UNITED STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q/A
 (Amendment
No. 1)
 
 x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period ended     March 31,
2008
 
 or
 
 o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
transition period from ____ to _____
  Commission
file number  000-28767
 China
3C Group
 (Exact
Name of Registrant as Specified in Its Charter)
  Nevada
                88-0403070(State
      or other jurisdiction of incorporation or organization)
                (I.R.S.
      Employer Identification
  No.)
 
 368
HuShu Nan Road
 HangZhou City, Zhejiang
Province, China 310014
  (Address
of Principal Executive Offices) (Zip Code)
 
 086-0571-88381700
 (Registrant’s
telephone number, including area code)
  
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 Indicate
by check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days:   Yes x No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer 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 May
10, 2008 the registrant had 52,673,938shares of common stock
outstanding.
  
  EXPLANATORY
NOTE
 
 We are
filing this Amendment No. 1 to Quarterly Report on Form 10-Q/A to amend (a)Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations of Part I, (b) Item 4 Controls and Procedures, of Part I
and (c) the notes to the financial statements contained in the Report of
Independent Registered Public Accounting Firm.
 
 Except as
specifically referenced herein, this Amendment No. 1 to Quarterly Report on Form
10-Q/A does not reflect any event occurring subsequent to May 16, 2008, the
filing date of the original report.
  
  TABLE
OF CONTENTS
 
 PART
      I. FINANCIAL INFORMATIONItem
      1. Financial Statements:Report
      of Independent Registered Public Accounting Firm
                    
                    1Consolidated
      Balance Sheets as of March 31, 2008 (Unaudited) and December 31,
      2007
                    
                    2Consolidated
      Statements of Income for the Three Months Ended March 31, 2008 and 2007
      (Unaudited)
                    
                    3Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2008 and
      2007 (Unaudited)
                    
                    4Consolidated
      Statement of Stockholders’ Equity for the Three Months Ended March 31,
      2008 (Unaudited) and the Year Ended December 31, 2007
                    
                    5Notes
      to Consolidated Financial Statements
                    
                    6 -
      18Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                    
                    19Item
      3. Qualitative and Quantitative Disclosure about Market
    Risk
                    
                    25Item
      4. Controls and Procedures
                    
                    27PART
      II. OTHER INFORMATIONItem
      1. Legal Proceedings
                    
                    27Item
      1A. Risk Factors
                    
                    27Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                    
                    31Item
      3. Defaults Upon Senior Securities
                    
                    31Item
      4. Submission of Matters to a Vote of Security Holders
                    
                    31Item
      5. Other Information
                    
                    31Item
      6. Exhibits
                    
                    32Signatures
                    
                    33
  
  PART
I. FINANCIAL
INFORMATION
 
 Item 1. Financial
Statements.
  MORGENSTERN,
SVOBODA & BAER, CPA’s, P.C.
 
 CERTIFIED
PUBLIC ACCOUNTANTS
 40
Exchange Place, Suite 1820
 New York,
NY 10005
 TEL:
(212) 925-9490
 FAX:
(212) 226-9134
 E-MAIL:
MORGENCPA@CS.COM
 
 Report of Independent
Registered Public Accounting Firm
 
 Board of
Directors and Stockholders of
 China 3C
Group and Subsidiaries
 
 We have
reviewed the accompanying consolidated balance sheets of China 3C Group as of
March 31, 2008 and the consolidated statements of operations for the three
months ended March 31, 2008 & 2007 and consolidated statements of cash flows
and shareholders equity for the three months then ended. These financial
statements are the responsibility of the Company’s management.
 
 We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our reviews, we are not aware of any material modifications that should be made
to the accompanying interim financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the United
States of America.
 
 We have
previously audited, in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
China 3C Group as of December 31, 2007 and the related consolidated statements
of income retained earnings and comprehensive income, and consolidated
statements of cash flows for the year then ended; and in our report dated March
4, 2008 we expressed an unqualified opinion on those financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of December 31, 2007, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been
derived.
 
 Morgenstern,
Svoboda & Baer CPA’s P.C.
 Certified
Public Accountants
 
 New York,
New York
 May 9,
2008
  1
  CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAS
      OF MARCH 31, 2008 AND DECEMBER 31,
2007
  3/31/2008
                          
                          
                          12/31/2007ASSETSCurrent
      AssetsCash
      and cash equivalents
                          
                          $
                          23,421,645
                          
                          
                          $
                          24,952,614Accounts
      receivable, net
                          
                          
                          14,804,457
                          
                          
                          
                          8,077,533Inventory
                          
                          
                          10,977,257
                          
                          
                          
                          6,725,371Advance
      to supplier
                          
                          
                          1,645,508
                          
                          
                          
                          2,572,285Prepaid
      expenses
                          
                          
                          264,625
                          
                          
                          
                          382,769Total
      Current Assets
                          
                          
                          51,113,492
                          
                          
                          
                          42,710,572Property
      & equipment, net
                          
                          
                          85,763
                          
                          
                          
                          89,414Goodwill
                          
                          
                          20,348,278
                          
                          
                          
                          20,348,278Refundable
      deposits
                          
                          
                          54,468
                          
                          
                          
                          48,541Total
      Assets
                          
                          $
                          71,602,001
                          
                          
                          $
                          63,196,805LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                          
                          $
                          4,977,584
                          
                          
                          $
                          3,108,235Income
      tax payable
                          
                          
                          1,847,239
                          
                          
                          
                          2,684,487Total
      Current Liabilities
                          
                          
                          6,824,823
                          
                          
                          
                          5,792,722Stockholders’
      EquityCommon
      stock, $.001 par value, 100,000,000shares
      authorized, 52,673,938 and 52,673,938 issued and
    outstanding
                          
                          
                          52,674
                          
                          
                          
                          52,674Additional
      paid-in capital
                          
                          
                          19,465,776
                          
                          
                          
                          19,465,776Subscription
      receivable
                          
                          
                          (50,000
                          )
                          
                          
                          (50,000
                          )Statutory
      reserve
                          
                          
                          7,234,295
                          
                          
                          
                          7,234,295Other
      comprehensive income
                          
                          
                          3,472,384
                          
                          
                          
                          1,872,334Retained
      earnings
                          
                          
                          34,602,049
                          
                          
                          
                          28,829,004Total
      Stockholders’ Equity
                          
                          
                          64,777,178
                          
                          
                          
                          57,404,083Total
      Liabilities and Stockholders’ Equity
                          
                          $
                          71,602,001
                          
                          
                          $
                          63,196,805
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  2
  CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOMEFOR
      THE THREE MONTHS ENDING MARCH 31, 2008 AND
  2007
  2008
                                      
                                      
                                      2007Sales,
      net
                                      
                                      $
                                      68,153,455
                                      
                                      
                                      $
                                      84,523,1944Cost
      of sales
                                      
                                      
                                      57,607,075
                                      
                                      
                                      
                                      70,590,912Gross
      profit
                                      
                                      
                                      10,546,380
                                      
                                      
                                      
                                      13,932,282General
      and administrative expenses
                                      
                                      
                                      2,986,044
                                      
                                      
                                      
                                      3,726,162Income
      from operations
                                      
                                      
                                      7,560,336
                                      
                                      
                                      
                                      10,206,120Other
      (Income) ExpenseInterest
      income
                                      
                                      
                                      (36,095
                                      )
                                      
                                      
                                      (13,791
                                      )Other
      expense
                                      
                                      
                                      12,813
                                      
                                      
                                      
                                      6,864Total
      Other (Income) Expense
                                      
                                      
                                      (23,282
                                      )
                                      
                                      
                                      (6,927
                                      )Income
      before income taxes
                                      
                                      
                                      7,583,618
                                      
                                      
                                      
                                      10,213,047Provision
      for income taxes
                                      
                                      
                                      1,810,573
                                      
                                      
                                      
                                      3,749,259Net
      income
                                      
                                      $
                                      5,773,045
                                      
                                      
                                      $
                                      6,463,788Net
      income per share:Basic
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.12Diluted
                                      
                                      $
                                      0.11
                                      
                                      
                                      $
                                      0.12Weighted
      average number of shares outstanding:Basic
                                      
                                      
                                      52,673,938
                                      
                                      
                                      
                                      52,578,938Diluted
                                      
                                      
                                      53,073,938
                                      
                                      
                                      
                                      52,578,938
  The
accompanying notes are an integral part of these consolidated financial
statements.
  3
 
 CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTHS ENDED MARCH 31, 2008 AND
2007
  2008
                              
                              
                              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                              
                              $
                              5,773,045
                              
                              
                              $
                              6,463,788Adjustments
      to reconcile net income to net cash(used
      in) provided by operating activities:Depreciation
                              
                              
                              9,946
                              
                              
                              
                              10,056Gain
      on asset disposition
                              
                              
                              (2,161
                              )
                              
                              
                              -Provision
      for bad debts
                              
                              
                              13,498
                              
                              
                              
                              357Stock
      based compensation
                              
                              
                              117,557
                              
                              
                              
                              851,400(Increase)
      / decrease in assets:Accounts
      receivables
                              
                              
                              (6,740,422
                              )
                              
                              
                              (2,665,528
                              )Inventory
                              
                              
                              (4,251,886
                              )
                              
                              
                              (1,845,097
                              )Prepaid
      expense
                              
                              
                              587
                              
                              
                              
                              23,129Advance
      to supplier
                              
                              
                              926,777
                              
                              
                              
                              (1,224,393
                              )Deposits
                              
                              
                              (5,927
                              )
                              
                              
                              (41,950
                              )Increase
      / (decrease) in current liabilities:Accounts
      payable and accrued expenses
                              
                              
                              1,869,349
                              
                              
                              
                              (95,078
                              )Income
      tax payable
                              
                              
                              (837,248
                              )
                              
                              
                              1,151,782Total
      adjustments
                              
                              
                              (8,899,930
                              )
                              
