
                
                
                
                
                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
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,822,640
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,822,640Income
      for the three months ended June 30, 2008
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                13,325,040
                
                
                
                13,325,040Balance
      June 30, 2008
                
                
                52,673,938
                
                
                $
                52,674
                
                
                $
                19,465,776
                
                
                $
                4,694,974
                
                
                $
                (50,000
                )
                
                $
                7,234,295
                
                
                $
                42,154,044
                
                
                $
                73,551,763




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


6


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 1 - ORGANIZATION





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





On
December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
through a reverse merger. China 3C Group acquired all of the issued and
outstanding capital stock of Capital pursuant to a Merger Agreement dated 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 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 (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
June 30, 2008 and December 31, 2007, the accounts of Zhejiang, Wang Da, Yiwu,
Sanhe, and Joy & Harmony were maintained, and its financial statements were
expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were
translated into U.S. Dollars (USD) in accordance with Statement of Financial
Accounts Standards (SFAS) No. 52, Foreign Currency Translation, with the CNY as
the functional currency. According to the Statement, all assets and liabilities
were translated at the current exchange rate, stockholders equity are translated
at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a component of shareholders equity. Transaction gains
and losses are reflected in the income statement.


8





CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Use of
Estimates





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





Principles of
Consolidation





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





Risks and
Uncertainties





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





Contingencies





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





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





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


9





CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED )





Cash and Cash
Equivalents





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





Accounts
Receivable





The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts
amounted to $128,017 and $103,803 as at June 30, 2008 and December 31, 2007,
respectively.




Inventories





Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower. As of June 30, 2008 and December 31, 2007 inventory consisted of finished
goods valued at $12,991,176 and $6,725,371, respectively.




Property, Plant &
Equipment




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





Furniture
      and Fixtures & Office Equipment
                5
      yearsAutomobile
                5
      years




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





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


10


CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008




Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED )




Long-Lived
Assets




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




Fair Value of Financial
Instruments




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




Revenue
Recognition





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




Share Based
Payment




In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123.” This statement
amended SFAS 123, “Accounting for Stock-Based Compensation,” to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amended the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Effective for 2006 the Company 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


JUNE
30, 2008




Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED )





Advertising





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




Income
Taxes




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




Basic and Diluted Earnings
per Share




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




Statement of Cash
Flows




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


12


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Concentration of Credit
Risk




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




Segment
Reporting





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





Recent accounting
pronouncements





In
December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment”,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant-date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first quarter of fiscal
2006.





In May
2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections."
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior periods' financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between "retrospective application" of an
accounting principle and the "restatement" of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.





In June
2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides guidance on
determining the amortization period for leasehold improvements acquired in a
business combination or acquired subsequent to lease inception. The guidance in
EITF 05-6 will be applied prospectively and is effective for periods beginning
after June 29, 2005. EITF 05-6 is not expected to have a material effect on its
consolidated financial position or results of operations.


13


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




In June
2005, the FASB Staff issued FASB Staff Position 150-5 (FSP 150-5), Issuers
Accounting under FASB Statement No. 150 for Freestanding Warrants and Other
Similar Instruments on Shares that are Redeemable. FSP 150-5 addresses
whether freestanding warrants and other similar instruments on shares that are
redeemable, either puttable or mandatorily redeemable, would be subject to the
requirements of FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, regardless of
the timing or the redemption feature or the redemption price. The FSP is
effective after June 30, 2005.





On
February 16, 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. SFAS No. 155 amends SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAF No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155, permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133, establishes a requirement to
evaluate interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on the qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006.





In March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not
expect its adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.





In July
2006, the FASB issued Interpretation No. 48, Accounting for uncertainty in
Income Taxe s - an
interpretation of FASB Statement 109  (FIN 48) . FIN 48 clarifies the
accounting for Income Taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition and clearly scopes income taxes out of SFAS No. 5,
Accounting for Contingencies . FIN 48 is effective for
fiscal years beginning after December 15, 2006. We did not have a material
impact on our consolidated financial position, results of operations or cash
flows.





