**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-Q**





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




For
      the
      quarterly period ended 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 shell
      company (as defined in Rule 12b-2 of the Exchange Act). oYesxNo




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





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




As
      of May
      10, 2008 the registrant had 52,673,938 s hares
      of
      common stock outstanding.





**TABLE
      OF CONTENTS**





**PART
                I. FINANCIAL INFORMATION**Item
                1. Financial Statements:Report
                of Independent Registered Public Accounting Firm
            1Consolidated
                Balance Sheets as of 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
                -
                19Item
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            20Item
                3. Qualitative and Quantitative Disclosure about Market
                Risk
            23Item
                4T. Controls and Procedures
            24**PART
                II. OTHER INFORMATION**Item
                1. Legal Proceedings
            25Item
                1A. Risk Factors
            25Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            30Item
                3. Defaults Upon Senior Securities
            30Item
                4. Submission of Matters to a Vote of Security Holders
            30Item
                5. Other Information
            30Item
                6. Exhibits
            30Signatures
            31







**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 SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**AS
      OF MARCH 31, 2008 AND DECEMBER 31, 2007**







**3/31/2008**
            
            **12/31/2007****ASSETS****Current
                Assets**Cash
                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
            
            
            48,541**Total
                Assets**
            
            $
            71,602,001
            
            $
            63,196,805**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                LiabilitiesAccounts
                payable and accrued expenses
            
            $
            4,977,584
            
            $
            3,108,235Income
                tax payable
            
            
            1,847,239
            
            
            2,684,487Total
                Current Liabilities
            
            
            6,824,823
            
            
            5,792,722**Stockholders’
                Equity**Common
                stock, $.001 par value, 100,000,000shares
                authorized,52,673,938and 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 SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**


**FOR
      THE THREE MONTHS ENDING MARCH 31, 2008 AND 2007**




**2008**
            
            **2007**Sales,
                net
            
            $
            68,153,455
            
            $
            84,523,194Cost
                of sales
            
            
            57,607,075
            
            
            70,590,912**Gross
                profit**
            
            
            10,546,380
            
            
            13,932,282General
                and administrative expenses
            
            
            2,986,044
            
            
            3,726,162**Income
                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
            
            
            3,749,259**Net
                income**
            
            $
            5,773,045
            
            $
            6,463,788**Net
                income per share:**Basic
            
            $
            0.11
            
            $
            0.12Diluted
            
            $
            0.11
            
            $
            0.12**Weighted
                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 SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007**




2008
            
            2007**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                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
            )
            
            2,628,466**CASH
                FLOWS FROM INVESTING ACTIVITIES**Purchase
                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
            )
            
            2,586,736**Cash
                and cash equivalents, beginning balance**
            
            
            24,952,614
            
            
            6,498,450**Cash
                and cash equivalents, ending balance**
            
            $
            23,421,645
            
            $
            9,085,186**SUPPLEMENTAL
                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 SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ EQUITY**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2008 AND THE YEAR ENDED DECEMBER 31,
      2007**





**Additional**
            
            **Other**
            
            
            
            
            
            
            
            **Total****Common Stock**
            
            **Paid-In**
            
            **Comprehensive**
            
            **Subscription**
            
            **Statutory**
            
            
            
            **Stockholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Income**
            
            **Receivable**
            
            **Reserve**
            
            **Retained Earnings**
            
            **Equity****Balance December 31, 2006**
            
            
            52,488,938
            
            $
            52,489
            
            $
            17,352,691
            
            $
            427,616
            
            $
            (50,000
            )
            $
            3,320,755
            
            $
            9,822,844
            
            $
            30,926,395Foreign
                currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            1,444,718
            
            
            
            
            
            
            
            
            
            
            
            1,444,718Income
                for the 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
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,113,270**Balance
                December 31, 2007**
            
            
            52,673,938
            
            
            52,674
            
            
            19,465,776
            
            
            1,872,334
            
            
            (50,000
            )
            
            7,234,295
            
            
            28,829,004
            
            
            57,404,083Foreign
                currency translation adjustments
            
            
            
            
            
            
            
            
            
            
            
            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. Capital is a holding company and owns all the issued
      and outstanding capital stock of Sanhe and Joy & Harmony. 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.





The
      Company is now 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.




6


**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.


7




**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 price. 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




8





**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.




Stock-Based
      Compensation




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




9





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**




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





Advertising





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




Income
      Taxes




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




Basic
      and Diluted Earnings per Share




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




Statement
      of Cash Flows




In
      accordance with 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.