                              
                              (3,835,322
                              )Net
      cash (used in) provided by operating activities
                              
                              
                              (3,126,885
                              )
                              
                              
                              2,628,466CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property & equipment
                              
                              
                              (6,581
                              )
                              
                              
                              (34,879
                              )Proceeds
      from asset sales
                              
                              
                              2,447
                              
                              
                              
                              -Net
      cash used by investing activities
                              
                              
                              (4,134
                              )
                              
                              
                              (34,879
                              )Effect
      of exchange rate changes on cash and cash equivalents
                              
                              
                              1,600,050
                              
                              
                              
                              (6,851
                              )Net
      change in cash and cash equivalents
                              
                              
                              (1,530,969
                              )
                              
                              
                              2,586,736Cash
      and cash equivalents, beginning balance
                              
                              
                              24,952,614
                              
                              
                              
                              6,498,450Cash
      and cash equivalents, ending balance
                              
                              $
                              23,421,645
                              
                              
                              $
                              9,085,186SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the year for:Income
      tax payments
                              
                              $
                              2,647,821
                              
                              
                              $
                              2,597,477Interest
      payments
                              
                              $
                              -
                              
                              
                              $
                              -
  The
accompanying notes are an integral part of these consolidated financial
statements.
  4
  CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITYFOR
      THE THREE MONTHS ENDED MARCH 31, 2008 AND THE YEAR ENDED DECEMBER 31,
      2007
  Additional
                                      
                                      
                                      Other
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      TotalCommon
      Stock
                                      
                                      
                                      Paid-In
                                      
                                      
                                      Comprehensive
                                      
                                      
                                      Subscription
                                      
                                      
                                      Statutory
                                      
                                      
                                      Retained
      Earnings
                                      
                                      
                                      Stockholders’Shares
                                      
                                      
                                      Amount
                                      
                                      
                                      Capital
                                      
                                      
                                      Income
                                      
                                      
                                      Receivable
                                      
                                      
                                      Reserve
                                      
                                      
                                      
                                      
                                      
                                      EquityBalance
      December 31, 2006
                                      
                                      
                                      52,488,938
                                      
                                      
                                      $
                                      52,489
                                      
                                      
                                      $
                                      17,352,691
                                      
                                      
                                      $
                                      427,616
                                      
                                      
                                      $
                                      (50,000
                                      )
                                      
                                      $
                                      3,320,755
                                      
                                      
                                      $
                                      9,822,844
                                      
                                      
                                      $
                                      30,926,395Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,444,718
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,444,718Income
      for the year ended December 31, 2007
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      22,919,700
                                      
                                      
                                      
                                      22,919,700Transfer
      to statutory reserve
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      3,913,540
                                      
                                      
                                      
                                      (3,913,540
                                      )Stock
      based compensation
                                      
                                      
                                      185,000
                                      
                                      
                                      
                                      185
                                      
                                      
                                      
                                      2,113,085
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      2,113,270Balance
      December 31, 2007
                                      
                                      
                                      52,673,938
                                      
                                      
                                      
                                      52,674
                                      
                                      
                                      
                                      19,465,776
                                      
                                      
                                      
                                      1,872,334
                                      
                                      
                                      
                                      (50,000
                                      )
                                      
                                      
                                      7,234,295
                                      
                                      
                                      
                                      28,829,004
                                      
                                      
                                      
                                      57,404,083Foreign
      currency translation adjustments
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,600,050
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      1,600,050Income
      for the three months ended March 31, 2008
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      
                                      5,773,045
                                      
                                      
                                      
                                      5,773,045Balance
      March 31, 2008
                                      
                                      
                                      52,673,938
                                      
                                      
                                      $
                                      52,674
                                      
                                      
                                      $
                                      19,465,776
                                      
                                      
                                      $
                                      3,472,384
                                      
                                      
                                      $
                                      (50,000
                                      )
                                      
                                      $
                                      7,234,295
                                      
                                      
                                      $
                                      34,602,049
                                      
                                      
                                      $
                                      64,777,178
  The
accompanying notes are an integral part of these consolidated financial
statements.
  5
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note
1 - ORGANIZATION
 
 China 3C
Group (the “Company”) was incorporated on August 20, 1998 under the laws of the
State of Nevada. Capital Future Developments Limited - BVI (“Capital”) was
incorporated on July 22, 2004 under the laws of the British Virgin Islands.
Zhejiang Yong Xin Digital Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin
Communication Ltd. (“Yiwu”), Hangzhou Wang Da Electronics Co., Ltd. (“Wang Da”),
Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and Shanghai Joy &
Harmony Electronics Company Limited (“Joy & Harmony”) were incorporated
under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997,
March, 30, 1998, April 12, 2004, and August 20, 2003, respectively.
 
 On
December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
through a reverse merger. China 3C Group acquired all of the issued and
outstanding capital stock of Capital pursuant to a Merger Agreement dated as of
December 21, 2005 by and among China 3C Group, XY Acquisition Corporation,
Capital and the shareholders of Capital (the “Merger Agreement”). Pursuant to
the Merger Agreement, Capital became a wholly owned subsidiary of China 3C Group
and, in exchange for the Capital shares, China 3C Group issued 35,000,000 new
shares of its common stock to the shareholders of Capital, representing 93% of
the then issued and outstanding capital stock of China 3C Group and a cash
consideration of $500,000.
 
 On August
3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a
cash and stock transaction valued at approximately $8,750,000. The consideration
consisted of 915,751 newly issued shares of the Company’s common stock and
$5,000,000 in cash.
 
 On
November 28, 2006, Capital completed the acquisition of a 100% interest in Joy
& Harmony for a cash and stock transaction valued at approximately
$18,500,000. The consideration consisted of 2,723,110 shares of the Company’s
common stock and $7,500,000 in cash.
 
 On August
15, 2007, the Company changed the ownership structure. As a result, instead of
Capital owning 100% of Zhejiang, as previously was the case, Capital entered
into contractual agreements with Zhejiang whereby Capital owns a 100% interest
in the revenues of Zhejiang. Capital does not have an equity interest in
Zhejiang, but is deemed to have all the economic benefits and liabilities by
contract.  Under this structure, Zhejiang is now a wholly foreign
owned enterprise (WOFE) of Capital. The contractual agreements give Capital and
its’ equity owners an obligation to absorb any losses and rights to receive
revenue. Capital will be unable to make significant decisions about the
activities of Zhejiang and cannot carry out its principal activities without
financial support. These characteristics as defined in Financial Accounting
Standards Board (FASB) interpretation 46, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of Zhejiang to be
consolidated with Capital and   ultimately with China 3C
Group.  Zhejiang owns 90% of the issued and outstanding capital stock
of each of Wang Da and Yiwu.
 
 6
  
 
 The
Company is engaged in the business of resale and distribution of mobile phones,
facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods,
electronic dictionaries, CD players, radios, Walkmans, and audio
systems.
 
 Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of
Presentation
 
 The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the Chinese Renminbi, however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars.
 
  7
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Translation
Adjustment
 
 As of
March 31, 2008 and December 31, 2007, the accounts of Zhejiang, Wang Da, Yiwu,
Sanhe, and Joy & Harmony were maintained, and its financial statements were
expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were
translated into U.S. Dollars (USD) in accordance with Statement of Financial
Accounts Standards (SFAS) No. 52, Foreign Currency Translation, with the CNY as
the functional currency. According to the Statement, all assets and liabilities
were translated at the current exchange rate, stockholders equity are translated
at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a component of shareholders equity. Transaction gains
and losses are reflected in the income statement.
 
 Use of
Estimates
 
 The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
 Principles of
Consolidation
 
 The
consolidated financial statements include the accounts of China 3C Group and its
wholly owned subsidiaries Capital, Zhejiang, Wang Da, Yiwu, Joy & Harmony,
and Sanhe, collectively referred to within as the Company. All material
intercompany accounts, transactions and profits have been eliminated in
consolidation.
 
 Risks and
Uncertainties
 
 The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
 
 Contingencies
 
 Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
 
 If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
 
 Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
  8
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Cash and Cash
Equivalents
 
 Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
 
 Accounts
Receivable
 
 The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts
amounted to $121,763 and $103,803 as at March 31, 2008 and December 31, 2007,
respectively.
  Inventories
 
 Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. Management compares the cost of inventories with the market value and
allowance is made for writing down their inventories to market value, if lower.
As of March 31, 2008 and December 31, 2007 inventory consisted of finished goods
valued at $10,977, 257 and $6,725,371, respectively.
  Property, Plant &
Equipment
  Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
 
 Furniture
      and Fixtures & Office Equipment
                    
                    5
      yearsAutomobile
                    
                    5
      years
  As of
March 31, 2008 and December 31, 2007 Property, Plant & Equipment consist of
the following:
 
 2008
                    
                    
                    2007Automobile
                    
                    $
                    132,627
                    
                    
                    $
                    138,330Office
      equipment
                    
                    
                    112,193
                    
                    
                    
                    105,612244,820
                    
                    
                    
                    243,942Accumulated
      depreciation
                    
                    
                    (159,057
                    )
                    
                    
                    (154,528
                    )$
                    85,763
                    
                    
                    $
                    89,414
  9
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
  Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
  Long-Lived
Assets
  Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144), which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations for a Disposal of a Segment of a Business. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used in accordance with SFAS No. 144. SFAS No. 144 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets carrying amounts. In that event, a loss
is recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes that, as of
March 31, 2008 there were no significant impairments of its long-lived
assets.
  Fair Value of Financial
Instruments
  Statement
of Financial Accounting Standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
  Revenue
Recognition
 
 The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
  Share Based
Payment
  In December 2002, the FASB issued SFAS
No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS 123.” This statement amended SFAS 123, “Accounting for
Stock-Based Compensation,” to provide alternative methods of transition for a
voluntary charge to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amended the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Effective for 2006 the Company adopted SFAS 123 (R), “Share-Based
Payment” which supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees” and eliminates the intrinsic value method that was provided in
SFAS 123 for accounting of stock-based compensation to employees. The Company
made no employee stock-based compensation grants before December 31, 2005 and
therefore has no unrecognized stock compensation related liabilities or expense
unvested or vested prior to 2006.
 
