UNITED STATES



SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549



FORM 10-K/A

(Amendment No. 2)



(Mark One)



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



For the fiscal year ended December 31, 2010



OR



| |  ̈ | 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)



Registrant’s telephone number, including
area code: 086-0571-88381700



Securities registered pursuant to Section 12(b) of the Act:
None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, $0.001 par value



Title of class



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ̈Nox



Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ̈Nox



Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.   YesxNo ̈



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ̈No ̈



Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x



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 ̈                                                     | Accelerated filer ̈        
|---------------------------------------------------------------------------- | --------------------------
|Non-accelerated filer ̈
        (Do not check if a smaller reporting company) | Smaller reporting companyx



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



The aggregate market value of the 44,861,327
shares of voting and non-voting common equity stock held by non-affiliates of the registrant was approximately $13,458,398 as of
June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, based on the last
sale price of the registrant’s common stock on such date of $0.30 per share, as reported on the OTC Bulletin Board.



As of May 17, 2011, there were 58,511,327
shares of the registrant’s common stock outstanding.



Documents incorporated by reference: None.











EXPLANATORY NOTE



This Amendment No. 2 to our Annual
Report on Form 10-K/A ("Form 10-K/A") is being filed to amend our Annual Report on 10-K for the year ended December
31, 2010 ("Form 10-K"), which was originally filed with the Securities and Exchange Commission (the "SEC")
on May 18, 2011, as amended on March 23, 2012. We are filing this Amendment No. 2 to include disclosure consistent with comments
received by the SEC. We are amending and restating Items 1, 7, 8, 9 and 15 in this Form 10-K/A.



Below is a summary of these errors and
the related corrections:



| | · | The
                                                                                                              Company amended
                                                                                                              Item 1 to clarify
                                                                                                              the fact that Capital
                                                                                                              did not sell its
                                                                                                              equity ownership
                                                                                                              in Zhejiang upon
                                                                                                              executing the contractual
                                                                                                              agreements in 2007.
                                                                                                              Capital remains
                                                                                                              as the owner of
                                                                                                              100% equity of Zhejiang
                                                                                                              through shareholding
                                                                                                              entrustment agreements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                              Company reclassified
                                                                                                              fees paid to department
                                                                                                              stores from a contra
                                                                                                              revenue account
                                                                                                              to selling, general
                                                                                                              and administrative
                                                                                                              expenses. The amount
                                                                                                              of $9,740, $10,505
                                                                                                              and $12,687 were
                                                                                                              previously classified
                                                                                                              in contra-revenue
                                                                                                              account as a deduction
                                                                                                              to net sales for
                                                                                                              the year ended December
                                                                                                              31, 2010, 2009 and
                                                                                                              2008.  The
                                                                                                              Company moved the
                                                                                                              amount to selling
                                                                                                              expenses, and it
                                                                                                              is reported as selling,
                                                                                                              general and administrative
                                                                                                              expenses in the
                                                                                                              statement of operations
                                                                                                              and comprehensive
                                                                                                              loss.  The
                                                                                                              reclassification
                                                                                                              caused a $9,740
                                                                                                              increase in net
                                                                                                              sales from $148,354
                                                                                                              to $158,094 and
                                                                                                              a corresponding
                                                                                                              increase of $9,740
                                                                                                              in Selling, general
                                                                                                              and administrative
                                                                                                              expenses from $32,523
                                                                                                              to $42,263 in 2010;
                                                                                                              a $10,505 increase
                                                                                                              in net sales from
                                                                                                              $208,489 to $218,994
                                                                                                              and a corresponding
                                                                                                              increase of $10,505
                                                                                                              in Selling, general
                                                                                                              and administrative
                                                                                                              expenses from $21,621
                                                                                                              to $32,126 in 2009;
                                                                                                              and a $12,687 increase
                                                                                                              in net sales from
                                                                                                              $310,644 to $323,331
                                                                                                              and a corresponding
                                                                                                              increase of $12,687
                                                                                                              in Selling, general
                                                                                                              and administrative
                                                                                                              expenses from $14,132
                                                                                                              to $26,819 in 2008.  The
                                                                                                              gross profit increased
                                                                                                              $9,740, $10,505
                                                                                                              and $12,687 respectively
                                                                                                              in 2010, 2009 and
                                                                                                              2008. The income (loss) from
                                                                                                              operations and net
                                                                                                              income (loss) remained unchanged.  The
                                                                                                              impact of the restatement
                                                                                                              was limited to the
                                                                                                              presentation of
                                                                                                              the consolidated
                                                                                                              statements of operations
                                                                                                              and comprehensive
                                                                                                              income (loss). The
                                                                                                              consolidated balance
                                                                                                              sheets, the consolidated
                                                                                                              statements of stockholders’
                                                                                                              equity and the related
                                                                                                              consolidated statements
                                                                                                              of cash flows remained
                                                                                                              unaffected.  See
                                                                                                              changes in Item
                                                                                                              15.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                              restatement above
                                                                                                              also affected the
                                                                                                              disclosure of segment
                                                                                                              reporting. As a
                                                                                                              result, we have
                                                                                                              amended Note 13
                                                                                                              - SEGMENT INFORMATION
                                                                                                              and ITEM 7. MANAGEMENT’S
                                                                                                              DISCUSSION AND ANALYSIS
                                                                                                              OF FINANCIAL CONDITION
                                                                                                              AND RESULTS OF OPERATIONS.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                              Company amended
                                                                                                              Item 9 revising
                                                                                                              our conclusions
                                                                                                              on the effectiveness
                                                                                                              of disclosure controls
                                                                                                              and procedures and
                                                                                                              internal control
                                                                                                              over financial reporting
                                                                                                              to “ineffective.”
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, as required by Rule 12b-15 of the Securities
Exchange Act of 1934, this Amendment No. 2 contains new certifications by our Chief Executive Officer and our Chief Financial
Officer, filed as exhibits hereto.











CHINA 3C GROUP



Table of Contents



|           |                                                                                       |  | PAGE
|---------- | ------------------------------------------------------------------------------------- |  | ----
|PART I     |                                                                                       |  | 4   
|           |                                                                                       |  |     
|Item 1     | Business                                                                              |  | 4   
|           |                                                                                       |  |     
|PART II    |                                                                                       |  | 13  
|           |                                                                                       |  |     
|Item 7     | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|           |                                                                                       |  |     
|Item 8     | Financial Statements and Supplementary Data                                           |  | 32  
|           |                                                                                       |  |     
|Item 9     | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 32  
|           |                                                                                       |  |     
|Item 9A(T) | Controls and Procedures                                                               |  | 32  
|           |                                                                                       |  |     
|Item 9B    | Other Information                                                                     |  |     
|           |                                                                                       |  |     
|PART IV    |                                                                                       |  | 34  
|           |                                                                                       |  |     
|Item 15    | Exhibits, Financial Statement Schedules                                               |  | 34  
|           |                                                                                       |  |     
|           | Index to Consolidated Financial Statements                                            |  | F-1 



2







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 Part II, Item
7. 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.



3







PART I



ITEM 1. BUSINESS



Overview



China 3C Group (including our subsidiaries
unless the context indicates otherwise, the “Company”, “China 3C,” “China 3C Group,” “we,”
or “us”) was incorporated on August 20, 1998 under the laws of the State of Nevada. Before July 2009, we were only
engaged in the resale and distribution of third party products and generated 100% of our revenue from resale of items such as mobile
phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players, radio
Walkmans and audio systems. On July 6, 2009, we acquired Jinhua Baofa Logistic Ltd. (“Jinhua”).  At that
point, we started providing transportation logistics services to businesses in Eastern China.



In 2007 we began operating under a “store
in store” business model. As of December 31, 2010 we established and operated 821 “stores in stores.”  We
operate under the brand names Hangzhou Wang Da, Yiwu YongXin, Shanghai Joy & Harmony and Hangzhou Sanhe. The “store in
store” business operation model resulted in expanded marketing channels, thus, positively stimulated the growth of sales
in 2007 and 2008. However, starting in 2009, we had declining sales under the “stores in stores” model due to increased
competition from direct stores and large department stores as well as the impact of the economic slow down. Therefore, we decided
to open direct stores and franchises. As of December 31, 2010, Zhejiang has three direct and two franchise stores in operation.



On July 6, 2009, China 3C and its subsidiary
Zhejiang (as defined below) and Yiwu (as defined below) acquired 100% of Jinhua. Jinhua provides transportation logistics
services to businesses.



Under the stores in stores model, we distribute
our products mainly via so-called concessionaire agreements with larger department stores, supermarkets, large electronics retail
stores, and other retailers. The retail distribution of many products in China, including those we sell, is conducted through the
concessionaire model. Under this model, companies such as China 3C own their own outlets within larger stores and in so doing assume
responsibility for most financial and operational aspects of those outlets including capital cost, inventory, wages, selection,
pricing, and general management. Our retail partners are compensated via margin they earn on the products we sell. This model is
similar to that employed by many department stores in the US. However, this model is different from the model found at large electronic
retailers like Best Buy and general retailers like Wal-Mart. We have found that many investors are curious as to why the model
in China differs from the one found in the US. We believe the main reasons are:



| | • | We decrease the financial risk for our retail partners by assuming
responsibility for the inventory and capital expense associated with distributing our products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | We decrease operational risk for our retail partners by hiring and
managing employees and handling logistics issues such as wholesale purchase and delivery and returns and after-sales service.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | We decrease merchandising risk for our retail partners by bringing
product expertise and specific market knowledge that is difficult for large retailers to develop on their own across a broad range
of product categories.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4









| | • | China’s size, regional differences, logistical difficulties, managerial challenges, underdeveloped credit markets, and
rapid growth rate increases risk for all retailers and drive the need to mitigate risk which is why our retail partners rely
on us.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Organizational Structure

(All dollar amounts in thousands)



China 3C 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 Company Limited (“Zhejiang”),
Yiwu Yong Xin Communication Limited (“Yiwu”), Hangzhou Wandda Electronics Company Limited (“Wang Da”),
Hangzhou Sanhe Electronic Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic Development Company
Limited (“Joy & Harmony”) were incorporated under the laws of the Peoples Republic of China (“PRC”
or “China”) on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25, 2003, respectively. China
3C owns 100% of CFDL and CFDL own 100% of the capital stock of Joy & Harmony and Sanhe. Until August 14, 2007, when it made
the change to its ownership structure described in the next paragraph in order to comply with certain requirements of PRC law,
CFDL owned 100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. Zhejiang owns 90% and Wang Da
owns 10% of Yiwu. On March 10, 2009 Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. (“Letong”)
to establish an electronic retail franchise operation for China 3C Group. On July 6, 2009, Zhejiang and Yiwu acquired Jinhua. Jinhua
was incorporated under the laws of PRC on December 27, 2001.



On December 21, 2005, CFDL became a wholly
owned subsidiary of China 3C through a merger with a wholly owned subsidiary of the Company (the “Merger Transaction”).
China 3C 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, 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 and, for the CFDL shares, China 3C 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
at that time and cash of $500.



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



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



On August 15, 2007, we executed a
series of contractual agreements between Capital and Zhejiang. The contractual agreements give Capital and its equity owners
an obligation, and having ability to absorb, any losses, and rights to receive returns; however, these contractual agreements
did not change the equity ownership of Zhejiang. We did not dispose Capital’s actual equity ownership of Zhejiang when
we executed the contractual agreements. Capital entered into share-holding entrustment agreements with five individuals:
Zhenggang Wang, Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%, respectively, of
the equity interest of Zhejiang on behalf of Capital on November 21, 2005. The entrustment agreements confirm that CFDL is
the actual owner of Zhejiang. CFDL enjoys the actual shareholder’s rights and has the right to obtain any benefits
received by the nominal holders. Zhenggang Wang is the CEO and shareholder of China 3C Group. Yimin Zhang, Huiyi Lv, Xiaochun
Wang and Zhongsheng Bao have no other relationship with China 3C Group. No consideration was given to these individuals who
held the equity of Zhejiang on behalf of CFDL.



5







On July 6, 2009, China 3C’s subsidiaries,
Zhejiang and Yiwu acquired Jinhua, a company organized under the laws of the PRC. Zhejiang acquired 90% and Yiwu acquired 10% of
the entire equity interests in Jinhua from the shareholders of Jinhua for a purchase price of RMB 120,000,000 ($17,500) in cash.



Yiwu, Wangda, Sanhe, Joy & Harmony are
engaged in the business of resale and distribution of third party products and generate approximately 100% of their revenue from
resale of items such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPod, electronic
dictionaries, CD players, radios, Walkmans, and audio systems. We sell and distribute products through retail stores and secondary
distributors. We operate most of our retail operations through our “store in store” model. Under this model, the Company
leases space in major department stores and retailers. Leasing costs can vary based on a percentage of sales, or can be fixed.
In 2010, 2009 and 2008, all of our stores in stores leases were variable based on sales.



In 2009, Zhejiang started establishing direct
electronic retail stores and franchise operation.



Following the acquisition of Jinhua, the
Company began providing logistic service to businesses in addition to its traditional business of resale and distribution of third
party products such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic
dictionaries, CD players, radio Walkmans and audio systems.



Our corporate structure as of December 31,
2010 is as follows:



6











Our Business



Information About Our Segments



During fiscal 2010, we operated in five
reportable segments:



| | a. | Yiwu Yong Xin Telecommunication Company, Limited, or “Yiwu,” focuses on the selling, circulation and modern logistics
of fax machines and cord phone products.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Hangzhou Wang Da Electronics Company, Limited, or “Wang Da,” focuses on the selling, circulation and modern logistics
of cell phones, cell phones products, and digital products, including digital cameras, digital camcorders, PDAs, flash disks, and
removable hard disks.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7







| | c. | Hangzhou Sanhe Electronic Technology Limited “Sanhe,” focuses on the selling, circulation and modern logistics
of home electronics, including DVD players, audio systems, speakers, televisions and air conditioners.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Shanghai Joy & Harmony Electronics Company Limited or “Joy & Harmony,” focuses on the selling, circulation
and modern logistics of consumer electronics, including MP3 players, MP4 players, iPod, electronic dictionary, radios, and Walkmans.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Jinhua Baofa Logistic Company Litmited or “Jinhua” provides transportation logistics services to businesses. Jinhua
operates primarily in Eastern China and covers many of the most developed cities in the Eastern China such as Shanghai, Hangzhou
and Nanjing
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Financial information about our segments
is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 13, Segment
Information, of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data,
of this Annual Report on Form 10-K/A.



Yiwu Yong Xin Telecommunication Company,
Limited (“Yiwu”)



Yiwu is an authorized sales agent, focusing
on the selling, circulation and modern logistics of fax machines and cord phone products in China. Yiwu mainly distributes Philips
fax machines and China’s local brands Feng Da and CJT fax machines. Yiwu sells its products through retail “stores
in stores” in major department stores throughout the Huadong Region of China (consisting of the Chinese provinces of Zhejiang,
Jiangsu and Anhui). Yiwu had 211 retail locations in 2010. Yiwu contributed 12.6% of the Company’s revenue in 2010.



The five largest suppliers and customers
of Yiwu for 2010 are as follows:



|Top 5 suppliers                                 |  | Top 5 customers                            
|----------------------------------------------- |  | -------------------------------------------
|Yiwu are Fengda Technology Company Limited      |  | Zhejiang Suning Appliance Company Limited  
|                                                |  |                                            
|Ninbo Zhongxun Electronics Company Limited      |  | Shanghai Suning Appliance Company Limited  
|                                                |  |                                            
|Shanghai Zhongfang Electronics Company Limited  |  | Suning Appliance Company Limited           
|                                                |  |                                            
|Hangzhou Senruida Trade Company Limited         |  | Yongle China Appliance Company Limited     
|                                                |  |                                            
|Shanghai Hongyi Office Supplies Company Limited |  | Shanghai GOME Electrical Appliances Limited



The top five suppliers contributed 84.2%
of purchases of Yiwu in 2010 and the top five customers contributed 32.9% of revenue of Yiwu in 2010.



Yiwu has a diverse customer base and, the
loss of any single customer is not expected to have a material adverse affect on its business and operations. Yiwu did not spend
a material amount of money on research and development in 2010.



8







The main competitors of Yiwu are Hangzhou
Xinfeng Office Equipment Co, Ltd., Hangzhou Sihai Office Equipment Co, Ltd. and Shanghai Xunbo Office Equipment Co, Ltd.



Hangzhou Wang Da Electronics Company,
Limited (“Wang Da”)



Wang Da is an authorized sales agent focusing
on the selling, circulation and modern logistics of cell phones, cell phone products, IT products (including notebook or laptop
computers), and digital products (including digital cameras, digital camcorders, MP3 players, PDAs, flash disks, and removable
hard disks) in China. Wang Da mainly distributes its products through retail “stores in stores” located in major department
stores throughout the “Huadong” region of China (consisting of the Chinese provinces of Zhejiang, Jiangsu and Anhui).
Wang Da had 215 retail locations in 2010. Wang Da contributed 28.5% of the Company’s revenue in 2010.



The five largest suppliers and customers
for Wang Da in 2010 are as follows:



|Top 5 suppliers                                               |  | Top 5 customers                                                      
|------------------------------------------------------------- |  | ---------------------------------------------------------------------
|Shenzhen Tianyin Telecommunication Company Limited            |  | Zhejiang Suning Appliance Company Limited                            
|                                                              |  |                                                                      
|Hangzhou Weihua Telecommunication Company Limited             |  | Shanghai Jiadeli Supermarket Group                                   
|                                                              |  |                                                                      
|Hangzhou Tianchen Digital Telecommunication Company Limited   |  | Shanghai Guangda Comunication Terminal Products Sales Company Limited
|                                                              |  |                                                                      
|Hangzhou Liandong Telecommunication Equipment Company Limited |  | Suzhou Meijia Supermarket Group                                      
|                                                              |  |                                                                      
|Shanghai Post&Telecom Appliances Company (Hangzhou)           |  | Huarun Vanguard Supermarket (Zhejiang) Company Limited               



The five largest suppliers contributed 60.9%
of the purchases of Wang Da in 2010 and the five largest customers contributed 15.7% of revenue of Wang Da in 2010.



Wang Da has a diverse customer base and
the loss of any single customer is not expected to have a material adverse affect on the Company’s business and operations.
Wang Da did not spend a material amount of money on research and development and did not have a significant backlog as of December
31, 2010.



