UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549










FORM
10-K





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For
      the fiscal year ended December 31,
      2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              
              For
      the transition period from ____________ to
  ____________





Commission
file number 000-28767




CHINA
3C GROUP


(Exact
name of registrant as specified in its charter)





Nevada
            88-0403070(State
      or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
      Employer Identification No.)





368
HuShu Nan Road


HangZhou
City, Zhejiang Province, China 310014


(Address
of Principal Executive Offices) (Zip Code)





086-0571-88381700


(Registrant’s
Telephone Number, Including Area Code)





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





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





Common Stock, $.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 
 ̈
    No   x




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  
 ̈
    No   x




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.   Yes   x
    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.   ̈




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 filerxNon-accelerated filer ̈Smaller reporting
company ̈




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


Yes  
 ̈
    No   x




The
aggregate market value of the 43,469,844 shares of voting and non-voting common
equity stock held by non-affiliates of the registrant was approximately
$56,076,099 as of June 30, 2008, 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 $1.29 per share, as reported on the
OTC Bulletin Board.




As of
April 14, 2009, there were 52,834,055 shares of the registrant’s common stock
outstanding.




Documents
incorporated by reference: None.









CHINA
3C GROUP




Table
of Contents





PAGEPART IItem 1
            
            
            Business
            
            
            1Item 1A
            
            
            Risk
      Factors
            
            
            7Item 1B
            
            
            Unresolved
      Staff Comments
            
            
            10Item 2
            
            
            Properties
            
            
            11Item 3
            
            
            Legal
      Proceedings
            
            
            11Item 4
            
            
            Submission
      of Matters to a Vote of Security Holders
            
            
            11PART IIItem 5
            
            
            Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            
            11Item 6
            
            
            Selected
      Financial Data
            
            
            13Item 7
            
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            
            14Item 7A
            
            
            Quantitative
      and Qualitative Disclosure About Market Risk
            
            
            29Item 8
            
            
            Financial
      Statements and Supplementary Data
            
            
            30Item 9
            
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            
            30Item
      9A
            
            
            Controls
      and Procedures
            
            
            30Item 9B
            
            
            Other
      Information
            
            
            31PART IIIItem 10
            
            
            Directors,
      Executive Officers and Corporate Governance
            
            
            31Item 11
            
            
            Executive
      Compensation
            
            
            33Item 12
            
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            
            
            37Item 13
            
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            
            38Item 14
            
            
            Principal
      Accountant Fees and Services
            
            
            38PART IVItem 15
            
            
            Exhibits,
      Financial Statement Schedules
            
            
            39Index
      to Consolidated Financial Statements
            
            
            43




i




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.




PART
I




ITEM
1. BUSINESS





Overview




China 3C
Group (referred to herein as the “Company”, “China 3C,” “we” or “us”) was
incorporated on August 20, 1998 under the laws of the State of Nevada. We are
engaged in the business of resale and distribution of third party products and
generate approximately 100% of our revenue from resale of items such as mobile
phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players,
iPods, electronic dictionaries, CD players, radio Walkmans and audio
systems.




In 2007
we began operating under a “store in store” business model. As of December 31,
2008 we have established and were operating 1,014 “stores in
stores.”  We operate under the brand names Hangzhou Wang Da, Yiwu
YongXin, Shanghai Joy & Harmony and Hangzhou Sanhe. This business operation
model results in expanded marketing channels, thus, positively stimulating the
growth of sales.




During
2008 we entered into an acquisition agreement to acquire a transportation
logistics company in Eastern China which has been our transportation service
provider. In March 2009, we began working on establishing an electronics
franchise which will consist of free-standing, independent stores in Eastern
China. We expect franchise stores to pay 20-30% of their monthly net income as
royalty to China 3C and we will also generate 1-2% net profit from any products
we sell to franchisees. Additionally, China 3C can generate additional revenue
from franchisee advertising and after-sales service support and China 3C will
receive a rebate (2% of revenue) from product manufacturers after the company
opens up 100 franchise stores.





On the
retail side 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 that we sell, is conducted through the concessionaire model.
Under this model, companies such as China 3C own their own outlets within the
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 U.S. However, this model is also
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 U.S. We believe,
the main reasons are as follows:





·
            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.





·
            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.





It is
interesting to note that even foreign retailers such as Carrefour and Wal-Mart
have to a certain degree adopted the concessionaire model in China, which is an
indication as to how conditions in China make the concessionaire model a virtual
necessity for retailers.





Organizational
Structure




On
December 21, 2005, we entered into a merger agreement with Capital Future
Development Limited, or “CFD,” and its shareholders pursuant to which we
acquired all of the issued and outstanding capital stock of CFD, thus making it
a wholly owned subsidiary of the Company. CFD shareholders received and
aggregate of 35,000,000 newly issued shares of our common stock and cash
consideration of $500,000, divided proportionally among the CFD shareholders in
accordance with their respective ownership interests in CFD immediately before
the completion of the transaction. The cash portion of the consideration was
paid on the first anniversary of the closing of this transaction pursuant to
nine interest-free promissory notes.




1


CFD was
incorporated on July 22, 2004 under the laws of the British Virgin Island and is
a holding company that owns all of the issued and outstanding stock of Hangzhou
Sanhe Electronic Technology Limited, or “HSE,” and Shanghai Joy & Harmony
Electronics Company Limited, or “SJ&H.”




CFD
acquired all of the issued and outstanding capital shares of HSE pursuant to a
share exchange agreement with HSE and its shareholders in exchange for an
aggregate of 915,751 shares of the Company’s common stock and $5,000,000,
divided proportionally among the HSE shareholders in accordance with their
respective ownership interests in immediately before the completion of the
transaction.




CFD acquired all of the issued and outstanding capital shares of
SJ&H pursuant to a share exchange agreement with SJ&H and its
shareholders in exchange for an aggregate of 2,723,110 shares of the Company’s
common stock and $7,500,000, divided proportionally among the SJ&H
shareholders in accordance with their respective ownership interests in
immediately before the completion of the transaction.




On August
15, 2007, in order to comply with the requirements of PRC law, we recapitalized
our ownership structure. As a result, instead of CFD owning 100% of Zhejiang
Yong Xin Digital Technology Company Limited, or “ZYX”, as previously was the
case, CFD entered into contractual arrangements with ZYX whereby CFD owns a 100%
interest in the revenues of ZYX. CFD does not have an equity interest in ZYX but
is deemed to have all the economic benefits and liabilities by contract. Under
this structure, ZYX is now a wholly foreign owned enterprise (WOFE) of CFD. The
contractual agreements give CFD and its equity owners an obligation to absorb
any losses and rights to receive revenue. CFDL will be unable to make
significant decisions about the activities of ZYX and cannot carry out its
principal activities without financial support. These characteristics as defined
in Financial Accounting Standards Board (FASB) Interpretation 46, Consolidation
of Variable Interests Entities, qualifies the business operations of ZYX to be
consolidated with CFDL.




ZYX is a
company organized under the laws of China, and it owns 90% of the issued and
outstanding capital stock of each of Hangzhou Wang Da Electronics Company,
Limited, or “HWD,” and Yiwu Yong Xin Telecommunication Company, Limited, or
“YYX,” both of which are organized under the laws of China. HWD and YYX each own
the remaining 10% of other’s issued and outstanding capital stock, and each are
operating companies.





On
December 19, 2008, ZYX and YYX entered into an acquisition agreement with Jinhua
Baofa Logistic Limited, a company organized under the laws of the People’s
Republic of China (“Jinhua”) and the shareholders of Jinhua, who own 100% of the
equity interest in Jinhua. Pursuant to the acquisition agreement, ZYX will
acquire 90% and YYX will acquire 10% of the entire equity interests in Jinhua
from its shareholders. As of December 31, 2008 China 3C has made a purchase
deposit of $7,318,501 to Jinhua. China 3C expects the acquisition to be
completed by June 30, 2009.




2











Our
Business





Information
About Our Segments





During fiscal year 2008, we operated
four reportable segments:





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





b.
            Hangzhou
      Wang Da Electronics Company, Limited, or “HWD,” 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.





c.
            Hangzhou
      Sanhe Electronic Technology Limited “HSE,” 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 “SJ&H,” focuses on
      the selling, circulation and modern logistics of consumer electronics,
      including MP3 players, MP4 players, iPod, electronic dictionary, radios,
      and Walkmans.





3


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.





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




YYX is an
authorized sales agent, focusing on the selling, circulation and modern
logistics of fax machines and cord phone products in China. YYXC mainly
distributes Philips fax machines and China’s top local brands Feng Da and CJT
fax machines. YYX sells 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). YYX had 295 retail
locations in 2008. YYX contributed approximately 20% of revenue to the Company
in 2008.




The five
largest suppliers for YYX are Feng Da High Technology Company Limited, Hangzhou
Shenruida Trade Company Limited, Shanghai Zhongfang Electronics Company Limited,
Wenzhou Jingwei Company and Ninbo Zhongxun Electronics Company Limited. The five
largest customers for YYX are Shanghai GOME Electrical Appliances Limited,
Suning Appliance Company Limited, Zhejiang GOME Appliances Company, Shanghai
Suning Appliance Company Limited, Zhejiang Suning Appliance Company Limited. The
top five customers contributed 31.48% of revenue of YYX in 2008.




YYX has a
diverse customer base and, the loss of any single customer is not expected to
have a material adverse affect on YYX’s business and operations. YYX did not
spend a material amount of money on research and development, and did not have a
significant backlog for 2008.





The main
competitors of YYX are Hangzhou Guang Tong Company, Hangzhou Yin Dun Company,
Hangzhou Qing Teng Company, Hangzhou Si Tong Company, and Zhejiang Shen You
Electrical Appliance Company. YYX has many years of long term relationships with
well-known brands, which provides YYX with advantages in purchase price compared
to its competitors. In addition, YYX has the competitive advantage of
maintaining an extensive distribution network.





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




HWD 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. HWD 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). HWD had 256 retail locations
in 2008. HWD contributed approximately 33% of revenue to the Company in
2008.




The five
largest suppliers for HWD are Shanghai Post & Telecom Appliances Company -
Hangzhou Branch, Shenzhen Tianyin Telecommunication Company Limited, Hangzhou
Tianchen Digital Telecommunication Company Limited, Hangzhou Qiuxin Internet
Equipment Company Limited and Hangzhou Weihua Telecommunication Company Limited.
The five largest customers for HWD are Zhejiang GOME Appliances Company,
Zhejiang Suning Appliance Company Limited, Shanghai Jiadeli Supermarket Group,
Shanghai EBT Mobile and Suzhou Meijia Supermarket Group. The top five customers
contributed 15.5% of revenue of HWD in 2008.





HWD 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. HWD did
not spend a material amount of money on research and development and did not
have a significant backlog for 2008.




The main
competitors of HWD include Telephone World, Hangzhou Yindun, Shanghai Guangda,
Changjiang Tianyin and Hangzhou Zhenghua. Additionally, there are Ningbo Haishu,
and Zhongyu. HWD has many years of experiences in mobile phone sales. HWD has a
wide distribution network in Zhejiang, Shanghai, Jiangsu and other regions.
These competitors use different 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 HWD. Therefore, these
competitors typically have only a fraction of our sales.





Hangzhou
Sanhe Electronic Technology Limited (“HSE”)




HSE is a
home electronics retail chain in Eastern China, headquartered in HangZhou City.
It had 234 retail “stores in stores” in Shanghai City, Zhejiang Province and
Jiangsu Province in 2008. HSE specializes in the sale of home electronics,
including air conditioners, audio systems, speakers and DVD players. In 2006,
HSE expanded its business to the television sets, and has received sales agent
licenses from TCL, Chuangwei and Haier. HSE contributed approximately 23% of
revenue to the Company in 2008.





4


The five
largest suppliers for HSE are Zhejiang Shaixinke Company Limited, Zhongshan
Longde Home Electronics Company, Zhejiang Zhuocheng Digital Electronics Company
Limited, Shenzhen Chuangwei-RGB Electronics Company Limited and Shenzhen Aosike
Electronics Company Limited. The five largest customers for HSE are Lianhua
Supermarket Group, Hangzhou Lianhua Huashang Group, Jiangsu Times Supermarket
Company Limited, Shanghai Lotus Supercenter and Zhejiang Huarun Vanguard Company
Limited. The top five customers contributed 32.7% of revenue of HSE in
2008.