 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.
  10
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Income
Taxes
  The
Company utilizes SFAS No. 109, Accounting for Income Taxes, which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
  Basic and Diluted Earnings
per Share
  Earnings
per share are calculated in accordance with the Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), Earnings per share. SFAS No. 128
superseded Accounting Principles Board Opinion No. 15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
  Statement of Cash
Flows
  In
accordance with the Statement of Financial Accounting Standards No. 95,
Statement of Cash Flows, cash flows from the Company’s operations is based upon
the local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
  Concentration of Credit
Risk
  Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related to
accounts receivable through credit approvals, credit limits and monitoring
procedures. The Company routinely assesses the financial strength of its
customers and, based upon factors surrounding the credit risk, establishes an
allowance, if required, for uncollectible accounts and, as a consequence,
believes that its accounts receivable credit risk exposure beyond such allowance
is limited.
  Segment
Reporting
 
 Statement
of Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information requires use of the management approach model
for segment reporting. The management approach model is based on the way a
company’s management organizes segments within the company for making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
 
 11
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 Recent accounting
pronouncements
 
 In
December 2004, the FASB issued FASB Statement No. 123R, “Share-Based Payment”,
an Amendment of FASB Statement No. 123” (“FAS No. 123R”). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company’s first quarter of fiscal
2006.
 
 In May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior periods’ financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between “retrospective application” of an
accounting principle and the “restatement” of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
 
 In June
2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
Period for Leasehold Improvements (“EITF 05-6.”) EITF 05-6 provides guidance on
determining the amortization period for leasehold improvements acquired in a
business combination or acquired subsequent to lease inception. The guidance in
EITF 05-6 will be applied prospectively and is effective for periods beginning
after June 29, 2005. EITF 05-6 is not expected to have a material effect on its
consolidated financial position or results of operations.
 
 In June
2005, the FASB Staff issued FASB Staff Position 150-5 (FSP 150-5), Issuers
Accounting under FASB Statement No. 150 for Freestanding Warrants and Other
Similar Instruments on Shares that are Redeemable. FSP 150-5 addresses
whether freestanding warrants and other similar instruments on shares that are
redeemable, either puttable or mandatorily redeemable, would be subject to the
requirements of FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, regardless of
the timing or the redemption feature or the redemption price. The FSP is
effective after June 30, 2005.
 
 On
February 16, 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. SFAS No. 155 amends SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities, and SFAF No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155, permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133, establishes a requirement to
evaluate interest in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on the qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006.
 
 In March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets – an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The
Company  does not  expect
its  adoption  of this new standard  to have
a  material  impact  on
its  financial  position,  results  of
operations or cash flows.
 
 12
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note 2 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
 In
September 2006, FASB issued SFAS No. 157, Fair Value
Measurements.  This statement defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements.  This
statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement
attribute.  Accordingly, this Statement does not require any new fair
value measurements.  However, for some entities, the application of
this Statement will change current practice.  This Statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.  The
management is currently evaluating the effect of this pronouncement on financial
statements.
 
 In
September 2006, FASB issued SFAS No. 158 Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R). This Statement improves financial reporting by
requiring an employer to recognize the over funded or under funded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its statement of financial position and to recognize
changes in that funded statues in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets
of a not-for-profit organization.  This statement also improves
financial reporting by requiring an employer to measure the funded status of a
plan as of the date of its year-end statement of financial position, with
limited exceptions. An employer with publicly traded equity securities is
required to initially recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end of the
fiscal year ending after December 15, 2006.  An employer without
publicly traded equity securities is required to recognize the funded status of
a defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after June 15, 2007.  However, an
employer without publicly traded equity securities is required to disclose the
following information in the notes to financial statements for a fiscal year
ending after December 15, 2006, but before June 16, 2007, unless it has applied
the recognition provisions of this Statement in preparing those financial
statements.
 
 a.
              A
      brief description of the provisions of this
  Statement.
 b.
              The
      date that adoption is required.
 c.
              The
      date the employer plans to adopt the recognition provisions of this
      Statement, if earlier.
 
 The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008.
 
 The
Company believes that the adoption of these standards will have no material
impact on its financial statements.
 
 In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (SAB 108).  SAB 108 was issued to provide
interpretive guidance on how the effects of the carryover reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 are effective for the Company for its December 31,
2006 year-end.  The adoption of SAB 108 had no impact on the Company’s
consolidated financial statements.
 
 In
February 2007, FASB issued SFAS 159 The Fair Value Option for Financial Assets
and Financial Liabilities – Including an Amendment of FABS Statement No.
115.  This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This statement is
expected to expand the use of fair value measurement, which is consistent with
the Board’s long-term measurement objectives for accounting for financial
instruments.  This statement is effective as of the beginning of an
entity’s first fiscal year that begins after November 15, 2007.  The
management is currently evaluating the effect of this pronouncement on financial
statements.
 13
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note
3 - ADVANCE TO
SUPPLIER
  Advance
to suppliers represents payments to suppliers for payments of finished goods. As
of March 31, 2008 and December 31, 2007 the Company had paid $1,645,508 and
$2,572,285, respectively as advances to supplies.
 
 Note
4 - COMMON
STOCK
  On
December 20, 2005, the Company completed a private offering of 1,000,000 shares
of its common stock at a per share price of $0.10 to an unaffiliated individual,
resulting in gross proceeds to the Company of $100,000. The proceeds were to be
used for the Company’s proposed plan to identify and complete a merger or
acquisition with private entities.
 
 On
December 20, 2005, the Company issued a warrant to purchase 4,000,000
shares of its common stock to two individuals at $0.10 per share, which was the
fair value of the shares at the date of issuance. The warrant was issued as
consideration for financial consulting services to be provided from December 20,
2005 to December 19, 2006. The warrants were exercised on December 30, 2005. The
shares were issued subsequently in 2006.
 
 On
December 21, 2005, the Company agreed to purchase all of the issued and
outstanding shares of Capital from its shareholders for approximately $500,000
in cash and 35,000,000 shares of the Company’s common stock, or approximately
93% of the total issued and outstanding shares.
 
 On
December 21, 2005, the Company announced a plan named the China 3C Group 2005
Equity Incentive Plan (the “Plan ̈) for providing incentives to attract, retain
and motivate eligible persons whose presence and potential contributions are
important to the success of the Company. 5,000,000 shares of common stock were
allocated to the Plan.
 
 On
December 21, 2005, the Company agreed to issue 4,980,000 shares under the
Plan to a number of consultants who were engaged to provide various services to
the Company during the period from January 1, 2005 to December 20, 2005. These
shares were valued at $0.10 per share, or $498,000, and were expensed as
consulting fees in the statements of operations. The shares were issued
subsequently in 2006.
 
 On
December 21, 2005, the Company issued 2,256,795 shares of the Company’s common
stock to a company for guarantee fees related to the acquisition of Capital. The
guarantee was valued at $225,680, which was the fair value of the shares issued
at the date of the transaction and was expensed as consulting fees in the
statement of operations.
 
 Pursuant
to share exchange agreement, dated August 3, 2006, the company issued 915,751
shares of restricted common stock, to the former shareholders of Hangzhou Sanhe
Electronic Technology Limited. The shares were valued at $3,750,000, which was
the fair value of the shares at the date of exchange agreement. This amount is
included in the cost of net assets and goodwill purchased.
 
 Pursuant
to share exchange agreement, dated November 28, 2006, the company issued
2,723,110 shares of newly issued shares of Common Stock to the former
shareholders of Shanghai Joy & Harmony Electronics Company Limited. The
shares were valued at $11,000,000, which was the fair value of the shares at the
date of exchange agreement. This amount is included in the cost of net assets
and goodwill purchased.
 
 On March
6, 2007, the Company issues 180,000 shares of common stock, $.001 par value,
issuable pursuant to the China 3C Group amended 2005 Equity Incentive Plan.
These shares are deemed “restricted securities” under rule 405 and rule 144 of
the Securities Act of 1933, as amended.
 
 14
 
 CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note
5 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION
 
 On
December 20, 2005, the Company issued a warrant for 4,000,000 shares to two
individuals with an exercise price of $0.10. The warrants were issued for
consulting services to be provided from December 20, 2005 to December 19, 2006.
The warrant was exercisable immediately and was exercised on December 30,
2005.
  The
Company is amortizing the fair value of the warrants, $400,000, over the period
of the agreement. The fair value of the warrants was calculated assuming 293%
volatility, term of the warrant of 3 years, risk free rate of 4% and dividend
yield of 0%. For the year ended December 31, 2006 and December 31, 2005,
$387,945 and $12,055 of consulting fees were expensed relating to the warrants,
respectively.
 
 On December 8, 2006 the Company issued,
to a newly appointed Board member, an option grant (incentive stock options) to
purchase 50,000 shares of common stock at the closing price as of December 7,
2006. The options expire 10 years from issuance.
 
 On
January 2, 2007 the Company issued, to an other newly appointed Board member, an
option grant (incentive stock options) to purchase 50,000 shares of common stock
at the closing price as of January 2 2007. The options expire 10 years from
issuance. As of December 17, 2007, the Board member resigned.
 
 On May 7,
2007 the Board of Directors appointed Joseph Levinson to serve as a member of
the Board of Directors of the Company.  Mr. Levinson has been named
chairman of the Nominating Committee of the Company.  In addition, Mr.
Levinson is in charge of investor relations for the Company.
 As
compensation for the services set forth herein, Mr. Levinson
receives:
 
 ·
                A
      monthly grant during his term of service of 1,000 shares of the Company’s
      common stock,
 ·
                An
      annual grant of stock options to purchase 300,000 shares of common stock
      of the Company. The annual grant of stock options vested immediately upon
      issuance. The exercise price of the initial grant of stock options shares
      was based on the closing price of the common stock of the Company on May
      7, 2007.
 
