UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended     June 30,
2009
 
 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 registrant (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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes o 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 oAccelerated 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). Yes o No x
 
 As of
August 12, 2009 the registrant had 53,931,327shares of common stock
outstanding.
  
  TABLE
OF CONTENTS
 
 PAGEPART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Consolidated
      Balance Sheets as of June 30, 2009 (Unaudited) and December 31,
      2008
                      1Consolidated
      Statements of Income for the Six Months Ended June 30, 2009 and 2008
      (Unaudited)
                      2Consolidated
      Statements of Income for the Three Months Ended June 30, 2009 and 2008
      (Unaudited)
                      3Consolidated
      Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
      (Unaudited)
                      4Notes
      to Consolidated Financial Statements
                      5Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                      20Item
      3. Quantitative and Qualitative Disclosure About Market
    Risk
                      27Item
      4. Controls and Procedures
                      28PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                      29Item
      1A. Risk Factors
                      29Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                      29Item
      3. Defaults Upon Senior Securities
                      29Item
      4. Submission of Matters to a Vote of Security Holders
                      29Item
      5. Other Information
                      29Item
      6. Exhibits
                      29Signatures
                      30
  
  PART
I. FINANCIAL INFORMATION
 
 Item
1.  Financial Statements
 
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 
 June 30,
                  
                  
                  December 31,2009
                  
                  
                  2008(Unaudited)
                  
                  
                  (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  25,448,256
                  
                  
                  $
                  32,157,831Accounts
      receivable, net
                  
                  
                  24,481,068
                  
                  
                  
                  23,724,587Inventories
                  
                  
                  9,377,825
                  
                  
                  
                  8,971,352Advances
      to suppliers
                  
                  
                  2,337,541
                  
                  
                  
                  2,491,518Prepaid
      expenses and other current assets
                  
                  
                  27,161
                  
                  
                  
                  87,773Total
      current assets
                  
                  
                  61,671,851
                  
                  
                  
                  67,433,061Property,
      plant and equipment, net
                  
                  
                  55,513
                  
                  
                  
                  64,100Goodwill
                  
                  
                  20,348,278
                  
                  
                  
                  20,348,278Deposit
      for acquisition of subsidiary
                  
                  
                  14,609,631
                  
                  
                  
                  7,318,501Refundable
      deposits
                  
                  
                  26,796
                  
                  
                  
                  32,076Total
      assets
                  
                  $
                  96,712,069
                  
                  
                  $
                  95,196,016LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                  
                  $
                  4,457,112
                  
                  
                  $
                  5,417,327Income
      tax payable
                  
                  
                  391,887
                  
                  
                  
                  2,140,624Total
      liabilities
                  
                  
                  4,848,999
                  
                  
                  
                  7,557,951Stockholders'
      equityCommon
      stock, $0.001 par value, 100,000,000 million shares authorized, 53,931,327
      and 52,673,938 issued and outstanding as of June 30, 2009 and December 31,
      2008, respectively
                  
                  
                  53,931
                  
                  
                  
                  52,674Additional
      paid-in capital
                  
                  
                  19,464,519
                  
                  
                  
                  19,465,776Subscription
      receivable
                  
                  
                  (50,000
                  )
                  
                  
                  (50,000
                  )Statutory
      reserve
                  
                  
                  11,109,379
                  
                  
                  
                  11,109,379Other
      comprehensive income
                  
                  
                  5,143,453
                  
                  
                  
                  5,272,104Retained
      earnings
                  
                  
                  56,141,788
                  
                  
                  
                  51,788,132Total
      stockholders' equity
                  
                  
                  91,863,070
                  
                  
                  
                  87,638,065Total
      liabilities and stockholders' equity
                  
                  $
                  96,712,069
                  
                  
                  $
                  95,196,016
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  1
 
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR
THE SIX MONTHS ENDED JUNE 30, 2009 and 2008 (UNAUDITED)
 
 2009
                      
                      
                      2008Net
      sales
                      
                      $
                      128,537,496
                      
                      
                      $
                      146,668,847Cost
      of sales
                      
                      
                      112,458,293
                      
                      
                      
                      123,246,750Gross
      profit
                      
                      
                      16,079,203
                      
                      
                      
                      23,422,097Selling,
      general and administrative expenses
                      
                      
                      10,235,495
                      
                      
                      
                      6,312,088Income
      from operations
                      
                      
                      5,843,708
                      
                      
                      
                      17,110,009Other
      (income) expenseInterest
      income
                      
                      
                      (54,072
                      )
                      
                      
                      (65,567
                      )Gain
      on disposal
                      
                      
                      -
                      
                      
                      
                      (2,161
                      )Other
      income
                      
                      
                      (162,786
                      )
                      
                      
                      (311,929
                      )Other
      expense
                      
                      
                      115,852
                      
                      
                      
                      -Total
      other (income) expense
                      
                      
                      (101,006
                      )
                      
                      
                      (379,657
                      )Income
      before income taxes
                      
                      
                      5,944,714
                      
                      
                      
                      17,489,666Provision
      for income taxes
                      
                      
                      1,591,058
                      
                      
                      
                      4,164,627Net
      income
                      
                      
                      4,353,656
                      
                      
                      
                      13,325,039Foreign
      currency translation adjustments
                      
                      
                      (128,651
                      )
                      
                      
                      2,822,640Comprehensive
      income
                      
                      $
                      4,225,005
                      
                      
                      $
                      16,147,679Net
      income available to common shareholders per share:Basic
                      
                      $
                      0.08
                      
                      
                      $
                      0.25Diluted
                      
                      $
                      0.08
                      
                      
                      $
                      0.25Weighted
      average shares outstanding:Basic
                      
                      
                      53,682,309
                      
                      
                      
                      52,673,938Diluted
                      
                      
                      53,682,309
                      
                      
                      
                      53,073,938
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR
THE THREE MONTHS ENDED JUNE 30, 2009 and 2008 (UNAUDITED)
 
 2009
                      
                      
                      2008Net
      sales
                      
                      $
                      51,125,936
                      
                      
                      $
                      78,515,392Cost
      of sales
                      
                      
                      45,105,462
                      
                      
                      
                      65,639,675Gross
      profit
                      
                      
                      6,020,474
                      
                      
                      
                      12,875,717Selling,
      general and administrative expenses
                      
                      
                      4,749,219
                      
                      
                      
                      3,326,044Income
      from operations
                      
                      
                      1,271,255
                      
                      
                      
                      9,549,673Other
      (income) expenseInterest
      income
                      
                      
                      (24,964
                      )
                      
                      
                      (29,472
                      )Gain
      on disposal
                      
                      
                      -
                      
                      
                      
                      (2,161
                      )Other
      income
                      
                      
                      (14,659
                      )
                      
                      
                      (324,743
                      )Other
      expense
                      
                      
                      4,630
                      
                      
                      
                      -Total
      other (income) expense
                      
                      
                      (34,993
                      )
                      
                      
                      (356,376
                      )Income
      before income taxes
                      
                      
                      1,306,248
                      
                      
                      
                      9,906,049Provision
      for income taxes
                      
                      
                      392,167
                      
                      
                      
                      2,354,054Net
      income
                      
                      
                      914,081
                      
                      
                      
                      7,551,995Foreign
      currency translation adjustments
                      
                      
                      7,923
                      
                      
                      
                      1,222,591Comprehensive
      income
                      
                      $
                      922,004
                      
                      
                      $
                      8,774,586Net
      income available to common shareholders per share:Basic
                      
                      $
                      0.02
                      
                      
                      $
                      0.14Diluted
                      
                      $
                      0.02
                      
                      
                      $
                      0.14Weighted
      average shares outstanding:Basic
                      
                      
                      53,931,327
                      
                      
                      
                      52,673,938Diluted
                      
                      
                      53,931,327
                      
                      
                      
                      53,073,938
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  3
  
 CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 FOR
THE SIX MONTHS ENDED JUNE, 2009 and 2008 (UNAUDITED)
 
 2009
                  
                  
                  2008CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income
                  
                  $
                  4,353,656
                  
                  
                  $
                  13,325,040Adjustments
      to reconcile net income to net cash provided by (used in ) operating
      activities:Depreciation
                  
                  
                  13,300
                  
                  
                  
                  20,069Gain
      on asset disposition
                  
                  
                  -
                  
                  
                  
                  (2,161
                  )Provision
      for bad debts
                  
                  
                  3,305
                  
                  
                  
                  17,445Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  226,293(Increase)
      / decrease in assets:Accounts
      receivable
                  
                  
                  (801,418
                  )
                  
                  
                  (11,039,822
                  )Other
      receivable
                  
                  
                  25,731
                  
                  
                  
                  -Inventories
                  
                  
                  (423,551
                  )
                  
                  
                  (6,265,805
                  )Prepaid
      expenses and other current assets
                  
                  
                  34,775
                  
                  
                  
                  9,291Refundable
      deposits
                  
                  
                  5,208
                  
                  
                  
                  (4,078
                  )Advance
      to suppliers
                  
                  
                  149,424
                  
                  
                  
                  94,151(Increase)
      / decrease in current liabilities:Accounts
      payable and accrued expenses
                  
                  
                  (893,234
                  )
                  
                  
                  2,101,789Income
      tax payable
                  
                  
                  (1,745,979
                  )
                  
                  
                  (255,625
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  721,217
                  
                  
                  
                  (1,773,413
                  )CASH
      FLOW FROM INVESTING ACTIVITIESPurchase
      of property and equipment
                  
                  
                  (4,196
                  )
                  
                  
                  (10,650
                  )Proceeds
      from asset sales
                  
                  
                  -
                  
                  
                  