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


14


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





a.
            A
      brief description of the provisions of this statementb.
            The
      date that adoption is requiredc.
            The
      date the employer plans to adopt the recognition provisions of this
      statement, if earlier.





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





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





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





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





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


15


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





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




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





Note 3 - ADVANCE
TO SUPPLIER




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




Note 4 - COMMON
STOCK




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





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





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


16


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 4 - COMMON
STOCK (CONTINUED)





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





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





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





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





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





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





Note 5 - ACQUISITIONS





(a)
Hangzhou Sanhe Electronic Technology Ltd.





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




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




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


17


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 5 - ACQUISITIONS
(CONTINUED)





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





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





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





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





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




(b)
Shanghai Joy & Harmony Electronics Company Limited





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




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


18


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 5 - ACQUISITIONS
(CONTINUED)





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





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





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




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





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





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





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





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


19


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 6 - STOCK
WARRANTS, OPTIONS, AND COMPENSATION





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




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





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





On
January 2, 2007, the Company issued, to an other newly appointed Board member,
an option grant (incentive stock options) to purchase 50,000 shares of common
stock at the closing price as of January 2, 2007. The options expire 10 years
from issuance. As of December 17, 2007, the Board member resigned.





On May 7,
2007, the Board of Directors appointed Joseph Levinson to serve as a member of
the Board of Directors of the Company. Mr. Levinson has been named chairman of
the Nominating Committee of the Company. In addition, Mr. Levinson is in charge
of investor relations for the Company.


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





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





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




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





Six Months endedJune 30, 2008Expected
      Volatility
                  
                  
                  153
                  %Expected
      term (in years)Todd
      L. Mavis
                  
                  
                  2Kenneth
      T. Berents
                  
                  
                  9Joseph
      Levinson
                  
                  
                  9Expected
      dividends
                  
                  
                  -Risk-free
      rate of return (weighted average)
                  
                  
                  3
                  %Weighted
      average grant-date fair value
                  
                  
                  3.8-6.15





Expected
volatility is based on the historical volatility of the Company’s stock price.
The expected term represents the estimated average period of time that the
options remain outstanding. No dividend payouts were assumed, as the Company has
no plans to declare dividends during the expected term of the
stock


20


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





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





options.
The risk-free rate of return reflects the weighted average interest rate offered
for zero coupon treasury bonds over the expected term of the options. Based upon
this calculation and pursuant to ETIF 96-18 the company recorded a $226,293 and
a $899,952 service period expense for these warrants for the six months ending
June 30, 2008 and the year ending December 31, 2007.




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




Note 7 – STOCKEXCHANGE
AGREEMENT





On
December 21, 2005 Capital Future Developments Ltd - BVI became a wholly owned
subsidiary of China 3C Group through a reverse merger. China 3C Group acquired
all of the issued and outstanding capital stock of Capital Future Developments
Ltd. - BVI pursuant to a Merger Agreement dated at December 21, 2005 by and
among China 3C Group, XY Acquisition Corporation, Capital Future Developments
Ltd. - BVI and the shareholders of Capital Future Developments Ltd - BVI (the
"Merger Agreement"). Pursuant to the Merger Agreement, Capital Future
Developments Ltd. - BVI became a wholly owned subsidiary of China 3C Group and,
in exchange for the Capital Future Developments Ltd. BVI
shares, China 3C Group issued 35,000,000 shares of its common stock to the
shareholders of Capital Future Developments Ltd. - BVI, representing 93% of the
issued and outstanding capital stock of China 3C Group at that time and a cash
consideration of $500,000.   As a result of the exchange agreement, the
reorganization was treated as an acquisition by the accounting acquirer that is
being accounted for as a recapitalization and as a reverse merger by the legal
acquirer for accounting purposes. Pursuant to the recapitalization, all capital
stock shares and amounts and per share data were retroactively
restated.





Note 8 - COMPENSATED
ABSENCES




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





Note 9 - INCOME
TAXES





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




Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT) is at a statutory
rate of 25%, which is comprises of 22% national income tax and 3% local income
tax.