 Stock
options—The three stock option grants have a ten-year life and were fully vested
upon issuance. The option holder has no voting or dividend rights. The grant
price was equal the market price at the date of grant. The Company records the
expense of the stock options over the related vesting period. The options were
valued using the Black-Scholes option-pricing model at the date of grant stock
option pricing.
 
 Three
      Months endedMarch
      31, 2008Expected
      Volatility
                    
                    
                    153
                    %Expected
      term (in years)Todd
      L. Mavis
                    
                    
                    2Kenneth
      T. Berents
                    
                    
                    9Joseph
      Levinson
                    
                    
                    9Expected
      dividends
                    
                    
                    -Risk-free
      rate of return (weighted average)
                    
                    
                    3
                    %Weighted
      average grant-date fair value
                    
                    
                    3.8-6.15
 
 Expected
volatility is based on the historical volatility of the Company’s stock price.
The expected term represents the estimated average period of time that the
options remain outstanding. No dividend payouts were assumed, as the Company has
no plans to declare dividends during the expected term of the stock 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. Revaluation of
the value of these options, as required by EITF 96-18, resulted in a service
period expense of $117,557 for the three months ending March 31,
2008.
 
 15
 
 CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note
5 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION (CONTINUED)
 
 The
Company did not grant any options during the three months ended March 31,
2008.
 
 Note
6 - STOCKEXCHANGE
AGREEMENT
 
 On December 21, 2005 Capital Future
Developments Ltd - BVI became a wholly owned subsidiary of China 3C Group
through a reverse merger. China 3C Group acquired all of the issued and
outstanding capital stock of Capital Future Developments Ltd. - BVI pursuant to
a Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY
Acquisition Corporation, Capital Future Developments Ltd. - BVI and the
shareholders of Capital Future Developments Ltd - BVI (the “Merger Agreement”).
Pursuant to the Merger Agreement, Capital Future Developments Ltd. - BVI became
a wholly owned subsidiary of China 3C Group and, in exchange for the Capital
Future Developments Ltd. - BVI shares, China 3C Group issued 35,000,000 shares
of its common stock to the shareholders of Capital Future Developments Ltd. -
BVI, representing 93% of the issued and outstanding capital stock of China 3C
Group at that time and a cash consideration of $500,000. As a result of the exchange agreement,
the reorganization was treated as an acquisition by the accounting acquirer that
is being accounted for as a recapitalization and as a reverse merger by the
legal acquirer for accounting purposes. Pursuant to the recapitalization, all
capital stock shares and amounts and per share data were retroactively
restated.
 
 Note
7 - COMPENSATED
ABSENCES
  Regulation
45 of local PRC labor law 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
8 - INCOME
TAXES
 
 The
Company through its subsidiaries, Zhejiang, Wang Da, Sanhe, and Yiwu, is
governed by the Income Tax Laws of the PRC. Operations in the United States of
America have incurred net accumulated operating losses of approximately
$2,300,000 as of December 31, 2007 for income tax purposes. However, a hundred
percent allowance has been created on the deferred tax asset of approximately
$920,000 due to uncertainty of its realization.
  Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory
rate of 25%.
 
 The
following is a reconciliation of income tax expense:
 
 3/31/2008
                        
                        U.S.
                        
                        
                        State
                        
                        
                        International
                        
                        
                        TotalCurrent
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,810,573
                        
                        
                        $
                        1,810,573Deferred
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        1,810,573
                        
                        
                        $
                        1,810,573
 3/31/2007
                        
                        U.S.
                        
                        
                        State
                        
                        
                        International
                        
                        
                        TotalCurrent
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        3,749,259
                        
                        
                        $
                        3,749,259Deferred
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        3,749,259
                        
                        
                        S
                        3,749,259
 Reconciliation
of the differences between the statutory U.S. Federal income tax rate and the
effective rate is as follows:
 3/31/2008
                        
                        
                        3/31/2007US
      statutory tax rate
                        
                        
                        34
                        %
                        
                        
                        34
                        %Foreign
      income not recognized in US
                        
                        
                        -34
                        %
                        
                        
                        -34
                        %PRC
      income tax
                        
                        
                        25
                        %
                        
                        
                        33
                        %Effective
      rate
                        
                        
                        25
                        %
                        
                        
                        33
                        %
  16
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
  Note
9 - COMMITMENTS
  The
Company leases various office facilities under operating leases that terminate
thru 2011. The Company also has management agreements that terminated in 2007
but were renewed in 2008. The future minimum obligations under these agreements
are as follows:
 
 2009
                    
                    $
                    114,9892010
                    
                    $
                    71,7192011
                    
                    $
                    31,8492012
                    
                    $
                    10,696
  Note
10 - STATUTORY
RESERVE
 
 In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises income, after the payment of the PRC income taxes, shall be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
of the profit after tax to the surplus reserve fund and additional 5-10 percent
to the public affair fund. The public welfare fund reserve was limited to 50
percent of the registered capital.  Effective January 1, 2006, there
is now only one fund requirement. The reserve is 10 percent of income after tax,
not to exceed 50 percent of registered capital.
 
 Statutory
Reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of March 31,
2008 and December 31, 2007, the Company had allocated $7,234,295 to these
non-distributable reserve funds.
 
 Note
11 - OTHER
COMPREHENSIVE INCOME
 
 Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders equity, at March 31, 2008 and December 31, 2007
are as follows:
  Foreign
      Currency
                  Translation
                  Adjustment
                
                
                Accumulated
      Other
                  Comprehensive
                  IncomeBalance
      at December 31, 2006
                
                $
                427,616
                
                
                $
                427,616Change
      for 2007
                
                
                1,444,718
                
                
                
                1,444,718Balance
      at December 31, 2007
                
                
                1,872,334
                
                
                
                1,872,334Change
      for 2008
                
                
                1,600,050
                
                
                
                1,600,050Balance
      at March 31, 2008
                
                $
                3,472,384
                
                
                $
                3,472,384
  17
  CHINA
3C GROUP AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 MARCH
31, 2008
 
 Note 12 -CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS
 
 The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC and by the general state
of the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
 
 Note
13 – MAJOR CUSTOMERS
AND CREDIT RISK
 
 During
the quarter ended March 31, 2008, no customer accounted for more than 10% of the
Company’s sales or accounts receivable. At March 31, 2008 three (3)vendors comprised more
than 35% of the Company’s accounts payable. No vendors accounted for more than
10% of the Company’s purchases during 2007.
 
 Note 14 -   SEGMENT
INFORMATION
 
 The
Company separately operates and prepares accounting and other financial reports
to management for four of its major business organizations (Wang Da, Sanhe, Yiwu
and Joy & Harmony). Each of the individual operating companies corresponds
to different product groups.  Wang Da is mainly operating mobile
phones, Sanhe is mainly operating home appliances, Yiwu is mainly operating
office communication products, and Joy & Harmony is mainly operating
consumer electronics.  All segments are accounted for using the
accounting principals described in Note 2.
 
 The
Company has identified four reportable segments required by SFAS 131: (1) mobile
phones, (2) home electronics, (3) office communication products, and (4)
consumer electronics.
 
 The
following tables present summarized information by segment (in
thousands):
  Quarter Ended March 31,
      2008Mobile
                            Phones
                          
                          
                          Home
                            Electronics
                          
                          
                          Office
                            Communication
                            Products
                          
                          
                          Consumer
                            Electronics
                          
                          
                          Other
                          
                          
                          TotalSales,
      net
                          
                          $
                          22,248
                          
                          
                          $
                          16,490
                          
                          
                          $
                          13,439
                          
                          
                          $
                          15,976
                          
                          
                          $
                          -
                          
                          
                          $
                          68,153Cost
      of sales
                          
                          
                          18,733
                          
                          
                          
                          13,517
                          
                          
                          
                          11,559
                          
                          
                          
                          13,798
                          
                          
                          
                          -
                          
                          
                          
                          57,607Gross
      profit
                          
                          
                          3,515
                          
                          
                          
                          2,973
                          
                          
                          
                          1,880
                          
                          
                          
                          2,178
                          
                          
                          
                          -
                          
                          
                          
                          10,546Income
      from operations
                          
                          
                          2,547
                          
                          
                          
                          1,864
                          
                          
                          
                          1,190
                          
                          
                          
                          1,660
                          
                          
                          
                          299
                          
                          
                          
                          7,560Total
      assets
                          
                          $
                          21,294
                          
                          
                          $
                          18,269
                          
                          
                          $
                          14,452
                          
                          
                          $
                          16,818
                          
                          
                          $
                          769
                          
                          
                          $
                          71,602
  Quarter Ended March 31,
      2007Mobile
                        Phones
                      
                      
                      Home
                        Electronics
                      
                      
                      Office
                        Communication
                        Products
                      
                      
                      Consumer
                        Electronics
                      
                      
                      Other
                      
                      
                      TotalSales,
      net
                      
                      $
                      26,690
                      
                      
                      $
                      18,204
                      
                      
                      $
                      20,253
                      
                      
                      $
                      19,376
                      
                      
                      $
                      -
                      
                      
                      $
                      84,523Cost
      of sales
                      
                      
                      22,857
                      
                      
                      
                      14,178
                      
                      
                      
                      17,449
                      
                      
                      
                      16,107
                      
                      
                      
                      -
                      
                      
                      
                      70,591Gross
      profit
                      
                      
                      3,833
                      
                      
                      
                      4,026
                      
                      
                      
                      2,804
                      
                      
                      
                      3,269
                      
                      
                      
                      -
                      
                      
                      
                      13,932Income
      from operations
                      
                      
                      3,282
                      
                      
                      
                      2,867
                      
                      
                      
                      2,486
                      
                      
                      
                      2,807
                      
                      
                      
                      (1,236)
                      
                      
                      
                      10,206Total
      assets
                      
                      $
                      13,253
                      
                      
                      $
                      12,191
                      
                      
                      $
                      8,992
                      
                      
                      $
                      12,432
                      
                      
                      $
                      1,484
                      
                      
                      $
                      48,352
  18
  Forward
Looking Statements
 
 We have
included, and from time to time may make in our public filings, press releases
or other public statements, certain statements, including, without limitation,
those under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 2.  In some cases, these statements are
identifiable through the use of words such as “anticipate”, “believe”,
“estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”,
“may”, “should”, “will”, “would”, and similar expressions. You are cautioned not
to place undue reliance on these forward-looking statements.  In
addition, our management may make forward-looking statements to analysts,
investors, representatives of the media and others.  These
forward-looking statements are not historical facts and represent only our
beliefs regarding future events, many of which, by their nature, are inherently
uncertain and beyond our control.
 