HSE 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 for 2008.




The main
competitors of HSE include Hangzhou Meidi, Hangzhou Danong, Nanjing Mingci,
Shanghai Feitong and Jiangshu Huayi. Additionally, there is Baicheng Group with
sales of approximately $30 million per year and Shanghai Feiteng with sales of
approximately $30-40 million per year. HSE 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, HSE has the competitive advantage of maintaining an extensive
distribution network.





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




SJ&H
is a consumer electronics retail chain in Eastern China. It had 229 retail
outlets in Shanghai City and Jiangsu Province in 2008. SJ&H 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. SJ&H contributed
approximately 24% of revenue to the Company in 2008.




The five
largest suppliers for SJ&H are Shanghai Ganshun Trade Company Limited, Huaqi
Information Digital Technology Company Limited (Aigo) – Shanghai, SONY-Shanghai
Company Limited, Shanghai Jingming Technology Company Limited and Shanghai
China-tex Electronic System Company Limited. The five largest customers for
SJ&H are Shanghai No. 1 Department Store Company Limited, Shanghai Lanle
Trade Company Limited, Hangzhou Xituo Internet Technology Company, Changzhou
Jingdu Hardware Electric Products Company and Shanghai Xinzehui Digital
Technology Company Limited. The top five customers contributed 3% of revenue of
SJ&H.





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 SJ&H’s sales. During 2008 SJ&H did not have
any material backlog of orders. SJ&H did not spend a material amount of
money on research and development in 2008.





The main
competitors of SJ&H include Shanghai Huaning, Shanghai Juexiang, Shanghai
Wansi and Shanghai Feitong. SJ&H’s competitors are a combination of a large
number of very small stores who lack the Company’s economies and scale, as well
as a small number of large players such as large department stores. Additional
competitors include Shanghai Yonguan Digital with sales of approximately $45
million per year, Shanghai Dongqi with sales of approximately of $7-8 million
per year, and Shanghai Yidunj of sales of $4-5 million per
year.  SJ&H has a large number of retail locations compared to its
competitors. In addition, SJ&H has built good relationships with
suppliers of well-known brands such as Apple, Sony, Meizu, Desheng and
Aigo.





Acquisition
of Jinhua





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





As of December 31, 2008 China 3C has
made a purchase deposit of $7,318,501 to the shareholders of Jinhua. On April 4,
2009 the parties to the Jinhua agreement executed an amendment to the agreement
which changed from March 31, 2009 to June 30, 2009 the date by which the parties
have agreed that the audit of Jinhua’s financial statements for the fiscal year
ended December 31, 2008 is required to be completed. In the event that the audit
is not completed by June 30, 2009, the agreement may be terminated. In the event
that the audited net income of Jinhua is less than RMB 15,000,000, the agreement
may also be terminated.





Intellectual
Property





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





5


Seasonality
and Quarterly Fluctuations





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




Working
Capital





We fund our business operations through
a combination of available cash and cash equivalents, short-term investments and
cash flows generated from operations.





In early
2008, we experienced an unprecedented snow storm. Since all of our stores carry
a low level of inventory, the snow storm caused a shortage of inventory.
Therefore, we increased our inventory level during 2008 in order to maintain an
adequate level for all stores as a precaution for other possible occurrences.
The increase of inventory will decrease our working capital. However, the
increase of inventory was not significant.





Due to
the global economic slowdown, we have extended the payment terms for all our
retail partners from 15 days to 30 days. This will lead to an increase in our
accounts receivable. The increase in accounts receivable will cause a decrease
in working capital.





We
believe that our currently available working capital, primarily cash from
operation, is adequate to execute our current business plan.





Customers





We do not
have a significant concentration of sales with 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 2008.





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
three 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 operations are in material
compliance with all applicable environmental laws. We did not incur any costs to
comply with environmental laws in 2008, 2007 and 2006.





Employees




The
Company currently has 1,807 employees, all of which are full time employees
located in China. ZYX has 21 employees, YYX has 370 employees, HWD has 548
employees, HSE has 502 employees, and SJ&H has 366 employees.




The
Company has no collective bargaining agreements with any unions.




6


Recent
Developments





On March 13, 2009, the Company
announced that ZYX has formed Hangzhou Letong Digital Technology Co., Ltd.
(“Letong”) to establish an electronic retail franchise operation for China 3C
Group. China 3C plans on establishing its electronic franchise stores in third
tier and county-level cities in the Eastern China region with future plans to
expand outside of Eastern China into provincial capitals and second-tier cities.
Letong has commenced operations with $2.9 million in capital contributed by
China 3C to be utilized specifically for the marketing of the franchise plan and
the build out of 15 direct stores, which will be owned and operated by Letong
and will serve as a model for franchisees. China 3C’s goal is to open up 15
direct stores and 15 franchise stores in 2009 with 100 additional franchise
stores in 2010.





All franchise store locations will be
known as “Yong Xin Digital Technology” Stores. They will utilize Yong Xin’s logo
and have similar store layouts and color patterns. Future franchise stores are
expected to be converted from already existing retail store locations. In many
smaller cities in China, consumer electronic products such as cell phones and
computers are sold in single-product stores. Upon signing a franchise agreement,
Letong will convert selected single-product stores into comprehensive stores
that carry a wide variety of branded consumer electronic products and product
lines. A minimum of 75% of franchisee store products will be supplied by China
3C through its wholesale electronics operating division. Each franchise store
will have access to essentially all of China 3C’s roughly 3,000 consumer
electronic products.





These stores will be free-standing,
independent stores and will be comprised of three different size formats: a)
small-size stores with an average size of less than 500 sq. ft; b) medium-size
stores with an average size of 500-1,000 sq. feet and; c) large-size stores with
an average size that exceeds 1,000 square feet. On average, China 3C believes
the typical franchise store size will be approximately 1,000 sq. feet. This
compares to an average size of approximately 135 sq. ft for its 1,000+ store in
store retail locations.





Based
on the current model of our franchise business, we expect franchise stores to
pay 20-30% of their monthly net income as royalty to ZYX and we will also
generate 1-2% net profit from any products we sell to franchisees. ZYX can
generate additional revenue from franchisee advertising and after-sales service
support and China 3C will receive a rebate (2% of revenue) from product
manufacturers after Letong opens up 100 franchise stores. Based on these
projections, we believe our franchise business can generate net margin of 7% on
an annualized basis. China 3C will distribute products to each store as well as
collect merchandise payments on a daily basis, thereby keeping inventory and
operating cash flows healthy.





We believe that our acquisition of
Jinhua Baofa Logistic Limited (“Jinhua”) at the end of December 2008 provides
the Company with a strong logistics platform and competitive cost advantages to
building out its franchise operations.




ITEM
1A.   RISK
FACTORS





Risk
Factors Associated with Our Business




A general
economic downturn, a recession in China or sudden disruption in business
conditions may affect consumer purchases of discretionary items, including
consumer and business products, which could adversely affect our
business. Consumer spending is generally affected by a number of factors,
including general economic conditions, the level of unemployment, inflation,
interest rates, energy costs, gasoline prices and consumer confidence generally,
all of which are beyond our control. Consumer purchases of discretionary items
tend to decline during recessionary periods, when disposable income is lower,
and may impact sales of our products. In addition, sudden disruptions in
business conditions as a result of a terrorist attack, retaliation and the
threat of further attacks or retaliation, war, adverse weather conditions and
climate changes or other natural disasters, pandemic situations or large scale
power outages can have a short or, sometimes, long-term impact on consumer
spending. A downturn in the economies in China, including any recession or a
sudden disruption of business conditions in China’s economy, could adversely
affect our business, financial condition, and results of operation.





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





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





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





7


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





If we do not
anticipate and respond to changing consumer preferences in a timely manner, our
operating results could materially suffer. Our business depends, in large
part, on our ability to introduce successfully new products, services and
technologies to consumers, the frequency of such introductions, the level of
consumer acceptance, and the related impact on the demand for existing products,
services and technologies. Failure to predict accurately constantly changing
consumer tastes, preferences, spending patterns and other lifestyle decisions,
or to address effectively consumer concerns, could have a material adverse
effect on our revenue, results of operations and standing with our
customers.





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





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





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





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





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




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





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





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





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





8
 
 Risks
Related to Doing Business in China
 
 Our
business operations take place primarily in China. Because Chinese laws,
regulations and policies are continually changing, our Chinese operations will
face several risks summarized below.


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





Certain political
and economic considerations relating to China could adversely affect our
company.  China is transitioning from a planned economy to a
market economy. While the PRC government has pursued economic reforms since its
adoption of the open-door policy in 1978, a large portion of the Chinese economy
is still operating under five-year plans and annual state plans. Through these
plans and other economic measures, such as control on foreign exchange, taxation
and restrictions on foreign participation in the domestic market of various
industries, the PRC government exerts considerable direct and indirect influence
on the economy. Many of the economic reforms carried out by the PRC government
are unprecedented or experimental, and are expected to be refined and improved.
Other political, economic and social factors can also lead to further
readjustment of such reforms. This refining and readjustment process may not
necessarily have a positive effect on our operations or future business
development. Our operating results may be adversely affected by changes in
China’s economic and social conditions as well as by changes in the policies of
the PRC government, such as changes in laws and regulations, or the official
interpretation thereof, which may be introduced to control inflation, changes in
the interest rate or method of taxation, and the imposition of additional
restrictions on currency conversion.





Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, could have a significant effect on economic conditions in China or
particular regions thereof, and could require us to divest ourselves of any
interest we then hold in Chinese properties or joint ventures.





Due to various
restrictions under PRC laws on the distribution of dividends by our PRC
operating companies, we may not be able to pay dividends to our
stockholders.  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 ZYX, HWD and SJ&H, may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. Additionally, ZYX, HWD
and SJ&H 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.  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 ZYX, HWD and SJ&H.





Currency
conversion and exchange rate volatility could adversely affect our financial
condition and the value of our common stock.The PRC government
imposes control over the conversion of Renminbi, or RMB, into foreign
currencies. Under the current unified floating exchange rate system, the
People’s Bank of China, or PBOC, publishes an exchange rate, which we refer to
as the PBOC exchange rate, based on the previous day’s dealings in the
inter-bank foreign exchange market. Financial institutions authorized to deal in
foreign currency may enter into foreign exchange transactions at exchange rates
within an authorized range above or below the PBOC exchange rate according to
market conditions.





Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of RMB into foreign exchange by Foreign Investment Enterprises, or FIEs, for use
on current account items, including the distribution of dividends and profits to
foreign investors, is permissible. FIEs are permitted to convert their after-tax
dividends and profits to foreign exchange and remit such foreign exchange to
their foreign exchange bank accounts in China. Conversion of RMB into foreign
currencies for capital account items, including direct investment, loans, and
security investment, is still under certain restrictions. On January 14, 1997,
the State Council amended the Foreign Exchange Control Regulations and added,
among other things, an important provision, which provides that the PRC
government shall not impose restrictions on recurring international payments and
transfers under current account items.





Enterprises
in China, including FIEs, which require foreign exchange for transactions
relating to current account items, if within a certain limited amount may,
without approval of the State Administration of Foreign Exchange, or SAFE,
effect payment from their foreign exchange account or convert and pay at the
designated foreign exchange banks by providing valid receipts and
proofs.





Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE or its relevant branches must be
sought.





9


Our
wholly owned subsidiaries, ZYX, HWD and SJ&H are FIEs to which the Foreign
Exchange Control Regulations are applicable. There can be no assurance that we
will be able to obtain sufficient foreign exchange to pay dividends or satisfy
other foreign exchange requirements in the future.





Between
1994 and 2004, the exchange rate for RMB against the U.S. dollar remained
relatively stable, most of the time in the region of approximately RMB8.28 to
US$1.00. However, in 2005, the Chinese government announced that it would begin
pegging the exchange rate of the RMB against a number of currencies, rather than
just the U.S. dollar. As our operations are primarily in China, any significant
revaluation of the RMB may materially and adversely affect our cash flows,
revenues, financial condition and the value of our common stock. For example, to
the extent that we need to convert U.S. dollars into RMB for our operations,
appreciation of this currency against the U.S. dollar could have a material
adverse effect on our business, financial condition, results of operations and
the value of our common stock. Conversely, if we decide to convert our Renminbi
into U.S. dollars for the purpose of declaring dividends on our common stock or
for other business purposes and the U.S. dollar appreciates against the RMB, the
U.S. dollar equivalent of our earnings from our subsidiaries in China would be
reduced.