                  2,447Deposit
      for acquisition of subsidiary
                  
                  
                  (7,291,130
                  )
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  (7,295,326
                  )
                  
                  
                  (8,203
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (135,466
                  )
                  
                  
                  2,822,640Net
      increase (decrease) in cash
                  
                  
                  (6,709,575
                  )
                  
                  
                  1,041,024Cash,
      beginning of period
                  
                  
                  32,157,831
                  
                  
                  
                  24,952,614Cash,
      end of period
                  
                  $
                  25,448,256
                  
                  
                  $
                  25,993,638Supplemental
      disclosure of cash flow information:Interest
      paid
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes paid
                  
                  $
                  3,339,755
                  
                  
                  $
                  4,420,252
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2009
 
 Note
1 - ORGANIZATION
 
 China 3C
Group (the “Company”) was incorporated on August 20, 1998 under the laws of the
State of Nevada. Capital Future Developments Limited - BVI (“Capital”) was
incorporated on July 22, 2004 under the laws of the British Virgin Islands.
Zhejiang Yong Xin Digital Technology Company Limited (“Zhejiang”), Yiwu Yong Xin
Communication Limited (“Yiwu”), Hangzhou Wang Da Electronics Company Limited
(“Wang Da”), Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and
Shanghai Joy & Harmony Electronics Company Limited (“Joy & Harmony”)
were incorporated under the laws of Peoples Republic of China (“PRC”) on July
11, 2005, July 18, 1997, March, 30, 1998, April 12, 2004, and August 20, 2003,
respectively. On March 10, 2009 Zhejiang set up a new operating entity, Hangzhou
Letong Digital Technology Co., Ltd. (“Letong”) to establish an electronic retail
franchise operation for China 3C Group.
 
 On
December 21, 2005, Capital became a wholly- owned subsidiary of China 3C Group
through a reverse merger (“Merger Transaction”). China 3C Group acquired all of
the issued and outstanding capital stock of Capital pursuant to a Merger
Agreement dated at December 21, 2005 by and among China 3C Group, XY Acquisition
Corporation, Capital and the shareholders of Capital (the “Merger Agreement”).
Pursuant to the Merger Agreement, Capital became a wholly owned subsidiary of
China 3C Group and, in exchange for the Capital shares, China 3C Group issued
35,000,000 shares of its common stock to the shareholders of Capital,
representing 93% of the issued and outstanding capital stock of China 3C Group
at that time and a cash consideration of $500,000.
  On August
3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a
cash and stock transaction valued at approximately $8,750,000. The consideration
consisted of 915,751 newly issued shares of the Company’s common stock and
$5,000,000 in cash.
  On
November 28, 2006, Capital completed the acquisition of a 100% interest in Joy
& Harmony for a cash and stock transaction valued at approximately
$18,500,000. The consideration consisted of 2,723,110 shares of the Company’s
common stock and $7,500,000 in cash.
  On August
15, 2007, the Company changed its ownership structure. As a result, instead of
Capital owning 100% of Zhejiang, Capital entered into contractual agreements
with Zhejiang whereby Capital owns a 100% interest in the revenues of Zhejiang.
Capital does not have an equity interest in Zhejiang, but enjoys all the
economic benefits. Under this structure, Zhejiang is now a wholly foreign owned
enterprise of Capital. The contractual agreements give Capital and its equity
owners an obligation, and having ability to absorb, any losses, and rights to
receive returns. Capital will be unable to make significant decisions about the
activities of Zhejiang and cannot carry out its principal activities without
financial support. These characteristics as defined in Financial Accounting
Standards Board (“FASB”) Interpretation 46, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of Zhejiang to be
consolidated with Capital and ultimately with China 3C Group. Zhejiang owns 90%
of the issued and outstanding capital stock of each of Wang Da and
Yiwu.
  5
  
 
 The
Company is engaged in the business of resale and distribution of third party
products and generates approximately 100% of our revenue from resale of items
such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3
and MP4 players, iPods, electronic dictionaries, CD players, radio Walkmans and
audio systems.
 
 On
December 19, 2008, China 3C Group’s subsidiaries, Zhejiang and Yiwu entered into
an acquisition agreement (the “Jinhua Agreement”) with Jinhua Baofa Logistic
Ltd., a company organized under the laws of the People’s Republic of China
(“Jinhua”) and the shareholders of Jinhua, who own 100% of the equity interest
in Jinhua in the aggregate. Pursuant to the Jinhua Agreement Zhejiang will
acquire 90% and Yiwu will acquire 10% of the entire equity interests in Jinhua
from the shareholders of Jinhua for a total purchase price of RMB 120,000,000
payable as follows: (i) RMB 50,000,000, within 10 business days after the
execution of the Jinhua Agreement; (ii) RMB 50,000,000 within 10 business days
following the completion of the audit of Jinhua’s financial statements for the
fiscal year ending December 31, 2008, in accordance with generally accepted
accounting principles in the U.S. (the “Audit”), which Audit shall be completed
no later than March 31, 2009; and (iii) the remaining RMB 20,000,000 no later
than three months after the completion of Jinhua’s Audit. The source of the cash
used for the purchase of 100% of the equity of Jinhua was from working capital
of China 3C Group.
 
 Jinhua
was founded in 2001 and is a well-known transportation logistics company in
Eastern China and has been a long time transportation provider for China 3C
Group. Jinhua has approximately 280 customers and operates a fleet of more than
70 trucks and transports freight including electronics, machinery and equipment,
metal products, chemical materials, garments and handicraft goods, in more than
20 cities in Eastern China. Its transportation service covers many of the most
developed cities in the Eastern China region such as Shanghai, Hangzhou and
Nanjing.
  6
  On April
4, 2009, Zhejiang and Yiwu entered into an amendment to the Jinhua Agreement
(the “Amended Agreement”) with the shareholders of Jinhua. The Amended Agreement
changed from March 31, 2009 to June 30, 2009 the date by which the parties have
agreed that the Audit is required to be completed. In the event that the audit
is not completed by June 30, 2009, the Agreement may be terminated.
 
 On July
6, 2009, Zhejiang and Yiwu completed the acquisition of Jinhua from the
shareholders of Jinhua.   The final installment of RMB 20,000,000
(approximately US $2,900,000) will be paid within 10 days of the filing of the
amendment to the current report on Form 8-K dated July 6, 2009, which filing is
expected to be made by the Company not later than 71 calendar days after July 6,
2009.
 
 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
(“US GAAP”).  The Company’s functional currency is the Chinese
Renminbi, however the accompanying consolidated financial statements have been
translated and presented in United States Dollars.
 
 Principles of
Consolidation
 
 The
consolidated financial statements include the accounts of China 3C Group and its
wholly owned subsidiaries Capital, Wang Da, Yiwu, Joy & Harmony, and Sanhe
and variable interest entity Zhejiang, collectively referred to as the Company.
All material intercompany accounts, transactions and profits have been
eliminated in consolidation.
 
 Currency
Translation
 
 The
accounts of Zhejiang, Wang Da, Yiwu, Sanhe, and Joy & Harmony were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with Statement of Financial Accounts Standards (“SFAS”)
No. 52, “Foreign Currency Translation,” with the CNY as the functional currency.
According to SFAS No. 52, all monetary assets and liabilities were translated at
the ending exchange rate, non-monetary assets and stockholders’ equity are
translated at the historical rates and income statement items are translated at
the average exchange rate for the period. The resulting translation adjustments
are reported as other comprehensive income in accordance with SFAS No. 130,
“Reporting Comprehensive Income,” as a component of shareholders’ equity.
Transaction gains and losses are reflected in the condensed consolidated income
and comprehensive income statement.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
 Risks and
Uncertainties
 
 The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
 
 Contingencies
 
 Certain
conditions may exist as of the date the financial statements are issued, which
could result in a loss to the Company but which will only be resolved when one
or more future events occur or fail to occur. The Company’s management assesses
such contingent liabilities, and such assessment inherently involves an exercise
of judgment. In assessing loss contingencies related to legal proceedings that
are pending against the Company or unasserted claims that may result in such
proceedings, the Company’s management evaluates the perceived merits of any
legal proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought.
  7
  If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability is accrued in the Company’s financial statements. If the
assessment indicates that a potential material loss contingency is not probable
but is reasonably possible, or is probable but cannot be estimated, then the
nature of the contingent liability, together with an estimate of the range of
possible loss if determinable and material would be disclosed.
 
 Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
  Accounts
Receivable
 
 The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts was
$365,363 (unaudited) and $365,318 as of June 30, 2009 and December 31, 2008,
respectively.
 
 Inventories
 
 Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market.  Management compares the cost of inventories with the market
value and allowance is made for writing down their inventories to market value,
if lower. As of June 30, 2009 and December 31, 2008, inventory consisted
entirely of finished goods valued at $9,377,825 (unaudited) and $8,971,352,
respectively.
  Property, Plant &
Equipment, net
  Property,
plant and equipment are stated at cost. Expenditures for maintenance and repairs
are charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
 
 Automotive
                5
      yearsOffice
      Equipment
                5
      years
  As of
June 30, 2009 and December 31, 2008, property and equipment consisted of the
following:
 
 2009
                    
                    
                    2008(Unaudited)Automotive
                    
                    $
                    134,060
                    
                    
                    $
                    132,627Office
      equipment
                    
                    
                    119,980
                    
                    
                    
                    116,700Sub
      Total
                    
                    
                    254,040
                    
                    
                    
                    249,327Less:
      accumulated depreciation
                    
                    
                    (198,527
                    )
                    
                    
                    (185,227
                    )Total
                    
                    $
                    55,513
                    
                    
                    $
                    64,100
  Long-Lived
Assets
  The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market values
are reduced for the cost of disposal. Based on its review, the Company believes
that, as of June 30, 2009 and December 31, 2008, there were no significant
impairments of its long-lived assets.
  8
  Fair Value of Financial
Instruments
  SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires the
Company to disclose estimated fair values of financial instruments. The carrying
amounts reported in the statements of financial position for current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
  Revenue
Recognition
 
 In
accordance with Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin (“SAB”) 104, the Company recognizes revenues when there is persuasive
evidence of an arrangement, product delivery and acceptance have occurred, the
sales price is fixed and determinable, and collectability of the resulting
receivable is reasonably assured.
 