10





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**





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




Concentration
      of Credit Risk




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




Segment
      Reporting





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





Recent
      accounting pronouncements





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





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





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


11





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**





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





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





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




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





In
      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.




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. 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.




**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.




13




**CHINA
        3C GROUP AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **MARCH
        31, 2008**




**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.


15


**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**





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





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.





The
      Company did not grant any option during the year ended March 31,
      2008.





**Note
      6 -** **STOCK** ****** **EXCHANGE
      AGREEMENT**





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


16





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**





**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
              %


17





**CHINA
      3C GROUP AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2008**





**Note
      9 -** **COMMITTMENTS**




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*
              *Income*Balance
                at December 31, 2006
            
            $
            427,616
            
            $
            427,616Change
                for 2007
            
            
            1,444,718
            
            
            1,444,718Balance
                at December 31, 2007
            
            
            1,872,334
            
            
            1,872,334Change
                for 2008
            
            
            1,600,050
            
            
            1,600,050Balance
                at March31,
                2008
            
            $
            3,472,384
            
            $
            3,472,384


18


**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.


19


**Forward
      Looking Statements**





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





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





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





**Overview**





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





On
      December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group
      through a merger with a wholly owned subsidiary of the Company. 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:


20


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




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





Pursuant
      to a share exchange agreement, dated August 3, 2006, we issued 915,751 shares
      of
      restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic
      Technology 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 now 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**





**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, an
      decrease of 20%. The decrease was primarily due to strengthening cost controls
      such as rationalizing of management structure and increasing sophistication
      of
      computerized systems.


21


**I** **ncome
      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.





**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.





**Capital
      Expenditures**





Total
      capital expenditures for the first three months of 2008 were $6,581 for purchase
      of fixed assets **** as
      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.


22


**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.





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.


23


**Concentration
      of Credit Risk**





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





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





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





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





**Seasonality
      and Quarterly Fluctuations**





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




**Item
      4T. Controls and Procedures.**





**Evaluation
      of Disclosure Controls and Procedures**





Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we conducted an
      evaluation of our disclosure controls and procedures, as such term is defined
      in
      Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based
      on this evaluation, our principal executive officer and principal financial
      officer have concluded that during the period covered by this report, such
      disclosure controls and procedures were effective to detect the inappropriate
      application of US GAAP. The Public Company Accounting Oversight Board has
      defined a material weakness as a “significant deficiency or combination of
      significant deficiencies that results in more than a remote likelihood that
      a
      material misstatement of the annual or interim financial statements will not
      be
      prevented or detected.”




Management’s
      Report on Internal Control over Financial Reporting





This
      quarterly report does not include an attestation report of our registered public
      accounting firm regarding internal control over financial reporting.
      Management’s report was subject to attestation by our registered public
      accounting firm pursuant to temporary rules of the Securities and Exchange
      Commission that permit us to provide only management’s report in our annual
      report for the fiscal year ended December 31, 2007. Our management is
      responsible for establishing and maintaining adequate internal control over
      financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
      and
      15d-15(f). Under the supervision and with the participation of our management,
      including our principal executive officer and principal financial officer,
      we
      conducted an evaluation of the effectiveness of our internal control over
      financial reporting based on the framework in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission. In addition, in 2007, we engaged a consulting firm to assist our
      management in evaluating and strengthening our internal control over financial
      reporting with the objective of full compliance with the Sarbanes-Oxley Act
      of
      2002. Based on our evaluation, our principal executive officer and principal
      financial officer have concluded that during the period covered by this report,
      our internal controls over financial reporting were effective.


24


**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
      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.




***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.


25


***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.





***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.


26


***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.


27


***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.


28


***Economic
      Reform Issues***





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





·
            We
                will be able to capitalize on economic reforms;·
            The
                Chinese government will continue its pursuit of economic reform
                policies;·
            The
                economic policies, even if pursued, will be successful;·
            Economic
                policies will not be significantly altered from time to time;
                and·
            Business
                operations in China will not become subject to the risk of
                nationalization.





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




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





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





**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.


29


**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.





I **tem
      5.**  **Other
      Information.**





None.





**Item
      6.**  **Exhibits.**




**Exhibit No.**
            
            **Document
                Description**31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of
                the
                Securities Exchange Act of 1934, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A)
                of
                the Securities Exchange Act of 1934, as adopted pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of Chief Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906
                of the
                Sarbanes-Oxley Act of 2002).32.2
            
            Certification
                of Principal Financial Officer Pursuant to 18 U.S.C. 1350 (Section
                906 of
                the Sarbanes-Oxley Act of 2002)


30


**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 16 th day of
      May, 2008.


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


31