The legal system
in China has inherent uncertainties that may limit the legal protections
available in the event of any claims or disputes with third
parties.  The legal system in China is based on written
statutes. Prior court decisions may be cited for reference but have limited
precedential value. Since 1979, the central government has promulgated laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. As China’s foreign
investment laws and regulations are relatively new and the legal system is still
evolving, the interpretation of many laws, regulations and rules is not always
uniform and enforcement of these laws, regulations and rules involve
uncertainties, which may limit the remedies available in the event of any claims
or disputes with third parties. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention.





Risks Associated With Our Common
Stock





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




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




We do not intend
to pay dividends on our common stock.  The Company’s two operating
subsidiaries in China paid $525,460 in dividends during 2005, but there are no
plans for paying dividends in the foreseeable future. We intend to retain
earnings, if any, to provide funds for the implementation of our new business
plan.  We do not intend to declare or pay any dividends in the foreseeable
future.  Therefore, there can be no assurance that holders of common stock
will receive any additional cash, stock or other dividends on their shares of
common stock until we have funds, which the Board of Directors determines, can
be allocated to dividends.  Also, see risk factor titled “Due to
various restrictions under PRC laws on the distribution of dividends by our PRC
operating companies, we may not be able to pay dividends to our stockholders.”




ITEM 1B. UNRESOLVED STAFF
COMMENTS





None.




10


ITEM
2. PROPERTIES





The
Company does not own any real estate properties; all of the properties are
leased. The lease terms are as follows:




YYX





1.
            YYX
      headquarter office: lease term: one year (Aug. 2008 - Aug.
      2009)


2.
            Shanghai
      office: lease term: 6 months (Dec. 2008 - May 2009)


3.
            Apartments:
      Yiwu building, Yiwu village, Lease term: one year (July 2008 - June
      2009)


4.
            Hangzhou
      Office: lease term: 6 months (July 2008 – Jan. 2009)


5.
            Nanjing
      Office: lease term: 3 months (Dec. 2008 – Feb. 2009)


6.
            Ningbo
      Office: lease term: 3 months (Oct. 2008 –Dec.
  2008)





HWD





1.
            Suite
      417 and Suite 608, 347 Shaoxin Road: Lease term: 1 month (Dec. 2008 - Jan.
      2009).


2.
            Shanghai
      Office : lease term 3 months (Jan. 2009- Mar. 2009).


3.
            Ningbo
      Office : lease term 3 months (Jan. 2009- Mar. 2009).


4.
            Jiangsu
      Office : lease term 3 months (Nov. 2008- Jan.
  2009).





HSE





1.
            Yuanhua
      office: Lease term one year (Aug. 2008 - July 2009).


2.
            Hangzhou
      Xiaoshan warehouse: Lease Term six months (Nov. 2008 - Apr.
      2009).


3.
            Wuxi
      Office: lease term: 3 months (Dec. 2008 – Feb. 2009)


4.
            Shanghai
      Office: lease term: 3 months (Oct. 2008 –Dec.
  2008)





SJ&H




1.
            Wuxi
      Tower office: Lease term 3 months (Nov. 2008 - Jan.
  2008).


2.
            Warehouse:
      Shanghai, Lease term: 3 months (Jan. 2009 - Mar.
  2009).





The
Company believes that its leased spaces are adequate and suitable to maintain
and develop its business operations.




ITEM
3. LEGAL PROCEEDINGS





We are
not a party to any material pending legal proceedings.




ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





There
were no matters submitted to the stockholders in the fourth quarter of 2008
required to be disclosed.





PART
II




ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





The
Company’s common stock is quoted on the OTC Bulletin Board under the symbol
“CHCG.OB.” The following table sets forth the range of quarterly high and low
closing bids of the common stock as reported during the years ending December
31, 2007 and December 31, 2008 and through March 31, 2009:





Low
      Bid*
            
            
            High
      Bid*2007Quarter
      ended March 31
            
            $
            3.16
            
            
            $
            6.75Quarter
      ended June 30
            
            $
            5.50
            
            
            $
            7.83Quarter
      ended September 30
            
            $
            3.45
            
            
            $
            8.24Quarter
      ended December 31
            
            $
            2.89
            
            
            $
            5.332008Quarter
      ended March 31
            
            $
            1.25
            
            
            $
            3.97Quarter
      ended June 30
            
            $
            1.20
            
            
            $
            1.96Quarter
      ended September 30
            
            $
            1.20
            
            
            $
            2.26Quarter
      ended December 31
            
            $
            0.66
            
            
            $
            1.362009January
      1, 2008 – March 31, 2009
            
            $
            0.43
            
            
            $
            1.08





*
            The
      quotations reflect inter-dealer prices, without retail mark-up, mark-down
      or commission and may not represent actual
  transactions.





11




Stockholders





As of the
close of business on April 14, 2009, there were approximately 70 holders of
record of the Company’s common stock. However, we believe that there are
additional beneficial owners of our common stock who own their shares in “street
name.”





Dividends





The
Company did not pay any dividends during 2007 and 2008. The Company has no plans
to declare cash dividends on its common stock in the future. If the Company ever
determines to pay a dividend, it may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency from
the PRC for the payment of such dividends from the profits of its operating
subsidiaries in China.  Please see additional discussion under Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations; Financial Condition, Liquidity and Capital Resources.




Equity
Compensation Plan Information





Pursuant
to the terms of the China 3C Group 2005 Equity Incentive Plan (the “2005 Plan”),
which was adopted on December 21, 2005 by the Company’s Board of Directors,
5,000,000 shares of the Company’s common stock were available for awards under
the 2005 Plan. The 2005 Plan expired on December 31, 2006.





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





Securities
authorized for issuance under equity compensation plans





The
following is a summary of all of our equity compensation plans as of December
31, 2008.





Plan Category
            
            Number of securities
              to be issued upon
              exercise of
              outstanding options,
              warrants and rights
            
            Weighted average
              exercise price of
              outstanding options,
              warrants and rights
            
            Number of securities
              remaining available
              for future issuance
              under
              equity compensation
              plan (excluding
              securities reflected
              in column (a))(a)
            
            (b)
            
            (c)Equity
      Compensation Plans Approved by SecurityholdersEquity
      Compensation Plans Not Approved by Securityholders
            
            
            
            435,000
            (1)
            
            $
            3.94
            
            
            
            0




(1)
            The
      Company’s 2005 Equity Compensation Plan (the “2005 Plan”) expired on
      December 31, 2006. No further grants may be made under the 2005
      Plan.





Repurchase
of Securities




We did
not repurchase any of shares of our common stock during the fourth quarter of
2008.





12


Recent
Sales of Unregistered Securities




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





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





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





On May 7,
2007 the Board of Directors appointed Joseph J. Levinson to serve as a member of
the Board of Directors of the Company and to be in charge of the Company’s
investor relations. As compensation for his services, Mr. Levinson received: (1)
USD $60,000 per year, payable in equal quarterly installments; (2) a monthly
grant during his term of his services of 1,000 shares of the Company’s common
stock; (3) an initial annual grant of a stock option to purchase 300,000 shares
of the Company's common stock, with an exercise price of $6.15 per share (the
“2007 Stock Option”) under the China 3C Group 2005 Equity Incentive Plan; and
(4) a subsequent annual grant of a stock option to purchase an additional
300,000 shares of the Company's common stock, with an exercise price of $1.82
(the “2008 Stock Option”) under the China 3C Group 2005 Equity Incentive Plan.
In addition, the Company agreed that Mr. Levinson would receive (1) $2,500 for
each Board meeting that he attends, (2) $2,000 for each meeting of a committee
of the Board that he attends, (3) $5,000 upon being named the chairman of any
Board committee, and (4) $4,500 as a one time bonus upon joining the Board. It
was later determined that due to the expiration of the China 3C Group 2005
Equity Incentive Plan on December 31, 2006, the 2007 Stock Option and the 2008
Stock Option were not validly granted. Pursuant to the terms of the Compensation
Agreement dated as of November 27, 2008 between Mr. Levinson and the Company,
Mr. Levinson acknowledged that the 2007 Stock Option and the 2008 Stock Option
were not and will not be granted and in consideration for his services as a
Director accepted the issuance of 125,000 shares of the Company’s common
stock.  The 125,000 shares of the Company’s common stock were issued
to Mr. Levinson on January 7, 2009.





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.




ITEM 6.   SELECTED FINANCIAL
DATA





The
selected consolidated statement of income and comprehensive income data for the
years ended December 31, 2008, 2007 and 2006 and the selected consolidated
balance sheet data as of December 31, 2008 and 2007 are derived from our audited
consolidated financial statements included elsewhere in this Annual
Report.





The
selected consolidated balance sheet data as of December 31, 2006, 2005 and 2004,
and the selected consolidated financial data for the years ended December 31,
2005 and 2004, are derived from our audited consolidated financial statements
not included in this Annual Report.





13


The
following selected consolidated historical financial information should be read
in conjunction with our consolidated financial statements and related notes and
the information contained in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”





Year
      Ended December 31,2008
            
            2007
            
            2006
            
            2005
            
            2004Statements
      of Operations Data:Sales,
      net
            
            
            310,644,661
            
            
            276,026,673
            
            
            148,218,848
            
            
            32,588,634
            
            
            24,701,995Cost
      of sales
            
            
            262,002,877
            
            
            226,656,242
            
            
            125,411,758
            
            
            28,325,332
            
            
            21,577,365Gross
      profit
            
            
            48,641,784
            
            
            49,370,431
            
            
            22,807,090
            
            
            4,263,302
            
            
            3,124,630General
      and administrative expenses
            
            
            14,132,473
            
            
            13,614,500
            
            
            5,544,924
            
            
            1,706,869
            
            
            782,241Income
      from operations
            
            
            34,509,311
            
            
            35,755,931
            
            
            17,262,166
            
            
            2,556,433
            
            
            2,342,389Other
      (Income) Expense
            
            
            1,149,537Interest
      income
            
            
            (146,344
            )
            
            (88,413
            )
            
            (31,293
            )
            
            (10,156
            )
            
            (5,348
            )Other
      expense
            
            
            359,682
            
            
            74,215
            
            
            100,646
            
            
            17,364
            
            
            9,440Interest
      expense
            
            
            
            
            
            -
            
            
            7,565
            
            
            2,954
            
            
            1,104Total
      Other (Income) Expense
            
            
            936,199
            
            
            (14,198
            )
            
            76,918
            
            
            10,162
            
            
            5,196Income
      before income taxes
            
            
            35,445,510
            
            
            35,770,129
            
            
            17,185,248
            
            
            2,546,271
            
            
            2,337,193Provision
      for income taxes
            
            
            8,611,298
            
            
            12,850,429
            
            
            5,908,122
            
            
            1,088,021
            
            
            231,096Net
      income
            
            
            26,834,212
            
            
            22,919,700
            
            
            11,277,126
            
            
            1,458,250
            
            
            2,106,097Net
      income per share:Basic
      & diluted
            
            
            0.51
            
            
            0.44
            
            
            0.24
            
            
            0.04
            
            
            0.06Weighted
      average number of shares outstanding:Basic
      & diluted
            
            
            52,673,938
            
            
            52,671,438
            
            
            46,179,507
            
            
            35,133,427
            
            
            35,000,000




Year
      Ended December 31,2008
            
            2007
            
            
            2006
            
            2005
            
            2004Balance
      Sheets Data:Cash
      and cash equivalents
            
            
            32,157,831
            
            24,952,614
            
            
            6,498,450
            
            1,949,222
            
            469,658Working
      capital
            
            
            59,875,110
            
            36,917,850
            
            
            10,505,747
            
            3,634,989
            
            704,888Total
      assets
            
            
            95,196,016
            
            63,196,805
            
            
            39,987,575
            
            4,020,266
            
            1,492,006Total
      liabilities
            
            
            7,557,951
            
            5,792,722
            
            
            9,061,180
            
            341,615
            
            735,830Total
      shareholders’ equity
            
            
            87,638,065
            
            57,404,083
            
            
            30,926,395
            
            3,678,651
            
            756,176





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.
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.