 The
Company records revenues when title and the risk of loss pass to the
customer.  Generally, these conditions occur on the date the customer
takes delivery of the product.  Revenue is generated from sales of
consumer and business products through two main revenue streams:
 
 1.
              Retail. Approximately
      69%, 68%, 69% and 66% of the Company's revenue comes from sales to
      individual customers at outlets installed inside department stores etc.
      (i.e. store in store model) during the three and six months ended June 30,
      2009 and 2008, respectively and is mainly achieved through two broad
      categories:
 
 a.
              Purchase contracts. The
      terms for sales by purchase contracts have changed from 30
      days  to 45 days from the transfer of goods to the customer
      during the three months ended June 30, 2009. Under this method, the
      Company delivers goods to places designated by the customers and receives
      confirmation of delivery. At that time, ownership and all risks associated
      to the goods are transferred to the customers and payment is made within
      45 days. The Company relieves its inventory and recognizes revenue upon
      receipt of confirmation from the
customer.
 
 b.
              Point of sale transfer of
      ownership. Under this method, the Company’s products are placed in
      third party stores and sold by the Company’s sales people. Upon purchase
      of the item by the customer, the Company relieves its inventory and
      recognizes revenue related to that
item.
 
 2.
              Wholesale. Approximately
      31% and 32%, 31% and 34% of the Company's revenue comes from wholesale
      during the three and six months ended June 30, 2009 and 2008,
      respectively. Recognition of wholesale income is based on the contract
      terms. During the three months ended June 30, 2009, the main contract
      terms on wholesale changed from 10 days to 15 days after receipt of goods
      and that ownership and all risks associated with the goods are transferred
      to the customers on the date of goods
received.
 
 Sales
revenue is therefore recognized on the following basis:
 
 1.
              Store
      in store model:
 
 a.
              For
      goods sold under sales and purchase contracts, revenue is recognized when
      goods are received by customers.
 
 b.
              For
      goods at customer outlets which the Company’s sales people operate, and
      inventory of goods is under joint control by the customers and the
      Company, revenue is recognized at the point of sale to the end
      buyer.
 
 During public holidays or department
store celebration periods, we provide certain sales incentives to retail
customers to increase sales, such as gift giving and price reductions. These are
the only temporary incentives during the specified periods. Sales made to our
retail customers as a result of incentives are immaterial as a percentage of
total sales revenue.
 
 2.
              Wholesales:
 
 a.
              Revenue
      is recognized at the date of goods are received by wholesale customers. We
      operate our wholesale business by selling large volume orders to
      second-tier distributors and large department stores. Revenues from
      wholesale are recognized as net sales after confirmation with
      distributors. Net sales already take into account revenue dilution as they
      exclude inventory credit, discount fro early payment, product obsolescence
      and return of products and other allowances. Net sales also take into
      account the return of products in accordance with relevant laws and
      regulations in China.
  9
  Return
policies
 
 Our
return policy complies with China’s laws and regulations on consumer’s rights
and product quality. In accordance with Chinese law, consumers can return or
exchange used products within seven days only if the goods do not meet safety
and health requirements, endanger a person’s property, or do not meet the
advertised performance. If the conditions and requirements as set out in the
relevant laws and regulations are met, the retail stores are entitled to accept
a return of the goods from the consumer. In such cases, the Company shall accept
the returns unconditionally. Goods returned will be redirected to the production
factory or supplier who shall bear all losses on the returns in accordance the
laws and regulations. Consumer returns or exchanges of products that have not
been used, where the packaging has not been damaged, are honored if such return
or exchange is within seven days. If a consumer returns a product, the Company
must refund the invoice price to the consumer. The Company will then be
responsible for returning the goods to the production factory or supplier. At
that time the Company can recover the price based on the purchase and sale
contract with the producer or supplier. However, when goods are returned, the
Company loses the gross margin that it records when revenue is recognized,
regardless of whether the production factory or supplier takes the product back
or not.
 
 The
return rights granted to wholesale customers are similar to the rights granted
to retail customers. Once wholesale customers purchase the products, they follow
the same return policy as retail customers. We do not honor any return from
wholesale customers other than if the products don’t meet laws and regulations
or quality requirements. If the wholesale customers have a high inventory level
or product obsolescence caused by lower market demands or other operational
issues, the wholesale customers bear their own losses. When a wholesale customer
returns products, the Company will return the products to the suppliers or
manufacturers. A sales return and allowance is recorded at the sales price.
Meanwhile, a purchase return and allowance entry is recorded at the invoice
price because the suppliers or manufacturers bear the losses. The net effect is
that the Company derecognizes the gross profit when a return takes place, but
does not record any loss on the cost of the returned item back to the supplier
or manufacturer.
 
 In light
of the aforesaid PRC laws and regulations and the Company's arrangements with
suppliers, we do not provide an accrual for any estimated losses on subsequent
sale of the return of products.  As a result we do not engage in assessing
levels of inventory in the distribution channel, product obsolescence and/or
introductions of new products, as none of those factors have any impact on us
with respect to estimating losses on subsequent sale of returned goods. 
Third party market research report and consumer demand study is not used to make
estimates of goods returned.
 
 Cost of
Sales
 
 Cost of
sales consists of actual product cost, which is the purchase price of the
product less any discounts.  Cost of sales excludes freight charges,
purchase and delivery costs, internal transfer, freight charges and the other
costs of the Company’s distribution network, which are identified in general and
administrative expenses.
 
 General and Administrative
Expenses
 
 General
and administrative expenses are comprised principally of payroll and benefits
costs for retail and corporate employees, occupancy costs of corporate
facilities, lease expenses, management fees, traveling expenses and other
operating and administrative expenses, including freight charges, purchase and
delivery costs, internal transfer freight charges and other distribution
costs.
 
 Shipping and handling
fees
 
 The
Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for
Shipping and Handling Fees and Costs.  The Company does not charge its
customers for shipping and handling. The Company classifies shipping and
handling fees as part of General and administrative expenses. During the three
and six months ended June 30, 2009 and 2008, the Company incurred shipping and
handling fees and costs of  $59,532, $49,595, $103,300 and $119,407,
respectively.
 
 Vendor
Discounts
 
 The
Company has negotiated preferred pricing arrangements with certain vendors on
certain products. These arrangements are not contingent on any levels of volume
and are considered vendor discounts as opposed to rebates. The Company records
these discounts along with the purchase of the discounted items, resulting in
lower inventory cost and a corresponding lower cost of sales as the products are
sold.
  10
  Management fees paid to the
department stores under “store in store” model
 
 Under the
“store in store” business operation model, the Company may pay management fees
to the department stores, which are in the form of service charges or “selling
at an allowance (discount)”. The management fees are accounted for (1) in the
form of service charges which are reflected in general and administrative
expenses, or (2) in the form of “selling at an allowance (discount)”, as a
deduction of sales, which means, the expenses are directly deducted at a certain
percentage on sales. Such management fees accounted for general and
administrative expenses were $244,389, $388,536, $729,909 and $606,936 during
the three and six months ended June 30, 2009 and 2008 respectively. Management
fees accounted for deductions of sales were $1,880,521, $2,503,044, $4,245,455
and $4,613,438 in sales for the three and six months ended June 30, 2009 and
2008, respectively.
  Share Based
Payment
  In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123.” This statement
amended SFAS 123, “Accounting for Stock-Based Compensation,” to provide
alternative methods of transition for a voluntary charge to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amended the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.
 
 Advertising
 
 Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense was $71,462, $89,192, $128,298 and
$196,545 for the three and six months ended June 30, 2009 and 2008.
  Other
Income
  Other
income was $162,786 and $311,929, $14,659 and $326,904 for the six and three
months ended June 30, 2009 and 2008. Other income consists of the
following:
  Six months ended June 30,2009
                    
                    
                    2008Advertising
      service income
                    
                    $
                    103,220
                    
                    
                    $
                    235,261Repair
      service income
                    
                    
                    29,415
                    
                    
                    
                    -Commission
      income from China Unicom
                    
                    
                    30,151
                    
                    
                    
                    76,668Total
      other income
                    
                    $
                    162,786
                    
                    
                    $
                    311,929
 
 Three months ended June 30,2009
                    
                    
                    2008Advertising
      service income
                    
                    $
                    -
                    
                    
                    $
                    246,555Repair
      service income
                    
                    
                    14,659Commission
      income from China Unicom
                    
                    
                    -
                    
                    
                    
                    80,349Total
      other income
                    
                    $
                    14,659
                    
                    
                    $
                    326,904
 
 Advertising
service income is the fee we receive from electronic product manufacturers when
we advertise their products in our retail locations. Commission income from
China Unicom is derived from the sales of China Unicom’s wireless service and
products, i.e. rechargeable mobile phone cards.
 