21


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008


Note 9 - INCOME
TAXES (CONTINUED)





The
following is a reconciliation of income tax expense:




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




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




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




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




Note 10 - COMMITMENTS




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





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





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


22


CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2008





Note 11 - STATUTORY
RESERVE





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





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





Note 12 - OTHER
COMPREHENSIVE INCOME





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




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




Note 13   - CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS





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





Note 14 – MAJOR
CUSTOMERS AND CREDIT RISK





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




23




Note
15 -   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 June 30,
      2008Mobile
                  Phones
                
                
                Home
                  Electronics
                
                
                Office
                  Communication
                  Products
                
                
                Consumer
                  Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                25,529
                
                
                $
                18,648
                
                
                $
                17,030
                
                
                $
                17,309
                
                
                $
                -
                
                
                $
                78,516Cost
      of sales
                
                
                21,769
                
                
                
                15,137
                
                
                
                14,112
                
                
                
                14,621
                
                
                
                -
                
                
                
                65,639Gross
      profit
                
                
                3,760
                
                
                
                3,511
                
                
                
                2,918
                
                
                
                2,688
                
                
                
                -
                
                
                
                12,877Income
      from operations
                
                
                2,371
                
                
                
                2,399
                
                
                
                2,222
                
                
                
                2,097
                
                
                
                461
                
                
                
                9,550Total
      assets
                
                $
                22,326
                
                
                $
                21,739
                
                
                $
                16,418
                
                
                $
                19,251
                
                
                $
                1,456
                
                
                $
                81,190




Three Months Ended June 30,
      2007Mobile
                  Phones
                
                
                Home
                  Electronics
                
                
                Office
                  Communication
                  Products
                
                
                Consumer
                  Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                19,482
                
                
                $
                16,057
                
                
                $
                14,362
                
                
                $
                14,598
                
                
                $
                -
                
                
                $
                64,499Cost
      of sales
                
                
                16,435
                
                
                
                11,950
                
                
                
                12,452
                
                
                
                12,223
                
                
                
                -
                
                
                
                53,060Gross
      profit
                
                
                3,047
                
                
                
                4,107
                
                
                
                1,910
                
                
                
                2,375
                
                
                
                -
                
                
                
                11,439Income
      from operations
                
                
                2,385
                
                
                
                2,918
                
                
                
                1,366
                
                
                
                2,058
                
                
                
                (303)
                
                
                
                8,424Total
      assets
                
                $
                12,522
                
                
                $
                12,221
                
                
                $
                10,673
                
                
                $
                13,052
                
                
                $
                1,696
                
                
                $
                50,164


24


Forward
Looking Statements





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





The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q/A.
The following discussion contains forward-looking statements. Our actual results
may differ significantly from those projected in the forward-looking statements.
Factors that may cause future results to differ materially from those projected
in the forward-looking statements include, but are not limited to, those
discussed in “Risk Factors” and elsewhere in this Form 10-Q/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 (“CFDL”) was incorporated on July 22, 2004
under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and
CFDL own 100% of the capital stock of SJHE and Sanhe. Until August 14, 2007,
when it made the change to its ownership structure described in the next
paragraph in order to comply with certain requirements of PRC law, CFDL owned
100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of
Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. Collectively the six
corporations are referred to herein as the Company.





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





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


25





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




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





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





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





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





Result
of Operations





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





Reportable
Operating Segments





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




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


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


c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”


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





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.