Overview





China 3C Group (“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 (“YYX”), Hangzhou
Wandga Electronics Company Limited (“HWD”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Company Limited (“SJ&H”) were incorporated under the laws of
Peoples Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April
12, 2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL
and CFDL own 100% of the capital stock of SJ&H and HSE. 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 YYX owns 10% of
HWD. Zhejiang owns 90% and HWD owns 10% of YYX. On December 19, 2008, ZYX
entered into an agreement to acquire 90% and YYX to acquire 10% of the entire
equity interests in Jinhua Baofa Logistic Limited (“Jinhua”), a company
organized under the laws of the People’s Republic of China. As of December 31,
2008, we have made a $7.3 million purchase deposit to Jinhua.





14


Collectively the seven corporations are
referred to herein as the Company.





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





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





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




(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.





The
Company is engaged in the business of resale and distribution of third party
products and generate approximately 100% of its revenue from resale of items
such as mobile phone, facsimile machines, DVD players, stereo’s, 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.





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





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





We
operate substantially all 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. For the year ended 2008, 17 store in stores’ leases were fixed rents, the
remaining 997 store in stores’ leases were variable based on sales.




15


Results
of Operations





Year
Ended December 31, 2008 compared to Year Ended December 31,
2007





Reportable
Operating Segments





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




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




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




c)           Hangzhou
Sanhe Electronic Technology Limited  or “HSE”




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





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





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





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





Year
      ended December 31,
            
            
            PercentageYYX
            
            2008
            
            
            2007
            
            
            ChangeRevenue
            
            $
            63,370
            
            
            $
            61,385
            
            
            
            3.23
            %Gross
      Profit
            
            $
            9,978
            
            
            $
            9,205
            
            
            
            8.40
            %Gross
      Margin
            
            
            15.75
            %
            
            
            15.00
            %
            
            
            0.75
            %Operating
      Income
            
            $
            7,615
            
            
            $
            7,378
            
            
            
            3.21
            %





For the
year ended December 31, 2008, YYX generated revenue of $63,370 thousand, an
increase of $1,985 thousand or 3.23% compared to $61,385 thousand for the year
ended December 31, 2007. Gross profit increased $773 thousand or 8.40% from
$9,205 thousand for the year ended 2007 to $9,978 thousand for the year ended
2008. Operating income was $7,615 thousand in 2008, an increase of $237 thousand
or 3.21% compared to $7,378 thousand in 2007. Such increases in revenue, gross
profit and operation income were primarily due to the expansion of the Company’s
distribution networks as well as opening of new stores.





Gross
profit margin increased from 15% in 2007 to 15.75% in 2008, an increase of
0.75%. Such increase is primarily due to our strong bargaining power in purchase
of fax machines. Fax machines are China 3C’s most established product line. We
have long term relationships with our suppliers which gives us competitive
advantage in purchase cost.





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





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





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





Year
      ended December 31,
            
            
            PercentageHWD
            
            2008
            
            
            2007
            
            
            ChangeRevenue
            
            $
            102,935
            
            
            $
            83,496
            
            
            
            23.28
            %Gross
      Profit
            
            $
            16,313
            
            
            $
            13,633
            
            
            
            19.66
            %Gross
      Margin
            
            
            15.85
            %
            
            
            16.33
            %
            
            
            (0.48
            )%Operating
      Income
            
            $
            11,527
            
            
            $
            11,259
            
            
            
            2.38
            %





For the
year ended December 31, 2008, HWD generated revenue of $102,935 thousand, an
increase of $19,439 thousand or 23.28% compared to $83,496 thousand for the year
ended December 31, 2007. Gross profit increased $2,680 thousand or 19.66% from
$13,633 thousand for the year ended 2007 to $16,313 thousand for the year ended
2008. Operating income was $11,527 thousand in 2008, an increase of $268
thousand or 2.38% compared to $11,259 thousand in 2007. The increase in revenue,
gross profit and operating income were due to the expansion of HWD’s
distribution networks, as well as opening of new stores.





Gross
profit margin decreased from 16.33% in 2007 to 15.85% in 2008. The decrease was
a result of a slight increase in promotional sales on cell phones within the
HWD's store in store locations. The unit sales price of cell phones decreased in
2008 compared to the unit price in 2007, which caused the gross margin to
decrease. However, HWD has been continuously introducing new cell phone models
in an effort to maintain the gross margin.





c)           Hangzhou
Sanhe Electronic Technology Limited or “HSE”





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





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





Year
      ended December 31,
            
            
            PercentageHSE
            
            2008
            
            
            2007
            
            
            ChangeRevenue
            
            $
            70,243
            
            
            $
            67,157
            
            
            
            4.60
            %Gross
      Profit
            
            $
            12,444
            
            
            $
            16,234
            
            
            
            (23.35
            )%Gross
      Margin
            
            
            17.72
            %
            
            
            24.17
            %
            
            
            (6.45
            )%Operating
      Income
            
            $
            7,509
            
            
            $
            11,504
            
            
            
            (34.73
            )%





16


For the
year ended December 31, 2008, HSE generated revenue of $70,243 thousand, an
increase of $3,086 thousand or 4.60% compared to $67,157 thousand for the year
ended December 31, 2007. Gross profit decreased $3,790 thousand or 23.35% from
$16,234 thousand for the year ended 2007 to $12,444 thousand for the year ended
2008. Operating income was $7,509 thousand in 2008, a decrease of $3,995
thousand or 34.73% compared to $11,504 thousand in 2007. The increase in revenue
was primarily due to opening of 24 new stores in 2008. The decreases in gross
profit and operation income were primarily due to a more competitive sales
environment on home electronics.





Gross
profit margin decreased from 24.17% in 2007 to 17.72% in 2008. The decrease was
due to a more competitive sales environment on home electronics, which led to a
lower gross margin.





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





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





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


.


Year
      ended December 31,
            
            
            PercentageSJ&H
            
            2008
            
            
            2007
            
            
            ChangeRevenue
            
            $
            74,096
            
            
            $
            63,988
            
            
            
            15.80
            %Gross
      Profit
            
            $
            9,906
            
            
            $
            10,298
            
            
            
            (3.81
            )%Gross
      Margin
            
            
            13.37
            %
            
            
            16.09
            %
            
            
            (2.72
            )%Operating
      Income
            
            $
            7,406
            
            
            $
            8,755
            
            
            
            (15.41
            )%





For the
year ended December 31, 2008, SJ&H generated revenue of $74,096 thousand, an
increase of $10,108 thousand or 15.80% compared to $63,988 thousand for the year
ended December 31, 2007. Gross profit decreased $392 thousand or 3.81% from
$10,298 thousand for the year ended 2007 to $9,906 thousand for the year ended
2008. Operating income was $7,406 thousand in 2008, a decrease of $1,349
thousand or 15.41% compared to $8,755 thousand in 2007. The increase in revenue
was due to opening of 43 new stores in 2008 and expansion of distribution
networks. Gross profit and operation income decreased as a result of a slight
increase in promotional sales.





Gross
profit margin decreased from 16.09% in 2007 to 13.37% in 2008. The decrease was
a result of a slight increase in promotional sales.





Net
sales





Net sales
for 2008 totaled $310,645 thousand, representing a year-over-year increase of
12.54% as compared to $276,027 thousand for 2007. The increase was attributable
to the introduction of new consumer electronic products, increased marketing
initiatives within the Company's store in store locations, as well as opening
new stores in 2008.





Percentage
of sales





In 2008,
the Company earned approximately 68% of its sales from its retail operations and
32% of its sales from its wholesale operations compared to 65% from retail
operations and 35% from wholesale operations in 2007.





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





YYX
            
            
            HWD
            
            
            HSE
            
            
            SH&JRetail
            
            
            66
            %
            
            
            65
            %
            
            
            69
            %
            
            
            70
            %Wholesale
            
            
            34
            %
            
            
            35
            %
            
            
            31
            %
            
            
            30
            %




17





Cost
of Sales





Cost of
sales for 2008 totaled $262,003 thousand, or approximately 84.34% of net sales
compared to $226,656 thousand, or approximately 82.11% for 2007. The increase in
the cost of sales was a direct result of the corresponding increase in sales.
The cost of sales as a percentage increased slightly during 2008 primarily due
to increased costs of home electronics products.





Top
Ten Suppliers of Each of Our Subsidiaries in 2008





YYX
            
            HWD
            
            HSE
            
            SH&J1
            
            Fengda
      Technology Company Limited
            
            Shanghai
      Post&Telecom Appliances Co - Hangzhou
            
            Zhejiang
      Shaixinke Company Limited
            
            Shanghai
      Ganshun Trade Company Limited2
            
            Hangzhou
      Shenruida Trade Company Limited
            
            Shenzhen
      Tianyin Telecommunication Company Limited
            
            Zhongshan
      Longde Home Electronics Company Limited
            
            Huaqi
      Information Digital Technology Company Limited (aigo) –
      Shanghai3
            
            Shanghai
      Zhongfang Electronics Company Limited
            
            Hangzhou
      Tianchen Digital Telecommunication Company Limited
            
            Zhejiang
      Zhuocheng Digital Electronics Company Limited
            
            SONY-Shanghai
      Company Limited4
            
            Wenzhou
      Jingwei Company
            
            Hangzhou
      Qiuxin Internet Equipment Company Limited
            
            Shenzhen
      Chuangwei-RGB Electronics Company Limited
            
            Shanghai
      Jingming Technology Company Limited5
            
            Ninbo
      Zhongxun Electronics Company Limited
            
            Hangzhou
      Weihua Telecommunication Company Limited
            
            Shenzhen
      Aosike Electronics Company Limited
            
            Shanghai
      China-tex Electronic System Company Limited6
            
            Shanghai
      Hongyi Office Supplies Company Limited
            
            Hangzhou
      Chaoyue Telecommunication Company Limited
            
            Shanghai
      Haier Industrial and Trade Company
            
            Shanghai
      Caitong Digital Technology Company Limited7
            
            Shanghai
      Guangdian Equipment Company Limited
            
            Shenzhen
      Liansheng Technology Company Limited
            
            TCL
      Electronics Company Limited
            
            Beijing
      Broadcom Information Technology Company Limited8
            
            Yiwu
      Wantong Telecom Equipment Company Limited
            
            Hangzhou
      Huayu Telecommunication Appliances Company Limited
            
            Shenzhen
      Deheyuan Electronics Company
            
            Chongqing
      Zhaohua Digital Technology Company Limited9
            
            Shanghai
      Rongduo Business Company Limited
            
            Shenzhen
      Jinfeng Datong Technology Company Limited
            
            Shenzhen
      Angel Drinking Water Industrial Group
            
            Shanghai
      Jinling Network Equipment Company Limited10
            
            Shanghai
      Huoke Electronics Company Limited
            
            Shenzhen
      Jiepulin Company Limited
            
            Guangzhou
      Shengshida Electronics Company Limited
            
            Shenzhen
      Dejing Electronics Company Limited





Gross
Profit Margin





Gross profit margin in 2008 decreased
to 15.66% compared to 17.89% in 2007. The gross profit margin decrease was
mainly due to the decrease of 6.45% of gross profit margin of HSE and
the decrease of 2.72% of gross profit margin of SJ&H in 2008. The decrease in gross profit margin
was a result of a slight increase in promotional sales in
2008.





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





General
and administrative expenses for 2008 totaled $14,132 thousand, or approximately
4.55% of net sales, compared to $13,615 thousand, or approximately 4.93% of net
sales for 2007. General and administration expense as a percentage of net sales
decreased 0.38% as a result of strict cost controls implemented by the
Company.





Income
from Operations





Income
from operations for 2008 was $34,509 thousand, or 11.11% of net sales as
compared to income from operations of $35,756 thousand, or 12.95% of net sales
for 2007, a decrease of 3.49%. Competitive pricing led to the slight decline in
income from operations.