The main competitors of Wang Da include
Telephone World, Hangzhou Yindun, Shanghai Guangda, Changjiang Tianyin and Hangzhou Zhenghua. Additionally, there are Ningbo Haishu
and Zhongyu. Wang Da has many years of experiences in mobile phone sales. Wang Da has a wide distribution network in Zhejiang,
Shanghai, Jiangsu and other regions. These competitors use a variety of business models such as “store in stores”,
free standing stores and distribution channels. The competitors have smaller scale of operation and smaller distribution regions
compared to Wang Da. Therefore, these competitors typically have only a fraction of our sales.



Hangzhou Sanhe Electronic Technology
Limited (“Sanhe”)



Sanhe is a home electronics retail chain
in Eastern China, headquartered in HangZhou City. In 2010, it had 210 retail “store in stores” in Shanghai City, Zhejiang
Province and Jiangsu Province. Sanhe specializes in the sale of home electronics, including air conditioners, audio systems, speakers,
DVD players and TV. Sanhe contributed 27.7% of the Company’s revenue in 2010.



9







The five largest suppliers and customers
for Sanhe in 2010 are as follows:



|Top 5 suppliers                                        |  | Top 5 customers                                       
|------------------------------------------------------ |  | ------------------------------------------------------
|Hangzhou Xietong Trade Company Limited                 |  | Lianhua Supermarket Group                             
|                                                       |  |                                                       
|Zhejiang Zhuocheng Digital Electronics Company Limited |  | Hangzhou Lianhua Huashang Group                       
|                                                       |  |                                                       
|Shanghai Haier Industrial and Trade Company            |  | Shanghai Lotus Supercenter                            
|                                                       |  |                                                       
|Shenzhen Chuangwei-RGB Electronics Company             |  | Jiangsu Times Supermarket Company Limited             
|                                                       |  |                                                       
|TCL Electronics Company Limited                        |  | Huarun Vanguard Supermarket (Zhejiang) Company Limited



The five largest suppliers contributed 68.8%
of the purchases of Sanhe in 2010 and the top five customers contributed 31.9% of revenue of Sanhe in 2010.



Sanhe has a diverse customer base and, the
loss of any one customer would not likely have an adverse effect on the Company’s sales.  The Company did not spend
a material amount of money on research and development, and did not have a significant backlog as of December 31, 2010.



The main competitors of Sanhe include Hangzhou
Meidi, Hangzhou Danong, Nanjing Mingci, Shanghai Feitong and Jiangshu Huayi. Sanhe has many years of experience in the sale of
home electronics which has allowed it to build good relationships with brand name companies such as TCL, Skyworth, Meidi, Longdi
and Galanz. In addition, Sanhe has the competitive advantage of maintaining an extensive distribution network.



Shanghai Joy & Harmony Electronics
Company Limited (“Joy & Harmony”)



Joy & Harmony is a consumer electronics
retail chain in Eastern China. It had 196 retail locations in Shanghai City and Jiangsu Province in 2010. Joy & Harmony specializes
in the sale of consumer electronics, including MP3 players, MP4 players, iPods, electronic dictionaries, CD players, radios, Walkmans,
audio systems and speakers. The company is the authorized sales agent for well-known manufacturers in China, including Tecsun Radio
and Changhong ZARVA. Joy & Harmony contributed 23.5% of the Company’s revenue in 2010.



The five largest suppliers and customers
for Joy & Harmony in 2010 are as follows:



|Top 5 suppliers                                                 |  | Top 5 customers                                     
|--------------------------------------------------------------- |  | ----------------------------------------------------
|SONY (China) Company Limited (Shanghai)                         |  | Shanghai Xinzehui Digital Technology Company Limited
|                                                                |  |                                                     
|Shanghai Ganshun Trade Company Limited                          |  | Shanghai Sanmen Tesco Company Limited               
|                                                                |  |                                                     
|Huaqi Information Digital Technology Company Limited (Shanghai) |  | Shanghai Jiading Tesco Company Limited              
|                                                                |  |                                                     
|Shanghai Caitong Digital Technology Company Limited             |  | Shanghai Jinshan Tesco Company Limited              
|                                                                |  |                                                     
|Shanghai Bohui Electronics Company Limited                      |  | Suzhou Auchan Supermarket Company Limited           



10







The five largest suppliers contributed 65.2%
of the purchases of Joy & Harmony in 2010and the top five customers contributed 3.7% of revenue of Joy & Harmony in 2010.



As a retailer with hundreds of locations,
the Company is not reliant on any one customer or on a few customers. The loss of any one customer would not likely have an adverse
effect on Joy & Harmony’s sales. Joy & Harmony did not have any material backlog of orders at December 31, 2010.
Joy & Harmony did not spend a material amount of money on research and development in 2010.



The main competitors of Joy & Harmony
include Zhejiang Yifeng Technology Co., Ltd, Shanghai Yuanmai Trade Co, Ltd and Shanghai Like Digital Technology Co, Ltd. Joy &
Harmony has a large number of retail locations compared to its competitors. In addition, Joy & Harmony has built good
relationships with suppliers of well-known brands such as Apple, Sony, Meizu, Tecsun and Aigo.



Jinhua Baofa Logistic Litmited (“Jinhua”)



Jinhua has been in operation since 2001.
Jinhua transports electronics, machinery and equipment, metal products, chemical materials, garments and handcrafted goods for
businesses in the Eastern China region in which China 3C operates, such as Shanghai, Hangzhou and Nanjing. Jinhua contributed 7.2%
of revenue to the Company in 2010.



The five largest vendors and customers for
Jinhua in 2010 are as follows:



|Top 5 suppliers                                           |  | Top 5 customers                                                                
|--------------------------------------------------------- |  | -------------------------------------------------------------------------------
|Zhejiang Sheng Tong Logistic Company Limited              |  | Xiamen Shida Transportation Company Limited                                    
|                                                          |  |                                                                                
|Hangzhou Shenzhou Transportation Company Limited          |  | Guangzhou Shuntong Transportation Company Limited                              
|                                                          |  |                                                                                
|Shanghai Sheng Hui Transportation Company Limited         |  | Wuhan Tianda Express Company Limited                                           
|                                                          |  |                                                                                
|Shanghai Hong Wei Transportation Company Limited          |  | Fuzhou Zhilian Logistics Company Limited                                       
|                                                          |  |                                                                                
|Jiaxingshi Guohong Vehicle Transportation Company Limited |  | Suzhou Auchan Supermarket Company Limited Zhuhai Zhijie Express Company Limited



The five largest vendors contributed to
34.0% of direct cost of Jinhua in 2010 and the top five customers contributed 8.3% of revenue of Jinhua in 2010.



The main competitors of Jinhua include Hangzhou
Hongrun Transportation Co., Ltd, Hangzhou Tianzhao Logistics Co., Ltd, Hangzhou Huishen Logistics Co., Ltd, Terry Logistics Group
Co., Ltd, Shanghai Yanfu Logistics Co., Ltd, Shanghai Zhicheng Logistics Co., Ltd and Shanghai Jiaje Express Co., Ltd.



11







Intellectual Property



We consider our logos important to our business.  We
applied to register 10 logos with the State Administration of Industry and Commerce in China in 2007 and are currently awaiting
the administration’s approval.



Seasonality and Quarterly Fluctuations



Our businesses experience fluctuations in
quarterly performance. Traditionally, the first quarter has a greater amount of sales reflected by our electronics business due
to the New Year holidays in China occurring during that period. Nevertheless, at times, China can experience particularly inclement
weather in January and February which can disrupt the Company’s supply chain management systems. As our business model is
to operate only on several days of inventory, the effects of such weather disruptions can be severe in certain years.



Working Capital



We fund our business operations through
a combination of available cash and equivalents, short-term investments and cash flows generated from operations. We believe our
currently available working capital, primarily cash from operations, is adequate to execute our current business plan.



Customers



We do not have a significant concentration
of sales to any individual customer and, therefore, the loss of any one customer would not have a material impact on our business.
No single customer has accounted for 10% or more of our total revenue in 2010 and 2009.



Backlog



We do not have a material amount of backlog
orders.



Government Contracts



No material portion of our business is subject
to renegotiation of profits or termination of contracts or subcontracts at the election of the Chinese government.



Competition



We compete against other consumer electronics
retailers and wholesalers. We compete principally on the basis of product assortment and availability and value pricing, customer
service; store location and convenience and after-sales services. We believe our broad product assortment, competitive pricing
and convenient store locations differentiate us from most competitors. Our stores compete by emphasizing a complete product and
service solution and value pricing. In addition, our trained and knowledgeable sales and service staffs allow us to tailor the
offerings to meet the needs of our customers.



Research and Development



We have not engaged in any material research
and development activities during the past two fiscal years.



Environmental Matters



We are subject to China’s National
Environmental Protection Law, as well as a number of other national and local laws and regulations regulating air, water and noise
pollution and setting pollutant discharge standards. We believe that all our operations are in material compliance with all applicable
environmental laws. We did not incur any costs to comply with environmental laws in 2010 and 2009.



12







Employees



The Company currently has 2,271 employees,
all of which are full time employees located in China. Zhejiang has 52 employees, Yiwu has 297 employees, Wang Da has 525 employees,
Sanhe has 521 employees, Joy & Harmony has 352 employees and Jinhua has 524 employees.



The Company has no collective bargaining
agreements with any unions.



Part II



ITEM 7.         
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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



Overview (All dollar amounts in thousands)



China 3C owns 100% of CFDL and CFDL own
100% of the capital stock of Joy & Harmony and Sanhe. Until August 14, 2007, when it made the change to its ownership structure
described in the next paragraph in order to comply with certain requirements of PRC law, CFDL owned 100% of the capital stock of
Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009 Zhejiang
set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. (“Letong”) to establish an electronic retail
franchise operation for China 3C Group. On July 6, 2009, Zhejiang and Yiwu completed the acquisition of Jinhua Baofa Logistic Ltd
(“Jinhua”).  Jinhua was incorporated under the laws of PRC on December 27, 2001.



On December 21, 2005, CFDL became
a wholly owned subsidiary of China 3C through a merger with a wholly owned subsidiary of the Company (the “Merger
Transaction”). China 3C acquired all of the issued and outstanding capital stock of CFDL pursuant to a the Merger
Agreement dated December 21, 2005 by and among China 3C, 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 and, in
exchange for the CFDL shares, China 3C 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 at that time and cash of $500. On August 15, 2007, we executed a
series of contractual agreements between Capital and Zhejiang. The contractual agreements give Capital and its equity owners
an obligation, and having ability to absorb, any losses, and rights to receive returns; however, these contractual agreements
did not change the equity ownership of Zhejiang. We did not dispose Capital’s actual equity ownership of Zhejiang when
we executed the contractual agreements. Capital entered into share-holding entrustment agreements with five individuals:
Zhenggang Wang, Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%, respectively, of
the equity interest of Zhejiang on behalf of Capital on November 21, 2005. The entrustment agreements confirm that CFDL is
the actual owner of Zhejiang. CFDL enjoys the actual shareholder rights and has the right to obtain any benefits received by
the nominal holders. Zhenggang Wang is the CEO and shareholder of China 3C Group. Yimin Zhang, Huiyi Lv, Xiaochun Wang and
Zhongsheng Bao have no other relationship with China 3C Group. No consideration was given to these individuals who held the
equity of Zhejiang on behalf of CFDL.



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:



13







(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 Sanhe, valued at $3,750,
which was the fair value of the shares at the date of the share 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 Joy &
Harmony, valued at $11,000, 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 July 6, 2009, China 3C’s subsidiaries,
Zhejiang and Yiwu completed acquisition of Jinhua, a company organized under the laws of the PRC. Zhejiang acquired 90% and Yiwu
acquired 10% of the entire equity interests in Jinhua from the shareholders of Jinhua for a purchase price of RMB 120,000 ($17,500)
in cash.



Yiwu, Wangda, Sanhe, Joy & Harmony are
engaged in the business of resale and distribution of third party products and generates approximately 100% of its revenue from
resale of items such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPod, electronic
dictionaries, CD players, radios, Walkmans, and audio systems. We sell and distribute products through retail stores and secondary
distributors. We operate most of our retail operations through our “store in store” model. Under this model, the Company
leases space in major department stores and retailers. Leasing costs can vary based on a percentage of sales, or can be fixed.
In 2010 and 2009, all of our stores in stores leases were variable based on sales.



In 2009, Zhejiang started establishing direct
electronic retail stores and franchise operation. As of December 31, 2010, the Company has two franchise stores and three direct
retail stores in operation, all of which are located in Zhejiang province. For the years ended December 31, 2010 and 2009, the
direct stores and franchise stores had revenue of $138 and $258. The direct store and franchise operation is still in the early
stage and does not represent a significant part of our business as of December 31, 2010.



Following the acquisition of Jinhua, the
Company began providing logistic service to businesses in addition to its traditional business of resale and distribution of third
party products such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic
dictionaries, CD players, radio Walkmans and audio systems.



Results of Operations



Year Ended December 31, 2010 compared to Year Ended
December 31, 2009



Reportable Operating Segments



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



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



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



14







| | c) | Hangzhou Sanhe Electronic Technology Limited  or “Sanhe”
| | -- | --------------------------------------------------------



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



| | e) | Jinhua Baofa Logistic Limited or “Jinhua”
| | -- | -----------------------------------------



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



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



All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Yiwu                    |  | 2010                    |        |   | 2009       |  
|Revenue (restated)      |  | $                       | 20,251 |   |            | $
|Gross Profit (restated) |  | $                       | 2,328  |   |            | $
|Gross Margin (restated) |  |                         | 11.5   | % |            |  
|Operating (Loss)        |  | $                       | (2,456 | ) |            | $



For the year ended December 31, 2010, Yiwu generated revenue
of $20,251, a decrease of $24,124 or 54.4% compared to $44,375 for the year ended December 31, 2009. Gross profit decreased $2,801
or 54.6% from $5,129 for the year ended 2009 to $2,328 for the year ended 2010. Such decrease in revenue was primarily due to
the shrinking market in office communication products. The decrease in revenue was also a result of closing 73 stores in stores
in 2010. Operating losses was $2,456 in 2010; operating loss increased $1,844 or 301.3% compared to $612 in 2009. The increase
in operating losses was primarily a result of higher labor cost and management fees paid to department stores as a percentage
of sales.



Gross profit margin decreased from 11.6% in 2009 to 11.5%
in 2010, a decrease of 0.1%. Such decrease is primarily due to the more competitive fax machines and telephone market in China
compared to 2009. To maintain market share, we had to launch more promotions which negatively affected our gross margin. In addition,
purchase rebate paid to suppliers, accounted for as an addition to cost of sales, as a percentage of sales increased in 2010,
which led to lower gross margin of Yiwu.



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



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



All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Wang Da                 |  | 2010                    |        |   | 2009       |  
|Revenue (restated)      |  | $                       | 43,801 |   |            | $
|Gross Profit (restated) |  | $                       | 3,728  |   |            | $
|Gross Margin (restated) |  |                         | 8.5    | % |            |  
|Operating (Loss)        |  | $                       | (3,156 | ) |            | $



For the year ended December 31, 2010, Wang Da generated
revenue of $43,801, a decrease of $14,943 or 25.4% compared to $58,744 for the year ended December 31, 2009. Gross profit decreased
$2,872 or 43.5% from $6,600 for the year ended 2009 to $3,728 for the year ended 2010. The decrease in revenue was primarily due
to increased competition from government-owned large telecommunication service providers. Telecommunication service providers
opened their direct operating stores to sell communication products. The number of electronics stores opened in the same area
where Wang Da’s stores are located has increased in 2010. These government-owned companies also launched promotions such
as “free phone with service contract” which drove the Wang Da’s revenue further down. Operating losses was $3,156
in 2010, increased $2,894 or 1,104.6% compared to operating loss of $262 in 2009. The increase in operating losses was primarily
a result of higher labor cost and management fees paid to department stores as a percentage of sales.



15







Gross profit margin decreased from 11.2% in 2009 to 8.5%
in 2010. The decrease was due to lower unit price of old model mobile phones as a result of the introduction of the 3G phones.



| | c) | Hangzhou Sanhe Electronic Technology Limited or “Sanhe”
| | -- | -------------------------------------------------------



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



All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Sanhe                   |  | 2010                    |        |   | 2009       |  
|Revenue (restated)      |  | $                       | 42,427 |   |            | $
|Gross Profit (restated) |  | $                       | 4,426  |   |            | $
|Gross Margin (restated) |  |                         | 10.4   | % |            |  
|Operating (Loss)        |  | $                       | (5,469 | ) |            | $



For the year ended December 31, 2010, Sanhe generated revenue
of $42,427, a decrease of $10,958 or 20.5% compared to $53,385for the year ended December 31, 2009. Gross profit decreased $4,201
or 48.7% from $8,627 for the year ended 2009 to $4,426 for the year ended 2010. The decrease in revenue was primarily due to the
shrinking market in DVD players and small home electronics as well as the closing of 11 stores in 2010. Operating losses was $5,469
in 2010, increased $4,728 or 638.1% compared to $741 in 2009. The increase in operating losses was primarily a result of non-cash
goodwill impairment charge of $1,347, higher labor cost and management fees paid to department stores as a percentage of sales.



Gross profit margin decreased from 16.2% in 2009 to 10.4%
in 2010. The decrease in gross profit and operation income was primarily due to the change in sales revenue mix. Due to the lesser
sales of DVD players and other small home electronics, we increased sales volume of TV sets, which has a lower margin, to maintain
the market share. Therefore, gross margin for Sanhe decreased in 2010.



Goodwill Impairment



We recorded non-cash goodwill impairment charge of $1,347 for
the year ended December 31, 2010 to reduce the carrying amount of Sanhe’s goodwill to its estimated fair value based upon
the impairment test conducted during the fourth quarter of 2010. For further discussion of goodwill impairment charges see Note
2 – “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Impairment of Goodwill” to the Consolidated Financial
Statements.



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



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







16







All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |         |   | Percentage |  
|----------------------- |  | ----------------------- | ------- | - | ---------- | -
|Joy & Harmony           |  | 2010                    |         |   | 2009       |  
|Revenue (restated)      |  | $                       | 40,247  |   |            | $
|Gross Profit (restated) |  | $                       | 5,460   |   |            | $
|Gross Margin (restated) |  |                         | 13.6    | % |            |  
|Operating Income (Loss) |  | $                       | (11,395 | ) |            | $



For the year ended December 31, 2010, Joy & Harmony
generated revenue of $40,247, a decrease of $16,413 or 29.0% compared to $56,660 for the year ended December 31, 2009. Gross profit
decreased $3,961 or 42.0% from $9,421 for the year ended 2009 to $5,460 for the year ended 2010. The decrease in revenue was primarily
due to a more competitive consumer electronics market as well as closing of 22 stores in 2010. The number of electronics stores
located in the area where Joy & Harmony’s stores are located has increased in 2010. In addition, many small manufacturers
closed down and large manufacturers raised the price of consumer electronics, which forced Joy & Harmony to discontinue some
of its products. This caused sales to decline. Operating losses was $11,395 in 2010, a decrease of $12,407 or 1,226.0% compared
to operating income of $1,012 in 2009, the decrease was primarily due to the non-cash goodwill impairment loss of $8,243 and an
increase in management fees paid to department stores.