 The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form
10-Q/A.  The following discussion contains forward-looking
statements.  Our actual results may differ significantly from those
projected in the forward-looking statements.  Factors that may cause
future results to differ materially from those projected in the forward-looking
statements include, but are not limited to, those discussed in  “Risk
Factors” and elsewhere in this Form 10-Q/A.
 
 Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
 
 Overview
 
 China 3C
Group was incorporated on August, 20, 1998 under the laws of the State of
Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and
CFDL own 100% of the capital stock of SJHE and Sanhe. Until August 14, 2007,
when it made the change to its ownership structure described in the next
paragraph in order to comply with certain requirements of PRC law, CFDL owned
100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of
Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. Collectively the six
corporations are referred to herein as the Company.
 
 On
December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group
through a merger with a wholly owned subsidiary of the Company. 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.
  (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.
 
 19
  Pursuant
to a share exchange agreement, dated August 3, 2006, we issued 915,751 shares of
restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic
Technology Ltd. The shares were valued at $3,750,000, which was the fair value
of the shares at the date of exchange agreement. This amount is included in the
cost of net assets and goodwill purchased.
 
 Pursuant
to a share exchange agreement, dated November 28, 2006, we issued 2,723,110
shares of newly issued shares of Common Stock to the former shareholders of
Shanghai Joy & Harmony Electronics Company Limited. The shares were valued
at $11,000,000, which was the fair value of the shares at the date of exchange
agreement. This amount is included in the cost of net assets and goodwill
purchased.
 
 The
Company is engaged in the business of the resale and distribution of mobile
phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players,
iPods, electronic dictionaries, CD players, radios, Walkmans, and audio systems.
We sell and distribute these products through retail stores and secondary
distributors.
 
 Result
of Operations
 
 For
the Three Months Ended March 31, 2008 and 2007
 
 Reportable
Operating Segments
 
 The
Company reports financial and operating information in the following four
segments:
  a)
              Yiwu
      Yong Xin Telecommunication Company, Limited or
  “Yiwu”
 b)
              Hangzhou
      Wang Da Electronics Company, Limited or “Wang
  Da”
 c)
              Hangzhou
      Sanhe Electronic Technology Limited or
  “Sanhe”
 d)
              Shanghai
      Joy & Harmony Electronics Company Limited or
  “SJHE”
 
 a)           Yiwu
Yong Xin Telecommunication Company Limited or “Yiwu”
 
 Yiwu
focuses on the selling, circulation and modern logistics of fax machines and
cord phone products.
 
 All
amounts, except percentage of revenues, in thousands of U.S.
dollars.
 
 Three
      months ended
                            March
      31,
                          
                          
                          PercentageYiwu
                          
                          2008
                          
                          
                          2007
                          
                          
                          ChangeRevenue
                          
                          $
                          13,439
                          
                          
                          $
                          20,253
                          
                          
                          
                          (33.64
                          )%Gross
      Profit
                          
                          $
                          1,880
                          
                          
                          $
                          2,804
                          
                          
                          
                          (32.95
                          )%Gross
      Margin
                          
                          
                          13.99
                          %
                          
                          
                          13.84
                          %
                          
                          
                          0.15
                          %Operating
      Income
                          
                          $
                          1,190
                          
                          
                          $
                          2,486
                          
                          
                          
                          (52.13
                          )%
 
 For the three months ended March 31,
2008, Yiwu generated revenue of $13,439 thousand, a decrease of $6,814 thousand
or 33.64% compared to $20,253 thousand for the three months ended March 31,
2007. Gross profit decreased $924 thousand or 32.95% from $2,804 thousand for
the three months ended March 31, 2007 to $1,880 thousand for the three months
ended March 31, 2008. Operating income was $1,190 thousand for the three months
ended March 31, 2008, a decrease of $1,296 thousand or 52.13% compared to $2,486
thousand for the three months ended March 31, 2007. Such decreases in revenue,
gross profit and operation income were primarily due to the unprecedented snow
storm in China during the first two months of the year which created a backlog
in our distribution channels, and the pressure of increased competition within
the markets in which we operate.
 
 20
  b)           Hangzhou
Wang Da Electronics Company Limited or “Wang Da”
 
 Wang Da
focuses on the selling, circulation and modern logistics of cell phones, cell
phones products, and digital products, including digital cameras, digital
camcorders, PDAs, flash disks, and removable hard disks.
 
 All
amounts, except percentage of revenues, in thousands of U.S.
dollars.
  Three months ended
                            March 31,
                          
                          
                          PercentageWang
      Da
                          
                          2008
                          
                          
                          2007
                          
                          
                          ChangeRevenue
                          
                          $
                          22,248
                          
                          
                          $
                          26,690
                          
                          
                          
                          (16.64)
                          %Gross
      Profit
                          
                          $
                          3,515
                          
                          
                          $
                          3,833
                          
                          
                          
                          (8.30)
                          %Gross
      Margin
                          
                          
                          15.80
                          %
                          
                          
                          14.36
                          %
                          
                          
                          1.44
                          %Operating
      Income
                          
                          $
                          2,547
                          
                          
                          $
                          3,282
                          
                          
                          
                          (22.39)
                          %
 
 For the three months ended March 31,
2008, Wang Da generated revenue of $22,248 thousand, a decrease of $4,442
thousand or 16.64% compared to $26,690 thousand for the three months ended March
31, 2007. Gross profit decreased $318 thousand or 8.30% from $3,833 thousand for
the three months ended March 31, 2007 to $3,515 thousand for the three months
ended March 31, 2008. Operating income was $2,547 thousand for the three months
ended March 31, 2008, a decrease of $735 thousand or 22.39% compared to $3,282
thousand for the three months ended March 31, 2007. Such decreases in revenue,
gross profit and operation income were primarily due to the unprecedented snow
storm in China during the first two months of the year which created a backlog
in our distribution channels.
 
 Gross
profit margin increased from 14.36% in the three months ended March 31, 2007 to
15.80% in the three months ended March 31, 2008, an increase of
1.44%.
 
 c)           Hangzhou
Sanhe Electronic Technology Limited or “Sanhe”
 
 Sanhe
focuses on the selling, circulation and modern logistics of home electronics,
including DVD players, audio systems, speakers, televisions and air
conditioners.
 
 All
amounts, except percentage of revenues, in thousands of U.S.
dollars.
 
 Three months ended
                            March 31,
                          
                          
                          PercentageSanhe
                          
                          2008
                          
                          
                          2007
                          
                          
                          ChangeRevenue
                          
                          $
                          16,490
                          
                          
                          $
                          18,204
                          
                          
                          
                          (9.42)
                          %Gross
      Profit
                          
                          $
                          2,973
                          
                          
                          $
                          4,026
                          
                          
                          
                          (26.15)
                          %Gross
      Margin
                          
                          
                          18.03
                          %
                          
                          
                          22.12
                          %
                          
                          
                          (4.09)
                          %Operating
      Income
                          
                          $
                          1,864
                          
                          
                          $
                          2,867
                          
                          
                          
                          (34.98)
                          %
 
 For the three months ended March 31,
2008, Sanhe generated revenue of $16,490 thousand, a decrease of $1,714 thousand
or 9.42% compared to $18,204 thousand for the three months ended March 31, 2007.
Gross profit decreased $1,053 thousand or 26.15% from $4,026 thousand for the
three months ended March 31, 2007 to $2,973 thousand for the three months ended
March 31, 2008. Operating income was $1,864 thousand for the three months ended
March 31, 2008, a decrease of $1,003 thousand or 34.98% compared to $2,867
thousand for the three months ended March 31, 2007. Such decreases in revenue,
gross profit and operation income were primarily due to the unprecedented snow
storm in China during the first two months of the year which created a backlog
in our distribution channels.
 
 Gross
profit margin decreased from 22.12% in 2007 to 18.03% in 2008. The decrease was
due to a more competitive sales environment on home electronics, which led to a
lower gross margin.
 
 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.
 
 21
  All
amounts, except percentage of revenues, in thousands of U.S.
dollars.
  Three
      months ended
                              March
      31,
                            
                            
                            PercentageSJHE
                            
                            2008
                            
                            
                            2007
                            
                            
                            ChangeRevenue
                            
                            $
                            15,976
                            
                            
                            $
                            19,376
                            
                            
                            
                            (17.55)
                            %Gross
      Profit
                            
                            $
                            2,178
                            
                            
                            $
                            3,269
                            
                            
                            
                            (33.97)
                            %Gross
      Margin
                            
                            
                            13.63
                            %
                            
                            
                            16.87
                            %
                            
                            
                            (3.24)
                            %Operating
      Income
                            
                            $
                            1,660
                            
                            
                            $
                            2,807
                            
                            
                            
                            (40.86)
                            %
  For the three months ended March 31,
2008, SJHE generated revenue of $15,976 thousand, a decrease of $3,400 thousand
or 17.55% compared to $19,376 thousand for the three months ended March 31,
2007. Gross profit decreased $1,091 thousand or 33.37% from $3,269 thousand for
the three months ended March 31, 2007 to $2,178 thousand for the three months
ended March 31, 2008. Operating income was $1,660 thousand for the three months
ended March 31, 2008, a decrease of $1,147 thousand or 40.86% compared to $2,807
thousand for the three months ended March 31, 2007. Such decreases in revenue,
gross profit and operation income were primarily due to the unprecedented snow
storm in China during the first two months of the year which created a backlog
in our distribution channels.
 