Provision
for income taxes





Provision for income taxes
for 2008 was $8,611 thousand, representing year-over-year decrease of 32.99% as
compared to $12,850 thousand for 2007. The effective income tax rate for 2008
and 2007 was 25% and 33%, respectively. The decrease in provision for income
taxes was because a lower Enterprise Income Tax rate of 25% became effective
January 1, 2008 for both domestic enterprises and FIEs pursuant to China’s new
Enterprise Income Tax Law.





18


Net
Income





Net
income was $26,834 thousand or 8.64% of net sales for 2008 compared to $22,920
thousand or 8.30% of net sales for 2007. Net income increased primarily due to
the decrease in income tax expenses using the new EIT tax rate of 25% pursuant
to China’s new Enterprise Income Tax Law. The increase of new income was also a
result of additional income generated from value-added services such as
after-sales support services compared to 2007.





Year
Ended December 31, 2007 compared to Year Ended December 31,
2006




Reportable
Operating Segments





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




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




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




c)           Hangzhou
Sanhe Electronic Technology Limited or “HSE”




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





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





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





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





Year
      ended December 31,
            
            
            PercentageYYX
            
            2007
            
            
            2006
            
            
            ChangeRevenue
            
            $
            61,385
            
            
            $
            51,092
            
            
            
            20.15
            %Gross
      Profit
            
            $
            9,205
            
            
            $
            7,988
            
            
            
            15.24
            %Gross
      Margin
            
            
            15.00
            %
            
            
            15.63
            %
            
            
            (0.63
            )%Operating
      Income
            
            $
            7,378
            
            
            $
            6,821
            
            
            
            8.17
            %





For the
year ended December 31, 2007, YYX generated revenue of $61,385 thousand, an
increase of $10,293 thousand or 20.15% compared to $51,092 thousand for the year
ended December 31, 2006. Gross profit increased $1,217 thousand or 15.24% from
$7,988 thousand for the year ended 2006 to $9,205 thousand for the year ended
2007. Operating income was $7,378 thousand in 2007, an increase of $557 thousand
or 8.17% compared to $6,821 thousand in 2006. Such increases in revenue, gross
profit and operation income were primarily due to the expansion of the Company’s
distribution networks, as well as opening of new stores.





Gross
profit margin decreased from 15.63% in 2006 to 15% in 2007, a decrease of 0.63%.
The decrease is primarily due to the market maturity of office telecommunication
products.





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





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





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





Year
      ended December 31,
            
            
            PercentageHWD
            
            2007
            
            
            2006
            
            
            ChangeRevenue
            
            $
            83,496
            
            
            $
            61,992
            
            
            
            34.69
            %Gross
      Profit
            
            $
            13,633
            
            
            $
            8,589
            
            
            
            58.73
            %Gross
      Margin
            
            
            16.33
            %
            
            
            13.86
            %
            
            
            2.47
            %Operating
      Income
            
            $
            11,259
            
            
            $
            7,051
            
            
            
            59.68
            %





For the
year ended December 31, 2007, HWD generated revenue of $83,496 thousand, an
increase of $21,504 thousand or 34.69% compared to $61,992 thousand for the year
ended December 31, 2006. Gross profit increased $5,044 thousand, or 58.73% from
$8,589 thousand for the year ended 2006 to $13,633 thousand for the year ended
2007. Operating income was $11,259 thousand in 2007, an increase of $4,208
thousand, or 59.68% compared to $7,051 thousand in 2006. The increase in
revenue, gross profit and operation income were primarily due to the expansion
of the Company’s distribution networks as well as opening of new stores. In
addition, the increase was also due to improvement in operating
efficiency.





19


Gross
profit margin increased from 13.86% in 2006 to 16.33% in 2007, an increase of
2.47%. The gross margin increased because HWD increased its share of domestic
mobile phone sales compared to foreign brand name mobile phones. Gross margin of
domestic mobile phones was higher than foreign brand name mobile phones, which
led to higher overall gross margin for HWD.





c)           Hangzhou
Sanhe Electronic Technology Limited or “HSE”





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





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





Year
      ended December 31,
            
            
            PercentageHSE
            
            2007
            
            
            2006
            
            
            ChangeRevenue
            
            $
            67,157
            
            
            $
            21,660
            
            
            
            210.05
            %Gross
      Profit
            
            $
            16,234
            
            
            $
            4,036
            
            
            
            302.23
            %Gross
      Margin
            
            
            24.17
            %
            
            
            18.63
            %
            
            
            5.54
            %Operating
      Income
            
            $
            11,504
            
            
            $
            2,579
            
            
            
            346.06
            %





For the
year ended December 31, 2007, HSE generated revenue of $67,157 thousand compared
to $21,660 thousand for the year ended December 31, 2006. Gross profit was
$16,234 thousand in 2007 compared to $4,036 thousand in 2006. Operating income
was $11,504 thousand for the year ended December 31, 2007 compared to $2,579
thousand for the year ended December 31, 2006.





China 3C
Group acquired HSE in August 2006. Therefore, only 3 months of HSE’s financial
results were consolidated to the financial statements of China 3C Group for the
year ended December 31, 2006. This led to the significant increase in revenue,
gross profit and operating income from 2006 to 2007.





Gross
margin increased 5.54% from 18.63% in 2006 to 24.17% in 2007. The increase was
due to lower cost of DVD players and speaker systems. The Company had the
bargain power to negotiate lower purchase price with its suppliers because of
the large volume of products China 3C Group purchased from them.





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





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





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





Year
      ended December 31,
            
            
            PercentageSJ&H
            
            2007
            
            
            2006
            
            
            ChangeRevenue
            
            $
            63,988
            
            
            $
            13,474
            
            
            
            374.90
            %Gross
      Profit
            
            $
            10,298
            
            
            $
            2,194
            
            
            
            369.37
            %Gross
      Margin
            
            
            16.09
            %
            
            
            16.28
            %
            
            
            (0.19
            )%Operating
      Income
            
            $
            8,755
            
            
            $
            1,878
            
            
            
            366.19
            %





For the
year ended December 31, 2007, SJ&H generated revenue of $63,988 thousand
compared to $13,474 thousand for the year ended December 31, 2006. Gross profit
was $10,298 thousand in 2007 compared to $2,194 thousand in 2006. Operating
income was $8,755 thousand for the year ended December 31, 2007 compared to
$1,878 thousand for the year ended December 31, 2006.





China 3C
Group acquired SJ&H in November 2006. Therefore, only 2 months of SJ&H’s
financial results were consolidated to the financial statements of China 3C
Group for the year ended December 31, 2006. This led to the significant increase
in revenue, gross profit and operating income from 2006 to 2007.





Gross
margin was 16.09% in 2007 compared to 16.28% in 2006, a decrease of
0.19%.




20
 
 Net
sales
 
 Net sales
for 2007 totaled $276,026 thousand, representing a significant year-over-year
increase of 86.23% as compared to $148,219 thousand for 2006. The large increase
amount was due to a combination of both organic growth and contribution from
subsidiaries acquired in the second half of 2006. The sales from these
subsidiaries (YYX, HWD, HSE and SJ&H) in 2007 increased by $127,807 thousand
as compared to the sales that consolidated into the Company from the acquisition
dates in 2006, in which, HSET and SJ&H increased 210.05% ($45,497 thousand)
and 374.90% ($50,514 thousand), respectively, as compared to 2006. Higher sales
volume and the addition of new product lines were also factors. In addition, the
economic boom in China led to the growth of each subsidiary, in which, YYX and
HWD increased 20.19% ($10,293 thousand) and 34.69% ($21,504 thousand),
respectively, as compared with 2006.


Percentage
of sales





The
Company earned approximately 65% of its sales from its retail operations, and
the remaining 35% from wholesale operations in 2007 compared to 73% of its sales
from its retail operations, and the remaining 27% from wholesale operations in
2006.





Cost
of Sales





Cost of
sales for 2007 totaled $226,656 thousand, or approximately 82.11% of net sales
compared to $125,412 thousand, or approximately 84.61% for 2006. The increase in
the cost of sales was directly associated with the corresponding increase in
sales. The cost of sales as a percentage decreased during 2007 due to the
introduction of new product models with higher gross profit margin. The
increased cost of sales was a direct result of the large increase in purchases
required to meet our sales levels.




Top
Ten Suppliers of Each of Our Subsidiaries




YYX
            
            HWD
            
            HSE
            
            SH&J1
            
            Fengda
      Technology Company Limited
            
            Shanghai
      Post&Telecom Appliances Co, Hangzhou Branch
            
            Zhejiang
      Shaixinke Company Limited
            
            Shanghai
      Ganshun Trade Company Limited2
            
            Hangzhou
      Shenruida Trade Company Limited
            
            Shenzhen
      Tianyin Telecommunication Company Limited
            
            Zhongshan
      Longde Home Electronics Company Limited
            
            Huaqi
      Information Digital Technology Company Limited (aigo) –
      Shanghai3
            
            Shanghai
      Zhongfang Electronics Company Limited
            
            Hangzhou
      Tianchen Digital Telecommunication Company Limited
            
            Zhejiang
      Zhuocheng Digital Electronics Company Limited
            
            SONY-Shanghai
      Company Limited4
            
            Wenzhou
      Jingwei Company
            
            Hangzhou
      Qiuxin Internet Equipment Company Limited
            
            Shenzhen
      Chuangwei-RGB Electronics Company Limited
            
            Shanghai
      Jingming Technology Company Limited5
            
            Ninbo
      Zhongxun Electronics Company Limited
            
            Hangzhou
      Weihua Telecommunication Company Limited
            
            Shenzhen
      Aosike Electronics Company Limited
            
            Shanghai
      China-tex Electronic System Company Limited6
            
            Shanghai
      Hongyi Office Supplies Company Limited
            
            Hangzhou
      Chaoyue Telecommunication Company Limited
            
            Shanghai
      Haier Industrial and Trade Company
            
            Shanghai
      Caitong Digital Technology Company Limited7
            
            Shanghai
      Guangdian Equipment Company Limited
            
            Shenzhen
      Liansheng Technology Company Limited
            
            TCL
      Electronics Company Limited
            
            Beijing
      Broadcom Information Technology Company Limited8
            
            Yiwu
      Wantong Telecom Equipment Company Limited
            
            Hangzhou
      Huayu Telecommunication Appliances Company Limited
            
            Shenzhen
      Deheyuan Electronics Company
            
            Chongqing
      Zhaohua Digital Technology Company Limited9
            
            Shanghai
      Rongduo Business Company Limited
            
            Shenzhen
      Jinfeng Datong Technology Company Limited
            
            Shenzhen
      Angel Drinking Water Industrial Group
            
            Shanghai
      Jinling Network Equipment Company Limited10
            
            Shanghai
      Huoke Electronics Company Limited
            
            Shenzhen
      Jiepulin Company Limited
            
            Guangzhou
      Shengshida Electronics Company Limited
            
            Shenzhen
      Dejing Electronics Company Limited




Gross
Profit Margin





Gross
profit margin for 2007 increased to 17.89% compared to 15.39% for 2006. The
gross profit margin increased was mainly due to the increase of 5.54% of gross
profit margin of HSE in 2007. The increase was partially due to the inclusion of
the newly acquired subsidiaries. The gross profit margin increased as we
benefited from increasing economies of scale as the Company grew in size and
scale. Higher sales of higher margin products such as MP3 and DVD players were
also critical factors.





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 Expense





General
and administrative expense for 2007 totaled $13,615 thousand, or approximately
4.93% of net sales, compared to $555 thousand, or approximately 3.74% for 2006.
The increase was primarily due to the costs of managing a larger operation as
the Company integrated its newly acquired subsidiaries.





21


Income
from Operations





Income
from operations for 2007 was $35,756 thousand or 12.95% of net sales as compared
to income from operations of $17,262 thousand for 2006 or 11.65% of net sales.
Increasing economies of scale were a critical factor for the larger margins, as
were a higher margin product mix. Because of our marketing power, we were able
to increase sales prices at a greater rate than the increase in the cost of
sales, thus giving us an advantage in an inflationary environment in
2007.





Provision
for income taxes





Provision
for income taxes for 2007 was $12,850 thousand, representing year-over-year
increase of 117% as compared to $5,908 thousand for 2006. The effective rate of
income tax was 33% for both 2007 and 2006. The increase was due to a significant
increase in taxable income.