 Income
Taxes
  The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
  11
  Basic and Diluted Earnings
per Share
  Earnings
per share are calculated in accordance with SFAS No. 128, “Earnings per Share.”
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period. If
convertible shares and stock options are anti-dilutive, the impact of conversion
is not included in the diluted net income per share. Excluded from the
calculation of diluted earnings per share for the three and six months ended
June 30, 2009 was 50,000 options, as they were not dilutive.
  Statement of Cash
Flows
  In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the functional currency, in our
case the CNY. As a result, amounts related to changes in assets and liabilities
reported on the statement of cash flows will not necessarily agree with the
changes in the corresponding balances on the balance sheet.
  Concentration of Credit
Risk
  Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance
is limited.
  Segment
Reporting
 
 SFAS No.
131, “Disclosure about Segments of an Enterprise and Related Information,”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. The Company operates in four segments (see Note
13).
 
 Recent Accounting
Pronouncements
 
 In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115.” This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. This statement is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments. This statement was
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The adoption of this statement had no effect on the Company’s
consolidated financial statements.
 
 In
December 2007, FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) changes how a reporting
enterprise accounts for the acquisition of a business. SFAS 141(R) requires
an acquiring entity to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value, with limited exceptions,
and applies to a wider range of transactions or events. SFAS 141(R) is
effective for fiscal years beginning on or after December 15, 2008 and
early adoption and retrospective application is prohibited. Effective January 1,
2009, the Company adopted SFAS 141(R). The adoption of SFAS 141(R) had no impact
on the Company’s condensed consolidated financial statements but will have a
material impact on future acquisitions. We will account for future business
acquisitions in accordance with these standards.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements” (“SFAS 160”).  This Statement
amends ARB 51 to establish accounting and reporting standards for the
non-controlling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. The Company adopted SFAS 160 on
January 1, 2009. The adoption of this statement had no effect on the Company’s
consolidated financial statements.
  12
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities.” The 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
Standard also improves transparency about the location and amounts of derivative
instruments in an entity’s financial statements; how derivative instruments and
related hedged items are accounted for under Statement 133; and how derivative
instruments and related hedged items affect its financial position, financial
performance, and cash flows. The Company adopted SFAS 161 on January 1, 2009.
The adoption of this statement had no effect on the Company’s consolidated
financial statements.
 
 In May
2008, the FASB issued FASB Staff Position (“FSP”) APB 14-1, “Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”).. FSP APB 14-1 clarifies
that convertible debt instruments that may be settled in cash upon either
mandatory or optional conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt
and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity’s
non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted FSP APB 14-1 beginning in the first
quarter of 2009, and this standard must be applied on a retroactive basis. This
Statement did not have an effect on the Company’s consolidated financial
statements.
 
 On May 8,
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS 162”)  which will provide framework for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with US GAAP for nongovernmental entities. With
the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities
will move from auditing literature to accounting literature.  Management
does not expect that this Statement will have an effect on the Company’s
consolidated financial statements.
 
 On June
16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities” (“EITF 03-6-1”)  to address the question of
whether instruments granted in share-based payment transactions are
participating securities prior to vesting. As provided in the FSP, unvested
share-based payment awards that contain rights to dividend payments should be
included in earnings per share calculations. The guidance will be effective
commencing in the year ended December 31, 2009. We are currently evaluating the
requirements of EITF 03-6-1 as well as the impact of the adoption on our
condensed consolidated financial statements.
 
 In
June 2008, the FASB ratified Emerging Issues Task Force Issue
No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is
Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 mandates a two-step
process for evaluating whether an equity-linked financial instrument or embedded
feature is indexed to the entity’s own stock.  Warrants that a company
issues that contain a strike price adjustment feature, upon the adoption of EITF
07-5, are no longer being considered indexed to the company’s own stock.
Accordingly, adoption of EITF 07-5 will change the current classification (from
equity to liability) and the related accounting for such warrants outstanding at
that date. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. This
Statement did not have an effect on the Company’s consolidated financial
statements.
 
 In April
2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board Opinion
(“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments”
(“FSP 107-1”), which will require that the fair value disclosures required for
all financial instruments within the scope of SFAS 107, "Disclosures about Fair
Value of Financial Instruments", be included in interim financial statements.
This FSP also requires entities to disclose the method and significant
assumptions used to estimate the fair value of financial instruments on an
interim and annual basis and to highlight any changes from prior periods. FSP
107-1 will be effective for interim periods ending after June 15, 2009. The
adoption of FSP 107-1 is not expected to have a material affect on the Company’s
consolidated financial statements.
 
 In May
2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165
is intended to establish general standards of accounting for and disclosures of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15, 2009. We
are in the process of evaluating the effect of the adoption of SFAS 165 will
have on our financial statements.
  13
  In June
2009, the FASB issued SFAS No. 166, a revision to SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”
(“SFAS 166”), which will require more information about transfers of financial
assets and where companies have continuing exposure to the risks related to
transferred financial assets. SFAS 166 is effective at the start of a company’s
first fiscal year beginning after November 15, 2009, or January 1, 2010 for
companies reporting earnings on a calendar-year basis. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
 
 In June
2009, the FASB issued SFAS No. 167, a revision to FASB Interpretation No. 46(R),
“Consolidation of Variable Interest Entities” (“SFAS 167”), which will change
how a company determines when an entity that is insufficiently capitalized or is
not controlled through voting (or similar rights) should be consolidated. Under
SFAS 167, determining whether a company is required to consolidate an entity
will be based on, among other things, an entity's purpose and design and a
company's ability to direct the activities of the entity that most significantly
impact the entity's economic performance. SFAS 167 is effective at the start of
a company’s first fiscal year beginning after November 15, 2009, or January 1,
2010 for companies reporting earnings on a calendar-year basis. We are in the
process of evaluating the effect, if any, the adoption of SFAS No. 167 will have
on our financial statements.
 
 In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting” (“SFAS
168”).  SFAS 168 represents the last numbered standard to be issued by
FASB under the old (pre-Codification) numbering system, and amends the GAAP
hierarchy. On July 1, FASB will launch new FASB’s Codification (full name: the
FASB Accounting Standards Codification TM.) The Codification will supersede
existing GAAP for nongovernmental entities; governmental entities will continue
to follow standards issued by FASB's sister organization, the Governmental
Accounting Standards Board (GASB).
 
 Note
3 – ADVANCES TO
SUPPLIERS
  Advances
to suppliers represent advance payments to suppliers for the purchase of
inventory. As of June 30, 2009 and December 31, 2008, the Company paid
$2,337,541 (unaudited) and $2,491,518, respectively, as advances to
suppliers.
  Note 4 – DEPOSIT
FOR ACQUISITION OF SUBSIDIARY
 
 On
December 19, 2008, China 3C Group’s subsidiaries, Zhejiang and Yiwu entered into
an acquisition agreement (the “Jinhua Agreement”) with Jinhua Baofa Logistic
Ltd. (“Jinhua”), a company organized under the laws of the People’s Republic of
China and the shareholders of Jinhua, who own 100% of Jinhua. Pursuant to the
Jinhua Agreement Zhejiang will acquire 90% and Yiwu will acquire 10% of the
equity interests in Jinhua from the shareholders of the equity interest in
Jinhua for a total purchase price of RMB 120,000,000 (approximately $17.6
million)  payable as follows: (i) RMB 50,000,000, within 10 business
days after the execution of the Jinhua Agreement; (ii) RMB 50,000,000 within 10
business days following the completion of the audit of Jinhua’s financial
statements for the fiscal year ending December 31, 2008, in accordance with US
GAAP (the “Audit”), which Audit shall be completed no later than March 31, 2009
(subsequently extended to June 30, 2009); and (iii) the remaining RMB 20,000,000
no later than three months after the completion of Jinhua’s Audit.
 
 As of
June 30, 2009, China 3C Group paid $14,609,631 (RMB 100,000,000) to Jinhua as a
deposit for the acquisition.
 
 Jinhua
was founded in 2001 and is a well-known transportation logistics company in
Eastern China and has been a long time transportation provider for China 3C
Group. Jinhua has approximately 280 customers and operates a fleet of more than
70 trucks and transports freight including electronics, machinery and equipment,
metal products, chemical materials, garments and handicraft goods, in more than
20 cities in Eastern China. Its transportation service covers many of the most
developed cities in the Eastern China region such as Shanghai, Hangzhou and
Nanjing.
 
 Note 5– ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
 
 Accounts
payable and accrued expenses as of June 30, 2009 (unaudited) and December 31,
2008 consist of the following:
 
 2009
                    
                    
                    2008Accounts
      payable
                    
                    $
                    2,726,939
                    
                    
                    $
                    2,753,728Accrued
      expenses and other payable
                    
                    
                    1,597,566
                    
                    
                    
                    1,839,807VAT
      tax payable
                    
                    
                    132,607
                    
                    
                    
                    823,793Total
                    
                    $
                    4,457,112
                    
                    
                    $
                    5,417,327
  14
  Note 6 - COMMON
STOCK
  The
Company appointed Joseph Levinson to serve as a member of the Company’s Board of
Directors on May 7, 2007. Joseph Levinson resigned as a member of the Company’s
Board of Directors on January 27, 2009.  There were no disagreements
between Mr. Levinson and the Company on any matter related to the Company’s
operations, policies or practices which resulted in his
resignation.  Pursuant to the Agreement dated May 3, 2007 the Company
agreed to issue to Mr. Levinson, as compensation for his services, a monthly
grant of 1,000 shares of the Company’s common stock.  The Company has
issued 20,000 shares in total to M. Levinson representing the 1,000 share per
month payments.  In addition, the Company agreed to grant Mr. Levinson
the following awards under the 2005 Plan: (i) an initial annual grant of a stock
option to purchase 300,000 shares of the Company’s common Stock, with an
exercise price of $6.15 per share (the “2007 Stock Option”); and (ii) a
subsequent annual grant of a stock option to purchase an additional 300,000
shares of the Company’s common stock, with an exercise price of $1.82 (the “2008
Stock Option”).  It was later determined that due to the expiration of
the China 3C 2005 Equity Incentive Plan on December 31, 2006, the 2007 Stock
Option and the 2008 Stock Option could not be validly
granted.  Pursuant to the terms of the Compensation Agreement dated as
of November 27, 2008 between Mr. Levinson and the Company, Mr. Levinson
acknowledged that the 2007 Stock Option and the 2008 Stock Option were not and
could  not be granted and,  in consideration for his
services as a Director accepted the issuance of 125,000 shares of the Company’s
common stock.
 