 Gross
profit margin decreased from 16.87% in 2007 to 13.63% in 2008, a decrease of
3.24%. The lower gross profit margin was due to increasing unit purchase prices
and unit sales prices that did not increase as much as purchases.
 
 Net
Sales
 
 Net sales
for the three months ended on March 31, 2008 decreased by 19%, to $68,153,455
compared with $84,523,194 for the three months ended March 31, 2007. The
decrease was due to fact that we had fewer sales which management believes was
contributed to by many factors including the slowdown in the retail markets in
general, a significant snowstorm in China during the first two months of the
year which created a backlog in our distribution channels, and the pressure of
increased competition within the markets in which we operate.
 
 Cost
of Sales
 
 Cost of
sales for the three months ended on March 31, 2008 totaled $57,607,075 compared
to $70,590,912 for the three months ended on March 31, 2007, a decrease of 18%.
The decreased cost of sales was a direct result of the decrease in expenditures
required to meet fewer customers’ requests during this period than last
year.
 
 Gross
Profit Margin
 
 Gross
profit margin for the three months ending March 31, 2008 was 15.5% compared to
16.5% for the three months ending March 31, 2007. The lower gross profit margin
was due to increasing unit purchase prices and unit sales prices that did not
increase as much as purchases.
 
 General
and Administrative Expenses
 
 General
and administrative expenses for the three months ending March 31, 2008 totaled
$2,986,044 or approximately 4% of net sales, compared to $3,726,162 or
approximately 4% of net sales for the three months ended March 31, 2007, a
decrease of 20%. The decrease was primarily due to strengthening cost controls
such as rationalizing of management structure and increasing sophistication of
computerized systems.
 
 Income
from Operations
 
 Income
from operations for the three months ended March 31, 2008 was $7,560,336 or 11%
of net sales as compared to income from operations of $10,206,120 or 12% of net
sales for the three months ending March 31, 2007, a decrease of 26%. Lower
sales, higher product costs, and logistic costs  such as higher
distribution costs were the key factors for the decrease in income from
operations.
 
 22
  Provision
for Income Taxes
 
 The
provision for income taxes for the three months ended March 31, 2008 was
$1,810,573 as compared with $3,749,259 for the three months ended March 31,
2007. The decrease was mainly attributed to the decrease in both taxable income
and lower statutory tax rates effective for 2008 in China.
 
 Net
Income
 
 Net
income was $5,773,045 or 8.5% of net sales for the three months ended on March
31, 2008 compared to $6,463,788 or 7.6% of net sales for the three months ended
on March 31, 2007, an decrease of 11%. The pressure of competition on retail
price and continued rising prices on product unit costs 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 $23,421,645 at March 31, 2008, as compared to
$9,085,186 at March 31, 2007, and compared to $24,952,614 at December 31,
2007.
  Under the
SJHE share exchange agreement, dated November 28, 2006, in exchange of
surrendering all their ownership in SJHE, the SJHE shareholders received both
stock consideration and cash consideration. The cash consideration consisted of
$7,500,000 in cash is payable as follows: $3,000,000 within 10 business days
after the closing of the transaction, and $4,500,000 payable six months after
the closing of the transaction as evidenced by promissory notes issued by us to
the Shanghai Shareholders. The $4,500,000 loan was repaid in the second quarter
of 2007.
 
 We
believe that the funds available to us are adequate to meet our operating needs
for the remainder of 2008.
  Three
      months endedMarch
      31, 2008
              
              
              March
      31, 2007(in
      thousands)
              
              
              (in
      thousands)Net
      cash (used in) provided by  operating activities
              
              $
              (3,127
              )
              
              $
              2,628Net
      cash (used in) investing activities
              
              $
              (4
              )
              
              $
              (34
              )Effect
      of exchange rate change on cash and cash equivalents
              
              $
              1,600
              
              
              $
              (7
              )Net
      increase in cash and cash equivalents
              
              $
              (1,531
              )
              
              $
              2,587Cash
      and cash equivalents at beginning of period
              
              $
              24,953
              
              
              $
              6,498Cash
      and cash equivalents at end period
              
              $
              23,422
              
              
              $
              9,085
 
 Operating
Activities
 
 Net cash
generated from operating activities decreased from $2,628 thousand for the three
months ended March 31, 2007 to $(3,127) thousand for the three months ended
March 31, 2008, approximately a 219% decrease.  The decrease was
mainly attributable to several factors, including (i) the substantial increase
in accounts receivable of $6,740 thousand in the three months ended March 31,
2008; (ii) the increase in inventory of $4,252 thousand in the three months
ended March 31, 2008; (iii) the increase in income tax payable of $837 thousand
in the three months ended March 31, 2008, offset by the increase in accounts
payable and accrued expenses of $1,869 thousand.
  Three
      months endedMarch
      31, 2008
                
                March
      31, 2007(in
      thousands)
                
                (in
      thousands)a)
      Increase in inventory
                
                $
                4,252
                
                
                $
                1,845b)
      Increase in Accounts Receivable
                
                $
                6,740
                
                
                $
                2,666c)
      Increase in inventory and accounts receivables
      as a whole a) + b)
                
                $
                10,992
                
                
                $
                4,511
 
 23
  On the
control side of distribution of products, the focus is always on the holding
cost of inventory and the value of accounts receivable as a whole comparing to
net sales.  Accounts receivable increased due to our extension
of  the period for repayment from 15 days to 30 days as a result of
global economy slowdown. We also increased the level of inventory in order to
maintain an adequate level for all stores in the event of unexpected incidents
such as the unprecedented snow storm.
  Three
      months endedMarch
      31, 2008
                          
                          
                          March
      31, 2007(in
      thousands)
                          
                          
                          (in
      thousands)d)
      Accounts payable and accrued charges
                          
                          $
                          1,869
                          
                          
                          $
                          (95
                          )
 
 The
Company has developed its own brand name over the past years and has been
successful in receiving support from its creditors.
 
 As a
result of the factors above, the Company used $3,127 thousand in operating
activities for the three months ended March 31, 2008.
 
 Investing
Activities
 
 Net cash
used in investing activities decreased to $4 thousand in 2008 from $35 thousand
in 2007, primarily due to the combined effect of decrease in purchase of
additional office equipments and increase in proceeds from asset
sales.
 
 Three
      months endedMarch
      31, 2008
                        
                        
                        March
      31, 2007(in
      thousands)
                        
                        
                        (in
      thousands)Net
      cash (used in) investment activities
                        
                        $
                        (4
                        )
                        
                        $
                        (35
                        )
 
 Financing
Activities
 
 The
Company did not carry out any financing activities during the three month ended
March 31, 2008 and 2007.
 
 Three
      months endedMarch
      31, 2008
                        
                        
                        March
      31, 2007(in
      thousands)
                        
                        
                        (in
      thousands)Net
      change in cash and cash equivalents
                        
                        $
                        24,953
                        
                        
                        $
                        6,498
 
 Three
      months endedMarch
      31, 2008
                        
                        
                        March
      31, 2007(in
      thousands)
                        
                        
                        (in
      thousands)Cash
      and cash equivalent at March 31, 2008 and 2007
                        
                        $
                        23,421
                        
                        
                        $
                        9,085
 
 With
effective internal control systems in place the Company maintained healthy net
cash flows over period and achieved a healthy cash position of $23,421 thousand
at March 31, 2008.
 
 Since
December 31, 2007, our accounts receivable balance increased due to a slow down
in accounts receivable turnover, which was partly due to the impact of a
slowdown in the global economy, so there has been a general decrease in
customers’ ability to make payments quickly, which could have had an effect on
our bad debt allowances. However, although such turnover slowed in comparison to
prior periods, we took good control of accounts receivable by changing the
contract terms only for our retail department store customers, where we maintain
a store in-store model, to extend the period for repayment from 15 days to 30
days. The extension of repayment terms has lead to the increase in accounts
receivable, but considering the extension is only for an additional 15 days, we
don’t expect these accounts receivables to be long-term compared to other
accounts receivable. For customers who want to further extend the repayment
terms, we will carefully review customers’ credit, percentage of sales and
payment history to determine whether we should extend the terms. If there is a
high risk that the account receivables become uncollectible, we will not extend
the repayment terms.
 
 24
  Collection
of debt is based on the terms of legal binding documents. We have not changed
our policy on reserving for bad debt, but have found a means to accommodate
customers given the financial crisis by extending payment terms. Since December
31, 2007, the account receivable department has periodically reviewed the
allowance for doubtful accounts. The estimate of bad debt allowance is based on
the aging of the receivables, the credit history and credit quality of the
customers, the term of the contracts as well as the balance outstanding. If an
account receivable item is considered highly probable that it is uncollectible,
then it will be charged to bad debt immediately in that period. Since then we
have not found any abnormal increase in bad debt.
  As a
result of the unprecedented snow storm in 2008, there was a shortage of
inventory available to our stores during the first quarter 2008.  This
shortage had a negative impact on our first quarter sales for
2008.  As a precautionary measure, the Company decided to increase its
level of inventory in order to maintain an adequate level for all stores in the
event of other unexpected incidents.  The Company' has adopted a
policy to appropriately increase its inventory to ensure sufficient product
turnover  to meet customer’s demand and avoid a shortage of
goods.  The increase in inventory has had a negative impact on cash
flows and liquidity.  However, the Company firmly believes that the
benefits of this change in policy outweighs the losses.  The Company
believes that an appropriate increase in inventory level is a beneficial policy
enhancing individual stores ability to response to sales change and in return
building up the Company's goodwill thereby securing sales growth. This change in
inventory policy will reduce the Company’s cash liquidity in the short term but
it won’t affect the future cash flow in the long term.  The current
economic environment will not affect the Company’s ability to sell inventory
currently in hand because the Company has high inventory turnover. Days
inventory on hand is approximately 15 days. Therefore, even if the economy
environment changes, the Company can still sell inventory currently in hand
within a short period.
 