Net
Income





Net
income was $22,920 thousand, or 8.30% of net sales for 2007 compared to $11,277
thousand, or 7.61% of net sales for 2006. Increasing economies of scale, a
higher margin product mix and significant larger store were all key factors for
the large increase in net income.





Retail
locations




The following table reflects a roll
forward during the fiscal year ended December 31, 2006, 2007 and 2008of 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 2006, 2007 and 2008.





HWD
            
            
            YYX
            
            
            HSE
            
            
            SJ&H
            
            
            TotalLocations
      at Jan. 1, 2006
            
            
            175
            
            
            
            264
            
            
            
            -
            
            
            
            -
            
            
            
            439Opened
      during year 2006
            
            
            45
            
            
            
            39
            
            
            
            -
            
            
            
            -
            
            
            
            84Closed
      during year 2006
            
            
            (6
            )
            
            
            (15
            )
            
            
            -
            
            
            
            -
            
            
            
            (21
            )Acquired
      during year 2006
            
            -
            
            
            -
            
            
            
            165
            
            
            
            159
            
            
            
            324Locations
      at Dec. 31, 2006
            
            
            214
            
            
            
            288
            
            
            
            165
            
            
            
            159
            
            
            
            826Opened
      during year 2007
            
            
            30
            
            
            
            37
            
            
            
            55
            
            
            
            34
            
            
            
            156Closed
      during year 2007
            
            
            (7
            )
            
            
            (51
            )
            
            
            (9
            )
            
            
            (7
            )
            
            
            (74
            )Locations
      at Dec. 31, 2007
            
            
            237
            
            
            
            274
            
            
            
            211
            
            
            
            186
            
            
            
            908Opened
      during year 2008
            
            
            37
            
            
            
            34
            
            
            
            24
            
            
            
            43
            
            
            
            138Closed
      during year 2008
            
            
            (18
            )
            
            
            (13
            )
            
            
            (1
            )
            
            
            -
            
            
            
            (32
            )Locations
      at Dec. 31, 2008
            
            
            256
            
            
            
            295
            
            
            
            234
            
            
            
            229
            
            
            
            1014




The
following table reflects the square footage of each store space during the
fiscal year ended December 31, 2006, 2007 and 2008.





(
      In square feet)
            
            HWD
            
            
            YYX
            
            
            HSE
            
            
            SJ&H
            
            
            TotalAreas
      at Jan. 1, 2006
            
            
            19,965
            
            
            
            39,222
            
            
            
            -
            
            
            
            -
            
            
            
            59,187Opened
      during year 2006
            
            
            5,208
            
            
            
            5,768
            
            
            
            -
            
            
            
            -
            
            
            
            10,976Closed
      during year 2006
            
            
            (802
            )
            
            
            (2,210
            )
            
            
            -
            
            
            
            -
            
            
            
            3,012Acquired
      during year 2006
            
            -
            
            
            -
            
            
            
            23,099
            
            
            
            18,056
            
            
            
            41,155Areas
      at Dec. 31, 2006
            
            
            24,371
            
            
            
            42,780
            
            
            
            23,099
            
            
            
            18,056
            
            
            
            108,306Opened
      during year 2007
            
            
            3,335
            
            
            
            5,475
            
            
            
            7,408
            
            
            
            3,709
            
            
            
            19,927Closed
      during year 2007
            
            
            (778
            )
            
            
            (7,547
            )
            
            
            (1,212
            )
            
            
            (764
            )
            
            
            (10,301
            )Areas
      at Dec 31, 2007
            
            
            26,928
            
            
            
            40,708
            
            
            
            29,295
            
            
            
            21,001
            
            
            
            117,932




Opened
      during year 2008
            
            
            5,698
            
            
            
            5,270
            
            
            
            3,888
            
            
            
            6,020
            
            
            
            20,876Closed
      during year 2008
            
            
            (1,890
            )
            
            
            (1,724
            )
            
            
            (112
            )
            
            
            -
            
            
            
            (3,726
            )Areas
      at Dec. 31, 2008
            
            
            30,736
            
            
            
            44,254
            
            
            
            33,071
            
            
            
            27,021
            
            
            
            135,082




22


The following table reflects net
sales per square foot for the fiscal year ended December 31, 2006, 2007 and
2008.





(In
      US dollars)
            
            HWD
            
            
            YYX
            
            
            HSE
            
            
            SJ&H
            
            
            Average2006
            
            
            1,440
            
            
            
            690
            
            
            
            1,497
            
            
            
            1,871
            
            
            
            9952007
            
            
            1,666
            
            
            
            703
            
            
            
            1,617
            
            
            
            2,244
            
            
            
            1,4202008
            
            
            1,910
            
            
            
            812
            
            
            
            1,301
            
            
            
            1,802
            
            
            
            1,467




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 2006 and March 2007 in the same “store in
store.”





(In
      US dollars)
            
            HWD
            
            
            YYX
            
            
            HSE
            
            
            SJ&H
            
            
            Average2006
            
            
            13,800
            
            
            
            8,700
            
            
            
            17,400
            
            
            
            17,700
            
            
            
            12,7002007
            
            
            15,300
            
            
            
            8,500
            
            
            
            18,000
            
            
            
            20,200
            
            
            
            17,9002008
            
            
            21,700
            
            
            
            11,900
            
            
            
            17,300
            
            
            
            20,400
            
            
            
            18,900




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.




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




23


(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, 2008. 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.





Three
      Months Ended12/31/2008
            
            
            9/30/2008
            
            
            6/30/2008
            
            
            3/31/2008
            
            
            12/31/2007
            
            
            9/30/2007
            
            
            6/30/2007
            
            
            3/31/2007Sales,
      net
            
            $
            84,919,058
            
            
            $
            79,056,756
            
            
            $
            78,515,392
            
            
            $
            68,153,455
            
            
            $
            69,108,145
            
            
            $
            57,896,861
            
            
            $
            64,498,473
            
            
            $
            84,523,194Cost
      of sales
            
            
            71,545,553
            
            
            
            67,210,574
            
            
            
            65,639,675
            
            
            
            57,607,075
            
            
            
            57,891,581
            
            
            
            45,113,474
            
            
            
            53,060,275
            
            
            
            70,590,912Gross
      profit
            
            
            13,373,505
            
            
            
            11,846,182
            
            
            
            12,875,717
            
            
            
            10,546,380
            
            
            
            11,216,564
            
            
            
            12,783,387
            
            
            
            11,438,198
            
            
            
            13,932,282General
      and administrative expenses
            
            
            4,089,418
            
            
            
            3,730,967
            
            
            
            3,326,044
            
            
            
            2,986,044
            
            
            
            4,017,300
            
            
            
            2,856,805
            
            
            
            3,014,233
            
            
            
            3,726,162Income
      from operations
            
            
            9,284,087
            
            
            
            8,115,215
            
            
            
            9,549,673
            
            
            
            7,560,336
            
            
            
            7,199,264
            
            
            
            9,926,582
            
            
            
            8,423,965
            
            
            
            10,206,120Other
      Income (Expense)Interest
      income
            
            
            42,763
            
            
            
            38,014
            
            
            
            29,472
            
            
            
            36,095
            
            
            
            30,990
            
            
            
            25,977
            
            
            
            17,655
            
            
            
            13,791Other
      income (expense)
            
            
            96,789
            
            
            
            378,976
            
            
            
            326,904
            
            
            
            (12,813
            )
            
            
            (61,421
            )
            
            
            (7,101
            )
            
            
            1,171
            
            
            
            (6,864
            )Total
      Other Income (Expense)
            
            
            139,552
            
            
            
            416,990
            
            
            
            356,376
            
            
            
            23,282
            
            
            
            (30,431
            )
            
            
            18,876
            
            
            
            18,826
            
            
            
            6,927Income
      before income taxes
            
            
            9,423,639
            
            
            
            8,532,205
            
            
            
            9,906,049
            
            
            
            7,583,618
            
            
            
            7,168,833
            
            
            
            9,945,458
            
            
            
            8,442,791
            
            
            
            10,213,047Provision
      for income taxes
            
            
            2,278,033
            
            
            
            2,168,638
            
            
            
            2,354,054
            
            
            
            1,810,573
            
            
            
            2,787,417
            
            
            
            3,372,489
            
            
            
            2,941,264
            
            
            
            3,749,259Net
      income
            
            $
            7,145,606
            
            
            $
            6,363,567
            
            
            $
            7,551,995
            
            
            $
            5,773,045
            
            
            $
            4,381,416
            
            
            $
            6,572,969
            
            
            $
            5,501,527
            
            
            $
            6,463,788Net
      income per share:Basic
      & diluted
            
            $
            0.14
            
            
            $
            0.12
            
            
            $
            0.14
            
            
            $
            0.11
            
            
            $
            0.08
            
            
            $
            0.12
            
            
            $
            0.10
            
            
            $
            0.12Weighted
      average number of shares outstanding:Basic
            
            
            52,673,938
            
            
            
            52,673,938
            
            
            
            52,673,938
            
            
            
            52,673,938
            
            
            
            52,671,438
            
            
            
            52,608,938
            
            
            
            52,608,938
            
            
            
            52,578,938Diluted
            
            
            53,073,938
            
            
            
            53,073,938
            
            
            
            53,073,938
            
            
            
            53,073,938
            
            
            
            52,671,438
            
            
            
            52,608,938
            
            
            
            52,608,938
            
            
            
            52,578,938





24


Liquidity
and Capital Resources





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
cash equivalents were $32,158 thousand at December 31, 2008 and current assets
totaled $67,433 thousand at December 31, 2008. The Company’s total current
liabilities were $7,558 thousand at December 31, 2008. Working capital at
December 31, 2008 was $59,875 thousand. During 2008, net cash provided by
operating activities was $12,690 thousand.





Cash and
cash equivalents were $24,953 thousand at December 31, 2007 and current assets
totaled $42,711 thousand at December 31, 2007. The Company’s total current
liabilities were $5,793 thousand at December 31, 2007. Working capital at
December 31, 2007 was $36,918 thousand. During 2007, net cash provided by
operating activities was $21,574 thousand.





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





April 20,
2007- HWD repaid approximately $1.3 million of the outstanding
balance;




April 26,
2007- ZYX repaid approximately $2.5 million of the outstanding balance;
and




April 30,
2007 -HSE repaid the remaining approximately $700,000 of the
balance.





The
Company believes it will be able to pay any debts that come due for the
foreseeable future.





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 ZYX, YYX, HWD, HSE and SJ&H may
pay dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations.
Additionally,  ZYX, YYX, HWD, HSE and SJ&H 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. We have not
declared any dividends on our common stock since inception and 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  ZYX, YYX, HWD, HSE and
SJ&H.





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




Year
      Ended December 31,2008
            
            
            2007
            
            
            2006Net
      cash provided by operating activities
            
            $
            12,690
            
            
            $
            21,574
            
            
            $
            10,969Net
      cash used in investing activities
            
            
            (7,327
            )
            
            
            (64
            )
            
            
            (29
            )Net
      cash (used in) provided by financing
activities
            
            
            -
            
            
            
            (4,500
            )
            
            
            (6,558
            )Effect
      of exchange rate change on cash and cash
      equivalents
            
            
            1,842
            
            
            
            1,444
            
            
            
            167Net
      increase in cash and cash equivalents
            
            
            7,205
            
            
            
            18,454
            
            
            
            4,549Cash
      and cash equivalents at beginning of year
            
            
            24,953
            
            
            
            6,498
            
            
            
            1,949Cash
      and cash equivalents at end of year
            
            $
            32,158
            
            
            $
            24,953
            
            
            $
            6,498





In light of the three components of
cash flows i.e. operating, investing and financing activities for the years
ended December, 31, 2006, 2007 and 2008.





Operating
Activities





Net cash generated from operating
activities decreased to $11,133 thousand in 2008 from $21,574 thousand
in 2007. This decrease was mainly attributable to several factors, including
(i) the increase of accounts receivable of $15,909 thousand resulting from
the extension of repayment terms from 15 days to 30 days for retail customers;
(ii) the increase of $2,246 thousand in inventories as a result of
increased level of inventories in 2008 to maintain an adequate level for all
stores as a precaution for possible incidents such as the snow storm in early
2008 ; (iii) the decrease in income taxes payable of $544 thousand, offset
by an increase of $2,309 thousand in accounts payable and accrued expenses and
an the increase in add-back of non-cash expenses, mainly consisting of
share-based compensation of $337 thousand in 2008.