Gross profit margin decreased from 16.6% in 2009 to 13.6%
in 2010. The global financial crisis caused many small electronics manufacturers to exit the market and large manufacturers to
raise the price of consumer electronics. Therefore, the cost for Joy & Harmony increased, which led to a significant decline
in gross margin.



Goodwill Impairment



We recorded non-cash goodwill impairment charge of $8,243 for
the year ended December 31, 2010 to reduce the carrying amount of Joy & Harmony’s goodwill to its estimated fair value
based upon the impairment test conducted during the fourth quarter of 2010. For further discussion of goodwill impairment charges
see Note 2 – “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Impairment of Goodwill” to the Consolidated
Financial Statements.



| | e) | Jinhua Baofa Logistic Limited or “Jinhua”
| | -- | -----------------------------------------



Jinhua provides transportation service to business and transports
freight, including electronics, machinery and equipment, metal products, chemical materials, garments and handicraft goods, in
more than 20 cities in Eastern China. Its transportation services cover many of the most developed cities in Eastern China such
as Shanghai, Hangzhou and Nanjing.



China 3C acquired Jinhua on July 6, 2009. Therefore, the consolidated
statement of income (loss) and comprehensive income (loss) of China 3C for the year ended December 31, 2009 includes Jinhua’s
operating results from the date of acquisition to December 31, 2009.



All amounts, except percentages of revenues, are in thousands
of US dollars.



|Jinhua                  |  | Year Ended December 31, 2010 |        |   | For the period from July 1 to December 31, 2009 |  
|----------------------- |  | ---------------------------- | ------ | - | ----------------------------------------------- | -
|Revenue                 |  | $                            | 10,691 |   |                                                 | $
|Gross Profit            |  | $                            | 1,402  |   |                                                 | $
|Gross Margin            |  |                              | 13.1   | % |                                                 |  
|Operating Income (Loss) |  | $                            | (1,448 | ) |                                                 | $



Gross margin decreased 17.6% from 30.7% in 2009 to 13.1% in
2010 primarily due to the increased fuel cost. Operating income decreased primarily due to decreased gross margin. Higher operating
expenses, in particular, also caused operating income to decrease. The labor cost of Jinhua increased 30% or $1,080 in 2010 due
to the mandated government policy as well as higher inflation.



17







Net sales



Net sales for 2010 totaled $158,094 (restated), a year-over-year
decrease of $60,900 or 27.8% compared to $218,994 (restated) for 2009. The decrease was attributable to the closing of 107 stores
in stores in 2010 as well as the increased competition in the electronics market in China.



Percentage of sales



In 2010, the Company earned 68.8% of its sales from its retail
operations and 31.2% from its wholesale operations compared to 68.9% from retail operations and 31.1% from wholesale in 2009.



Percentage of sales from retail and wholesale operations for
each segment is as follows:



|          |  | Yiwu |       |  | Wang Da |  |       | Sanhe |  |  | Joy & Harmony |  |  | Total |      
|--------- |  | ---- | ----- |  | ------- |  | ----- | ----- |  |  | ------------- |  |  | ----- | -----
|Retail    |  |      | 66.2% |  |         |  | 68.3% |       |  |  | 70.1%         |  |  |       | 70.6%
|Wholesale |  |      | 33.8% |  |         |  | 31.7% |       |  |  | 29.9%         |  |  |       | 29.4%



Cost of Sales



Cost of sales for 2010 totaled $140,668,
or 89.0% of net sales compared to $187,476, or 85.6% for 2009. The decrease in the cost of sales was a result of the decrease in
sales. The cost of sales as a percentage increased during 2010 primarily due to increased costs of electronics products. The increase
in purchase rebate paid to supplier, accounted for as an addition to cost of sales, also contributed to the increase in cost of
sales.



Top Ten Suppliers of Each of Our Subsidiaries in 2010



|  | Yiwu                                           |  | Wang Da                                                       |  | Sanhe                                                  |  | Joy & Harmony                                                   |  | Jinhua                                           
|- | ---------------------------------------------- |  | ------------------------------------------------------------- |  | ------------------------------------------------------ |  | --------------------------------------------------------------- |  | -------------------------------------------------
|1 | Fengda Technology Company Limited              |  | Shenzhen Tianyin Telecommunication Company Limited            |  | Hangzhou Xietong Trade Company Limited                 |  | SONY(China) Company Limited (Shanghai)                          |  | Zhejiang Sheng Tong Logistic Company Limited     
|  |                                                |  |                                                               |  |                                                        |  |                                                                 |  |                                                  
|2 | Ninbo Zhongxun Electronics Company Limited     |  | Hangzhou Weihua Telecommunication Company Limited             |  | Zhejiang Zhuocheng Digital Electronics Company Limited |  | Shanghai Ganshun Trade Company Limited                          |  | Hangzhou Shenzhou Transportation Company Limited 
|  |                                                |  |                                                               |  |                                                        |  |                                                                 |  |                                                  
|3 | Shanghai Zhongfang Electronics Company Limited |  | Hangzhou Tianchen Digital Telecommunication Company Limited   |  | Shanghai Haier Industrial and Trade Company            |  | Huaqi Information Digital Technology Company Limited (Shanghai) |  | Shanghai Sheng Hui Transportation Company Limited
|  |                                                |  |                                                               |  |                                                        |  |                                                                 |  |                                                  
|4 | Hangzhou Senruida Trade Company Limited        |  | Hangzhou Liandong Telecommunication Equipment Company Limited |  | Shenzhen Chuangwei-RGB Electronics Company             |  | Shanghai Caitong Digital Technology Company Limited             |  | Shanghai Hong Wei Transportation Company Limited 



18







|5  | Shanghai Hongyi Office Supplies Company Limited |  | Shanghai Post&Telecom Appliances Company (Hangzhou)          |  | TCL Electronics Company Limited                               |  | Shanghai Bohui Electronics Company Limited            |  | Jiaxingshi Guohong Vehicle Transportation Company Limited
|-- | ----------------------------------------------- |  | ------------------------------------------------------------ |  | ------------------------------------------------------------- |  | ----------------------------------------------------- |  | ---------------------------------------------------------
|   |                                                 |  |                                                              |  |                                                               |  |                                                       |  |                                                          
|6  | Shanghai Guangdian Equipment Company Limited    |  | Hangzhou Qiuxin Internet Equipment Company Limited           |  | Qingdao Haixin  Electronics  Limited
        Hangzhou  branch |  | Shanghai Yiqike Industrial and Trade Company Limited  |  | Guangzhou Shuntong Transportation Company Limited        
|   |                                                 |  |                                                              |  |                                                               |  |                                                       |  |                                                          
|7  | Yiwu Wantong Telecom Equipment Company Limited  |  | Shenzhen Liansheng Technology Company Limited                |  | Shenzhen Asicer Electronics Company Limited                   |  | Shanghai Tande Electronics Technology Company Limited |  | Shanghai Shenghui Transportation Company Limited         
|   |                                                 |  |                                                              |  |                                                               |  |                                                       |  |                                                          
|8  | Jiaxing Yage Electronics Company Limited        |  | Hangzhou Jiuxin Telecommunication Appliances Company Limited |  | Dongguang Lebang Electronics Limited                          |  | Shenzhen Dejing Electronics Company Limited           |  | Hefei Yuan Shun Da Transportation Company Limited        
|   |                                                 |  |                                                              |  |                                                               |  |                                                       |  |                                                          
|9  | Shanghai Huoke Electronics Company Limited      |  | Hangzhou Fuyin Trade Company Limited                         |  | Zhejiang Saixin Technology  Limited                           |  | Chongqing Zhaohua Digital Technology Company Limited  |  | Zhuhai Zhijie Transportation Company Limited             
|   |                                                 |  |                                                              |  |                                                               |  |                                                       |  |                                                          
|10 | Shanghai Rongduo Business Company Limited       |  | Shenzhen Jinfeng Datong Technology Company Limited           |  | Zhongshan Longdi Electronics Limited                          |  | Dongguan Gemei Technology Company Limited             |  | Sanming Yunlin Vehicle Transportation Company Limited    



19







Gross Profit Margin



Gross profit margin in 2010 decreased to
11.0% compared to 14.4% in 2009. The gross profit margin decrease was mainly attributed to the fact that many small manufacturers
of computers, communication and consumer products exited the market and large manufacturers raised the cost of goods
due to the global economic slowdown. In addition, the increased competition led the Company to launch more promotional sales to
attract customers. These events caused gross margin to decrease. The decrease in gross margin was also due to the increase in sales
rebate paid to suppliers.



Because the Company does not include the
costs for its distribution network in cost of sales, its gross profit and gross profit as a percentage of net sales (“gross
profit margin”) may not be comparable to those of other retailers that may include distribution costs in cost of sales and
in gross profit and gross margin.



General and Administrative Expenses



General and
administrative (“G&A”) expenses for 2010 totaled $42,263 (restated), or 26.7% of net sales, compared to
$32,126 (restated), or 14.7% of net sales for 2009. G&A expenses increased 31.6% primarily due to
a 16.4% increase in labor cost, increase in management fees paid to department stores and goodwill impairment of $9,591
charged in 2010.



Income (Loss) from Operations



Operating loss for 2010 was $24,837, or
(15.7)% of net sales compared to $608, or (0.3)% of net sales for 2009. Declined sales and gross margin and increased general and
administration expenses led to the decline in income from operations.



Provision for income taxes



Provision for income taxes for 2010 was
$52, representing year-over-year decrease of 92.7% compared to $714 for 2009. The decrease in income tax expenses was due to Yiwu,
Wang Da and Sanhe and Joy & Harmony having net losses in 2010 and therefore not having income tax expenses. Zhejiang was the
only subsidiary having net income but the tax expense was not significant. Although Jinhua had net losses, Jinhua paid a small
amount of income taxes based on the simplified tax system.



Net Income (loss)



Net loss was $(24,927) or (15.8)% of net
sales for 2010 compared to $1,213 or (0.6) % of net sales for 2009. Net income decreased primarily due to a decrease in sales and
gross margin and an increase in general administration expenses.



Foreign currency translation adjustments



The impact of foreign translation from our
accounts in RMB to US dollar on China 3C’s operating results was not material. During the translation process, the assets
and liabilities of all PRC subsidiaries are translated into US dollars at period-end exchange rates. The revenues and expenses
are translated into US dollars at average exchange rates of the periods. Resulting translation adjustments are recorded as a component
of accumulated other comprehensive income within stockholders’ equity.



|                                            |  | 2010 |         |  | 2009 | 
|------------------------------------------- |  | ---- | ------- |  | ---- | 
|RMB/US$ exchange rate at year end           |  |      | 0.15170 |  |      | 
|Average RMB/US$ exchange rate for the years |  |      | 0.14792 |  |      | 



Transaction gains or losses arising from
exchange rate fluctuation on transactions denominated in a currency other than the functional currency were included in the consolidated
results of operations. As a result of the translation, China 3C recorded a foreign currency gain of $1,526 in 2010 and loss of
$92 thousand in 2009, which is a separate line item on the Statements of Operations.



20







Year Ended December 31, 2009 compared to Year Ended
December 31, 2008



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



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



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



| | c) | Hangzhou Sanhe Electronic Technology Limited  or “Sanhe”
| | -- | --------------------------------------------------------



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



| | e) | Jinhua Baofa Logistic Limited or “Jinhua”
| | -- | -----------------------------------------



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



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



All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Yiwu                    |  | 2009                    |        |   | 2008       |  
|Revenue (Restated)      |  | $                       | 44,375 |   |            | $
|Gross Profit (Restated) |  | $                       | 5,129  |   |            | $
|Gross Margin (Restated) |  |                         | 11.6   | % |            |  
|Operating Income (Loss) |  | $                       | (612   | ) |            | $



For the year ended December 31, 2009, Yiwu generated revenue
of $44,375, a decrease of $18,995 or 30.0% compared to $63,370 for the year ended December 31, 2008. Gross profit decreased $4,849
or 48.6% from $9,978 for the year ended 2008 to $5,129 for the year ended 2009. Operating losses was $612 in 2009, a decrease of
$8,227 or 108.0% compared to operating income of $7,615 in 2008. Such decrease in revenue was primarily due to the shrinking market
in office communication products. The decrease in revenue was also a result of closing 23 stores in stores in 2009.



Gross profit margin decreased from 15.8% in 2008 to 11.6% in
2009, a decrease of 4.2%. Such decrease is primarily due to of the more competitive fax machines and telephone market in China
as compared to 2008. In order to maintain market shares, we had to launch more promotions which negatively affected the gross margin.
In addition, sales rebate paid to suppliers as a percentage of sales increased in 2009, which led to lower gross margin of Yiwu.



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



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







21







All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Wang Da                 |  | 2009                    |        |   | 2008       |  
|Revenue (Restated)      |  | $                       | 58,744 |   |            | $
|Gross Profit (Restated) |  | $                       | 6,600  |   |            | $
|Gross Margin (Restated) |  |                         | 11.2   | % |            |  
|Operating Income (Loss) |  | $                       | (262   | ) |            | $



For the year ended December 31, 2009, Wang Da generated
revenue of $58,744, a decrease of $44,191 or 42.9% compared to $102,935 for the year ended December 31, 2008. Gross profit decreased
$9,713 or 59.5% from $16,313 for the year ended 2008 to $6,600 for the year ended 2009. Operating losses was $262 in 2009, a decrease
of $8,227 or 102.3% compared to operating income of $11,527 in 2008. The decrease in revenue was primarily due to the high competition
from government-owned large telecommunication service providers. Telecommunication service providers started to open their direct
operating stores to sell communication products and also launched promotions such as “free phone with service contract”
in 2009. In addition, the introduction of 3G phones caused lower demand for the old model mobile phones. Meanwhile, the 3G network
is still in the trial period, customers are waiting to upgrade to 3G phones until the 3G network is complete. The decrease in revenue
was also attributed to the closing of 42 stores in stores in 2009.



Gross profit margin decreased from 15.9% in 2008 to 11.2% in
2009. The decrease was due to lower unit price of old model mobile phones as a result of the introduction of the 3G phones.



| | c) | Hangzhou Sanhe Electronic Technology Limited or “Sanhe”
| | -- | -------------------------------------------------------



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



All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Sanhe                   |  | 2009                    |        |   | 2008       |  
|Revenue (Restated)      |  | $                       | 53,385 |   |            | $
|Gross Profit (Restated) |  | $                       | 8,627  |   |            | $
|Gross Margin (Restated) |  |                         | 16.2   | % |            |  
|Operating Income (Loss) |  | $                       | (741   | ) |            | $



For the year ended December 31, 2009, Sanhe generated revenue
of $53,385, a decrease of $16,858 or 24.0% compared to $70,243 for the year ended December 31, 2008. Gross profit decreased $3,817
or 30.7% from $12,444 for the year ended 2008 to $8,627 for the year ended 2009. Operating losses was $741 in 2009, a decrease
of $8,250 or 109.9% compared to operating income of $7,509 in 2008. The increase in revenue was primarily due to the shrinking
market in DVD players and small home electronics as well as the closing of 24 stores in 2009.



Gross profit margin decreased from 17.7% in 2008 to 16.2% in
2009. The decrease in gross profit and operating income was primarily due to the change in sales revenue mix. In 2009, due to the
lesser sales of DVD players and other small home electronics, sales volume of TV sets, which has a lower margin, comparatively
increased. Therefore, gross margin for Sanhe decreased in 2009.



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



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







22







All amounts, except percentage of revenues, in thousands of
US dollars.



|                        |  | Year Ended December 31, |        |   | Percentage |  
|----------------------- |  | ----------------------- | ------ | - | ---------- | -
|Joy & Harmony           |  | 2009                    |        |   | 2008       |  
|Revenue (Restated)      |  | $                       | 56,660 |   |            | $
|Gross Profit (Restated) |  | $                       | 9,421  |   |            | $
|Gross Margin (Restated) |  |                         | 16.6   | % |            |  
|Operating Income        |  | $                       | 1,012  |   |            | $



For the year ended December 31, 2009, Joy & Harmony generated
revenue of $56,660, a decrease of $17,436 or 23.5% compared to $74,096 for the year ended December 31, 2008. Gross profit decreased
$485 or 4.9% from $9,906 for the year ended 2008 to $9,421 for the year ended 2009. Operating income was $1,012 in 2009, a decrease
of $6,394 or 86.3% compared to $7,406 in 2008. The decrease in revenue was primarily due to closing of 12 stores in 2009. In addition,
manufacturers have been introducing new products at a slower rate and the old products currently on the market have become out-dated.
This has caused the unit price of consumer electronics to drop and sales to decline.



Gross profit margin increased from 13.4% in 2008 to 16.6% in
2009.



| | e) | Jinhua Baofa Logistic Limited or “Jinhua”
| | -- | -----------------------------------------



Jinhua provides transportation service to business and transports
freight, including electronics, machinery and equipment, metal products, chemical materials, garments and handicraft goods, in
more than 20 cities in Eastern China. Its transportation services cover many of the most developed cities in Eastern China such
as Shanghai, Hangzhou and Nanjing.



China 3C acquired Jinhua on July 6, 2009. Therefore, the consolidated
statement of income (loss) and comprehensive income (loss) of China 3C for the year ended December 31, 2009 includes Jinhua’s
operating results from the date of acquisition to December 31, 2009.



All amounts, except percentages of revenues, are in thousands
of US dollars.



|Jinhua           |  | For the period from July 1 to December 31, 2009 |      
|---------------- |  | ----------------------------------------------- | -----
|Revenue          |  | $                                               | 5,573
|Gross Profit     |  | $                                               | 1,713
|Gross Margin     |  |                                                 | 30.7 
|Operating Income |  | $                                               | 1,098



Net sales



Net sales for 2009 totaled $218,994 (restated), representing
a year-over-year decrease of 29.5% compared to $323,331 (restated) for 2008. The decrease was attributable to the closing of 101 stores in
stores in 2009 as well as the negative effect of global economic slowdown.