Six months ended
                  June 30,
                
                
                PercentageYiwu
                
                2008
                
                
                2007
                
                
                ChangeRevenue
                
                $
                30,469
                
                
                $
                34,615
                
                
                
                (11.98)
                %Gross
      Profit
                
                $
                4,798
                
                
                $
                4,714
                
                
                
                1.78
                %Gross
      Margin
                
                
                15.75
                %
                
                
                13.62
                %
                
                
                2.13
                %Operating
      Income
                
                $
                3,412
                
                
                $
                3,852
                
                
                
                (11.42)
                %





Three months ended
                  June 30,
                
                
                PercentageYiwu
                
                2008
                
                
                2007
                
                
                ChangeRevenue
                
                $
                17,030
                
                
                $
                14,362
                
                
                
                18.58
                %Gross
      Profit
                
                $
                2,918
                
                
                $
                1,910
                
                
                
                52,77
                %Gross
      Margin
                
                
                17.13
                %
                
                
                13.30
                %
                
                
                3.83
                %Operating
      Income
                
                $
                2,222
                
                
                $
                1,366
                
                
                
                62.66
                %




26




For the
six months ended June 30, 2008, Yiwu generated revenue of $30,469 thousand, a
decrease of $4,146 thousand or 11.98% compared to $34,615 thousand for the six
months ended June 30, 2007. Gross profit increased $84 thousand or 1.78% from
$4,714 thousand for the six months ended June 30, 2007 to $4,798 thousand for
the six months ended June 30, 2008. Operating income was $3,412 thousand for the
six months ended June 30, 2008, a decrease of $440 thousand or 11.42% compared
to $3,852 thousand for the six months ended June 30, 2007. Such decreases in
revenue and operation 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 June 30, 2008, Yiwu generated revenue of $17,030 thousand, an
increase of $2,668 thousand or 18.58 % compared to $14,362 thousand for the
three months ended June 30, 2007. Gross profit increased $1,008 thousand or
52.77% from $1,910 thousand for the three months ended June 30, 2007 to $2,918
thousand for the three months ended June 30, 2008. Operating income was $2,222
thousand for the three months ended June 30, 2008, an increase of $856 thousand
or 62.66% compared to $1,366 thousand for the three months ended June 30, 2007.
Such increases in revenue, gross profit and operation income were primarily due
to the expansion of the Company’s distribution networks as well as opening of
new stores.





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.





Six months ended
                  June 30,
                
                
                PercentageWang Da
                
                2008
                
                
                2007
                
                
                ChangeRevenue
                
                $
                47,777
                
                
                $
                46,172
                
                
                
                3.48
                %Gross
      Profit
                
                $
                7,275
                
                
                $
                6,880
                
                
                
                5.74
                %Gross
      Margin
                
                
                15.23
                %
                
                
                14.90
                %
                
                
                0.33
                %Operating
      Income
                
                $
                4,918
                
                
                $
                5,667
                
                
                
                (13.22)
                %





Three months endedJune 30,
                
                
                PercentageWang Da
                
                2008
                
                
                2007
                
                
                ChangeRevenue
                
                $
                25,529
                
                
                $
                19,482
                
                
                
                31.04
                %Gross
      Profit
                
                $
                3,760
                
                
                $
                3,047
                
                
                
                23.40
                %Gross
      Margin
                
                
                14.73
                %
                
                
                15.64
                %
                
                
                (0.91)
                %Operating
      Income
                
                $
                2,371
                
                
                $
                2,385
                
                
                
                (0.59)
                %





For the
six months ended June 30, 2008, Wang Da generated revenue of $47,777 thousand,
an increase of $1,605 thousand or 3.48% compared to $46,172 thousand for the six
months ended June 30, 2007. Gross profit increased $395 thousand or 5.74% from
$6,880 thousand for the six months ended June 30, 2007 to $7,275 thousand for
the six months ended June 30, 2008. Operating income was $4,918 thousand for the
six months ended June 30, 2008, a decrease of $749 thousand or 13.22 % compared
to $5,667 thousand for the six months ended June 30, 2007. The slight 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.





27




For the
three months ended June 30, 2008, Wang Da generated revenue of $25,529 thousand,
an increase of $6,047 thousand or 31.04% compared to $19,482 thousand for the
three months ended June 30, 2007. Gross profit increased $713 thousand or 23.40%
from $3,047 thousand for the three months ended June 30, 2007 to $3,760 thousand
for the three months ended June 30, 2008. Operating income was $2,371 thousand
for the three months ended June 30, 2008, a decrease of $14 thousand or 0.59%
compared to $2,385 thousand for the three months ended June 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.