2008
            
            
            2007
            
            
            2006(in
      thousands)
            
            
            (in
      thousands)
            
            
            (in
      thousands)Net
      cash provided by operating activities
            
            $
            12,690
            
            
            $
            21,574
            
            
            $
            10,969+15.69
            %
            
            
            +96.68
            %




25




2008
            
            
            2007
            
            
            2006(in
      thousands)
            
            
            (in
      thousands)
            
            
            (in
      thousands)Sales
      Net
            
            $
            310,645
            
            
            $
            276,027
            
            
            $
            148,219+109.59
            %
            
            
            +86.23
            %





Using 2006 as base year, there was a
healthy growth in net cash generated from the operating activities in 2007, an
increase of 96.68%. The significant increase in net cash generated by operating
activities in 2007 was in line with the significant growth in net sales of
86.23% in 2007.





Using 2006 as base year, net sales in
2008 increased 109.59% while cash generated from operating activities increased
15.7%. Increase in cash generated from operating activities was not in line with
sales and the difference was primarily due to the increase of inventory and
accountants receivable in 2008.





2008
            
            
            2007
            
            
            2006(in
      thousands)
            
            
            (in
      thousands)
            
            
            (in
      thousands)a)    
      Increase in inventory
            
            $
            (2,246
            )
            
            $
            (3,946
            )
            
            $
            (488
            )+360.25
            %
            
            
            +708.6
            %b)    
      Increase in accounts receivable
            
            $
            (15,909
            )
            
            $
            (73
            )
            
            $
            (2,375
            )+569.85
            %
            
            
            -96.93
            %




In 2008, cash provided by operating
activities decreased compared to 2007 due to the increase in accounts receivable
and inventories.





The
increase in accounts receivable in 2008 was due to the extension of payment
terms from all the Company's retail partners from 15 days to 30 days. Although
the amount of accounts receivable increased during 2008, the Company still
maintain 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.





In 2006 and 2007, the Company operated
with a low level of inventory. In early 2008, China experienced an unprecedented
snow storm. Since all of our stores carry a low level of inventory, the snow
storm caused a shortage of inventory. Therefore, we increased our inventory
level during 2008 in order to maintain an adequate level for all stores as a
precaution for other possible incidents. Although we increased the level of
inventories, we still maintain a high inventory turnover. Our inventory turned
24 times during 2008.




Investing
activities





2008
            
            
            2007
            
            
            2006(in
      thousand)
            
            
            (in
      thousand)
            
            
            (in
      thousand)Net
      cash used investment activities
            
            $
            (7,327
            )
            
            $
            (64
            )
            
            $
            (29
            )251.66
            %
            
            
            120.69
            %





Net
cash used in investing activities increased to $7,327 thousand in 2008 from
$64 thousand in 2007 as a result of the acquisition of Jinhua. On December
19, 2008, ZYX and YYX entered into an agreement to acquire Jinhua. Pursuant to
the acquisition agreement, ZYX and YYX are 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 thousand to
the shareholders of Jinhua in 2008.





Net cash used in investing activities
increased to $64 thousand in 2007 from $29 thousand in 2006, primarily
due to our purchase of additional office equipment.





26


The Company's activities focus on
distribution of products.  As a result, investment in fixed assets is
moderate and hence there is little effect to the utilization of cash resources
over fiscal years 2008, 2007 and 2006.





Financing
Activities





There was no cash used in financing
activities in 2008. Net cash used in financing activities decreased to $4,500
thousand in 2007 from $6,558 thousand in 2006, due to payment of notes of
$4,500 thousand for the acquisition of SJ&H in 2007 and $6,558
thousand for acquisition of HSE and SJ&H in 2006.





Financial
      activities
            
            2008
            
            
            2007
            
            
            2006(in
      thousand)
            
            
            (in
      thousand)
            
            
            (in
      thousand)Net
      cash (used) in financing activities
            
            $
            —
            
            
            $
            (4,500
            )
            
            $
            (6,558
            )(100
            )%
            
            
            (31.38
            )
      %





The fast growth and development of the Company relies on the acquisition of
other entities either for product lines, sales networks or their man power in
order to significantly enhance the Company's sales and
profitability.





The Company utilized its cash resources in 2006 and 2007 in aggregate of $11,058
thousand for acquisition of HSE and SJ&H.





All the above components adding up or compensate each other giving cash
contributions to the Company.





Net
change in cash and cash equivalents





2008
            
            
            2007
            
            
            2006(in
      thousand)
            
            
            (in
      thousand)
            
            
            (in
      thousand)Net
      change in cash and cash
equivalents
            
            $
            7,205
            
            
            $
            18,454
            
            
            $
            4,549+58.39
            %
            
            
            +305.67
            %





Cash
and cash equivalent




2008
            
            
            2007
            
            
            2006(in
      thousand)
            
            
            (in
      thousand)
            
            
            (in
      thousand)Cash
      and cash equivalent at December 31, 2006, 2007 and 2008
            
            $
            32,158
            
            
            $
            24,952
            
            
            $
            6,498+394.89
            %
            
            
            +283.99
            %




Capital
Expenditures





Total
capital expenditures for purchase of fixed assets during 2008, 2007 and 2006
were $11,088, $64,325 and $30,591, respectively, as given the low level of
capital requirements needed to open additional “stores in stores” the Company
believes its funds are sufficient to support its organic growth.





Working Capital Requirements





Historically
operations and short term financing have been sufficient to meet our cash needs.
We believe that we will be able to generate revenues from sales 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.





27


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.





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; and (3)
whether all elements of the contract have been fulfilled and delivered. In
addition, our revenue recognition policy requires an assessment as to 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.





Accounting
for Derivative Instruments





Statement
of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, requires all derivatives to be
recorded on the Company’s balance sheet at fair value.





In
September 2000, the Emerging Issues Task Force (“EITF”) issued EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in a Company’s Own Stock” (“EITF 00-19”), which requires freestanding
contracts that are settled in a company’s own stock, including common stock
warrants, to be designated as an equity instrument, asset or a liability. Under
the provisions of EITF 00-19, a contract designated as an asset or a liability
must be carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in the company’s results of operations. A contract
designated as an equity instrument must be included within equity, and no fair
value adjustments are required.





Tabular
Disclosure of Contractual Obligations




The following table sets forth our
contractual obligations as of December 31, 2008:




Payment
      Due by PeriodLess than 1
            
            
            
            
            
            More thanContractual
      Obligations
            
            Total
            
            year
            
            1-3 years
            
            3-5 years
            
            5
      yearsOperating
      lease obligations
            
            
            $
            362,800
            
            
            $
            274,000
            
            
            $
            88,800
            
            
            $
            -
            
            
            $
            -Purchase
      obligationsTotal
      contractual obligations
            
            
            $
            362,800
            
            
            $
            274,000
            
            
            $
            88,800
            
            
            $
            -
            
            
            $
            -




28





ITEM 7A.   QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK





Foreign
Currency Exchange Rate Risk





Fluctuations
in the rate of exchange between the U.S. dollar and foreign currencies,
primarily the Chinese Renminbi, could adversely affect our financial results.
During the fiscal year ended December 31, 2008, approximately all of our sales
are denominated in foreign currencies. We expect that foreign currencies will
continue to represent a similarly significant percentage of our sales in the
future. Selling, marketing and administrative costs related to these sales are
largely denominated in the same respective currency, thereby mitigating our
transaction risk exposure. We therefore believe that the risk of a significant
impact on our operating income from foreign currency fluctuations is not
substantial. However, for sales not denominated in U.S. dollars, if there is an
increase in the rate at which a foreign currency is exchanged for U.S. dollars,
it will require more of the foreign currency to equal a specified amount of U.S.
dollars than before the rate increase. In such cases and if we price our
products in the foreign currency, we will receive less in US. dollars than we
did before the rate increase went into effect. If we price our products in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our price not being
competitive in a market where business is transacted in the local
currency.





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





Interest
Rate Risk





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





Inflation





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





Currency
Exchange Fluctuations





All of
the Company’s revenues are denominated in Chinese Renminbi, while its expenses
are denominated primarily in Chinese Renminbi (“RMB”). The value of the
RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including U.S. dollars, has been
based on rates set by the People’s Bank of China, which are set daily based on
the previous day’s inter-bank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official exchange rate for
the conversion of Renminbi to U.S. dollars had generally been stable and the
Renminbi had appreciated slightly against the U.S. dollar. However, on July 21,
2005, the Chinese government changed its policy of pegging the value of Chinese
Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. Recently there has been increased political pressure on the Chinese
government to decouple the Renminbi from the United States dollar. At the recent
quarterly regular meeting of People’s Bank of China, its Currency Policy
Committee affirmed the effects of the reform on Chinese Renminbi exchange rate.
Since February 2006, the new currency rate system has been operated; the
currency rate of Renminbi has become more flexible while basically maintaining
stable and the expectation for a larger appreciation range is shrinking. The
Company has never engaged in currency hedging operations and has no present
intention to do so.





Concentration
of Credit Risk





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





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





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




29




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




ITEM 8.   FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA





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





ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE




Not
applicable.




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, 2008, as
such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on this evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
the Company’s disclosure controls and procedures were effective as of such date
to ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosures.





Management’s
Report on Internal Control over Financial Reporting





Our
independent registered public accounting firm, Goldman Parks Kurland Mohidin,
LLP, who also audited our consolidated financial statements, independently
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008, as stated in their report which is included in this Annual
Report on Form 10-K.





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Internal control over financial reporting 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 generally accepted accounting principles 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 generally accepted
accounting principles, 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.





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, internal
control over financial reporting 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.





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation, our principal executive officer and principal financial officer have
concluded that during the period covered by this report, our internal controls
over financial reporting were not effective for the following
reasons:





a.
              The
      Company did not identify material sales cut-off errors as part of its
      period end closing process. This sales cut-off error resulted in
      understatement of sales, accounts receivable by approximately $4.2
      million, cost of goods sold and pre-tax income by approximately $3.6
      million and $0.6 million, respectively, and overstatement of inventory by
      approximately $3.6million.
      This error was corrected in the financial
  statements.




30


b.
                Lack
      of technical accounting expertise among financial staff regarding US GAAP
      and the requirements of the PCAOB, and regarding preparation of financial
      statements.
 
 We plan
to take the following steps to remediate the significant deficiencies in
internal control over financial reporting that are identified
above.
 
 a.
                Hire
      a senior accounting staff that has experiences in U.S. GAAP and SOX 404 to
      oversee the financial reporting process in order to ensure the Company’s
      compliance with U.S. GAAP and security
laws.
  b.
                Provide
      trainings to accounting staff on U.S.
GAAP.
 
 Our
independent registered public accounting firm, Goldman Parks Kurland Mohidin
LLP, who also audited our consolidated financial statements, independently
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008, as stated in their report which is included in this Annual
Report on Form 10-K.
 
 Changes
in Internal Control over Financial Reporting
  There was
no change 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 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
  ITEM
9B. OTHER INFORMATION
 
 None.


PART III





ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE





The
following table sets forth the name, age and position of each of our officers
and directors as of April 14, 2009.




Name
            
            Age
            
            PositionZhenggang
      Wang
            
            40
            
            Chief
      Executive Officer and Chairman of the BoardWeidong
      Huang
            
            38
            
            Chief
      Financial OfficerXiang
      Ma
            
            34
            
            PresidentChenghua
      Zhu
            
            33
            
            DirectorMingjun
      Zhu
            
            40
            
            DirectorRongjin
      Weng
            
            45
            
            DirectorWei
      Kang Gu
            
            70
            
            DirectorKenneth
      T. Berents
            
            61
            
            Director,
      Chairman Audit Committee





There are no family relationships
between or among any of the executive officers or directors of the Company.
Below are brief descriptions of the backgrounds and experiences of the officers
and directors:





Zhenggang
Wang, Chief Executive Office and Chairman of the Board




Mr. Wang,
has been the Company’s chief executive officer and chairman of its Board of
Directors since December 2005. He is also the founder, chairman and chief
executive officer of Zhejiang Yong Xin Digital Technology Company Limited, a
holding company for the purpose of holding interests in Hangzhou Wang Da
Electronics Company, Limited and Yiwu Yong Xin Telecommunication Company,
Limited, both of which are based in China. Mr. Wang established Yiwu Yong
Xin Telecommunication Company, Limited in 1997, and he serves as its chairman
and chief executive officer. In 1998, Mr. Wang established Hangzhou Wang Da
Electronics Company, Limited, which is in the business of distributing cellular
telephone phones. Mr. Wang is the chairman and chief executive officer of
Hangzhou Wang Da Electronics Company, Limited.  Mr. Wang does not
hold any other directorships with reporting companies in the United
States.