 Capital
Expenditures
 
 Total
capital expenditures for the first three months of 2008 were $6,581 for purchase
of fixed assetsas
compared to $34,897 for the first three months of 2007.
 
 Working Capital
Requirements
 
 Historically
operations and short term financing have been sufficient to meet our cash needs.
We believe that we will be able to generate revenues from sales to provide the
necessary cash flow to meet anticipated working capital requirements. However,
our actual working capital needs for the long and short term will depend upon
numerous factors, including operating results, competition, and the availability
of credit facilities, none of which can be predicted with certainty. Future
expansion will be limited by the availability of financing products and raising
capital.
 
 Off-Balance
Sheet Arrangements
 
 We have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk.
 
 Foreign
Currency Exchange Rate Risk
 
 Fluctuations
in the rate of exchange between the U.S. dollar and foreign currencies,
primarily the Chinese Renminbi, could adversely affect our financial results.
During the fiscal year ended December 31, 2007, approximately all of our sales
are denominated in foreign currencies. We expect that foreign currencies will
continue to represent a similarly significant percentage of our sales in the
future. Selling, marketing and administrative costs related to these sales are
largely denominated in the same respective currency, thereby mitigating our
transaction risk exposure. We therefore believe that the risk of a significant
impact on our operating income from foreign currency fluctuations is not
substantial. However, for sales not denominated in U.S. dollars, if there is an
increase in the rate at which a foreign currency is exchanged for U.S. dollars,
it will require more of the foreign currency to equal a specified amount of U.S.
dollars than before the rate increase. In such cases and if we price our
products in the foreign currency, we will receive less in US. dollars than we
did before the rate increase went into effect. If we price our products in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our price not being
competitive in a market where business is transacted in the local
currency.
 
 25
  All of
our sales denominated in foreign currencies are denominated in the Chinese
Renminbi. Our principal exchange rate risk therefore exists between the U.S.
dollar and this currency. Fluctuations from the beginning to the end of any
given reporting period result in the re-measurement of our foreign
currency-denominated receivables and payables, generating currency transaction
gains or losses that impact our non-operating income/expense levels in the
respective period and are reported in other (income) expense, net in our
combined consolidated financial statements. We do not currently hedge our
exposure to foreign currency exchange rate fluctuations. We may, however, hedge
such exposure to foreign currency exchange rate fluctuations in the
future.
  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, while its expenses
are denominated primarily in Chinese Renminbi (“RMB”). 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.
Since February 2006, the new currency rate system has been operated; the
currency rate of Renminbi has become more flexible while basically maintaining
stable and the expectation for a larger appreciation range is shrinking. The
Company has never engaged in currency hedging operations and has no present
intention to do so.
 
 Concentration
of Credit Risk
 
 Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions as described below:
 
 ·
                The
      Company’s business is characterized by rapid technological change, new
      product and service development, and evolving industry standards and
      regulations. Inherent in the Company’s business are various risks and
      uncertainties, including the impact from the volatility of the stock
      market, limited operating history, uncertain profitability and the ability
      to raise additional capital.
 
 ·
                All
      of the Company’s revenue is derived from Asia and Greater China. Changes
      in laws and regulations, or their interpretation, or the imposition of
      confiscatory taxation, restrictions on currency conversion, devaluations
      of currency or the nationalization or other expropriation of private
      enterprises could have a material adverse effect on our business, results
      of operations and financial
condition.
 
 ·
                If
      the Company is unable to derive any revenues from Greater China, it would
      have a significant, financially disruptive effect on the normal operations
      of the Company.
 
 26
  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 March 31, 2008, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
the Company’s disclosure controls and procedures were not effective as of such
date to ensure that information required to be disclosed by us in our Exchange
Act reports is recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, or persons performing similar
functions, as appropriate, to allow timely decisions regarding required
disclosures.  Our management identified that the ineffectiveness was
due to not having internal personnel with sufficient expertise and knowledge of
the requirements for disclosure of the information that have been collected and
reported, as required under the securities laws and disclosures required under
U.S. GAAP.
  We plan
to take the following steps to remediate the deficiencies in disclosure controls
and procedures that are identified above:
 
 ·
                Management
      will provide additional training to our staff, and in particular to our
      key accounting personnel, with respect to the disclosure requirements
      under securities law and U.S.
GAAP.
 
 Changes
in Internal Control over Financial Reporting
  There was
no change in our internal control over financial reporting that occurred during
the first fiscal quarter of 2008 covered by this Quarterly Report on Form 10-Q/A
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
 
 PART II. OTHER INFORMATION
 
 Item 1. Legal
Proceedings.
 
 Neither
the Company nor its property is a party to any pending legal proceeding. The
Company’s management does not believe that there are any proceedings to which
any director, officer, or affiliate of the Company, any owner of record of
beneficially held or owner of more than five percent (5%) of the Company’s
common stock, or any associate of any such director, officer, affiliate of the
Company, or security holder is a party adverse to the Company, or has a material
interest adverse to the Company.
 
 Item
1A. Risk Factors.
 
 Risks
Associated With Our Common Stock
 
 There is a
limited public market for our common stock.There is currently a
limited public market for the common stock. Holders of our common stock may,
therefore, have difficulty selling their common stock, should they decide to do
so. In addition, there can be no assurances that such markets will continue or
that any shares of common stock, which may be purchased may be sold without
incurring a loss. Any such market price of the common stock may not necessarily
bear any relationship to our book value, assets, past operating results,
financial condition or any other established criteria of value, and may not be
indicative of the market price for the common stock in the future. Further, the
market price for the common stock may be volatile depending on a number of
factors, including business performance, industry dynamics, news announcements
or changes in general economic conditions.
  27
  Our common stock
may be deemed penny stock with a limited trading market. Our common
stock is currently listed for trading in the Over-The-Counter Market on the NASD
Electronic Bulletin Board, which is generally considered to be a less efficient
markets than markets such as NASDAQ or other national exchanges, and which may
cause difficulty in conducting trades and difficulty in obtaining future
financing. Further, our securities are subject to the “penny stock rules”
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). The penny stock rules apply to non-NASDAQ
companies whose common stock trades at less than $5.00 per share or which have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). Such rules require, among other things, that
brokers who trade “penny stock” to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade “penny stock” because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited. In
the event that we remain subject to the “penny stock rules” for any significant
period, there may develop an adverse impact on the market, if any, for our
securities. Because our securities are subject to the “penny stock rules,”
investors will find it more difficult to dispose of our securities. Further, for
companies whose securities are traded in the Over-The-Counter Market, it is more
difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for
significant news events because major wire services, such as the Dow Jones News
Service, generally do not publish press releases about such companies, and (iii)
to obtain needed capital.
  We do not intend
to pay dividends on our common stock. The Company’s two operating
subsidiaries in China paid $525,460 in dividends during 2005, but there are no
plans for paying dividends in the foreseeable future. We intend to retain
earnings, if any, to provide funds for the implementation of our new business
plan.  We do not intend to declare or pay any dividends in the foreseeable
future.  Therefore, there can be no assurance that holders of common stock
will receive any additional cash, stock or other dividends on their shares of
common stock until we have funds, which the Board of Directors determines, can
be allocated to dividends.
  If we are unable
to successfully integrate the businesses we acquire, our ability to expand our
product offerings and geographic reach may be significantly limited.In
order to expand our product offerings and grow our customer base by reaching new
customers through expanded geographic coverage, we may continue to acquire
businesses that we believe are complimentary to our growth strategy.
Acquisitions involve numerous risks, including difficulties in the assimilation
of acquired operations, loss of key personnel, distraction of management’s
attention from other operational concerns, failure to maintain supplier
relationships, inability to maintain goodwill of customers from acquired
businesses, and the inability to meet projected financial results that supported
how much was paid for the acquired businesses.
 
 Our business will
be harmed if we are unable to maintain our supplier alliance agreements with
favorable terms and conditions.We have licensing/distribution agreements
with key suppliers in a number of major product categories. Our business will be
harmed if we are unable to maintain these favorable agreements or are limited in
our ability to gain access to additional like agreements with our key
suppliers.
  It is very
difficult to predict the sales cycle for our products. If we are unable
to successfully select and introduce new products or fail to keep pace with the
rapid advances in technology, our business condition will be negatively
impacted.The duration and product selection involved in our sales cycle
is dependent on a number of factors, including immediate product availability,
pricing, features, product complexity, economic environment, and customer
financial condition. If potential customers take longer than we expect to decide
to purchase our products, or if our customers decide on a different
product/feature set than available from our existing supplier agreements, the
financial condition and results of our operations will be adversely
affected.
 
 Because our
operating/business model continues to evolve it is difficult to predict our
future performance, and our business is difficult to evaluate.Our
business model continues to evolve over time. We do not have an extensive
operating history upon which you can easily and accurately evaluate our
business, or our ongoing financial condition. As our model evolves over time and
due to our numerous acquisitions, we face risks and challenges due to a lack of
meaningful historical data upon which we can develop budgets and make
forecasts.
 