 On
January 15, 2009, the Company’s Board of Directors adopted the China 3C Group,
Inc. 2008 Omnibus Securities and Incentive Plan (the “2008
Plan”).  The 2008 Plan provides for the granting of distribution
equivalent rights, incentive stock options, non-qualified stock options,
performance share awards, performance unit awards, restricted stock awards,
stock appreciation rights, tandem stock appreciation rights, unrestricted stock
awards or any combination of the foregoing, as may be best suited to the
circumstances of the particular employee, director or
consultant.  Under the 2008 Plan 2,000,000 shares of the Company’s
common stock are available for issuance for awards.  Each award shall
remain exercisable for a term of ten (10) years from the date of its grant. The
price at which a share of common stock may be purchased upon exercise of an
option shall not be less than the closing sales price of the common stock on the
date such option is granted.  The 2008 Plan shall continue in effect,
unless sooner terminated, until the tenth anniversary of the date on which it is
adopted by the Board. During the three and six months ended June 30, 2009, the
Company issued 1,093,272 shares of common stocks and recognized $81,084
compensation expenses under the 2008 Plan. As of June 30, 2009, there was
$891,928 of unrecognized compensation expense related to the nonvested stocks.
The cost is expected to be recognized over a three year period.
 
 Note
7 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION
 
 The
Company appointed Kenneth T. Berents to serve as a member of the Company’s Board
of Directors on December 8, 2006.  Under the Board of Directors
Agreement between the Company and Mr. Berents, dated December 8, 2006, the
Company agreed to issue to Mr. Berents as a compensation for his services under
the 2005 Plan, an initial grant of a stock option to purchase 50,000 shares of
the Company’s common stock upon execution of the Board of Directors Agreement
and an option to purchase 30,000 shares of the Company’s common stock on each
anniversary of the Board of Directors Agreement , provided Mr. Berents is a
member of the Board of Directors at such time.  It was later
determined that due to the expiration of the 2005 Plan on December 31, 2006 the
grants of stock options to Mr. Berents could not be validly
granted.  In order to meet its obligations under the Board of
Directors Agreement, the Company entered into the following agreements with Mr.
Berents (i) Stock Option Agreement - Director Non-Qualified Stock Option dated
as of December 1, 2008 and effective as of January 15, 2009 for the issuance of
50,000 shares of the Company’s common stock, with an exercise price of $4.29 per
share under the Company’s 2008 Plan to Mr. Berents, (ii) Stock Option Agreement
- Director Non-Qualified Stock Option dated as of December 1, 2008 and effective
as of January 15, 2009 for the issuance of 30,000 shares of the Company’s common
stock, with an exercise price of $4.27 per share under the Company’s 2008 Plan
to Mr. Berents, and (iii) Stock Option Agreement - Director Non-Qualified Stock
Option dated as of December 1, 2008 and effective as of January 15, 2009 for the
issuance of 30,000 shares of the Company’s common stock, with an exercise price
of $0.90 per share under the Company’s 2008 Plan to Mr. Berents.
 
 The
Company appointed Todd L. Mavis to serve as a member of the Company’s Board of
Directors on January 2, 2007. Mr. Mavis resigned as a member of the Board of
Directors effective as of December 17, 2007.  There were no
disagreements between Mr. Mavis and the Company on any matter related to the
Company’s operations, policies or practices which resulted in his
resignation.   As a compensation for his services,  the
Company agreed to issue to Mr. Mavis under the 2005 Plan, an initial annual
grant of a stock option to purchase 50,000 shares of the Company’s common stock,
with an exercise price of $3.80 per share (the “Mavis Stock
Option”).  Under the Board of Directors Agreement between the Company
and Mr. Mavis, dated January 2, 2007, in the event that Mr. Mavis is no longer a
member of the Board of Directors, his exercise period for all vested options is
twenty-four months from the anniversary date of his departure from the Board of
Directors.  It was later determined that due to the expiration of the
2005 Plan on December 31, 2006 the Mavis Stock Option could not be validly
granted.  Pursuant to the terms of the Stock Option Agreement with
Todd L. Mavis dated as of April 21, 2009 between Mr. Mavis and the Company, Mr.
Mavis was granted an option to purchase 50,000 shares of the Company’s common
stock (the “New Mavis Stock Option”), for an exercise price per share of common
stock equal to $3.46.  All or any part of the New Mavis Stock Option
may be exercised by Mr. Mavis, no later than December 17, 2009.
  15
  Stock
options— All options issued have a ten-year life and were fully vested upon
issuance. The option holder has no voting or dividend rights. The grant price
was equal the market price at the date of grant. The Company records the expense
of the stock options over the related vesting period. The options were valued
using the Black-Scholes option-pricing model at the date of grant stock option
pricing.
 
 The
expected term represents the estimated average period of time that the options
remain outstanding. The expected volatility is based on the historical
volatility of the Company’s stock price. No dividend payouts were assumed, as
the Company has no plans to declare dividends during the expected term of the
stock options. The risk-free rate of return reflects the weighted average
interest rate offered for zero coupon treasury bonds over the expected term of
the options. Based upon this calculation and pursuant to EITF 96-18, the company
recorded expenses of $226,293 and $108,736 for the six and
three  months ending June 30, 2008, respectively and none for
2009.
 
 The
Company did not grant any options during the six months ended June 30, 2009 and
2008.
 
 Note
8 - COMPENSATED
ABSENCES
  Regulation
45 of the labor laws in the People’s Republic of China (PRC) entitles employees
to annual vacation leave after 1 year of service. In general all leave must be
utilized annually, with proper notification, any unutilized leave is
cancelled.
 
 Note
9 - INCOME
TAXES
 
 The
Company, through its subsidiaries, Zhejiang, Wang Da, Sanhe, Joy & Harmony
and Yiwu, is governed by the Income Tax Laws of the PRC. Operations in the
United States of America have incurred net accumulated operating losses of
approximately $2,457,892 as of June 30, 2009 for income tax purposes. However, a
100% allowance has been recorded on the deferred tax asset of approximately
$836,000 due to uncertainty of its realization.
  Pursuant
to the PRC Income Tax Laws, from January 1, 2008, the Enterprise Income Tax is
at a statutory rate of 25%.
  The
following is a reconciliation of income tax expense for the six months ended
June 30, 2009 and 2008:
 
 2009
                    
                    U.S.
                    
                    
                    State
                    
                    
                    International
                    
                    
                    TotalCurrent
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,591,058
                    
                    
                    $
                    1,591,058Deferred
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,591,058
                    
                    
                    $
                    1,591,058
 
 
 2008
                    
                    U.S.
                    
                    
                    State
                    
                    
                    International
                    
                    
                    TotalCurrent
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,164,627
                    
                    
                    $
                    4,164,627Deferred
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    4,164,627
                    
                    
                    $
                    4,164,627
 
 The
following is a reconciliation of income tax expense for the three months ended
June 30, 2009 and 2008:
 
 2009
                    
                    U.S.
                    
                    
                    State
                    
                    
                    International
                    
                    
                    TotalCurrent
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    228,520
                    
                    
                    $
                    228,520Deferred
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    228,520
                    
                    
                    $
                    228,520
 
 2008
                    
                    U.S.
                    
                    
                    State
                    
                    
                    International
                    
                    
                    TotalCurrent
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,887,999
                    
                    
                    $
                    1,887,999Deferred
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    1,887,999
                    
                    
                    $
                    1,887,999
  16
  Reconciliation
of the differences between the statutory U.S. Federal income tax rate and the
effective rate is as follows:
  For the six months ended June
      30,2009
                    
                    
                    2008US
      statutory tax rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Tax
      rate difference
                    
                    
                    (9.0
                    %)
                    
                    
                    (9.0
                    %)Increase
      in valuation allowance
                    
                    
                    1.8
                    %
                    
                    
                    (1.2
                    %)Effective
      rate
                    
                    
                    26.8
                    %
                    
                    
                    23.8
                    %
 
 For the three months ended June
      30,2009
                    
                    
                    2008US
      statutory tax rate
                    
                    
                    34.0
                    %
                    
                    
                    34.0
                    %Tax
      rate difference
                    
                    
                    (9.0
                    %)
                    
                    
                    (9.0
                    %)Increase
      in valuation allowance
                    
                    
                    5.0
                    %
                    
                    
                    (1.2
                    %)Effective
      rate
                    
                    
                    30.0
                    %
                    
                    
                    23.8
                    %
 
 Note
10 - COMMITMENTS
  The
Company leases office facilities under operating leases that terminate through
2011. Rent expense for the three and six months ended June 30, 2009 and 2008 was
$68,018, $62,203, $119,192 and $125,002, respectively. The future minimum
obligations under these agreements are as follows by years as of June 30,
2009:
  2010
                      
                      $
                      310,0002011
                      
                      
                      103,0002012
                      
                      
                      75,000
 
 Note
11 - STATUTORY
RESERVE
 
 In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprise’s income, after the payment of the PRC income taxes, shall
be allocated to the statutory surplus reserves and statutory public welfare
fund. Prior to January 1, 2006, the proportion of allocation for reserve was 10
percent of the profit after tax to the surplus reserve fund and additional 5-10
percent to the public affair fund. The public welfare fund reserve was limited
to 50 percent of the registered capital. Effective January 1, 2006, there is now
only one fund requirement. The reserve is 10 percent of income after tax, not to
exceed 50 percent of registered capital.
 