Gross
profit margin decreased from 15.64% in the three months ended June 30, 2007 to
14.73% in the three months ended June 30, 2008, a decrease of
0.91%.  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.





Six months ended
                    June 30,
                  
                  
                  PercentageSanhe
                  
                  2008
                  
                  
                  2007
                  
                  
                  ChangeRevenue
                  
                  $
                  35,138
                  
                  
                  $
                  34,261
                  
                  
                  
                  2.56
                  %Gross
      Profit
                  
                  $
                  6,484
                  
                  
                  $
                  8,133
                  
                  
                  
                  (20.28)
                  %Gross
      Margin
                  
                  
                  18.45
                  %
                  
                  
                  23.74
                  %
                  
                  
                  (5.29)
                  %Operating
      Income
                  
                  $
                  4,263
                  
                  
                  $
                  5,785
                  
                  
                  
                  (26.31)
                  %





Three months ended
                    June 30,
                  
                  
                  PercentageSanhe
                  
                  2008
                  
                  
                  2007
                  
                  
                  ChangeRevenue
                  
                  $
                  18,648
                  
                  
                  $
                  16,057
                  
                  
                  
                  16.14
                  %Gross
      Profit
                  
                  $
                  3,511
                  
                  
                  $
                  4,107
                  
                  
                  
                  (14.51)
                  %Gross
      Margin
                  
                  
                  18.83
                  %
                  
                  
                  25.58
                  %
                  
                  
                  (6.75)
                  %Operating
      Income
                  
                  $
                  2,399
                  
                  
                  $
                  2,918
                  
                  
                  
                  (17.79)
                  %





For the
six months ended June 30, 2008, Sanhe generated revenue of $35,138 thousand, an
increase of $877 thousand or 2.56% compared to $34,261 thousand for the six
months ended June 30, 2007. Gross profit decreased $1,649 thousand or 20.28%
from $8,133 thousand for the six months ended June 30, 2007 to $6,484 thousand
for the six months ended June 30, 2008. Operating income was $4,263 thousand for
the six months ended June 30, 2008, a decrease of $1,522 thousand or 26.31 %
compared to $5,785 thousand for the six months ended June 30, 2007. The slight
increase in revenue was 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
and operating income decreased due to a more competitive sales environment on
home electronics.





For the
three months ended June 30, 2008, Sanhe generated revenue of $18,648 thousand,
an increase of $2,591 thousand or 16.14% compared to $16,057 thousand for the
three months ended June 30, 2007. Gross profit decreased $596 thousand or 14.51%
from $4,107 thousand for the three months ended June 30, 2007 to $3,511 thousand
for the three months ended June 30, 2008. Operating income was $2,399 thousand
for the three months ended June 30, 2008, a decrease of $519 thousand or 17.79%
compared to $2,918 thousand for the three months ended June 30, 2007. Gross
profit and operating income decreased due to a more competitive sales
environment on home electronics.





Gross
profit margin decreased from 25.58% in the three months ended June 30, 2007 to
18.83% in the three months ended June 30, 2008, a decrease of
6.75%.  Gross margin income decreased due to a more competitive sales
environment on home electronics which caused the unit sales price to
decrease.





28




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





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





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





Six months ended
                    June 30,
                  
                  
                  PercentageSJHE
                  
                  2008
                  
                  
                  2007
                  
                  
                  ChangeRevenue
                  
                  $
                  33,285
                  
                  
                  $
                  33,974
                  
                  
                  
                  (2.03)
                  %Gross
      Profit
                  
                  $
                  4,866
                  
                  
                  $
                  5,644
                  
                  
                  
                  (13.78)
                  %Gross
      Margin
                  
                  
                  14.62
                  %
                  
                  
                  16.61
                  %
                  
                  
                  (1.99)
                  %Operating
      Income
                  
                  $
                  3,757
                  
                  
                  $
                  4,865
                  
                  
                  