 Future
acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of further indebtedness, and increased amortization expense.Our growth model has in the past and most probably in the future will
involve acquisitions that may result in potentially dilutive issuances of equity
securities or the incurrence of debt and unknown liabilities. Such acquisitions
may result in significant write-offs and increased amortization expenses that
could adversely affect our business and the results of our
operations.
 
 If our products
fail to perform properly our business could suffer significantly.Although we do not currently develop or manufacturer our existing
products, should they fail to perform we may suffer lost sales and customer
goodwill, ongoing liability claims, license terminations, severe harm to our
brand and overall reputation, unexpected costs, and reallocation of resources to
resolve product issues.
 
 28
  Rapid and
substantial growth is the key to our overall strategy, if we are unable to
manage our growth profitably and effectively, we may incur unexpected expenses
and be unable to meet our financial and customer obligations.In order
for us to meet our financial objectives we will need to substantially expand our
operations to achieve necessary market share. We cannot be certain that our IT
infrastructure, financial controls, systems, and processes will be adequate to
support our expansion. Our future results will depend on the ability of our
officers and key employees to manage changing business conditions in
administration, reporting, controls, and operations.
 
 If we are unable
to obtain additional financing for our future needs we may be unable to respond
to competitive pressures and our business may be impaired.We cannot be
certain that financing with favorable terms, or at all, will be available for us
to pursue our expansion initiatives. We may be unable to take advantage of
favorable acquisitions or to respond to competitive pressures. This inability
may harm our operations or financial results.
  If we are forced
to lower our prices to compete, our financial performance may be negatively
impacted.We derive our sales from the resale of products from a number
of our suppliers. If we are forced to lower our prices due to added competition,
inferior feature offerings, excess inventory, pressure for cash, declining
economic climate, or any other reason, our business may become less
profitable.
 
 If we are unable
to maintain existing supplier relationships or form new ones, our business and
financial condition may suffer.We rely on our current suppliers along
with new suppliers to provide us access to competitive products for resale. If
we are unable to gain access to suppliers with needed product with favorable
terms our business may be negatively impacted.
  If we incur costs
that exceed our existing insurance coverage in lawsuits brought to us in the
future, it could adversely affect our business and financial condition.We maintain third party insurance coverage against liability risks
associated with lawsuits. While we believe these arrangements are an effective
way to insure against liability, the potential liabilities associated with such
risks or other events could exceed the coverage provided by such
insurance.
 
 Risks
Related to Doing Business in China
 
 Our
business operations take place primarily in China. Because Chinese laws,
regulations and policies are continually changing, our Chinese operations will
face several risks summarized below.
 
 Limitations on
Chinese economic market reforms may discourage foreign investment in Chinese
businesses.The value of investments in Chinese businesses could be
adversely affected by political, economic and social uncertainties in China. The
economic reforms in China in recent years are regarded by China’s central
government as a way to introduce economic market forces into China. Given the
overriding desire of the central government leadership to maintain stability in
China amid rapid social and economic changes in the country, the economic market
reforms of recent years could be slowed, or even reversed.
 
 Any change in
policy by the Chinese government could adversely affect investments in Chinese
businesses. Changes in policy could result in imposition of restrictions
on currency conversion, imports or the source of suppliers, as well as new laws
affecting joint ventures and foreign-owned enterprises doing business in China.
Although China has been pursuing economic reforms for the past two decades,
events such as a change in leadership or social disruptions that may occur upon
the proposed privatization of certain state-owned industries could significantly
affect the government’s ability to continue with its reform.
 
 We face economic
risks in doing business in China.As a developing nation,
China’s economy is more volatile than that of developed Western industrial
economies. It differs significantly from that of the U.S. or a Western European
Country in such respects as structure, level of development, capital
reinvestment, resource allocation and self-sufficiency. Only in recent years has
the Chinese economy moved from what had been a command economy through the 1970s
to one that during the 1990s encouraged substantial private economic activity.
In 1993, the Constitution of China was amended to reinforce such economic
reforms. The trends of the 1990s indicate that future policies of the Chinese
government will emphasize greater utilization of market forces. For example, in
1999 the Government announced plans to amend the Chinese Constitution to
recognize private property, although private business will officially remain
subordinated to the state-owned companies, which are the mainstay of the Chinese
economy. However, there can be no assurance that, under some circumstances, the
government’s pursuit of economic reforms will not be restrained or curtailed.
Actions by the central government of China could have a significant adverse
effect on economic conditions in the country as a whole and on the economic
prospects for our Chinese operations.
  29
  The Chinese legal
and judicial system may negatively impact foreign investors. In 1982, the National
People’s Congress amended the Constitution of China to authorize foreign
investment and guarantee the “lawful rights and interests” of foreign investors
in China. However, China’s system of laws is not yet comprehensive. The legal
and judicial systems in China are still rudimentary, and enforcement of existing
laws is inconsistent. Many judges in China lack the depth of legal training and
experience that would be expected of a judge in a more developed country.
Because the Chinese judiciary is relatively inexperienced in enforcing the laws
that do exist, anticipation of judicial decision-making is more uncertain than
would be expected in a more developed country. It may be impossible to obtain
swift and equitable enforcement of laws that do exist, or to obtain enforcement
of the judgment of one court by a court of another jurisdiction. China’s legal
system is based on written statutes; a decision by one judge does not set a
legal precedent that is required to be followed by judges in other cases. In
addition, the interpretation of Chinese laws may be varied to reflect domestic
political changes.
  The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that a
change in leadership, social or political disruption, or unforeseen
circumstances affecting China’s political, economic or social life, will not
affect the Chinese government’s ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business and
prospects.
 
 The
practical effect of the People’s Republic of China legal system on our business
operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate
Articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of the
several states. Similarly, the People’s Republic of China accounting laws
mandate accounting practices, which are not consistent with U.S. Generally
Accepted Accounting Principles. China’s accounting laws require that an annual
“statutory audit” be performed in accordance with People’s Republic of China
accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
reports and statements to designated financial and tax authorities, at the risk
of business license revocation. Second, while the enforcement of substantive
rights may appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the “United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958).” Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
  Economic
Reform Issues
 
 China is a
country that has been undergoing a process of privatization for much of the past
three decades.Although the Chinese government owns the majority of
productive assets in China, in the past several years the government has
implemented economic reform measures that emphasize decentralization and
encourage private economic activity. Because these economic reform measures may
be inconsistent or ineffectual, there are no assurances that:
 
 ·
                We
      will be able to capitalize on economic
reforms;
 ·
                The
      Chinese government will continue its pursuit of economic reform
      policies;
 ·
                The
      economic policies, even if pursued, will be
  successful;
 ·
                Economic
      policies will not be significantly altered from time to time;
      and
 ·
                Business
      operations in China will not become subject to the risk of
      nationalization.
 Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within China, could lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
  Over the
last few years, China’s economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included devaluations of the Chinese
currency, the Renminbi (RMB), restrictions on the availability of domestic
credit, reducing the purchasing capability of certain of its customers, and
limited re-centralization of the approval process for purchases of some foreign
products. These austerity measures alone may not succeed in slowing down the
economy’s excessive expansion or control inflation, and may result in severe
dislocations in the Chinese economy. The Chinese government may adopt additional
measures to further combat inflation, including the establishment of freezes or
restraints on certain projects or markets.
 
 30
  To date
reforms to China’s economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China’s economic system
will continue or that we will not be adversely affected by changes in China’s
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
 
 Risk
Factors Associated with Our Business
  Non-performance
by our suppliers may adversely affect our operations by delaying delivery or
causing delivery failures, which may negatively affect demand, sales and
profitability. We purchase various types of products from our
suppliers.  We would be materially and adversely affected by the failure of
our suppliers to perform as expected.  We could experience delivery delays
or failures caused by production issues or delivery of non-conforming products
if its suppliers failed to perform, and we also face these risks in the event
any of its suppliers becomes insolvent or bankrupt.
 
 We depend on the
continued services of our executive officers and the loss of key personnel could
affect our ability to successfully grow our business. We are highly
dependent upon the services of our senior management team, particularly
Zhenggang Wang, our Chairman and Chief Executive Officer and Weidong Huang, our
Chief Financial Officer. The permanent loss for any of our key executives, could
have a material adverse effect upon our operating results. We may not be able to
locate suitable replacements for our executives if their services were lost. We
do not maintain key man life insurance on any of these individuals.
  With the markets
being highly competitive, we may not be able to compete successfully.Many of our competitors have substantially greater revenues and financial
resources than we do. We may not be able to compete favorably and increased
competition may substantially harm our business, business prospects and results
of operations. If we are not successful in our target markets, our sales could
decline, our margins could be negatively impacted and we could lose market
share, any of which could materially harm our business, results of operations
and profitability.
 
 Item 2.  Unregistered Sales of Equity
Securities and Use of Proceeds.
 
 Not
Applicable.
 
 Item 3.  Defaults Upon Senior
Securities.
  Not
Applicable.
 
 Item 4. Submission of Matters to a Vote of
Security Holders.
 
 There
were no matters submitted to the stockholders in the quarter that are required
to be disclosed.
 
 Item 5. Other
Information.
 
 None.
 
 31
  Item 6. Exhibits.
  Exhibit
      No.
                    
                    Document
      Description31.1
                    
                    Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32.1
                    
                    Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
                    
                    Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of
      the Sarbanes-Oxley Act of
2002)
  32
  SIGNATURES
 
 Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Company has
duly caused this  report to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 7th day of
May, 2009.
  CHINA
      3C GROUPBy:
                    /s/
      Zhenggang
      WangName:  
      Zhenggang WangTitle:
      Chief Executive Officer and
Chairman
  33
  Exhibit
Index
 
 Exhibit
      No.
                    
                    Document
      Description31.1
                    
                    Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
      of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32.1
                    
                    Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the
      Sarbanes-Oxley Act of 2002).32.2
                    
                    Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of
      the Sarbanes-Oxley Act of
2002)
  34