 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,
2009 and December 31, 2008, the Company had allocated $11,109,379 to these
non-distributable reserve funds.
  17




Note
12 - OTHER
COMPREHENSIVE INCOME





The
detail of other comprehensive income as included in stockholders’ equity at June
30, 2009 (unaudited) and December 31, 2008 are as follows:





ForeignCurrencyTranslationAdjustmentBalance
      at December 31, 2007
                              
                              $
                              1,872,334Change
      for 2008
                              
                              
                              3,399,770Balance
      at December 31, 2008
                              
                              
                              5,272,104Change
      for six months ended June 30, 2009
                              
                              
                              (128,651
                              )Balance
      at June 30, 2009
                              
                              $
                              5,143,453





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, 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 six and three months ended June 30, 2009 and 2008, no customer accounted for
more than 10% of the Company’s sales or accounts receivable. At June 30, 2009
one (1)vendor
comprised approximately 21.67% of the Company’s accounts payable. At June 30,
2008 four (4) vendors comprised more than 57% of the Company’s accounts
payable.





Note
15 -   SEGMENT
INFORMATION





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





We
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):





Six Months Ended June 30,
    2009Mobile
                
                
                Home
                
                
                Communication
                
                
                ConsumerPhones
                
                
                Electronics
                
                
                Products
                
                
                Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                39,912
                
                
                $
                30,996
                
                
                $
                26,389
                
                
                $
                31,241
                
                
                $
                -
                
                
                $
                128,538Cost
      of sales
                
                
                35,449
                
                
                
                25,159
                
                
                
                23,928
                
                
                
                27,922
                
                
                
                -
                
                
                
                112,458Gross
      profit
                
                
                4,463
                
                
                
                5,838
                
                
                
                2,459
                
                
                
                3,319
                
                
                
                -
                
                
                
                16,079Income
      from operations
                
                
                1,204
                
                
                
                1,902
                
                
                
                422
                
                
                
                1,748
                
                
                
                567
                
                
                
                5,843Total
      assets
                
                $
                14,695
                
                
                $
                16,712
                
                
                $
                15,123
                
                
                $
                16,344
                
                
                $
                33,838
                
                
                $
                96,712




18





Six Months Ended June 30, 2008Mobile
                
                
                Home
                
                
                Communication
                
                
                ConsumerPhones
                
                
                Electronics
                
                
                Products
                
                
                Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                47,310
                
                
                $
                35,538
                
                
                $
                30,148
                
                
                $
                33,673
                
                
                $
                -
                
                
                
                146,669Cost
      of sales
                
                
                39,998
                
                
                
                29,049
                
                
                
                25,397
                
                
                
                28,803
                
                
                
                -
                
                
                
                123,247Gross
      profit
                
                
                7,313
                
                
                
                6,489
                
                
                
                4,750
                
                
                
                4,870
                
                
                
                -
                
                
                
                23,422Income
      from operations
                
                
                4,918
                
                
                
                4,263
                
                
                
                3,412
                
                
                
                3,757
                
                
                
                760
                
                
                
                17,110Total
      assets
                
                $
                22,326
                
                
                $
                21,739
                
                
                $
                16,418
                
                
                $
                19,251
                
                
                $
                1,456
                
                
                $
                81,190





Three Months Ended June 30,
      2009Mobile
                
                
                Home
                
                
                Communication
                
                
                ConsumerPhones
                
                
                Electronics
                
                
                Products
                
                
                Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                14,168
                
                
                $
                14,403
                
                
                $
                10,587
                
                
                $
                11,968
                
                
                $
                -
                
                
                $
                51,126Cost
      of sales
                
                
                12,665
                
                
                
                11,815
                
                
                
                9,824
                
                
                
                10,801
                
                
                
                -
                
                
                
                45,105Gross
      profit
                
                
                1,504
                
                
                
                2,589
                
                
                
                762
                
                
                
                1,165
                
                
                
                -
                
                
                
                6,020Income
      from operations
                
                
                88
                
                
                
                764
                
                
                
                (80
                )
                
                
                469
                
                
                
                30
                
                
                
                1,271Total
      assets
                
                $
                14,695
                
                
                $
                16,712
                
                
                $
                15,123
                
                
                $
                16,344
                
                
                $
                33,838
                
                
                $
                96,712








Three Months Ended June 30,
      2008Mobile
                
                
                Home
                
                
                Communication
                
                
                ConsumerPhones
                
                
                Electronics
                
                
                Products
                
                
                Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                25,528
                
                
                $
                18,648
                
                
                $
                17,030
                
                
                $
                17,309
                
                
                $
                -
                
                
                $
                78,515Cost
      of sales
                
                
                21,770
                
                
                
                15,137
                
                
                
                14,112
                
                
                
                14,621
                
                
                
                -
                
                
                
                65,640Gross
      profit
                
                
                3,759
                
                
                
                3,511
                
                
                
                2,918
                
                
                
                2,688
                
                
                
                -
                
                
                
                12,876Income
      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




19




Forward
Looking Statements





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





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





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





Overview





China 3C
Group was incorporated on August, 20, 1998 under the laws of the State of
Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and
CFDL own 100% of the capital stock of SJHE and Sanhe. Until August 14, 2007,
when it made the change to its ownership structure described in the next
paragraph in order to comply with certain requirements of PRC law, CFDL owned
100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of
Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009
Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co.,
Ltd. (“Letong”) to establish an electronic retail franchise operation for China
3C Group. On July 6, 2009, the Company completed the acquisition of Jinhua Boafa
Logistic, Ltd.  Collectively the eight 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:




(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.




20




(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.





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





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





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





On July
6, 2009, Zhejiang and Yiwu completed the acquisition of Jinhua from the
shareholders of Jinhua.   The final installment of RMB 20,000,000
(approximately US $2,900,000) will be paid within 10 days of the filing of the
amendment to the current report on Form 8-K dated July 6, 2009, which filing is
expected to be made by the Company not later than 71 calendar days after July 6,
2009.





The
Company is engaged in 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, 2009 and 2008





Reportable
Operating Segments





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




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


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


c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”


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




21




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 percentages of revenues, are in thousands of U.S.
dollars.





Six months ended
                  June 30,
                
                
                PercentageYiwu
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                26,389
                
                
                $
                30,469
                
                
                
                (13.39)
                %Gross
      Profit
                
                $
                2,459
                
                
                $
                4,798
                
                
                
                (48.84)
                %Gross
      Margin
                
                
                9.32
                %
                
                
                15.75
                %
                
                
                (6.43)
                %Operating
      Income
                
                $
                422
                
                
                $
                3,412
                
                
                
                (87.63)
                %





Three months ended
                  June 30,
                
                
                PercentageYiwu
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                10,587
                
                
                $
                17,030
                
                
                
                (37.83)
                %Gross
      Profit
                
                $
                762
                
                
                $
                2,918
                
                
                
                (73.89)
                %Gross
      Margin
                
                
                7.20
                %
                
                
                17.13
                %
                
                
                (9.93)
                %Operating
      Income
                
                $
                (80)
                
                
                $
                2,222
                
                
                
                (103.60)
                %





For the
six months ended June 30, 2009, Yiwu generated revenue of $26,389, a decrease of
$4,080 or 13.39% compared to $30,469 for the six months ended June 30, 2008.
Gross profit decreased $2,339 or 48.84% from $4,798 for the six months ended
June 30, 2008 to $2,459 for the six months ended June 30, 2009. Operating income
was $422 for the six months ended June 30, 2009, a decrease of $2,990 or 87.63%
compared to $3,412 for the six months ended June 30, 2008.





For the
three months ended June 30, 2009, Yiwu generated revenue of $10,587, a decrease
of $6,443 or 37.83% compared to $17,030 for the three months ended June 30,
2008. Gross profit decreased $2,156 or 73.89% from $2,918 for the three months
ended June 30, 2008 to $762 for the three months ended June 30, 2009. Operating
loss was $(80) for the three months ended June 30, 2009, a decrease of $2,302 or
103.6% compared to operating income of $2,222 for the three months ended June
30, 2008.





Such
decrease in revenue was primarily due to weaker demand for office equipment as
well as lower unit sales price. Many small and medium-sized companies in China
were less likely to purchase or upgrade new office equipment in the current
economic environment.





Gross
margin decreased 6.43% and 9.93%, respectively during the six and three months
ended June 30, 2009. The decrease was a result of lower unit sales price of fax
machines and telephones due to a more competitive sales market.





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 percentages of revenues, are in thousands of U.S.
dollars.





Six months ended June 30,
                
                
                PercentageWang Da
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                39,912
                
                
                $
                47,777
                
                
                
                (16.46)
                %Gross
      Profit
                
                $
                4,463
                
                
                $
                7,275
                
                
                
                (38.65)
                %Gross
      Margin
                
                
                11.18
                %
                
                
                15.23
                %
                
                
                (4.05)
                %Operating
      Income
                
                $
                1,204
                
                
                $
                4,918
                
                
                
                (75.52)
                %




22





Three months ended June 30,
                
                
                PercentageWang Da
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                14,168
                
                
                $
                25,528
                
                
                
                (44.50)
                %Gross
      Profit
                
                $
                1,503
                
                
                $
                3,759
                
                
                
                (60.03)
                %Gross
      Margin
                
                
                10.61
                %
                
                
                14.73
                %
                
                
                (4.12)
                %Operating
      Income
                
                $
                88
                
                
                $
                2,371
                
                
                
                (96.29)
                %





For the
six months ended June 30, 2009, Wan Da generated revenue of $39,912, a decrease
of $7,865 or 16.46% compared to $47,777 for the six months ended June 30, 2008.
Gross profit decreased $2,812 or 38.65% from $7,275 for the six months ended
June 30, 2008 to $4,463 for the six months ended June 30, 2009. Operating income
was $1,204 for the six months ended June 30, 2009, a decrease of $3,714 or
75.52% compared to $4,918 for the six months ended June 30, 2008.