Percentage of sales



In 2009, the Company earned 68.9% of its
sales from its retail operations and 31.1% from its wholesale operations compared to 68.7% from retail operations and 31.3% from
wholesale in 2008.



Percentage of sales from retail operations
and wholesale operations for each segment is as follows:



|          |  | Yiwu |      |   | Wang Da |  |      | Sanhe |  |  | Joy & Harmony |  
|--------- |  | ---- | ---- | - | ------- |  | ---- | ----- |  |  | ------------- | -
|Retail    |  |      | 68.7 | % |         |  | 69.9 | %     |  |  | 67.6          | %
|Wholesale |  |      | 31.3 | % |         |  | 30.1 | %     |  |  | 32.4          | %



23







Cost of Sales



Cost of sales for 2009 totaled $187,476,
or 85.6% of net sales compared to $262,003, or 84.3% for 2008. The decrease in the cost of sales was a direct result of the corresponding
decrease in sales. The cost of sales as a percentage increased during 2009 primarily due to increased costs of electronics products
as well as increase in sales rebate paid to suppliers.



Top Ten Suppliers of Each of Our Subsidiaries in 2009



|  | Yiwu                                            |  | Wang Da                                                     |  | Sanhe                                                  |  | Joy & Harmony                                                          |  | Jinhua                                                   
|- | ----------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------------------ |  | ---------------------------------------------------------------------- |  | ---------------------------------------------------------
|1 | Fengda Technology Company Limited               |  | Shanghai Post & Telecom Appliances Co - Hangzhou            |  | Zhejiang Zhuocheng Digital Electronics Company Limited |  | Shanghai Ganshun Trade Company Limited                                 |  | Zhejiang Sheng Tong Logistic Company Limited             
|  |                                                 |  |                                                             |  |                                                        |  |                                                                        |  |                                                          
|2 | Hangzhou Shenruida Trade Company Limited        |  | Shenzhen Tianyin Telecommunication Company Limited          |  | Hangzhou Xietong Trade Co., Limited                    |  | Huaqi Information Digital Technology Company Limited (aigo) – Shanghai |  | Shanghai Hong Wei Transportation Company Limited         
|  |                                                 |  |                                                             |  |                                                        |  |                                                                        |  |                                                          
|3 | Shanghai Zhongfang Electronics Company Limited  |  | Hangzhou Tianchen Digital Telecommunication Company Limited |  | Shanghai Haier Industrial and Trade Company            |  | SONY- Shanghai Company Limited                                         |  | Hangzhou Shenzhou Transportation Company Limited         
|  |                                                 |  |                                                             |  |                                                        |  |                                                                        |  |                                                          
|4 | Wenzhou Jingwei Company                         |  | Hangzhou Qiuxin Internet Equipment Company Limited          |  | Zhejiang Saixin Technology Limited                     |  | Shanghai Jingming Technology Company Limited                           |  | Jiaxingshi Guohong Vehicle Transportation Company Limited
|  |                                                 |  |                                                             |  |                                                        |  |                                                                        |  |                                                          
|5 | Ninbo Zhongxun Electronics Company Limited      |  | Hangzhou Weihua Telecommunication Company Limited           |  | Shenzhen Chuangwei-RGB Electronics Company             |  | Shanghai China-tex Electronic System Company Limited                   |  | Shanghai Sheng Hui Transportation Company Limited        
|  |                                                 |  |                                                             |  |                                                        |  |                                                                        |  |                                                          
|6 | Shanghai Hongyi Office Supplies Company Limited |  | Hangzhou Chaoyue Telecommunication Company Limited          |  | TCL Electronics Company Limited                        |  | Shanghai Caitong Digital Technology Company Limited                    |  | Guangzhou Shuntong Transportation Company Limited        
|  |                                                 |  |                                                             |  |                                                        |  |                                                                        |  |                                                          
|7 | Shanghai Guangdian Equipment Company Limited    |  | Shenzhen Liansheng Technology Company Limited               |  | Qingdao Haixin Electronics Limited Hangzhou branch     |  | Beijing Broadcom Information Technology Company Limited                |  | Shanghai Shenghui Transportation Company Limited         



24







|8  | Yiwu Wantong Telecom Equipment Company Limited |  | Hangzhou Huayu Telecommunication Appliances Company Limited |  | Dongguang Lebang Electronics Limited        |  | Chongqing Zhaohua Digital Technology Company Limited |  | Hefei Yuan Shun Da Transportation Company Limited    
|-- | ---------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------- |  | ---------------------------------------------------- |  | -----------------------------------------------------
|   |                                                |  |                                                             |  |                                             |  |                                                      |  |                                                      
|9  | Shanghai Rongduo Business Company Limited      |  | Shenzhen Jinfeng Datong Technology Company Limited          |  | Zhongshan Longdi Electronics Limited        |  | Shanghai Jinling Network Equipment Company Limited   |  | Zhuhai Zhijie Transportation Company Limited         
|   |                                                |  |                                                             |  |                                             |  |                                                      |  |                                                      
|10 | Shanghai Huoke Electronics Company Limited     |  | Shenzhen Jiepulin Company Limited                           |  | Shenzhen Aosike Electronics Company Limited |  | Shenzhen Dejing Electronics Company Limited          |  | Sanming Yunlin Vehicle Transportation Company Limited



Gross Profit Margin



Gross profit margin in 2009 decreased to
14.4% (restated) compared to 19.0% (restated) in 2008. The gross profit margin decrease was mainly attributed to the fact that many small manufacturers
of computers, communication and consumer products exited the market and current manufacturers raised the cost of goods
due to the global economic slowdown. The decrease in gross margin was also due to the increase in sales rebate paid to suppliers.



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



General and Administrative Expenses



G&A expenses for 2009 totaled
$32,126 (restated), or 14.7% of net sales, compared to $26,819 (restated), or 8.3% of net sales for 2008. G&A expenses as
a percentage of net sales increased 6.4% due to salary increase of $4,600 in 2009 compared to 2008, additional $1,116
G&A expenses due to acquisition of Jinhua, increase in management fee and additional expenses in relation to the new
direct stores and franchise stores.



Income (Loss) from Operations



Operating loss for 2009 was $608, or (0.3)%
of net sales compared to Operating income of $34,509, or 11.1% of net sales for 2008, a decrease of 101.8%. Declined sales and
gross margin and increased G&A expenses led to the decline in income from operations.



25







Provision for income taxes



Provision for income taxes for 2009 was
$714, representing year-over-year decrease of 91.7% compared to $8,611 for 2008. The decrease in income tax expenses was due to
Yiwu, Wang Da and Sanhe having net losses in 2009 and therefore not having income tax expenses. In addition, Joy & Harmony’s
income from operations also declined in 2009 compared to 2008, therefore, had a lesser income tax expense. Although we added one
subsidiary - Jinhua in 2009, Jinhua’s income tax expense was not significant.



Net Income (loss)



Net loss was $1,213 or (0.6) % of net sales
for 2009 compared to $26,834 net income or 8.6% of net sales for 2008. Net income decreased primarily due to sales decline and
increase in general administration expenses.



Retail locations



The following table reflects a roll forward
during the fiscal years ended December 31, 2008, 2009 and 2010 of our retail locations during each year (i.e. number of stores
opened, number of stores closed and number of stores open at the end of the period).“Store in store” refers
to the sales counter where the Company’s products are displayed for sale within large-scale supermarket stores, department
stores and other operation sites for the Company. At present, we have “store in stores” in four main areas, Shanghai,
Zhejiang, Jiangsu and Anhui. The Company’s retail locations are all “store in store” locations in 2008,
2009 and 2010 with the exception of 3 director stores and 2 franchise stores.



|                           |  | Wang Da |     |   | Yiwu |  |     | Sanhe |  |  | Joy &Harmony |   |  | Total |    
|-------------------------- |  | ------- | --- | - | ---- |  | --- | ----- |  |  | ------------ | - |  | ----- | ---
|Locations at Jan. 1, 2008  |  |         | 237 |   |      |  | 274 |       |  |  | 211          |   |  |       | 186
|Opened during year 2008    |  |         | 37  |   |      |  | 34  |       |  |  | 24           |   |  |       | 43 
|Closed during year 2008    |  |         | (18 | ) |      |  | (13 | )     |  |  | (1           | ) |  |       | -  
|Locations at Dec. 31, 2008 |  |         | 256 |   |      |  | 295 |       |  |  | 234          |   |  |       | 229
|                           |  |         |     |   |      |  |     |       |  |  |              |   |  |       |    
|Opened during year 2009    |  |         | -   |   |      |  | 1   |       |  |  | -            |   |  |       | 1  
|Closed during year 2009    |  |         | (23 | ) |      |  | (42 | )     |  |  | (24          | ) |  |       | (12
|Locations at Dec. 31, 2009 |  |         | 233 |   |      |  | 254 |       |  |  | 210          |   |  |       | 218
|                           |  |         |     |   |      |  |     |       |  |  |              |   |  |       |    
|Opened during year 2010    |  |         | 11  |   |      |  | 2   |       |  |  | -            |   |  |       | -  
|Closed during year 2010    |  |         | (73 | ) |      |  | (1  | )     |  |  | (11          | ) |  |       | (22
|Locations at Dec. 31, 2010 |  |         | 171 |   |      |  | 255 |       |  |  | 199          |   |  |       | 196



The following table reflects the square
footage of each store space during the fiscal years ended December 31, 2008, 2009 and 2010.



|(In square feet)        |  | Wang Da |        |   | Yiwu |  |        | Sanhe |  |  | Joy & Harmony |   |  | Total |       
|----------------------- |  | ------- | ------ | - | ---- |  | ------ | ----- |  |  | ------------- | - |  | ----- | ------
|Areas at Jan. 1, 2008   |  |         | 26,928 |   |      |  | 40,708 |       |  |  | 29,295        |   |  |       | 21,001
|Opened during year 2008 |  |         | 5,698  |   |      |  | 5,270  |       |  |  | 3,888         |   |  |       | 6,020 
|Closed during year 2008 |  |         | (1,890 | ) |      |  | (1,724 | )     |  |  | (112          | ) |  |       | -     
|Areas at Dec. 31, 2008  |  |         | 30,736 |   |      |  | 44,254 |       |  |  | 33,071        |   |  |       | 27,021
|                        |  |         |        |   |      |  |        |       |  |  |               |   |  |       |       
|Opened during year 2009 |  |         | -      |   |      |  | 210    |       |  |  | -             |   |  |       | 142   
|Closed during year 2009 |  |         | (3,105 | ) |      |  | (4,704 | )     |  |  | (2,832        | ) |  |       | (1,368
|Areas at Dec. 31, 2009  |  |         | 27,631 |   |      |  | 39,760 |       |  |  | 30,239        |   |  |       | 25,795
|                        |  |         |        |   |      |  |        |       |  |  |               |   |  |       |       
|Opened during year 2010 |  |         | 860    |   |      |  | 2,258  |       |  |  | -             |   |  |       | -     
|Closed during year 2010 |  |         | (93    | ) |      |  | (9,555 | )     |  |  | (1,131        | ) |  |       | (2,272
|Areas at Dec. 31, 2010  |  |         | 28,398 |   |      |  | 32,463 |       |  |  | 29,108        |   |  |       | 23,523



26







The following table reflects net sales per square foot for the
fiscal years ended December 31, 2008, 2009 and 2010.



|(In US dollars) |  | Wang Da |       |  | Yiwu |  |       | Sanhe |  |  | Joy & Harmony |  |  | Average |      
|--------------- |  | ------- | ----- |  | ---- |  | ----- | ----- |  |  | ------------- |  |  | ------- | -----
|2008            |  |         | 1,910 |  |      |  | 812   |       |  |  | 1,301         |  |  |         | 1,802
|2009            |  |         | 2,079 |  |      |  | 1,058 |       |  |  | 1,709         |  |  |         | 1,996
|2010            |  |         | 1,489 |  |      |  | 577   |       |  |  | 1,410         |  |  |         | 1,485



The following table reflects the amount
of comparable or same store sales for each period (i.e. the change in sales from stores that were open for each of the fiscal years
presented).  A “comparable store” is defined as the same “store in store,” for which sales of
that “store in store” is compared in the same month or same quarter of different years, such as the comparison of the
sales occurring during March 2008 and March 2009 in the same “store in store.”



|(In US dollars) |  | Wang Da |        |  | Yiwu |  |        | Sanhe |  |  | Joy & Harmony |  |  | Average |       
|--------------- |  | ------- | ------ |  | ---- |  | ------ | ----- |  |  | ------------- |  |  | ------- | ------
|2008            |  |         | 21,700 |  |      |  | 11,900 |       |  |  | 17,300        |  |  |         | 20,400
|2009            |  |         | 14,878 |  |      |  | 9,464  |       |  |  | 13,880        |  |  |         | 15,221
|2010            |  |         | 10,219 |  |      |  | 4,510  |       |  |  | 7,563         |  |  |         | 9,789 



In assessing whether stores are “comparable”, it
is based on whether:



(1)  stores are in the same address;



(2)  relatively same business
area (e.g. if the business area of a store has changed in no more than 30%, it is regarded as having same business area; if the
change in business area is more than 30%, the change in business area will be regarded as too significant as to be comparable;



(3)  relatively same business
layout (e.g. if the layout of sales counter in a store remains unchanged over time, then that store would be regarded as a comparable
store; if there is significant change in layout of a sales counter in a store, that store will not be regarded as a comparable
store);



(4)  stores with same product
mix would be regarded as comparable; if there is significant change in product mix in a store, that store will not be regarded
as a comparable store;



(5) with respect to net sales per square
foot each year and how we treat changes in square footage, this depends on the materiality of the impact on sales per square foot
as a result of an increase or decrease in square footage. By way of example only, if a store with an area of 130 square feet had
sales of $14,000 per month in 2006, which results in approximately $108 in sales per square foot. In 2007, if the same store increased
the area of operation to 140 square feet and had sales of $16,000 per month that would result in approximately $114 in sales per
square foot. We would deem the $6 increase in sales per square foot to be immaterial.  Accordingly, in this case, we
will use the area of 130 square feet to compare same store sales, and the additional 10 square feet will be ignored in the calculation
of same store sales;



27







We consider changes in store square footage
of more than 30% to be material. Stores that undergo such changes will not be accounted for as “comparable stores”
because the change is too significant;



(6)  with respect to net sales
per square foot each year and how we treat relocated stores, if a “store in store” is relocated to a different retail
location, which we would refer to as a different operating environment, during the period, then that “store in store”
will not be used in the same store comparison.  However, if the “store in store” is relocated to another
location within the same retail location (or same operating environment) then the “store in store” sales will be used
in the calculation of the same store comparison; and



(7)  with respect to net
sales per square foot each year and how we treat closed stores, we treat a closed “store in store” the same way we
treat a “store in store” relocated to different retail location. A closed “store in store” is not used
in the same store comparison.



Opened and closed “stores in stores”
are primarily recognized based on the duration of the agreements with the shopping centers, as well as the sale and profits of
a “store in store.” Prior to opening a new “store in store” we are usually approached by a large-scale
department store or supermarket that offers us the opportunity to open a “store in store.” Our decision is based on
our study of the population traffic flow, the department store and supermarkets themselves, and the level of expected profitability
of a potential “store in store.” Following our inspection, we sign contracts with the department store and supermarkets,
which specifically address the terms and conditions of opening, closing and relocating the “stores in stores.”



QUARTERLY RESULTS OF OPERATIONS



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. Nevertheless, at times, China can experience particularly
inclement weather in January and February which can serious disrupt the Company’s supply chain management systems. As our
business model is to operate only on several days of inventory, the effects of such weather disruptions may be severe in certain
years.



The following table sets forth, for the
periods presented, our unaudited quarterly results of operations for the eight quarters ended December 31, 2010. The data
has been derived from our consolidated financial statements and, in our management’s opinion, they have been prepared on
substantially the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the financial results for the periods presented. This information should
be read in conjunction with the annual consolidated financial statements included elsewhere in this Form 10-K. The operating results
in any quarter are not necessarily indicative of the results that may be expected for any future period.



(amounts in thousands of US dollars)



|                                               |  | Three Months Ended |        
|---------------------------------------------- |  | ------------------ | -------
|                                               |  | 12/31/2010         |        
|Sales, net (restated)                          |  | $                  | 39,929 
|                                               |  |                    |        
|Cost of sales                                  |  |                    | 36,004 
|Gross profit (loss) (restated)                 |  |                    | 3,925  
|                                               |  |                    |        
|General and administrative expenses (restated) |  |                    | 22,855 
|Income (loss) from operations                  |  |                    | (18,931
|                                               |  |                    |        
|Other Income (Expense)                         |  |                    |        
|Interest income                                |  |                    | 31     
|Other income (expense)                         |  |                    | (28    
|Total Other Income (Expense)                   |  |                    | 3      
|Income (loss) before income taxes              |  |                    | (18,928
|                                               |  |                    |        
|Provision for income taxes                     |  |                    | (202   
|                                               |  |                    |        
|Net income (loss)                              |  | $                  | (18,726
|                                               |  |                    |        
|Net income (loss) per share:                   |  |                    |        
|Basic & diluted                                |  | $                  | (0.34  
|                                               |  |                    |        
|Weighted average number of shares outstanding: |  |                    |        
|Basic                                          |  |                    | 54,831 
|Diluted                                        |  |                    | 54,831 



28







Liquidity and Capital Resources (amounts in thousands of
US dollars)



Cash has historically been generated from
operations. Operations and liquidity needs are funded primarily through cash flows from operations and short-term borrowings.



Cash and equivalents were $26,249 at December
31, 2010 and current assets totaled $48,551. The Company’s current liabilities were $9,411 at December 31, 2010. Working
capital at December 31, 2010 was $39,140. During 2010, net cash used in operating activities was $4,698.



Cash and cash equivalents were $29,908 at
December 31, 2009 and current assets totaled $58,725 at December 31, 2009. The Company’s total current liabilities were $7,776
at December 31, 2009. Working capital at December 31, 2009 was $50,949. During 2009, net cash provided by operating activities
was $7,112.



The Company does not have any debt as of
December 31, 2010.