                  (22.77)
                  %





Three months ended
                    June 30,
                  
                  
                  PercentageSJHE
                  
                  2008
                  
                  
                  2007
                  
                  
                  ChangeRevenue
                  
                  $
                  17,309
                  
                  
                  $
                  14,598
                  
                  
                  
                  18.57
                  %Gross
      Profit
                  
                  $
                  2,688
                  
                  
                  $
                  2,375
                  
                  
                  
                  13.18
                  %Gross
      Margin
                  
                  
                  15.53
                  %
                  
                  
                  16.27
                  %
                  
                  
                  (0.74)
                  %Operating
      Income
                  
                  $
                  2,097
                  
                  
                  $
                  2,058
                  
                  
                  
                  1.90
                  %





For the
six months ended June 30, 2008, SJHE generated revenue of $33,285 thousand, a
decrease of $689 thousand or 2.03% compared to $33,974 thousand for the six
months ended June 30, 2007. Gross profit decreased $778 thousand or 13.78% from
$5,644 thousand for the six months ended June 30, 2007 to $4,866 thousand for
the six months ended June 30, 2008. Operating income was $3,757 thousand for the
six months ended June 30, 2008, a decrease of $1,108 thousand or 22.77% compared
to $4,865 thousand for the six months ended June 30, 2007. Such decreases in
revenue, gross profit and operation 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 June 30, 2008, SJHE generated revenue of $17,309 thousand, an
increase of $2,711 thousand or 18.57% compared to $14,598 thousand for the three
months ended June 30, 2007. Gross profit increased $313 thousand or 13.18% from
$2,375 thousand for the three months ended June 30, 2007 to $2,688 thousand for
the three months ended June 30, 2008. Operating income was $2,097 thousand for
the three months ended June 30, 2008, an increase of $39 thousand or 1.90%
compared to $2,058 thousand for the three months ended June 30, 2007. The
increase in revenue, gross profit and operating income was due to the expansion
of SJHE’s distribution networks, as well as opening of new stores.





Gross
profit margin slightly decreased from 16.27% in the three months ended June 30,
2007 to 15.53% in the three months ended June 30, 2008, a decrease of 0.74%. The
lower gross profit margin was due to increasing unit purchase prices and unit
sales prices that did not increase as much as purchases.





Net
Sales





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




Cost
of Sales





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





Gross
Profit Margin





Gross
profit margin for the six months ended June 30, 2008 was 16.0% as compared to
17.0% for the six months ended June 30, 2007. Gross profit margin for the three
months ended June 30, 2008 was 16.4% as compared to 17.7% for the three months
ended June 30, 2007. The lower gross profit margin was due to increasing unit
purchase prices and unit sales prices that did not increase in line with
increasing inflation in China. With the increasing competition, we could not
offset the cost of operations with higher selling prices.


29


General
and Administrative Expenses





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




Income
from Operations





Income
from operations for the six months ended June 30, 2008 was $17,110,009 or 12% of
net sales as compared to income from operations of $18,630,085 or 13% of net
sales for the six months ended June 30, 2007, a decrease of 8%. Income from
operations for the three months ended June 30, 2008 was $9,549,673 or 12% of net
sales as compared to income from operations of $8,423,965 or 13% of net sales
for the three months ended June 30, 2007, an increase of 13%. Lower sales,
higher product costs, and logistical costs, such as higher distribution costs,
were the key factors for the decrease in income from operations during the six
months ended June 30, 2008.





Provision
for Income Taxes





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





Net
Income





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




Liquidity
and Capital Resources





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


30


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




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





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in thousands)
                  
                  
                  (in thousands)Net
      cash (used in) provided by  operating activities
                  
                  $
                  (1,774
                  )
                  
                  $
                  12,908Net
      cash (used in) investing activities
                  
                  $
                  (8
                  )
                  
                  $
                  (62
                  )Effect
      of exchange rate change on cash and cash equivalents
                  