For the
three months ended June 30, 2009, Wan Da generated revenue of $14,168, a
decrease of $11,360 or 44.5% compared to $25,528 for the three months ended June
30, 2008. Gross profit decreased $2,256 or 60.03% from $3,759 for the three
months ended June 30, 2008 to $1,503 for the three months ended June 30, 2009.
Operating income was $88 for the three months ended June 30, 2009, a decrease of
$2,283 or 96.29% compared to $2,371 for the three months ended June 30,
2008.





During
the second quarter 2009, China started testing its 3G network. Because the 3G
network is still in the trial period, the network coverage is yet to be complete
and the cost of wireless service is relatively higher than before. In addition,
the costs of 3G phones are also higher than the old models. The introduction of
3G phones caused lower demand for the old model mobile phones. Meanwhile,
customers are waiting to upgrade to 3G phones until the 3G network is complete.
These factors led to decreased sales revenue during the six months ended June
30, 2009.  The revenue decrease was also attributed to the closing of
8 store in stores during the second quarter of 2009.





Gross
margin decreased 4.05% and 4.12%, respectively during the six and three months
ended June 30, 2009. The decrease was due to the fact that old model mobile
phones are selling at a lower unit price as a result of the introduction of 3G
phones.





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 percentages of revenues, are in thousands of U.S.
dollars.





Six months ended June 30,
                
                
                PercentageSanhe
                
                2009
                
                
                2008
                
                
                ChangeRevenue
                
                $
                30,996
                
                
                $
                35,138
                
                
                
                (11.79)
                %Gross
      Profit
                
                $
                5,838
                
                
                $
                6,484
                
                
                
                (9.96)
                %Gross
      Margin
                
                
                18.83
                %
                
                
                18.45
                %
                
                
                0.38
                %Operating
      Income
                
                $
                1,902
                
                
                $
                4,263
                
                
                
                (55.38)
                %





Three months ended June 30,
                  
                  
                  PercentageSanhe
                  
                  2009
                  
                  
                  2008
                  
                  
                  ChangeRevenue
                  
                  $
                  14,403
                  
                  
                  $
                  18,648
                  
                  
                  
                  (22.76)
                  %Gross
      Profit
                  
                  $
                  2,589
                  
                  
                  $
                  3,511
                  
                  
                  
                  (26.26)
                  %Gross
      Margin
                  
                  
                  17.98
                  %
                  
                  
                  18.83
                  %
                  
                  
                  (0.85)
                  %Operating
      Income
                  
                  $
                  764
                  
                  
                  $
                  2,399
                  
                  
                  
                  (68.15)
                  %





For the
six months ended June 30, 2009, Sanhe generated revenue of $30,996, a decrease
of $4,142 or 11.79% compared to $35,138 for the six months ended June 30, 2008.
Gross profit decreased $646 or 9.96% from $6,484 for the six months ended June
30, 2008 to $5,838 for the six months ended June 30, 2009. Operating income was
$1,902 for the six months ended June 30, 2009, a decrease of $2,361 or 55.38%
compared to $4,263 for the six months ended June 30, 2008.





For the
three months ended June 30, 2009, Sanhe generated revenue of $14,403, a decrease
of $4,245 or 22.76% compared to $18,648 for the three months ended June 30,
2008. Gross profit decreased $922 or 26.26% from $3,511 for the three months
ended June 30, 2008 to $2,589 for the three months ended June 30, 2009.
Operating income was $764 for the three months ended June 30, 2009, a decrease
of $1,635 or 68.15% compared to operating income of $2,399 for the three months
ended June 30, 2008.




Second
quarter has been a slow season for home electronics.  The decrease in
revenue was primarily due to weaker demand for home electronics during the
second quarter 2009. Part of the decline in revenue was also attributed to the
cancellation of the Chinese May 1st public holiday in 2009.





Gross
margin increased 0.38% during the six months ended June 30, 2009 and decreased
0.85% during the three months ended June 30, 2009. The decrease in gross margin
was a result of lower unit sales price of home electronics due to a more
competitive sales market.




23




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 percentages of revenues, are in thousands of U.S.
dollars.




Six months ended June 30,
                        
                        
                        PercentageSJHE
                        
                        2009
                        
                        
                        2008
                        
                        
                        ChangeRevenue
                        
                        $
                        31,241
                        
                        
                        $
                        33,285
                        
                        
                        
                        (6.14)
                        %Gross
      Profit
                        
                        $
                        3,319
                        
                        
                        $
                        4,866
                        
                        
                        
                        (31.79)
                        %Gross
      Margin
                        
                        
                        10.62%
                        %
                        
                        
                        14.62
                        %
                        
                        
                        (3.00)
                        %Operating
      Income
                        
                        $
                        1,748
                        
                        
                        $
                        3,757
                        
                        
                        
                        (46.53)
                        %





Three months ended June 30,
                        
                        
                        PercentageSJHE
                        
                        2009
                        
                        
                        2008
                        
                        
                        ChangeRevenue
                        
                        $
                        11,968
                        
                        
                        $
                        17,309
                        
                        
                        
                        (30.86)
                        %Gross
      Profit
                        
                        $
                        1,166
                        
                        
                        $
                        2,688
                        
                        
                        
                        (56.62)
                        %Gross
      Margin
                        
                        
                        9.74
                        %
                        
                        
                        15.53
                        %
                        
                        
                        (5.79)
                        %Operating
      Income
                        
                        $
                        469
                        
                        
                        $
                        2,097
                        
                        
                        
                        (77.63)
                        %





For the
six months ended June 30, 2009, SJHE generated revenue of $31,241, a decrease of
$2,044 or 6.14% compared to $33,285 for the six months ended June 30, 2008.
Gross profit decreased $1,547 or 31.79% from $4,866 for the six months ended
June 30, 2008 to $3,319 for the six months ended June 30, 2009. Operating income
was $1,748 for the six months ended June 30, 2009, a decrease of $2,009 or
46.53% compared to $3,757 for the six months ended June 30, 2008.





For the
three months ended June 30, 2009, SJHE generated revenue of $11,968, a decrease
of $5,341 or 30.86% compared to $17,309 for the three months ended June 30,
2008. Gross profit decreased $1,522 or 56.62% from $2,688 for the three months
ended June 30, 2008 to $1,166 for the three months ended June 30, 2009.
Operating income was $469 for the three months ended June 30, 2009, a decrease
of $1,628 or 77.63% compared to $2,097 for the three months ended June 30,
2008.





Gross
margin decreased 3.00% and 5.79% during the six and three months ended June 30,
2009, respectively. The decrease in gross margin was a result of lower unit
sales price of consumer electronics due to a more competitive sales
market.





Net
Sales





Net sales
for the six months ended June 30, 2009 decreased by 12.36%, to $128,537 as
compared to $146,669 for the six months ended June 30, 2008. Net sales for the
three months ended June 30, 2009 decreased by 34.88%, to $51,126 as compared to
$78,515 for the three months ended June 30, 2008. Management believes that the
lower sales were a result of various factors including a slowdown in the retail
markets in general, weaker demand for consumer and business electronics due to
the global financial conditions as well as 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, 2009 totaled $112,458 as compared to
$123,246 for the six months ended June 30, 2008, a decrease of 8.75%. Cost of
sales for the three months ended June 30, 2008 totaled $45,105 as compared to
$65,640 for the three months ended June 30, 2008, a decrease of 31.28%. 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.




24




Gross
Profit Margin





Gross
profit margin for the six months ended June 30, 2009 was 12.51% as compared to
15.97% for the six months ended June 30, 2008. Gross profit margin for the three
months ended June 30, 2009 was 11.78% as compared to 16.40% for the three months
ended June 30, 2008. The lower gross profit margin was primarily due to the
decreased unit sales prices of consumer and business electronics in the
competitive market in China.  While the unit sales prices decreased,
the purchase price remained flat.




General
and Administrative Expenses





General
and administrative expenses for the six months ended June 30, 2009 totaled
$10,235 or approximately 7.96% of net sales, as compared to $6,312 or
approximately 4.30% of net sales for the six months ended June 30, 2008, an
increase of 62.16%. General and administrative expenses for the three months
ended June 30, 2009 totaled $4,749 or approximately 9.29% of net sales, as
compared to $3,326,044 or approximately 4.24% of net sales for the three months
ended June 30, 2008, an increase of 42.79%. The increase in general and
administrative expenses was primarily due to an increase in base salary for all
staff, increase in public expenses as well as increased management fees paid to
department stores. Other factors include an increase in marketing expenses and
additional expenses incurred to upgrade the sales counters in retail stores to
enhance the business image during first quarter 2009.





Income
from Operations





Income
from operations for the six months ended June 30, 2009 was $5,844 or 4.55% of
net sales as compared to income from operations of $17,110 or 11.67% of net
sales for the six months ended June 30, 2008, a decrease of 65.85%. Income from
operations for the three months ended June 30, 2008 was $1,271 or 2.49% of net
sales as compared to income from operations of $9,550 or 12.16%of net sales for
the three months ended June 30, 2008, a decrease of 86.69%. Lower sales, lower
gross margin as well as increased operating expenses were the key factors for
the decrease in income from operations during the three and six months ended
June 30, 2009.