The Wholly Foreign Owned Enterprise Law
(1986), as amended and The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended, contain the principal regulations
governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises,
such as Zhejiang, Yiwu, Wang Da, Sanhe and Joy & Harmony may pay dividends only out of their accumulated profits, if any, determined
in accordance with PRC accounting standards and regulations. Additionally,  Zhejiang, Yiwu, Wang Da, Sanhe and Joy &
Harmony are required to set aside a certain amount of any accumulated profits each year (a minimum of 10%, and up to an aggregate
amount equal to half of its registered capital), to fund certain reserve funds. These reserves are not distributable as cash dividends
except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on
the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. The Company’s two operating
subsidiaries in China paid $525,460 in dividends during 2005, however, we do not intend to pay dividends on our common stock in
the foreseeable future. If we ever determine to pay a dividend, we may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency for the payment of such dividends from the profits of Zhejiang,
Yiwu, Wang Da, Sanhe and Joy & Harmony and Jinhua.



In summary, our cash flows were (in thousands):

|                                                       |  | Year Ended December 31, |       
|------------------------------------------------------ |  | ----------------------- | ------
|                                                       |  | 2010                    |       
|Net cash provided (used) by operating activities       |  | $                       | (4,698
|Net cash used in investing activities                  |  |                         | (22   
|Effect of exchange rate change on cash and equivalents |  |                         | 1,061 
|Net increase in cash and equivalents                   |  |                         | (3,659
|Cash and equivalents at beginning of year              |  |                         | 29,908
|Cash and equivalents at end of year                    |  | $                       | 26,249



29







Operating Activities



Net cash used in operating activities was $4,698 in 2010
compared to net cash generated from operating activities of $7,112 in 2009. This decrease was mainly attributable to (i) an increase
in net losses of $23,714 from $(1,213) in 2009 to $(24,927) in 2010, (ii) increase in inventories of $261, offset by the decrease
in accounts receivable of $7,688 and increase in accounts payable of $1,545 in 2010.



Net cash generated from operating activities decreased to $7,112
in 2009 from $12,690 in 2008. This decrease was mainly attributable to the $1,213 net losses incurred in 2009 compared to $26,834
net income in 2008.



|                                                    |  | 2010 |        |   | 2009 |   |       | 2008 | 
|--------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- | 
|Net cash (used in) provided by operating activities |  | $    | (4,698 | ) |      | $ | 7,112 |      | 



While net sales decreased 28.8% from 2009,
accounts receivable decreased 39.5%. The Company still maintains a healthy accounts receivable turnover. The collection of debt
is based on the terms of legal binding documents. The Company has not changed its policy on reserving for bad debt and has not
found any abnormal increases in bad debt.



Investing activities



|                                       |  | 2010 |     |   | 2009 |   |        | 2008 | 
|-------------------------------------- |  | ---- | --- | - | ---- | - | ------ | ---- | 
|Net cash used in investment activities |  | $    | (22 | ) |      | $ | (8,590 | )    | 



Net cash used in investing activities in
2010 was nominal. Net cash used in investing activities was $8,590 in 2009 and $7,327 in 2008 as a result of the acquisition of
Jinhua. On December 19, 2008, Zhejiang and Yiwu entered into an agreement to acquire Jinhua. Pursuant to the acquisition agreement,
Zhejiang and Yiwu were required to pay RMB 50,000 thousand within 10 business days after the execution of the agreement to Jinhua’s
shareholders. Therefore, China 3C made a purchase deposit of $7,319 to the shareholders of Jinhua in 2008. In July 2009, China
3C completed the acquisition of Jinhua and therefore paid $7,784 to Jinhua. In 2009, China 3C also made $806 investment in fixed
assets to open new direct stores.



Financing Activities



There was no cash used in financing activities in 2010, 2009
and 2008.



|Financing activities                    |  |   | 2010 |  |  |   | 2009 |  |  |   | 2008 | 
|--------------------------------------- |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|Net cash (used) in financing activities |  | $ | -    |  |  | $ | -    |  |  | $ | -    | 



Net change in cash and equivalents



|                                   |  | 2010 |        |   | 2009 |   |        | 2008 | 
|---------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- | 
|Net change in cash and equivalents |  | $    | (3,659 | ) |      | $ | (2,250 | )    | 



Cash and equivalents



|                     |  | 2010 |        |  | 2009 |   |        | 2008 | 
|-------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- | 
|Cash and equivalents |  | $    | 26,249 |  |      | $ | 29,908 |      | 



30







Cash and equivalents as of December 31,
2010 and 2009 were solely bank accounts in US and China. Specifically, cash and equivalents for each subsidiary as of December
31, 2010 and 2009 included:



(all amounts are denominated in thousands)



|Name of Entities |  | Region         |  | Currency |  | 2010   |  | 2009   | 
|---------------- |  | -------------- |  | -------- |  | ------ |  | ------ | 
|China 3C Group   |  | US entity      |  | USD      |  | 4      |  | -      | 
|Capital          |  | BVI entity     |  | USD      |  | -      |  | -      | 
|Zhejiang         |  | Chinese entity |  | RMB      |  | 1,781  |  | 5,180  | 
|Yiwu             |  | Chinese entity |  | RMB      |  | 40,568 |  | 28,437 | 
|Sanhe            |  | Chinese entity |  | RMB      |  | 38,066 |  | 42,867 | 
|Wangda           |  | Chinese entity |  | RMB      |  | 25,406 |  | 43,956 | 
|Joy & Harmony    |  | Chinese entity |  | RMB      |  | 43,369 |  | 60,709 | 
|Jinhua           |  | Chinese entity |  | RMB      |  | 23,809 |  | 23,335 | 



Cash equivalents held in the PRC subsidiaries
are not freely transferrable outside the country. The amounts not freely transferable as of December 31, 2010 and 2009 were RMB
172,999 (or $26,244) and RMB 204,484 (or $29,908).



Capital Expenditures



Capital expenditures for purchase of fixed
assets during 2010, 2009 and 2008 were $22, $806 and $11, respectively. The higher level of capital expenditures in 2009 was due
to the new business plan of opening new direct stores and franchise stores. Direct stores and franchise stores have higher capital
requirements than “stores in stores”.



Working Capital Requirements



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



Off-Balance Sheet Arrangements



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



Critical Accounting Policies



Our discussion and analysis of our financial
condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements
requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates.



31







An accounting policy is considered to be
critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time
the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates
that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe the following critical
accounting policies reflect the more significant estimates and assumptions used in the preparation of the consolidated financial
statements.



Revenue Recognition



Our revenues are generated from sales of
electronics products. All of our revenue transactions contain standard business terms and conditions. We determine the appropriate
accounting for these transactions after considering (1) whether a contract exists; (2) when to recognize revenue on the deliverables;
(3) whether all elements of the contract have been fulfilled and delivered; and (4) whether collection is reasonably assured, which
inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates
could materially impact the timing or amount of revenue recognition.



Please refer to Note 2 in the footnotes
to the financial statements for detailed description of our revenue recognition policy.



After Sales Service



The after-sales services that we provide
to our customers are primarily repair and maintenance. If a customer buys a product from us and needs repairs, we can usually arrange
to have the manufacturer repair the product. In certain cases, clerks in our stores are able to make the repairs directly.



Tabular Disclosure of Contractual Obligations



The following table sets forth our contractual
obligations as of December 31, 2010.



(amounts in thousands of US dollars):



|                              |  | Payment Due by Period |    
|----------------------------- |  | --------------------- | ---
|                              |  |                       |    
|Contractual Obligations       |  | Total                 |    
|Operating lease obligations   |  | $                     | 257
|Advertising obligations       |  |                       | 102
|Total contractual obligations |  | $                     | 359



ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



The financial statements of the Company
are included following the signature page to this Form 10-K/A.



ITEM 9A. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Under the supervision and with the participation
of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our
disclosure controls and procedures as of December 31, 2010, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act. Based on this evaluation, our principal executive officer and principal financial officer have concluded that as
of December 31, 2010 , the Company’s disclosure controls and procedures were not effective due to the material weakness
in our internal controls identified below.



32







Disclosure controls and procedures are
designed to provide that information required to be disclosed by us in reports that we file or submit under the Exchange Act is
accumulated, recorded, processed, summarized, communicated to our management, including our principal executive officer and principal
financial officer and reported within the time periods specified in Securities and Exchange Commission rules and forms.



Management’s Report on Internal Control over Financial
Reporting



Our management is responsible
for establishing and maintaining adequate internal control over financial reporting (“ICFR”), as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). ICFR refers to the process designed by, or under the supervision of,
our principal executive and principal financial officers, and effected by the Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the United States (“US
GAAP”) and includes those policies and procedures that:



1.  Pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;



2. Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with US GAAP and that
our receipts and expenditures are being made only in accordance with authorization of our management and directors; and



3. Provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect
on the financial statements.



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 ICFR based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, and due to the material
weakness described below, management concluded that our ICFR was not effective as of December
31, 2010.



Our management identified the following
material weakness: the ability of the Company to record transactions and provide disclosures in accordance with US GAAP. The current
staff in our accounting department are inexperienced in US GAAP. They need substantial training to meet the demands of a US public
company. The accounting skills and understanding necessary to fulfill the requirements of US GAAP-based reporting, including the
preparation of financial statements and consolidation, are inadequate.



All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide
only reasonable assurance with respect to financial statement preparation and presentation. Because of its inherent
limitations, ICFR may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.



Remediation Initiative



We intend to provide additional training
in US GAAP and disclosure requirements under US securities law to our staff, in particular, to our key accounting personnel.



33







Attestation Report of the Independent Registered Public
Accounting Firm



This Annual Report on Form 10-K/A does
not include an attestation report of our registered public accounting firm, Goldman Kurland and Mohidin, LLP, regarding internal
control over financial reporting because we are a non-accelerated filer. Our management’s report was not subject to attestation
by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide
only our management’s report in this Annual Report.



Changes in Internal Control over Financial Reporting



Other than the changes relating to the
material weakness described above, there were no changes in our internal control over financial reporting that occurred during
the fourth fiscal quarter of the fiscal year covered by this Annual Report on Form 10-K/A that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.



PART IV



ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES



(a)           The
following are filed with this Annual Report:



(1)  The financial statements listed on the Financial
Statements Table of Contents.



(2)  Not applicable.



(3)  The exhibits referred to below, which include
the following managerial contracts or compensatory plans or arrangements:

• China 3C Group
2011 Restricted Stock Plan



(b)           The
exhibits listed on the Exhibit Index are filed as part of this Annual Report.



(c)           Not
applicable.



EXHIBIT INDEX



|Exhibit
        No |  | Document Description                                                                                                                                                                                                                                                                                                                                   
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1                |  | Amended and Restated Articles of Incorporation of the Registrant (11)                                                                                                                                                                                                                                                                                  
|3.2                |  | By-laws of the Registrant (1 )                                                                                                                                                                                                                                                                                                                         
|4.1                |  | China 3C Group Amended 2005 Equity Incentive Plan. (2 )                                                                                                                                                                                                                                                                                                
|4.2                |  | China 3C Group 2011 Restricted Stock Plan                                                                                                                                                                                                                                                                                                              
|10.1               |  | Stock Purchase Agreement, dated as of October 17, 2005, by and among Sun Oil & Gas, Inc., EH&P Investments, John D. Swain, Fred Holcapek, PH Holding Group, Ma Cheng Ji, Zhou Wei, Zeng Xiu Lan, Gu Xiao Dong, Jacksonville Management Limited, Colin Wilson, Alliance Capital Management, Inc., Hanzhong Fang and China US Bridge Capital, Limited (3)
|10.2               |  | Consulting Services Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )                                                                                                                                                                                          
|10.3               |  | Operating Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )                                                                                                                                                                                                    
|10.4               |  | Proxy and Voting Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )                                                                                                                                                                                             
|10.5               |  | Option Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )                                                                                                                                                                                                       



34







|10.6  |  | Equity Pledge Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )                                                                                                                                                                                                                                             
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7  |  | Subscription Agreement, dated as of December 20, 2005, between the Registrant and Huiqi Xu. (5 )                                                                                                                                                                                                                                                                                                    
|10.8  |  | Consulting Agreement, dated as of December 20, 2005, among the Registrant, Wen-An Chen and Huoqing Yang. (5 )                                                                                                                                                                                                                                                                                       
|10.9  |  | Guarantee Contract between the Registrant and Shenzhen Shiji Ruicheng Guaranty and Investment Company Limited, dated as of December 21, 2005. (6 )                                                                                                                                                                                                                                                  
|10.10 |  | Agreement and Plan of Merger, dated as of December 21, 2005, among the Registrant, YX Acquisition Corporation, Capital Future Development Limited, Zhenggang Wang, Yimin Zhang, Weiyi Lv, Xiaochun Wang, Zhongsheng Bao, Simple (Hongkong) Investment & Management Company Limited, First Capital Limited, Shenzhen Dingyi Investment & Consulting Limited and China US Bridge Capital Limited. (6 )
|10.11 |  | Form of Promissory Note dated December 21, 2005. (6 )                                                                                                                                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.12 |  | Share Exchange Agreement, dated as of November 28, 2006, among China 3C Group, Capital Future Development Limited (“CFDL”), Shanghai Joy & Harmony Electronics Company Limited, and the shareholders of CFDL. (7 )                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|10.13 |  | Form of Securities Purchase Agreement, dated July 13, 2007, by and among the Registrant and certain subscribers (8 )                                                                                                                                                                                                                                                                                
|10.14 |  | Letter of Intent for Strategic Partnership, dated November 22, 2007, between the Registrant’s subsidiary Zhejiang Yongxin Technology Limited and Hangzhou Xituo Network Technology Company (9 )                                                                                                                                                                                                     
|10.15 |  | Consignment Agreement, dated January 2, 2008, between the Registrant’s subsidiary Hangzhou Shan He Electric Company Limited and Hangzhou Lotour Digital Products Business Company Limited (10 )                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|16    |  | Consignment Agreement, dated January 3, 2008, between the Registrant’s subsidiary Hangzhou Wang Da Electric Company Limited and Hangzhou Lotour Digital Products Business Company Limited (10 )                                                                                                                                                                                                     
|10.17 |  | Acquisition Agreement dated December 19, 2008 by and among Zhejiang Yong Xing Digital Technology Company Limited, Yiwu Yong Xin Communication Limited Jinhua Baofa Logistic Limited and the shareholders of Jinhua Baofa Logistic Limited (12)                                                                                                                                                      
|10.18 |  | Amendment to Acquisition Agreement dated April 4, 2009 by and among Zhejiang Yong Xing Digital Technology Company Limited, Yiwu Yong Xin Communication Limited and the shareholders of Jinhua Baofa Logistic Limited (13)                                                                                                                                                                           
|10.19 |  | Compensation Agreement, dated November 27, 2009, between China 3C Group and Joseph Levinson (14)                                                                                                                                                                                                                                                                                                    
|10.20 |  | Board of Directors Agreement, dated December 8, 2006, among China 3C Group and Kenneth T. Berents (15)                                                                                                                                                                                                                                                                                              
|10.21 |  | China 3C Group 2008 Omnibus Securities and Incentive Plan (16)                                                                                                                                                                                                                                                                                                                                      
|10.22 |  | Stock Option Agreement Director Non-Qualified Stock Option, dated December 1, 2008 and effective as of January 15, 2009, between China 3C Group and Kenneth Berents (16)                                                                                                                                                                                                                            
|10.23 |  | Stock Option Agreement Director Non-Qualified Stock Option, dated December 1, 2008 and effective as of January 15, 2009, between China 3C Group and Kenneth Berents (16)                                                                                                                                                                                                                            
|10.24 |  | Stock Option Agreement Director Non-Qualified Stock Option, dated December 1, 2008 and effective as of January 15, 2009, between China 3C Group and Kenneth Berents (16)                                                                                                                                                                                                                            



35







|10.25 |  | Stock Option Agreement with Todd L. Mavis, dated April 21, 2009, between China 3C Group and Todd L. Mavis (16)                                                                                                                    
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.26 |  | Agreement dated May 3, 2007 between China 3C Group and Joseph Levinson (16)                                                                                                                                                       
|10.27 |  | Letter Agreement dated June 16, 2009 between China 3C Group and Jian Zhang (17)                                                                                                                                                   
|      |  |                                                                                                                                                                                                                                   
|14.1  |  | Code of Business Conduct and Ethics (11)                                                                                                                                                                                          
|21.1  |  | List of Subsidiaries (18)                                                                                                                                                                                                         
|23.1  |  | Consent of Goldman Parks Kurland Mohidin LLP, an independent registered public accounting firm, filed herewith.                                                                                                                   
|31.1  |  | Certification of Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.                   
|31.2  |  | Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
|      |  |                                                                                                                                                                                                                                   
|32.1  |  | Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.                                                                                          
|32.2  |  | Certification of Principal Accounting and Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.                                                                           



| | (1) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on January 3, 2007.
| | --- | -----------------------------------------------------------------------------------------------------------------



| | (2) | Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (File No. 333-141173) dated March
9, 2007.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



| | (3) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on October 21, 2005.
| | --- | ------------------------------------------------------------------------------------------------------------------



| | (4) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on September 11, 2007.
| | --- | --------------------------------------------------------------------------------------------------------------------



| | (5) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on December 20, 2005.
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (6) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on December 22, 2005.
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (7) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on December 11, 2006.
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (8) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on July 17, 2007.
| | --- | ---------------------------------------------------------------------------------------------------------------



| | (9) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on November 28, 2007.
| | --- | -------------------------------------------------------------------------------------------------------------------



| | (10) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on January 17, 2008.
| | ---- | ------------------------------------------------------------------------------------------------------------------



| | (11) | Incorporated by reference from the Registrant’s Annual Report filed with the SEC on Form 10-K on March 27, 2008.
| | ---- | ----------------------------------------------------------------------------------------------------------------



36







| | (12) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on December 29, 2008.
| | ---- | -------------------------------------------------------------------------------------------------------------------



| | (13) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on April 9, 2009.
| | ---- | ---------------------------------------------------------------------------------------------------------------



| | (14) | Incorporated by reference from the Registrant’s Annual Report filed with the SEC on Form 10-K on April 16, 2009.
| | ---- | ----------------------------------------------------------------------------------------------------------------



| | (15) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on December 14, 2006.
| | ---- | -------------------------------------------------------------------------------------------------------------------



| | (16) | Incorporated by reference from the Registrant’s Registration Statement on Form S-8 (File No. 333-159200) dated May 13,
2009.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------



| | (17) | Incorporated by reference from the Registrant’s Current Report filed with the SEC on Form 8-K on June 22, 2009.
| | ---- | ---------------------------------------------------------------------------------------------------------------



| | (18) | Incorporated by reference from the Registrant’s Annual Report filed with the SEC on Form 10-K on April 15, 2010.
| | ---- | ----------------------------------------------------------------------------------------------------------------



SIGNATURES



Pursuant to the requirements of Section
13 or 15(d) 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 4th  day of June 2012.



| | CHINA 3C GROUP
| | --------------
| |               
| |               
| |               
| |               
| |               



Pursuant to the requirements of the Securities
Exchange Act of 1934, this amended report has been signed below by the following persons on behalf of the Company and in the capacities
indicated below and on the dates indicated.



|Signatures         |  | Title                              |  | Date         
|------------------ |  | ---------------------------------- |  | -------------
|                   |  |                                    |  |              
|/s/ Zhenggang Wang |  |                                    |  | June 4,  2012
|Zhenggang Wang     |  | Chief Executive Officer and        |  |              
|                   |  | Chairman (Principal Executive      |  |              
|                   |  | Officer)                           |  |              
|                   |  |                                    |  |              
|/s/ Xinchuan Kong  |  |                                    |  |              
|Xinchuan Kong      |  | President                          |  | June 4, 2012 
|                   |  |                                    |  |              
|/s/ Weiping Wang   |  |                                    |  |              
|Weiping Wang       |  | Chief Financial Officer (Principal |  | June 4, 2012 
|                   |  | Accounting and Financial Officer)  |  |              
|                   |  |                                    |  |              
|/s/ Chenghua Zhu   |  |                                    |  |              
|Chenghua Zhu       |  | Director                           |  | June 4, 2012 
|                   |  |                                    |  |              
|/s/ Mingjun Zhu    |  |                                    |  |              
|Mingjun Zhu        |  | Director                           |  | June 4, 2012 
|                   |  |                                    |  |              
|/s/ Rongjin Weng   |  |                                    |  |              
|Rongjin Weng       |  | Director                           |  | June 4, 2012 
|                   |  |                                    |  |              
|/s/ Wei Kang Gu    |  |                                    |  |              
|Wei Kang Gu        |  | Director                           |  | June 4, 2012 



37







CHINA 3C GROUP AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2010



TABLE OF CONTENTS



|Report of Independent Registered Public Accounting Firm               | F-2
|--------------------------------------------------------------------- | ---
|                                                                      |    
|Consolidated Balance Sheets                                           | F-3
|                                                                      |    
|Consolidated Statements of Operations and Comprehensive Income (Loss) | F-4
|                                                                      |    
|Consolidated Statements of Stockholders’ Equity                       | F-5
|                                                                      |    
|Consolidated Statements of Cash Flows                                 | F-6
|                                                                      |    
|Notes to Consolidated Financial Statements                            | F-7



F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors

China 3C Group



We have audited the accompanying consolidated
balance sheets of China 3C Group and subsidiaries (the “Company”) as of December 31, 2010 and 2009, and the related
consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows for the years ended December
31, 2010, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the   financial statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.