                  $
                  2,823
                  
                  
                  $
                  386Net
      increase in cash and cash equivalents
                  
                  $
                  1,041
                  
                  
                  $
                  8,732Cash
      and cash equivalents at beginning of period
                  
                  $
                  24,953
                  
                  
                  $
                  6,499Cash
      and cash equivalents at end period
                  
                  $
                  25,994
                  
                  
                  $
                  15,231





Operating
Activities





Net cash
generated from operating activities decreased from $12,908 thousand for the
three months ended June 30, 2007 to $(1,774) thousand for the three months ended
June 30, 2008, approximately a 113.74% decrease.  The decrease was
mainly attributable to several factors, including (i) the substantial increase
in accounts receivable of $11,040 thousand in the three months ended June 30,
2008; (ii) the increase in inventory of $6,266 thousand in the three months
ended June 30, 2008; (iii) the increase in income tax payable of $256 thousand
in the three months ended June 30, 2008, offset by the increase in accounts
payable and accrued expenses of $2,102 thousand.





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in
      thousands)
                  
                  
                  (in
      thousands)Sales
      Net
                  
                  $
                  78,515
                  
                  
                  $
                  64,498





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.





Six months endedJune 30, 2008
                            
                            June 30, 2007(in thousands)
                            
                            (in thousands)a)
      Increase in inventory
                            
                            $
                            6,266
                            
                            
                            $
                            2,094b)
      Increase in Accounts Receivable
                            
                            $
                            11,040
                            
                            
                            $
                            727c)
      Increase in inventory and accounts receivables as a whole a) +
      b)
                            
                            $
                            17,306
                            
                            
                            $
                            2,821


31





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.





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in thousands)
                  
                  
                  (in thousands)d)
      Accounts payable and accrued charges
                  
                  $
                  2,102
                  
                  
                  $
                  1,092





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in thousands)
                  
                  
                  (in thousands)d)
      Accounts payable and accrued charges
                  
                  $
                  2,102
                  
                  
                  $
                  1,092





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





The  Company
used $4,420 thousand in operating activities for the six months ended June 30,
2008.





Investing
Activities





Net cash
used in investing activities decreased to $8 thousand during the three months
ended June 30, 2008 from $62 thousand during the three months ended June 30,
2007, primarily due to the combined effect of decrease in purchase of additional
office equipments and increase in proceeds from asset sales.





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in thousands)
                  
                  
                  (in thousands)Net
      cash used investment activities
                  
                  $
                  (8
                  )
                  
                  $
                  (62
                  )





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





Financing
Activities





The
Company did not carry out any financing activities during the six months ended
June 30, 2008 and 2007.





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in
      thousands)
                  
                  
                  (in
      thousands)Net
      change in cash and cash equivalents
                  
                  $
                  1,041
                  
                  
                  $
                  8,732


32





Six months endedJune 30, 2008
                  
                  
                  June 30, 2007(in thousands)
                  
                  
                  (in thousands)Cash
      and cash equivalent at June 30, 2007 and 2008
                  
                  $
                  25,994
                  
                  
                  $
                  15,231





With
effective internal control systems in place the Company maintained healthy net
cash flows over period and achieved a healthy cash position of $25,994 thousand
at June 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 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 won’t 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 six months of 2008 were $10,650 for purchase
of fixed assets 
as compared to $62,353 for the first six months of 2007.





Working Capital Requirements





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


33





Off-Balance
Sheet Arrangements





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




Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Foreign
Currency Exchange Rate Risk





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





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


34


Interest
Rate Risk





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





Inflation





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





Currency
Exchange Fluctuations





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





Concentration
of Credit Risk





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





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





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





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





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 June 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 second 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.





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





Item
1A. Risk Factors.





Risks
Associated With Our Common Stock





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


35





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




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





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





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




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





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


36




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





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





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





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




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





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




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





Risks
Related to Doing Business in China





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





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


37


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





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




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




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





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


38





Economic
Reform Issues





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





·
            We
      will be able to capitalize on economic
reforms;


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


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


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


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




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




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





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


39


Risk
Factors Associated with Our Business




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





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




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





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





None.





Item 3.    Defaults Upon Senior
Securities.




None.





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





None.





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).


40


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


41




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).