Provision
for Income Taxes





The
provision for income taxes for the six months ended June 30, 2009 was $1,591
compared to $4,164 for the six months ended June 30, 2008. The provision for
income taxes for the three months ended June 30, 2009 was $392 compared to
$2,354 for the three months ended June 30, 2008. The decrease was attributed to
the decrease in taxable income.





Net
Income





Net
income was $4,354 or 3.39% of net sales for the six months ended June 30, 2009
compared to $13,325 or 9.09% of net sales for the six months ended June 30,
2008, a decrease of 67.33%. Net income was $915 or 1.79% of net sales for the
three months ended June 30, 2009 compared to $7,552 or 9.62% of net sales for
the three months ended June 30, 2008, a decrease of 87.90%. Decreased sales
revenue, lower gross margin and high operating expenses were the critical
factors which contributed to the decrease in net income.




Liquidity
and Capital Resources





Operations
and liquidity needs are funded primarily through cash flows from operations.
Cash and cash equivalents were $25,448 at June 30, 2009, compared to $25,994 at
June 30, 2008, and compared to $32,158 at December 31, 2008.




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





Six months endedJune 30, 2009
                    
                    
                    June 30, 2008Net
      cash (used in) provided by  operating activities
                    
                    $
                    721
                    
                    
                    $
                    (1,774
                    )Net
      cash (used in) investing activities
                    
                    $
                    (7,295
                    )
                    
                    $
                    (8
                    )Effect
      of exchange rate change on cash and cash equivalents
                    
                    $
                    (135
                    )
                    
                    $
                    2,823Net
      increase (decrease) in cash and cash equivalents
                    
                    $
                    (6,710
                    )
                    
                    $
                    1,041Cash
      and cash equivalents at beginning of period
                    
                    $
                    32,158
                    
                    
                    $
                    24,953Cash
      and cash equivalents at end period
                    
                    $
                    25,448
                    
                    
                    $
                    25,994




25




Operating
Activities





Net cash
generated from operating activities was $721 for the six months ended June
30, 2009 compared to net cash used in operating activities of $(1,774) for
the six months ended June 30, 2008, approximately a 141%
increase.  The increase was mainly attributable to several factors,
including (i) net income of $4,353; (ii) decrease in advance to suppliers of
$149; (iii) decrease in prepaid expenses and other current assets of $34, offset
by the increase in inventory of $424 and accounts receivable of $801 and
decrease in income taxes payable of $1,746 and accounts payable and accrued
expenses of $893 in the six months ended June 30, 2009.





Six months endedJune 30,
      2009
                        
                        
                        
                        June 30,
      2008a)
      Increase in inventory
                        
                        $
                        424
                        
                        
                        $
                        6,266b)
      Increase in Accounts Receivable
                        
                        $
                        801
                        
                        
                        $
                        11,040c)
      Increase in inventory and accounts receivables as a whole a) +
      b)
                        
                        $
                        1,224
                        
                        
                        $
                        17,306





During
the six months ended June 30, 2008, inventory increased significantly as a
result of the unprecedented snow storm during the first quarter 2008. There was
a shortage of inventory available to our stores.  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.





During
the six months ended June 30, 2008, 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, In response to the poor market
condition, the Company changed the contract terms 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 led to
the increase in the balance of accounts receivable at June 30,
2008.





During
the six months ended June 30, 2009, the Company has changed its contract terms
for retail department from 30 days to 45 days and wholesale department from 10
days to 15 days. This led to the increase of balance of accounts receivable at
June 30, 2009.  Inventory turnover slowed down slightly during the six
months ended June 30, 2009, which caused the slight increase of inventory of
$424 compared to December 31, 2008.





Investing
Activities





Six months endedJune 30, 2009
                  
                  
                  June 30, 2008Net
      cash used investment activities
                  
                  $
                  (7,295
                  )
                  
                  $
                  (8
                  )





Net cash
used in investing activities increased from $8 during the six months ended June
30, 2008 to $7,295 during the six months ended June 30, 2009, due to the deposit
payment for the acquisition of Jinhua. Pursuant to the acquisition agreement,
the Company paid for the second installment payment of $7,291 during the six
months ended Jun 30, 2009.





The
Company’s activities focused on the distribution of products.  As a
result, investments in fixed assets were moderate and hence there is little
effect to the utilization of cash over the six months ended June 30,
2008.


Financing
Activities





The
Company did not carry out any financing activities during the six months ended
June 30, 2009 and 2008.




26




Six months endedJune 30, 2009
                      
                      
                      June 30, 2008Net
      change in cash and cash equivalents
                      
                      $
                      (6,710
                      )
                      
                      $
                      1,041





Six months endedJune 30, 2009
                  
                  
                  June 30, 2008Cash
      and cash equivalent at June 30, 2009 and 2008
                  
                  $
                  25,448
                  
                  
                  $
                  25,994





With
effective internal control systems in place the Company maintained healthy net
cash flows over period and achieved a healthy cash position of $25,448 at June
30, 2009 and $25,994 at June 30, 2008.





Capital
Expenditures





Total
capital expenditures for the first six months of 2009 were $4 for purchase of
fixed assets compared to $11 for the first six months of 2008.





Working Capital Requirements





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





Off-Balance
Sheet Arrangements





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





Item
3. Quantitative and Qualitative Disclosures About Market Risk.





Foreign
Currency Exchange Rate Risk





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





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




27




Interest
Rate Risk





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





Inflation





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





Currency
Exchange Fluctuations





All of
the Company’s revenues are denominated in Chinese Renminbi, as are expenses. The
value of the RMB-to-U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Since 1994, the conversion of Renminbi into foreign currencies, including U.S.
dollars, has been based on rates set by the People’s Bank of China, which are
set daily based on the previous day’s inter-bank foreign exchange market rates
and current exchange rates on the world financial markets. Since 1994, the
official exchange rate for the conversion of Renminbi to U.S. dollars had
generally been stable and the Renminbi had appreciated slightly against the U.S.
dollar. However, on July 21, 2005, the Chinese government changed its policy of
pegging the value of Chinese Renminbi to the U.S. dollar. Under the new policy,
Chinese Renminbi may fluctuate within a narrow and managed band against a basket
of certain foreign currencies. Recently there has been increased political
pressure on the Chinese government to decouple the Renminbi from the United
States dollar. At the recent quarterly regular meeting of People’s Bank of
China, its Currency Policy Committee affirmed the effects of the reform on
Chinese Renminbi exchange rate. In February 2006, the new currency rate system
began operating.  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 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 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 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, 2009, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
the Company’s disclosure controls and procedures were effective as of such date
to ensure that information required to be disclosed by us in our Exchange Act
reports is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, or persons performing similar functions, as
appropriate, to allow timely decisions regarding required
disclosures.




28




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 2009 covered by this Quarterly Report on Form 10-Q
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
 The
Company strives to continue to enhance its internal control over financial
reporting and has hired new accounting staff who are familiar with US GAAP to
assist with the financial reporting during the second quarter of 2009 and during
future quarters.





PART II. OTHER INFORMATION





Item 1. Legal
Proceedings.





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





Item
1A. Risk Factors.





None.





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





None.





Item 3.  Defaults Upon Senior
Securities.




Not
Applicable.





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





None.





Item 5. Other
Information.





None.





Item 6. Exhibits.




Exhibit No.
            
            Document Description2.1
            
            Amendment
      to Acquisition Agreement dated April 4, 2009 by and among Zhejiang Yong
      Xing Digital Technology Co. Ltd., Yiwu Yong Xin Communication Ltd. and the
      shareholders of Jinhua Baofa Logistic Ltd., incorporated by reference from
      the Registrant’s Current Report filed with the SEC on Form 8-K on April 9,
      2009.10.1
            
            Letter
      Agreement dated June 16, 2009 between China 3C Group and Jian Zhang,
      incorporated by reference from the Registrant’s Current Report filed with
      the SEC on Form 8-K on June 22, 2009.31.1
            
            Certification
      of the Principal 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 Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
            
            Certification
      of the Principal Executive Officer pursuant to 18 U.S.C. 1350 (Section 906
      of the Sarbanes-Oxley Act of 2002).32.2
            
            Certification
      of the Principal Accounting and Financial Officer pursuant to 18 U.S.C.
      1350 (Section 906 of the Sarbanes-Oxley Act of
  2002).




29




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on


its
behalf by the undersigned thereunto duly authorized.




CHINA
      3C GROUPDate:
      August 14, 2009
              By:
              /s/Zhenggang
    WangName:  
      Zhenggang WangTitle:
      Chief Executive Officer and Chairman(Principal
      Executive Officer)




30




Exhibit
Index





Exhibit No.
            
            Document Description2.1
            
            Amendment
      to Acquisition Agreement dated April 4, 2009 by and among Zhejiang Yong
      Xing Digital Technology Co. Ltd., Yiwu Yong Xin Communication Ltd. and the
      shareholders of Jinhua Baofa Logistic Ltd., incorporated by reference from
      the Registrant’s Current Report filed with the SEC on Form 8-K on April 9,
      2009.10.1
            
            Letter
      Agreement dated June 16, 2009 between China 3C Group and Jian Zhang,
      incorporated by reference from the Registrant’s Current Report filed with
      the SEC on Form 8-K on June 22, 2009.31.1
            
            Certification
      of the Principal 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 Accounting and Financial Officer pursuant to Rule
      13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
            
            Certification
      of the Principal Executive Officer pursuant to 18 U.S.C. 1350 (Section 906
      of the Sarbanes-Oxley Act of 2002).32.2
            
            Certification
      of the Principal Accounting and Financial Officer pursuant to 18 U.S.C.
      1350 (Section 906 of the Sarbanes-Oxley Act of
  2002).




31