In our opinion, based on our audits, the
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of China 3C Group and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for
the years ended December 31, 2010, 2009 and 2008 in conformity with the U.S. generally accepted accounting principles.



Goldman Kurland and Mohidin, LLP



Encino, California

May 18, 2011

Except for Notes 1, 2, 5, 7 and 13, for which the date is March
14, 2012.



F-2







CHINA 3C GROUP

CONSOLIDATED BALANCE SHEETS

(in thousands)



|                                                                                                                                                         |  | December 31, |        |   | December 31, |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ------------ | -
|                                                                                                                                                         |  | 2010         |        |   | 2009         |  
|                                                                                                                                                         |  |              |        |   |              |  
|ASSETS                                                                                                                                                   |  |              |        |   |              |  
|                                                                                                                                                         |  |              |        |   |              |  
|Current assets:                                                                                                                                          |  |              |        |   |              |  
|Cash and equivalents                                                                                                                                     |  | $            | 26,249 |   |              | $
|Accounts receivable, net                                                                                                                                 |  |              | 11,026 |   |              |  
|Inventories                                                                                                                                              |  |              | 7,284  |   |              |  
|Advances to suppliers                                                                                                                                    |  |              | 2,201  |   |              |  
|Tax receivable                                                                                                                                           |  |              | 1,200  |   |              |  
|Prepaid expenses and other current assets                                                                                                                |  |              | 591    |   |              |  
|Total current assets                                                                                                                                     |  |              | 48,551 |   |              |  
|                                                                                                                                                         |  |              |        |   |              |  
|Property, plant and equipment, net                                                                                                                       |  |              | 191    |   |              |  
|Goodwill                                                                                                                                                 |  |              | 11,229 |   |              |  
|Intangible asset, net                                                                                                                                    |  |              | 13,153 |   |              |  
|Refundable deposits                                                                                                                                      |  |              | 7      |   |              |  
|Total assets                                                                                                                                             |  | $            | 73,131 |   |              | $
|                                                                                                                                                         |  |              |        |   |              |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                     |  |              |        |   |              |  
|                                                                                                                                                         |  |              |        |   |              |  
|Current liabilities:                                                                                                                                     |  |              |        |   |              |  
|Accounts payable and accrued expenses                                                                                                                    |  | $            | 8,675  |   |              | $
|Income tax payable                                                                                                                                       |  |              | 736    |   |              |  
|Total liabilities                                                                                                                                        |  |              | 9,411  |   |              |  
|                                                                                                                                                         |  |              |        |   |              |  
|Stockholders' equity                                                                                                                                     |  |              |        |   |              |  
|Common stock, $0.001 par value, 100,000,000 million shares authorized, 54,831,327  issued and outstanding as of December 31, 2010 and 2009, respectively |  |              | 55     |   |              |  
|Additional paid-in capital                                                                                                                               |  |              | 20,252 |   |              |  
|Subscription receivable                                                                                                                                  |  |              | (50    | ) |              |  
|Statutory reserve                                                                                                                                        |  |              | 11,543 |   |              |  
|Other comprehensive income                                                                                                                               |  |              | 6,706  |   |              |  
|Retained earnings                                                                                                                                        |  |              | 25,214 |   |              |  
|Total stockholders' equity                                                                                                                               |  |              | 63,720 |   |              |  
|Total liabilities and stockholders' equity                                                                                                               |  | $            | 73,131 |   |              | $



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



F-3







CHINA 3C GROUP

CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share amounts)



|                                                              |  | 2010       |            |   | 2009       |   |            | 2008       | 
|------------------------------------------------------------- |  | ---------- | ---------- | - | ---------- | - | ---------- | ---------- | 
|                                                              |  | (Restated) |            |   | (Restated) |   |            | (Restated) | 
|Net sales                                                     |  | $          | 158,094    |   |            | $ | 218,994    |            | 
|Cost of sales                                                 |  |            | 140,668    |   |            |   | 187,476    |            | 
|Gross profit                                                  |  |            | 17,426     |   |            |   | 31,518     |            | 
|Selling, general and administrative expenses                  |  |            | 42,263     |   |            |   | 32,126     |            | 
|Income from operations                                        |  |            | (24,837    | ) |            |   | (608       | )          | 
|Other (income) expense                                        |  |            |            |   |            |   |            |            | 
|Interest income                                               |  |            | (102       | ) |            |   | (109       | )          | 
|Other income                                                  |  |            | (5         | ) |            |   | (163       | )          | 
|Other expense                                                 |  |            | 145        |   |            |   | 163        |            | 
|Total other (income) expense                                  |  |            | 38         |   |            |   | (109       | )          | 
|                                                              |  |            |            |   |            |   |            |            | 
|Income (loss) before income taxes                             |  |            | (24,875    | ) |            |   | (499       | )          | 
|Provision for income taxes                                    |  |            | 52         |   |            |   | 714        |            | 
|Net income (loss)                                             |  | $          | (24,927    | ) |            | $ | (1,213     | )          | 
|Foreign currency translation adjustments                      |  |            | 1,526      |   |            |   | (92        | )          | 
|Comprehensive income (loss)                                   |  | $          | (23,401    | ) |            | $ | (1,305     | )          | 
|                                                              |  |            |            |   |            |   |            |            | 
|Net income (loss) available to common shareholders per share: |  |            |            |   |            |   |            |            | 
|Basic and Diluted                                             |  | $          | (0.45      | ) |            | $ | (0.02      | )          | 
|                                                              |  |            |            |   |            |   |            |            | 
|Weighted average shares outstanding:                          |  |            |            |   |            |   |            |            | 
|Basic and Diluted                                             |  |            | 54,831,327 |   |            |   | 53,867,890 |            | 



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



F-4







CHINA 3C GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY

YEARS ENDED DECEMBER 31, 2010, 2009 and
2008

(in thousands)



|                                                                         |  |              |        |  |         |   |    | Additional   |  |   |            |  |  |               |     |   | Other    |   |        |               |  |   | Total  |  
|------------------------------------------------------------------------ |  | ------------ | ------ |  | ------- | - | -- | ------------ |  | - | ---------- |  |  | ------------- | --- | - | -------- | - | ------ | ------------- |  | - | ------ | -
|                                                                         |  | Common Stock |        |  | Paid-In |   |    | Subscription |  |   | Statutory  |  |  | Comprehensive |     |   | Retained |   |        | Stockholders' | 
|                                                                         |  | Shares       |        |  | Amount  |   |    | Capital      |  |   | Receivable |  |  | Reserve       |     |   | Income   |   |        | Earnings      |  |   | Equity |  
|Balance at December 31, 2007                                             |  |              | 52,674 |  |         | $ | 53 |              |  | $ | 19,466     |  |  | $             | (50 | ) |          | $ | 7,234  |               |  | $ | 1,872  |  
|                                                                         |  |              |        |  |         |   |    |              |  |   |            |  |  |               |     |   |          |   |        |               |  |   |        |  
|Foreign currency translation adjustments                                 |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | 3,400  |  
|Transfer to statutory reserve                                            |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | 3,875  |               |  |   | -      |  
|Net income                                                               |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | -      |  
|                                                                         |  |              |        |  |         |   |    |              |  |   |            |  |  |               |     |   |          |   |        |               |  |   |        |  
|Balance at December 31, 2008                                             |  |              | 52,674 |  |         |   | 53 |              |  |   | 19,466     |  |  |               | (50 | ) |          |   | 11,109 |               |  |   | 5,272  |  
|                                                                         |  |              |        |  |         |   |    |              |  |   |            |  |  |               |     |   |          |   |        |               |  |   |        |  
|Foreign currency translation adjustments                                 |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | (92    | )
|Issuance of common stock for compensation                                |  |              | 1,997  |  |         |   | 2  |              |  |   | 285        |  |  |               | -   |   |          |   | -      |               |  |   | -      |  
|Issuance of common stock in consideration of the cancelled stock options |  |              | 160    |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | -      |  
|Transfer to statutory reserve                                            |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | 426    |               |  |   | -      |  
|Net income                                                               |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | -      |  
|                                                                         |  |              |        |  |         |   |    |              |  |   |            |  |  |               |     |   |          |   |        |               |  |   |        |  
|Balance at December 31, 2009                                             |  |              | 54,831 |  |         |   | 55 |              |  |   | 19,751     |  |  |               | (50 | ) |          |   | 11,535 |               |  |   | 5,180  |  
|                                                                         |  |              |        |  |         |   |    |              |  |   |            |  |  |               |     |   |          |   |        |               |  |   |        |  
|Foreign currency translation adjustments                                 |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | 1,526  |  
|Issuance of common stock for compensation                                |  |              | -      |  |         |   | -  |              |  |   | 501        |  |  |               | -   |   |          |   | -      |               |  |   | -      |  
|Transfer to statutory reserve                                            |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | 8      |               |  |   | -      |  
|Net loss                                                                 |  |              | -      |  |         |   | -  |              |  |   | -          |  |  |               | -   |   |          |   | -      |               |  |   | -      |  
|Balance at December 31, 2010                                             |  |              | 54,831 |  |         | $ | 55 |              |  | $ | 20,252     |  |  | $             | (50 | ) |          | $ | 11,543 |               |  | $ | 6,706  |  



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



F-5







CHINA 3C GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  | 2010 |         |   | 2009 |   |        | 2008 | 
|----------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- | 
|                                                                                          |  |      |         |   |      |   |        |      | 
|Operating activities:                                                                     |  |      |         |   |      |   |        |      | 
|Net income (loss)                                                                         |  | $    | (24,927 | ) |      | $ | (1,213 | )    | 
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |      |         |   |      |   |        |      | 
|Depreciation                                                                              |  |      | 11      |   |      |   | 614    |      | 
|Amortization of intangible assets                                                         |  |      | 1,405   |   |      |   | 698    |      | 
|Goodwill impairment                                                                       |  |      | 9,591   |   |      |   | -      |      | 
|Stock based compensation                                                                  |  |      | 501     |   |      |   | 287    |      | 
|Gain on asset disposition                                                                 |  |      | -       |   |      |   | -      |      | 
|Provision for bad debts                                                                   |  |      | -       |   |      |   | -      |      | 
|(Increase)/decrease in assets                                                             |  |      |         |   |      |   |        |      | 
|Accounts receivable                                                                       |  |      | 7,688   |   |      |   | 5,472  |      | 
|Tax receivable                                                                            |  |      | -       |   |      |   | (1,157 | )    | 
|Other receivable                                                                          |  |      | (138    | ) |      |   | (64    | )    | 
|Inventories                                                                               |  |      | (261    | ) |      |   | 2,199  |      | 
|Prepaid expenses and other current assets                                                 |  |      | (142    | ) |      |   | (142   | )    | 
|Advance to suppliers                                                                      |  |      | 251     |   |      |   | 119    |      | 
|Refundable deposits                                                                       |  |      | 9       |   |      |   | 17     |      | 
|(Increase) / decrease in current liabilities                                              |  |      |         |   |      |   |        |      | 
|Accounts payable and accrued expenses                                                     |  |      | 1,545   |   |      |   | 1,482  |      | 
|Income tax payable                                                                        |  |      | (231    | ) |      |   | (1,200 | )    | 
|Net cash provided (used) by operating activities                                          |  |      | (4,698  | ) |      |   | 7,112  |      | 
|                                                                                          |  |      |         |   |      |   |        |      | 
|CASH FLOW FROM INVESTING ACTIVITIES:                                                      |  |      |         |   |      |   |        |      | 
|Purchase of property and equipment                                                        |  |      | -       |   |      |   | (806   | )    | 
|Proceeds from asset sales                                                                 |  |      | (22     | ) |      |   | -      |      | 
|Payments for acquisition of subsidiary                                                    |  |      | -       |   |      |   | (7,784 | )    | 
|Net cash (used in) investing activities                                                   |  |      | (22     | ) |      |   | (8,590 | )    | 
|                                                                                          |  |      |         |   |      |   |        |      | 
|Effect of exchange rate changes on cash and cash equivalents                              |  |      | 1,061   |   |      |   | (772   | )    | 
|                                                                                          |  |      |         |   |      |   |        |      | 
|Net increase (decrease) in cash                                                           |  |      | (3,659  | ) |      |   | (2,250 | )    | 
|Cash, beginning of year                                                                   |  |      | 29,908  |   |      |   | 32,158 |      | 
|Cash, end of year                                                                         |  | $    | 26,249  |   |      | $ | 29,908 |      | 
|                                                                                          |  |      |         |   |      |   |        |      | 
|Supplemental disclosure of cash flow information:                                         |  |      |         |   |      |   |        |      | 
|Income taxes paid                                                                         |  | $    | 254     |   |      | $ | 3,073  |      | 
|Interest paid                                                                             |  | $    | -       |   |      | $ | -      |      | 



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



F-6







CHINA 3C GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010 AND 2009



Note 1 - ORGANIZATION



China 3C Group (the “Company” or “China 3C”)
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 (“BVI”). Zhejiang Yong Xin Digital Technology
Company Limited (“Zhejiang”), Yiwu Yong Xin Communication Limited (“Yiwu”), Hangzhou Wang Da Electronics
Company Limited (“Wang Da”), Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and Shanghai Joy &
Harmony Electronics Company Limited (“Joy & Harmony”), Jinhua Baofa Logistic Ltd (“Jinhua”) were incorporated
under the laws of Peoples Republic of China (“PRC”) on July 11, 2005, July 18, 1997, March, 30, 1998, April 12, 2004,
August 20, 2003 and December 27, 2001, respectively. All dollar amounts are in thousands, unless otherwise indicated.



On December 21, 2005, Capital became a wholly owned subsidiary
of China 3C Group through a reverse merger (“Merger Transaction”). China 3C Group acquired all of the issued and outstanding
capital stock of Capital pursuant to a Merger Agreement dated December 21, 2005 by and among China 3C Group, XY Acquisition Corporation,
Capital and the shareholders of Capital (the “Merger Agreement”). Pursuant to the Merger Agreement, Capital became
a wholly owned subsidiary of China 3C Group and, in exchange for the Capital shares, China 3C Group issued 35,000,000 shares of
its common stock to the shareholders of Capital, representing 93% of the issued and outstanding capital stock of China 3C Group
at that time and cash of $500.



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



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



On August 15, 2007, we executed a series of contractual agreements
between Capital and Zhejiang. The contractual agreements give Capital and its equity owners an obligation, and having ability to
absorb, any losses, and rights to receive returns; however, these contractual agreements did not change the equity ownership of
Zhejiang. We did not dispose Capital’s actual equity ownership of Zhejiang when we execute the contractual agreements. Capital
entered into share-holding entrustment agreements with five individuals - Zhenggang Wang, Yimin Zhang, Huiyi Lv, Xiaochun Wang
and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%, respectively, of the equity interest of Zhejiang on behalf of Capital on
November 21, 2005. The entrustment agreements confirm that CFDL is the actual owner of Zhejiang. CFDL enjoys the actual shareholder’s
rights and has the right to obtain any benefits received by the nominal holders. Zhenggang Wang is the CEO and shareholder of China
3C Group. Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao have no other relationship with China 3C Group. No consideration
was given to these individuals who held the equity of Zhejiang on behalf of CFDL.



On July 6, 2009, China 3C and its subsidiary Zhejiang and Yiwu
purchased 100% of Jinhua for RMB 120 million (approximately $17,500) in cash.  Zhejiang acquired 90% and Yiwu acquired 10%
of the equity interests in Jinhua.



The purchase price and related allocation to the estimated fair
values of the assets acquired and liabilities assumed, after proportionately allocating the goodwill resulting from the transaction
in accordance with ASC 805 “Business Combinations” is as follows:



F-7







|Cash paid for acquisition of Jinhua       |  | $ | 17,508 | 
|----------------------------------------- |  | - | ------ | 
|                                          |  |   |        | 
|Assets acquired :                         |  |   |        | 
|Cash                                      |  | $ | 2,406  | 
|Accounts receivable, net                  |  |   | 715    | 
|Other receivables, net                    |  |   | 60     | 
|Prepaid expenses                          |  |   | 133    | 
|Property, plant and equipment             |  |   | 216    | 
|Intangible asset - transportation network |  |   | 15,182 | 
|Goodwill                                  |  |   | 472    | 
|Assets acquired                           |  |   | 19,184 | 
|                                          |  |   |        | 
|Liabilities assumed:                      |  |   |        | 
|Accounts payable                          |  |   | 315    | 
|Accrued expenses and other payables       |  |   | 547    | 
|Due to shareholders                       |  |   | 814    | 
|Liabilities assumed                       |  |   | 1,676  | 
|                                          |  |   |        | 
|Net assets acquired                       |  | $ | 17,508 | 



Following the acquisition of Jinhua, the Company began
providing logistic service to businesses in addition to its traditional business of resale and distribution of third party products
such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries,
CD players, radio Walkmans and audio systems.



F-8











Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation



The accompanying consolidated financial statements were prepared
in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).  The
Company’s subsidiaries – Wang Da, Yiwu, Joy & Harmony, Sanhe, Jinhua and Zhejiang’s functional currency is
the Chinese Renminbi (“RMB”), however, the accompanying consolidated financial statements have been translated and
presented in United States Dollars (“$”, or “USD”). China 3C Group is the parent company that was incorporated
on August 20, 1998 under the laws of the State of Nevada. The parent company does not have operations; therefore, it does not have
sales. The main activities of China 3C Group were incurring public company expenses. China 3C Group pays all of its expenses in
USD. Therefore, we believe China 3C Group’s functional currency is USD. Capital was incorporated on July 22, 2004 under the
laws of the British Virgin Islands (“BVI”). Capital is a holding company and it does not have operations. As a result,
we determined that China 3C Group, and Capital’s functional currency is USD.



F-9







Principles of Consolidation



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



Currency Translation



The accounts of Zhejiang, Wang Da, Yiwu, Sanhe, Joy & Harmony
and Jinhua were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (“RMB”). Such financial
statements were translated into USD in accordance with FASB ASC Topic 830-10, “Foreign Currency Translation,” with
the RMB as the functional currency. According to FASB ASC Topic 830-10, assets and liabilities were translated at the ending exchange
rate, stockholders’ equity is translated at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported as other comprehensive income in accordance with
FASB ASC Topic 220, “Reporting Comprehensive Income,” as a component of shareholders’ equity. Transaction gains
and losses are reflected in the consolidated income (loss) and comprehensive income (loss) statement.



Use of Estimates



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



Risks and Uncertainties



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



Contingencies



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



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



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



F-10







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. Allowances for doubtful
debts were $441 and $404 as of December 31, 2010 and 2009, respectively.



|                                        |  | Additions             |     |  |                         |   |    |                                         | 
|--------------------------------------- |  | --------------------- | --- |  | ----------------------- | - | -- | --------------------------------------- | 
|Description                             |  | Balance at January 1, |     |  | (1) Charged to expenses |   |    | (2) Charged to other comprehensive loss | 
|Allowance for doubtful receivables 2010 |  | $                     | 404 |  |                         | $ | 37 |                                         | 
|Allowance for doubtful receivables 2009 |  | $                     | 365 |  |                         | $ | 37 |                                         | 



Inventories



Inventories are valued at the lower of cost (determined on a
weighted average basis) or market.  Management compares the cost of inventories with the market value and allowance is
made for writing down their inventories to market value, if lower. As of December 31, 2010 and 2009, inventory consisted entirely
of finished goods valued at $7,284 and $6,764, respectively.



Property, Plant & Equipment



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



|Automotive       | 5 years
|---------------- | -------
|Office Equipment | 5 years



As of December 31, 2010 and 2009, property and equipment consisted
of the following:



|                               |  | 2010 |       |   | 2009 |  
|------------------------------ |  | ---- | ----- | - | ---- | -
|Automotive                     |  | $    | 738   |   |      | $
|Office equipment               |  |      | 195   |   |      |  
|Leasehold improvement          |  |      | 65    |   |      |  
|Plant and Equipment            |  |      | 3     |   |      |  
|Sub Total                      |  |      | 1,001 |   |      |  
|Less: accumulated depreciation |  |      | (810  | ) |      |  
|Total                          |  | $    | 191   |   |      | $



F-11







The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with ASC 360 “Property, Plant and Equipment” requires impairment losses to
be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on
the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Losses on long-lived assets to
be disposed of are determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on
its review, the Company believes that, as of December 31, 2010 and 2009, there were no significant impairments of its long-lived
assets.



Fair Value of Financial Instruments



ASC 825 “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.



Impairment of Goodwill



In accordance with ASC 350,we test goodwill at
the reporting unit level for impairment on an annual basis. Reporting units are determined based on the Company's operating segments.
In performing the impairment test, we utilize the two-step approach prescribed under ASC 350. Step 1 requires a comparison
of the carrying value of each reporting unit to its estimated fair value. We use the income approach for Step 1 to estimate the
fair value of our reporting units. The Step 1 impairment analysis indicated that the carrying value of the net assets of Sanhe
and Joy & Harmony exceeded the estimated fair value of the reporting unit.



As a result, we were required to perform Step 2 of the goodwill
impairment test to determine the amount, if any, of goodwill impairment charges for Sanhe and Joy & Harmony. Step 2 of the
goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value.. If the carrying
value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount
equal to the excess. We completed Step 2 and determined that a goodwill impairment charge in the amount of $1,347 and $8,243 were
required for Sanhe and Joy & Harmony, respectively. The resulting goodwill impairment charge is reflected in operatings expenses
in our consolidated statements of operations.  Impairment charges related to goodwill have no impact on our cash balances.



The estimate of fair value of our reporting units requires significant
judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently
uncertain, including estimates of future growth rates, estimate of future discounted cash flows and operating margins and assumptions
about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates
and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the
future.



Revenue Recognition



In accordance with Securities and Exchange Commission (“SEC”)
Staff Accounting Bulletin (“SAB”) 104, the Company recognizes revenues when there is persuasive evidence of an arrangement,
product delivery and acceptance have occurred, the sales price is fixed and determinable, and collectability of the resulting receivable
is reasonably assured.



The Company records revenues when title and the risk of loss
pass to the customer.  Generally, these conditions occur on the date the customer takes delivery of the product.  Revenue
is generated from sales of China 3C products through two main revenue streams:



| | 1. | Retail. Approximately 68.8% , 68.9% and 68.7%of the Company's revenue comes from sales to individual customers
at outlets installed inside department stores etc. (i.e. store in store model) during 2010, 2009 and 2008, respectively and is
mainly achieved through two broad categories:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-12







| | a. | Purchase contracts. Sales by purchase contracts have terms of thirty days from the transfer of goods to the customer.
Under this method, the Company delivers goods to places designated by the customers and receives confirmation of delivery. At that
time, ownership and all risks associated to the goods are transferred to the customers and payment is made within 30 days. The
Company relieves its inventory and recognizes revenue upon receipt of confirmation from the customer.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Point of sale transfer of ownership. Under this method, the Company’s products are placed in third party stores
and sold by the Company’s sales people. Upon purchase of the item by the customer, the Company relieves its inventory and
recognizes revenue related to that item.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Wholesale. Approximately 31.2%, 31.1% and 31.3% of the Company's revenue comes from wholesale during 2010, 2009 and
2008, respectively. Recognition of income in wholesales is based on the contract terms. In 2009, the main contract terms on wholesale
agreed that payments be paid 15 days after receipt of goods and that ownership and all risks associated with the goods are transferred
to the customers on the date of goods received and payments will be made 15 days therefrom.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales revenue is therefore recognized on the following basis:



| | 1. | Store in store model:
| | -- | ---------------------



| | a. | For goods sold under sales and purchase contracts, revenue is recognized when goods are received by customers.
| | -- | --------------------------------------------------------------------------------------------------------------



| | b. | For goods at customer outlets which the Company’s sales people operate, and inventory of goods is under joint control
by the customers and the Company, revenue is recognized at the point of sale to the end buyer. China 3C has title and owns the
inventory under joint control. Such joint controlled inventory has been properly included in reported inventory balance of China
3C’s financial statements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During public holidays or department store celebration periods,
we provide certain sales incentives to retail customers to increase sales, such as gift giving and price reductions. These are
the only temporary incentives during the specified periods. Sales made to our retail customers as a result of incentives are immaterial
as a percentage of total sales revenue.



| | 2. | Wholesales:
| | -- | -----------



| | a. | Revenue is recognized at the date of goods are received by wholesale customers. We operate our wholesale business by selling
large volume orders to second-tier distributors and large department stores. Revenues from wholesale are recognized as net sales
after confirmation with distributors. Net sales already take into account revenue dilution as they exclude inventory credit, discount
fro early payment, product obsolescence and return of products and other allowances. Net sales also take into account the return
of products in accordance with relevant laws and regulations in China.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-13







Return policies



Our return policy complies with China’s laws and regulations
on consumer’s rights and product quality. In accordance with Chinese law, consumers can return or exchange used products
within seven days only if the goods do not meet safety and health requirements, endanger a person’s property, or do not meet
the advertised performance. If the conditions and requirements as set out in the relevant laws and regulations are met, the retail
stores are entitled to accept a return of the goods from the consumer. In such cases, the Company shall accept the returns unconditionally.
Goods returned will be redirected to the production factory or supplier who shall bear all losses on the returns in accordance
the laws and regulations. Consumer returns or exchanges of products that have not been used, where the packaging has not been damaged,
are honored if such return or exchange is within seven days. If a consumer returns a product, the Company must refund the invoice
price to the consumer. The Company will then be responsible for returning the goods to the production factory or supplier. At that
time the Company can recover the price based on the purchase and sale contract with the producer or supplier. However, when goods
are returned, the Company loses the gross margin that it records when revenue is recognized, regardless of whether the production
factory or supplier takes the product back or not.



The return rights granted to wholesale customers are similar
to the rights granted to retail customers. Once wholesale customers purchase the products, they follow the same return policy as
retail customers. We do not honor any return from wholesale customers other than if the products don’t meet laws and regulations
or quality requirements. If the wholesale customers have a high inventory level or product obsolescence caused by lower market
demands or other operational issues, the wholesale customers bear their own losses. When a wholesale customer returns products,
the Company will return the products to the suppliers or manufacturers. A sales return and allowance is recorded at the sales price.
Meanwhile, a purchase return and allowance entry is recorded at the invoice price because the suppliers or manufacturers bear the
losses. The net effect is that the Company derecognizes the gross profit when a return takes place, but does not record any loss
on the cost of the returned item back to the supplier or manufacturer.



In light of the aforesaid PRC laws and regulations and the Company's
arrangements with suppliers, we do not provide an accrual for any estimated losses on subsequent sale of the return of products. 
As a result we do not engage in assessing levels of inventory in the distribution channel, product obsolescence and/or introductions
of new products, as none of those factors have any impact on us with respect to estimating losses on subsequent sale of returned
goods.  Goods return policy strictly complies with the laws and regulations in China on consumer rights and product quality
requirements. If the conditions and requirements as set out in the relevant laws and regulations are met, customers are able to
return the goods unconditionally. In such cases, the Company shall accept the returns unconditionally. Goods returned will be redirected
back to the manufacturers or suppliers who shall meet all losses on returns in accordance the laws and regulations. The Company
will only be responsible for assisting the process of execution of goods return. The Company shall not bear any loss from goods
returned.



Unlike the US retail market, sellers do not accept returns caused
by any change in the sales market or change in customers’ preferences in China. Therefore, the Company generally does not
honor any return except for a product defect. As such, situations relating to return of goods from overstock in distribution channels,
product obsolescence and over-budgeted goods from launching of new products will not exist.

As a result, we do not provide any accrual on subsequent return
of goods sold.



The reported sales do not include estimate of returns due to
defects for the period presented because we do not offer customers the right to return in China. We do not allow the customers
to return the products for cash refunds, credit, or exchange for other products through general rights of return. If the products
are defective, manufacturers are directly responsible for the defects. China 3C Group, as a distributor, only assists customers
in returning the defective products to manufacturers. The manufacturers send replacement products to customers directly.



F-14







Cost of Sales



Cost of sales consists of actual product cost, which is the
purchase price of the product less any discounts.  Cost of sales excludes freight charges, purchase and delivery costs,
internal transfer, freight charges and the other costs of the Company’s distribution network, which are identified in general
and administrative expenses.



General and Administrative Expenses



General and administrative expenses are comprised principally
of payroll and benefits costs for retail and corporate employees, occupancy costs of corporate facilities, lease expenses, management
fees, traveling expenses and other operating and administrative expenses, including freight charges, purchase and delivery costs,
internal transfer freight charges and other distribution costs.



Shipping and handling fees



The Company follows ASC 605-45, “Handling Costs, Shipping
Costs”.  The Company does not charge its customers for shipping and handling. The Company classifies shipping and
handling fees as part of General and administrative expenses which were $228, $226 and $244 for 2010, 2009 and 2008, respectively.



Vendor Discounts



The Company has negotiated preferred pricing arrangements with
certain vendors on certain products. These arrangements are not contingent on any levels of volume and are considered vendor discounts
as opposed to rebates. The Company records these discounts along with the purchase of the discounted items, resulting in lower
inventory cost and a corresponding lower cost of sales as the products are sold.



Management fees paid to the department stores under “store
in store” model



Under the “store in store” business operation model,
the Company may pay management fees to the department stores, which are in the form of service charges. The management fees are
reflected in general and administrative expenses. Such management fees were $11,129 and $11,623 in general and administrative expenses
for 2010 and 2009, respectively.



Share Based Payment



The Company adopted ASC 718-10, “Stock Compensation”,
which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with
a primary focus on transactions in which an entity obtains employee services in share-based payment transactions. ASC 718-10 is
a revision to SFAS No. 123, “Accounting for Stock-Based Compensation,” ASC 718-10 requires measurement of the cost
of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with
limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be
recognized.



Advertising



Advertising expenses consist primarily of costs of promotion
for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.
Advertising expense was $491 and $405 for 2010 and 2009, respectively.



Other Income



Other income was $5, $163 and $1,150 for the years ended December
31, 2010, 2009 and 2008. Other income consists of the following: Other income was $5, $163 and $1,150 for the years ended
December 31, 2010, 2009 and 2008. Other income consists of the following:



|                                    |  | 2010 |   |  | 2009 |   |     | 2008 | 
|----------------------------------- |  | ---- | - |  | ---- | - | --- | ---- | 
|Advertising service income          |  | $    | - |  |      | $ | 103 |      | 
|Repair service income               |  |      | - |  |      |   | 30  |      | 
|Commission income from China Unicom |  |      | - |  |      |   | 30  |      | 
|Gain on disposal of PPE             |  |      | 5 |  |      |   | -   |      | 
|Total other income                  |  | $    | 5 |  |      | $ | 163 |      | 



F-15







Advertising service income is the service fee we received from
electronic product manufacturers when we advertise their products in our retail locations. Commission income from China Unicom
is related to the sales of China Unicom’s wireless service and products, i.e. rechargeable mobile phone cards.



Income Taxes



The Company utilizes ASC 740 “Income Taxes”. 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 (loss) per share are calculated in accordance with
ASC 260, “Earnings per Share”. Basic earnings (loss) per share is based upon the weighted average number of common
shares outstanding. Diluted earnings (losses) per share is based on the assumption that all dilutive convertible shares and stock
options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and
warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during the period. If convertible shares and stock options
are anti-dilutive, the impact of conversion is not included in the diluted net income per share. Excluded from the calculation
of diluted earnings per share for 2010 and 2009 were 50,000 and 100,000, respectively, as they were not dilutive.



Statement of Cash Flows



In accordance with FASB ASC Topic 230 “Statement of Cash
Flows”, cash flows from the Company’s operations are calculated based upon the functional currency, in our case the
RMB. As a result, amounts related to changes in assets and liabilities reported on the statement of cash flows will not necessarily
agree with the changes in the corresponding balances on the balance sheet.



Concentration of Credit Risk



Financial instruments that potentially subject the Company to
concentrations of credit risk are cash, accounts receivable, advances to suppliers 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 is 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



FASB ASC Topic 280, “Segment Reporting” requires
use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates
a company. The Company operated in four segments before the acquisition of Jinhua in July 2009. Since the acquisition of Jinhua,
the Company operates in five segments (see Note 13).



F-16







Recent Accounting Pronouncements



FASB ASC Topic 805“Business Combinations”
addresses the accounting and disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in
a business combination. FASB ASC Topic 805 requires an acquiring entity to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value, with limited exceptions, and applies to a wider range of transactions or events.
FASB ASC Topic 805 is effective for fiscal years beginning on or after December 15, 2008 and early adoption and retrospective
application is prohibited. The Company adopted FASB ASC Topic 805 on January 1, 2009. The Company accounted for the acquisition
of Jinhua in accordance with these standards.



FASB ASC Topic 810“Consolidation” establishes
accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that
should be reported as equity in the consolidated financial statements. The Company adopted FASB ASC Topic 810 on January 1, 2009.
The adoption of this statement had no effect on the Company’s consolidated financial statements.



FASB ASC Topic 815“Derivatives and Hedging”
is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Standard also improves transparency about the location and amounts of derivative instruments
in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement
133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows.
The Company adopted FASB ASC Topic 815 on January 1, 2009. The adoption of this statement had no effect on the Company’s
consolidated financial statements.



FASB ASC Topic 825“Financial Instruments”
requires that the fair value disclosures required for all financial instruments within the scope of FASB ASC Topic 825-10, “Disclosures
about Fair Value of Financial Instruments”, be included in interim financial statements. This FSP also requires entities
to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual
basis and to highlight any changes from prior periods. FASB ASC Topic 825 was effective for interim periods ending after June 15,
2009. The adoption of FASB ASC Topic 825 had no material effect on the Company’s consolidated financial statements.



FASB ASC Topic 860“Transfers and servicing”
requires more information about transfers of financial assets and where companies have continuing exposure to the risks related
to transferred financial assets. FASB ASC Topic 860 is effective at the start of a company’s first fiscal year beginning
after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis. The adoption of this statement
had no material effect on the Company’s financial statements.



Revisions underFASB ASC Topic 810“Consolidation”,
revises how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under FASB ASC Topic 810, determining whether a company is required to consolidate an entity will
be based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic performance. FASB ASC Topic 810 is effective at the start
of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on
a calendar-year basis. The adoption of FASB ASC Topic 810had no impact on our financial statements.



F-17







In June 2009, the FASB issued Accounting Standards Update “ASU”
2009-1. The FASB approved its Codification ASC as the single source of authoritative United States accounting and reporting
standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification is effective
for interim or annual financial periods ending after September 15, 2009 and impacts our financial statements as all future references
to authoritative accounting literature will be referenced in accordance with the Codification. There were no changes to the content
of our financial statements or disclosures as a result of implementing the Codification.



In April 2010, FASB issued ASU 2010-13, Compensation
– Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency
of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides guidance on the classification of a share-based
payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance,
or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2010. The adoption of this statement did not have a significant
impact on the Company’s financial statements.



In April 2010, the FASB issued ASU 2010-17, “Revenue Recognition—Milestone
Method (Topic 605): Milestone Method of Revenue Recognition”.This Update provides guidance on the recognition
of revenue under the milestone method, which allows a vendor to adopt an accounting policy to recognize all of the arrangement
consideration that is contingent on the achievement of a substantive milestone (milestone consideration) in the period the milestone
is achieved. The pronouncement is effective on a prospective basis for milestones achieved in fiscal years and interim periods
within those years, beginning on or after June 15, 2010. The adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.



InJuly 2010, the FASB issued ASU 2010-20, “Receivables
(Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”.The
amendments in this Update are to provide financial statement users with greater transparency about an entity’s allowance
for credit losses and the credit quality of its financing receivables. The disclosures about activity that occurs during the reporting
period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The adoption
of this statement did not have a significant impact on the Company’s financial statements.



Note 3 – ADVANCES TO SUPPLIERS



Advances to suppliers represent advance payments to suppliers
for the purchase of inventory. As of December 31, 2010 and 2009, the Company had paid $2,201 and $2,370, respectively, as advances
to suppliers.



Note 4 - COMMON STOCK



On January 15, 2009, the Company’s Board of Directors
(“BOD”) adopted the China 3C Group, Inc. 2008 Omnibus Securities and Incentive Plan (the “2008 Plan”). 
The 2008 Plan provides for the granting of distribution equivalent rights, incentive stock options, non-qualified stock options,
performance share awards, performance unit awards, restricted stock awards, stock appreciation rights, tandem stock appreciation
rights, unrestricted stock awards or any combination of the foregoing, as may be best suited to the circumstances of the particular
employee, director or consultant.  Under the 2008 Plan 2,000,000 shares of the Company’s common stock are available
for issuance for awards.  Each award shall remain exercisable for a term of ten (10) years from the date of its grant. The
price at which a share of common stock may be purchased upon exercise of an option shall not be less than the closing sales price
of the common stock on the date such option is granted.  The 2008 Plan shall continue in effect, unless sooner terminated,
until the tenth anniversary of the date on which it is adopted by the BOD.



F-18







In April and October 2009, the Company issued 1,997,272 shares
of common stock under the 2008 Plan. The cost is expected to be recognized over a three year period. $501 and $287 was recognized
as stock based compensation expense during 2010 and 2009. There was $715 unrecognized compensation expenses related to the nonvested
stocks as of December 31, 2010.



Note 5 - STOCK WARRANTS, OPTIONS, AND COMPENSATION



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



The following summarizes the option activities for the year
ended 2010, 2009 and 2008.



|                                 |  | Options |          |   | Weighted-Average Exercise Price |   |      | Weighted- Average Remaining Contractual Life (Years) |  |  | Aggregate Intrinsic Value | 
|-------------------------------- |  | ------- | -------- | - | ------------------------------- | - | ---- | ---------------------------------------------------- |  |  | ------------------------- | 
|Outstanding at January 1, 2008   |  |         | 400,000  |   |                                 | $ | 5.61 |                                                      |  |  | 8.13                      | 
|Granted                          |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Exercised                        |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Forfeited                        |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Outstanding at December 31, 2008 |  |         | 400,000  |   |                                 | $ | 5.61 |                                                      |  |  | 8.13                      | 
|Granted                          |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Exercised                        |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Forfeited                        |  |         | (300,000 | ) |                                 |   | 6.15 |                                                      |  |  | 6                         | 
|Outstanding at December 31, 2009 |  |         | 100,000  |   |                                 | $ | 5.61 |                                                      |  |  | 7.13                      | 
|Granted                          |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Exercised                        |  |         | -        |   |                                 |   | -    |                                                      |  |  | -                         | 
|Forfeited                        |  |         | (50,000  | ) |                                 |   | -    |                                                      |  |  | -                         | 
|Outstanding at December 31, 2010 |  |         | 50,000   |   |                                 | $ | 4.16 |                                                      |  |  | 7.13                      | 



Outstanding options by exercise price consisted of the following
as of December 31, 2010.



|Options Outstanding |      |  | Options Exercisable | 
|------------------- | ---- |  | ------------------- | 
|Exercise Price      |      |  | Number of Shares    | 
|$                   | 4.16 |  |                     | 



During the three years ended December 31, 2008, 2009 and 2010,
the Company did not issue any stock options. The 50,000 stock options outstanding as of December 31, 2010 were issued in 2007 to
our former director Mr. Kenneth Berents, which has a 10 year term and vested immediately upon issuance.



The company estimates the fair value of stock options
at grant date using the Black-Scholes valuation model, consistent with the provisions of ASC 718-10 “Stock Compensation”.
Key inputs and assumptions used to estimate the fair value of stock options include the grant price of the award, the expected
option term, volatility of the company’s stock, the risk-free rate and the company’s dividend yield.



F-19







The following table presents the weighted-average assumptions
used in the valuation at the grant date and the resulting weighted average fair value per option granted:



|Term:                                   |  |   | 10 years |  
|--------------------------------------- |  | - | -------- | -
|Expected volatility:                    |  |   | 130      | %
|Risk-free interest rate                 |  |   | 2        | %
|Dividend yield                          |  |   | 0        | %
|Weighted-average grant date fair value: |  | $ | 4.5      |  



Note 6 - COMPENSATED ABSENCES



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



Note 7 - INCOME TAXES



The Company’s policy is to recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense. The Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor were any interest expense recognized during 2010, 2009 and 2008.



Under ASC 740-10-25, evaluation of a tax position is a two-step
process. The first step is to determine whether it is more-likely-than-not that a tax position will be sustained upon examination,
including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is
to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in
the financial statements.



The US entity, China 3C Group is subject to the US federal income
tax at a rate of 34%. The US entity does not conduct any operations and only incurs public company expenses every year, such as
legal fees, accounting fees, investor relations expenses and filing fees. In the process of applying step one, we determined it
is more likely than not that all of the Company’s deferred tax assets will not be realized. As of December 31, 2010, the
US entity has incurred net accumulated operating losses of approximately $3,848 for income tax purposes. As a result, $1,308 of
valuation allowance was recorded to reduce the deferred tax asset to zero. The net change in valuation allowance was $172 in 2010
and $349 in 2009 for the US entity.



The PRC subsidiaries, Sanhe, Wangda, Joy& Harmony, Yiwu,
Zhejiang are subject to the PRC income tax at a rate of 25%. Jinhua is subject to PRC income tax using simplified tax system. In
2010, the PRC subsidiaries incurred an adjusted net operating loss of $23,869. In the process of applying step one, management
believes these subsidiaries will continue to incur losses in the near future due to high market competition, slowing market demand,
rising labor and fuel costs. We believe it is more likely than not that the subsidiaries will not be able to benefit from the deferred
tax assets in association with the operating losses. The net change in valuation allowance was $5,990 in 2010 and $240 in 2009
for the PRC subsidiaries.



F-20







The components of deferred income tax assets and liabilities
as of December 31, 2010, 2009 and 2008 are as follows:



|                          |  | 2010 |        |   | 2009 |   |      | 2008 | 
|------------------------- |  | ---- | ------ | - | ---- | - | ---- | ---- | 
|Deferred tax assets:      |  |      |        |   |      |   |      |      | 
|U.S. net operating losses |  | $    | 172    |   |      | $ | 349  |      | 
|PRC net operating losses  |  |      | 5,990  |   |      |   | 240  |      | 
|Total deferred tax assets |  |      | 6,162  |   |      |   | 589  |      | 
|Less valuation allowance  |  |      | (6,162 | ) |      |   | (589 | )    | 
|                          |  | $    | -      |   |      | $ | -    |      | 



Reconciliation of the differences between the statutory US Federal
income tax rate and the effective rate is as follows for 2010, 2009 and 2008.



|                                       |  | 2010 |       |    | 2009 |  |        | 2008 | 
|-------------------------------------- |  | ---- | ----- | -- | ---- |  | ------ | ---- | 
|(Credit) tax at US Statutory Rate      |  |      | (34.0 | )% |      |  | (34.0  | )%   | 
|Tax rate difference                    |  |      | 8.6   | %  |      |  | 9.0    | %    | 
|Non deductible expense-impairment loss |  |      | 9.6   |    |      |  | -      |      | 
|Other                                  |  |      | 0.1   |    |      |  | -      |      | 
|Valuation allowance                    |  |      | 15.5  | %  |      |  | (118.1 | )%   | 
|Effective rate                         |  |      | 0.2   | %  |      |  | (143.1 | )%   | 



The large fluctuation in the valuation allowance from (118.1)%
in 2009 to 15.5% in 2010 is due to multiple reasons.  First, the Company’s consolidated net loss before income taxes
in 2010 was $24,875, compared to the net loss of $499 in 2009.  Second, the Company had several subsidiaries with taxable
income and corresponding income tax provisions in 2009, causing the valuation account to be rather high.  Finally, in 2010,
the Company had impaired goodwill of $9,591 which is not deductible for tax purposes and did not have an increasing effect on the
valuation.



Note 8 - COMMITMENTS



The Company leases various office facilities under operating
leases that terminate through 2011. Rent expense for 2010, 2009 and 2008 was $500, $518 and $274, respectively. The future minimum
obligations under these agreements are as follows by years as of December 31, 2010:



|2011 |  | $ | 176 | 
|---- |  | - | --- | 
|2012 |  |   | 53  | 
|2013 |  |   | 12  | 



In addition, as of December 31, 2010, the Company is committed
to pay $102 under various advertising agreements expiring within one year.



Note 9 - STATUTORY RESERVE



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



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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 December 31, 2010, 2009 and 2008, the Company had allocated $11,543, $11,535 and $11,109 to these non-distributable reserve
funds.



Note 10 - OTHER COMPREHENSIVE INCOME



The detail of other comprehensive income as included in stockholders’
equity for 2010, 2009 and 2008 are as follows:



|                             |  | Foreign Currency Translation Adjustment |       |   | Total Accumulated Other Comprehensive Income |  
|---------------------------- |  | --------------------------------------- | ----- | - | -------------------------------------------- | -
|Balance at January 1, 2008   |  | $                                       | 1,872 |   |                                              | $
|Change for 2008              |  |                                         | 3,400 |   |                                              |  
|Balance at December 31, 2008 |  | $                                       | 5,272 |   |                                              | $
|Change for 2009              |  |                                         | (92   | ) |                                              |  
|Balance at December 31, 2009 |  | $                                       | 5,180 |   |                                              | $
|Change for 2010              |  |                                         | 1,526 |   |                                              |  
|Balance at December 31, 2010 |  | $                                       | 6,706 |   |                                              | $



Note 11- CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS



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



Note 12 - MAJOR CUSTOMERS AND CREDIT RISK



During 2010 and 2009, no customer accounted for more than 10%
of the Company’s sales.  As of December 31, 2010 and 2009, the Company had no individual customers or vendors that
comprised more than 10% of the Company’s accounts receivable or accounts payable.



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Note 13 -   SEGMENT INFORMATION



We separately operate and prepare accounting and other financial
reports to management for five major business organizations (Wang Da, Sanhe, Yiwu, Joy & Harmony and Jinhua). Each of the individual
operating companies corresponds to different product groups.  Wang Da is mainly operating mobile phones, Sanhe is mainly
operating home appliances, Yiwu is mainly operating office communication products, and Joy & Harmony is mainly operating consumer
electronics. Jinhua provides logistics to businesses in Eastern China. “Other” segment includes China 3C (the
US holding company), Capital and Zhejiang; China 3C and Capital have no operations except for incurring public company expenses.
Zhejiang started operation of direct stores and franchise stores in 2009. Since the direct stores and franchise stores are in trial
operation, revenue generated from such stores and gross profits are nominal, Zhejiang’s operation is reported in “Other”
segment. All segments are accounted for using the same principals as described in Note 2.



We have identified five reportable segments required by ASC
280: (1) mobile phone, (2) home electronics, (3) office communication product, (4) consumer electronics and (5) Logistics.



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



|                        |  | Year Ended December 31, 2010 |       
|----------------------- |  | ---------------------------- | ------
|                        |  | Mobile                       |       
|                        |  | Phones                       |       
|Sales, net (restated)   |  | $                            | 43,801
|Cost of sales           |  |                              | 40,073
|Gross profit (restated) |  |                              | 3,728 
|Loss from operations    |  |                              | (3,156
|Total assets            |  |                              | 10,993



|                              |  | Year Ended December 31, 2009 |       
|----------------------------- |  | ---------------------------- | ------
|                              |  | Mobile                       |       
|                              |  | Phones                       |       
|Sales, net (restated)         |  | $                            | 58,744
|Cost of sales                 |  |                              | 52,144
|Gross profit (restated)       |  |                              | 6,600 
|Income (loss) from operations |  |                              | (262  
|Total assets                  |  |                              | 13,761



In 2010, the enterprise-wide revenue derived from each group
of products was as follows:



| | Ÿ | Mobile phones was $43,801.
| | - | --------------------------

| | Ÿ | Office equipments was $20,251, including fax machine $14,017, telephones
$3,531, printers $1,864 and other accessories $839.
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | Ÿ | Home electronics was $42,427, including DVD players $5,704, Stereo
$3,457, TV $15,564 and other small home electronics $ 17,702.
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | Ÿ | Consumer electronics was $40,247, including MP3/MP4 $33,653, Radio
$1,148, CD player $1,555, GPS $2,859 and other products $1,032.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | Ÿ | Logistics was $10, 691.
| | - | -----------------------

| | Ÿ | Other was $677.
| | - | ---------------



In 2009, the enterprise-wide revenue derived from each group
of products was as follows:



| | Ÿ | Mobile phones was $58,744.
| | - | --------------------------

| | Ÿ | Office equipments was $ 44,375, including fax machine $22,997, telephones
$10,599, printers $5,294 and other accessories $5,485.
| | - | --------------------------------------------------------------------------------------------------------------------------------



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| | Ÿ | Home electronics was $53,385, including DVD players $9,817, Stereo
$5,372, TV $16,738 and other small home electronics $ 21,458.
| | - | --------------------------------------------------------------------------------------------------------------------------------

| | Ÿ | Consumer electronics was $56,660, including MP3/MP4 $44,919, Radio
$1,690, CD player $3,633, GPS $4,073 and other products $2,345.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | Ÿ | Logistics was $5,573.
| | - | ---------------------

| | Ÿ | Other was $257.
| | - | ---------------



Note 14 - RESTATEMENT OF CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



China 3C operates most of its retail operations through “store
in store” model. Under this model, the Company leases space in major department stores and retailers. The Company does not
pay the department stores fixed leasing costs. Instead, China 3C deducts a percentage of sales each month as compensation to the
department stores. China 3C records such costs as “sales discount” as a deduction from net sales.



In response to the SEC comments of December 19, 2011, the
Company reviewed “sales discount” and determined they should be reclassified as management fees. As a result, we
reclassified “sales discount” from a contra revenue account to management fees as part of the selling, general
and administrative expenses. $9,740, $10,505 and $12,687 were previously classified in contra-revenue account as a deduction
to net sales for the year ended December 31, 2010, 2009 and 2008.  The Company moved the amount to selling
expenses, and it is reported as selling, general and administrative expenses in the statement of operations and comprehensive
income (loss).  The reclassification caused a $9,740 increase in net sales from $148,354 to $158,094 and a
corresponding increase of $9,740 in Selling, general and administrative expenses from $32,523 to $42,263 in 2010; a $10,505
increase in net sales from $208,489 to $218,994 and a corresponding increase of $10,505 in Selling, general and
administrative expenses from $21,621 to $32,126 in 2009; and a $12,687 increase in net sales from $310,644 to $323,331 and a
corresponding increase of $12,687 in Selling, general and administrative expenses from $14,132 to $26,819 in
2008.  The gross profit increased $9,740, $10,505 and $12,687 respectively in 2010, 2009 and 2008. The loss from
operations and net loss remained unchanged.  The impact of the restatement was limited to the presentation of the
consolidated statements of operations and comprehensive income (loss). The consolidated balance sheets, the consolidated
statements of stockholders’ equity and the related consolidated statements of cash flows remained unaffected.



The table below summarizes the restatement changes to the consolidated
statements of operations and comprehensive income (loss):



|                                             |  | 2010          |         |  | 2010          |   |         |        | 
|-------------------------------------------- |  | ------------- | ------- |  | ------------- | - | ------- | ------ | 
|                                             |  | (as reported) |         |  | (as restated) |   |         | Change | 
|Net sales                                    |  | $             | 148,354 |  |               | $ | 158,094 |        | 
|Gross profit                                 |  |               | 7,686   |  |               |   | 17,426  |        | 
|Selling, general and administrative expenses |  |               | 32,523  |  |               |   | 42,263  |        | 



|                                             |  | 2009          |         |  | 2009          |   |         |        | 
|-------------------------------------------- |  | ------------- | ------- |  | ------------- | - | ------- | ------ | 
|                                             |  | (as reported) |         |  | (as restated) |   |         | Change | 
|Net sales                                    |  | $             | 208,489 |  |               | $ | 218,994 |        | 
|Gross profit                                 |  |               | 21,013  |  |               |   | 31,518  |        | 
|Selling, general and administrative expenses |  |               | 21,621  |  |               |   | 32,126  |        | 



|                                             |  | 2008          |         |  | 2008          |   |         |        | 
|-------------------------------------------- |  | ------------- | ------- |  | ------------- | - | ------- | ------ | 
|                                             |  | (as reported) |         |  | (as restated) |   |         | Change | 
|Net sales                                    |  | $             | 310,644 |  |               | $ | 323,331 |        | 
|Gross profit                                 |  |               | 48,641  |  |               |   | 61,328  |        | 
|Selling, general and administrative expenses |  |               | 14,132  |  |               |   | 26,819  |        | 



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