Weidong Huang,
Chief Financial Officer





Mr. Huang
has been the chief financial officer of the Company since October 2007. Prior to
joining the Company, Mr. Huang was the Manager of Audit Department, Zhejiang
Yongxin Digital Technology Company Limited, a subsidiary of the Company, where
he has been employed since July 2007. Prior to that he was General Manager of
Hangzhou Jinda Investment Consulting Company from August 2006 to June 2007 and
Assistant General Manager of Zhongcai Guoqi Investment Group Company from
December 2003 to July 2006. He was the General Manager of Zhongsheng Trade
Company from April 1998 to November 2003. Mr. Huang received a degree in
business administration from the Government Institute of Jinhua Municipal
Government.  Mr. Huang does not hold any directorships with
reporting companies in the United States.




31




Xiang
Ma, President





Mr. Ma
has been president of the Company since December 2005.  Mr. Ma was
President of Yiwu Yong Xin Telecommunication Company Limited, China 3C’s largest
subsidiary, from 1999 to the present. During the past six years, Mr. Ma’s
expertise in marketing and management have contributed significantly to the
company’s rapid growth, where it has gone from a small business in the
distribution of 3C products, particularly fax machines, in Eastern China to
being a major presence in that market. Prior to that, from 1996 to 1999, Mr. Ma
was the manager of Zhejiang Transfer Company Limited, a high-tech publicly
traded company in China. During his time at Zhejiang Transfer Company Limited,
Mr. Ma was also responsible for the company’s corporate communications. Mr. Ma
received his Bachelor degree from Zhejiang University with a concentration in
business management. Mr. Ma does not hold any other directorships with reporting
companies in the United States.




Chenghua
Zhu, Director





Ms. Zhu
has been a director of the Company since June 2006.  Ms. Zhu is a
senior project manager of Shanghai Shengzhang, a certified public accounting
firm. She was project manager at two CPA firms prior to joining Shanghai
Shengzhang, Shanghai Jiarui and Hubei Dahua.  Ms. Zhu does not hold
any other directorships with reporting companies in the United
States.





Mingjun
Zhu, Director





Mr. Zhu
has been a director of the Company since June 2006. Mr. Zhu is General Manager
of Zhejiang Mingda, a certified public accounting firm. He was General Manager
of Zhejiang Mingda Management Consulting Company. From 1993 to 2004, he was
Deputy Director of Yiwu Zhicheng, a CPA firm.  Mr. Zhu does not hold
any other directorships with reporting companies in the United
States.





Rongjin
Weng, Director





Mr. Weng
has been a director of the Company since December 2005.  Mr. Weng is
Chairman of Langsha Group, which is the largest sock manufacturer in China with
an annual revenue of $100 million. Mr. Weng established Langsha Knitting Company
Limited in 1995, and has served as its chairman and chief executive officer
since that time. Mr. Weng holds a master degree in Business Administration from
Shanghai Jiao Tong University. Mr. Weng does not hold any other directorships
with reporting companies in the United States.




Wei
Kang Gu, Director





Mr. Gu
has been a director of the Company since December 2005. Mr. Gu is a Professor of
Electronic Engineering at Zhejiang University. Founded in 1897, the University
has always been ranked among the few top universities in China and is today the
third most recognized university in China. It is a major research university
comprised of 22 colleges. Mr. Gu also serves on the Board of Bird Ningbo
Company. Founded in 1992, Bird Ningbo has grown to be China’s leading domestic
manufacturer of mobile phones. He is also Vice Chairman of Zhejiang Electronic
Association. Mr. Gu received a bachelors’ degree from Zhejiang
University.  Mr. Gu does not hold any other directorships with
reporting companies in the United States.





Kenneth
T. Berents, Director, Chairman Audit Committee





Mr.
Berents has been a director of the Company since December 2006. Mr. Berents is a
former managing director and senior portfolio manager for Goldman Sachs Asset
Management in Tampa, Fla., which manages $30 billion in growth stocks. Before
joining Goldman Sachs, he was the managing director and director of equity
research for First Union Securities, now Wachovia Securities, from 1993 to 2000.
He holds a bachelor’s in history from Villanova University and a master’s degree
in journalism from the University of Missouri-Columbia. He also was an Alfred P.
Sloan Fellow in economics at Princeton University. He has appeared on ABC’s
Nightline, CNN, CNBC and is widely quoted in national and trade
publications.  Mr. Berents does not hold any other directorships with
reporting companies in the United States.




Joseph
J. Levinson





Joseph J.
Levinson served as a member of the Board of Directors from May 2007 until his
resignation in January 2009.





Term


Each
director serves for a one year term after which they may stand for re-election
at the Company’s annual meeting of stockholders.




32




Compliance
with Section 16 (a) of the Exchange Act





Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
requires the executive officers and directors of the Company and every person
who is directly or indirectly the beneficial owner of more than 10% of any class
of security of the Company to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Such persons also are required to
furnish our company with copies of all Section 16(a) forms they file. Based
solely on our review of copies of such forms received by us, we believe that
during the fiscal year 2008, the executive officers and directors of the Company
and every person who is directly or indirectly the beneficial owner of more than
10% of any class of security of the Company complied with the filing
requirements of Section 16(a) of the Exchange Act, except Joseph Levinson who
did not timely file Form 4 disclosing one reportable transaction that occurred
during the fiscal year 2008, which Mr. Levinson later reported on a Form 4 filed
in February 2009.





Code
of Ethics





In 2007
we adopted a corporate code of ethics. We believe our code of ethics is
reasonably designed to deter wrongdoing and promote honest and ethical conduct;
provide full, fair, accurate, timely and understandable disclosure in public
reports; comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code of ethics. The
code of ethics was filed as Exhibit 14 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007. A written copy of the code of ethics will
be provided upon request at no charge by writing to our Chief Financial Officer,
China 3C Group, 368 HuShu Nan Road, HangZhou City, Zhejiang Province, China
310014.





Board
Committees and Designated Directors





The Board
of Directors has a Compensation Committee, a Nominating and Corporate Governance
Committee and an Audit Committee.




Audit
Committee





The Board
of Directors has established an audit committee in accordance with Section
3(a)(58)(A) of the Exchange Act.  The Audit Committee consists of
Kenneth T. Berents, Chairman and members Rongjin Weng and Chenghua Zhu. The
Board of Directors of the Company has determined that Mr. Berents is an “audit
committee financial expert” under Item 407(d) of Regulation S-K.





Compensation
Committee





Our
Compensation Committee consists of Wei Kang Gu, Chairman and member Rongjin
Weng. The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for our officers, including our
Chief Executive Officer, and employees and administers our stock option plans.
Each of the members of the Committee is independent and none have served as an
officer or employee of the Company.





Nominating
and Corporate Governance Committee





Our
Nominating and Corporate Governance Committee consists of Mingjun Zhu, Chairman
and member Wei Kang Gu. The Nominating and Corporate Governance Committee
assists the Board of Directors in identifying qualified individuals to become
board members, in determining the composition of the Board and in monitoring a
process established to assess Board effectiveness. Each of the members of the
Committee is independent and none have served as an officer or employee of the
Company.





Changes
in Director Nomination Process for Stockholders




There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors since the filing of the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2007.




ITEM
11. EXECUTIVE COMPENSATION





Compensation
Discussion And Analysis





The
Compensation Committee of our Board of Directors and our Chief Executive
Officer, Chief Financial Officer and head of Human Resources are collectively
responsible for implementing and administering all aspects of our benefit and
compensation plans and programs, as well as developing specific policies
regarding compensation of our executive officers. The members of our
Compensation Committee, Mingjun Zhu and Wei Kang Gu, are independent
directors.




33





Compensation
Objectives





Our
primary goal with respect to executive compensation has been to set compensation
at levels that attract and retain the most talented and dedicated executives
possible. Individual executive compensation is set at levels believed to be
comparable with executives in other companies of similar size and stage of
development operating in China. We also link long-term stock-based incentives to
the achievement of specified performance objectives and to align executives’
incentives with stockholder value creation.





Elements
of Compensation





Base
Salary . All full time executives are paid a base salary. For executives
who are Chinese nationals, including our Chief Executive Officer and Chairman,
we do not have employment agreements. Base salaries for our executives are
established based on the scope of their responsibilities, taking into account
competitive market compensation paid by other companies in our industry for
similar positions, professional qualifications, academic background, and the
other elements of the executive’s compensation, including stock-based
compensation. Our intent is to set executives’ base salaries near the median of
the range of salaries for executives in similar positions with similar
responsibilities at comparable companies, in line with our compensation
philosophy. Base salaries are reviewed annually, and may be increased to align
salaries with market levels after taking into account the subjective evaluation
described previously.





The
Company currently has no foreign employees and the amount of salary is primarily
determined by job requirements and each employee’s level in the corporate
hierarchy. The Company’s personnel department then makes salary decisions based
on these factors along with and job performance and market
conditions.




Equity Incentive
Compensation. We believe that long-term performance is achieved through
an ownership culture participated in by our executive officers through the use
of stock-based awards. Currently, we do not maintain any incentive compensation
plans based on pre-defined performance criteria. The Compensation Committee has
the general authority, however, to award equity incentive compensation, i.e.
stock options, to our executive officers in such amounts and on such terms as
the committee determines in its sole discretion. The Committee does not have a
determined formula for determining the number of options available to be
granted. Incentive compensation is intended to compensate officers for
accomplishing strategic goals such as mergers and acquisitions and fund raising.
The Compensation Committee will review each executive’s individual performance
and his or her contribution to our strategic goals periodically and determine
the amount of incentive compensation towards the end of the fiscal year. Our
Compensation Committee grants equity incentive compensation at times when we do
not have material non-public information to avoid timing issues and the
appearance that such awards are made based on any such
information.





Determination
of Compensation





Our Chief
Executive Officer, Chief Financial Officer and head of Human Resources meet
frequently during the last several weeks of our fiscal year to evaluate each
non-executive employee’s performance and determine his or her compensation for
the following year.





The
following table sets forth the cash and other compensation paid by us in 2008 to
all individuals who served as our Chief Executive Officer and Chief Financial
Officer, who we collectively refer to as the named executive officers (“NEOs”).
No executive received total compensation greater than $100,000 in
2008.






SUMMARY COMPENSATION TABLE


Name and
              Principal
              Position
            
            Year
            
            Salary ($)
            
            Bonus ($)
            
            Stock
              Awards
              ($)
            
            Option
              Awards
              ($)
            
            Total ($)Zhenggang
      Wang, CEO
            
            2008
            
            $
            27,800
            
            -
            
            
            -
            
            -
            
            $
            27,8002007
            
            $
            59,600
            
            -
            
            
            -
            
            -
            
            $
            59,6002006
            
            $
            15,000
            
            -
            
            
            -
            
            -
            
            $
            15,000Weidong
      Huang, CFO (1)
            
            2008
            
            $
            22,300
            
            -
            
            
            -
            
            -
            
            $
            22,3002007
            
            $
            5,000
            
            -
            
            
            -
            
            -
            
            $
            5,0002006
            
            $
            0Jian
      Liu, Former CFO (2)
            
            2007
            
            $
            53,000
            
            -
            
            
            -
            
            -
            
            $
            53,0002006
            
            $
            15,000
            
            -
            
            
            -
            
            -
            
            $
            15,000Joseph
      Levinson,
            
            2008
            
            $
            60,000
            
            -
            
            
            -
            
            -
            
            $
            60,000Investor
      Relations (3)
            
            2007
            
            $
            16,000
            
            __-
            
            
            13,930
            
            -
            
            $
            29,930


(1)
              Weidong
      Huang was appointed as Chief Financial Officer of the Company effective
      October 8, 2007.
  (2)
              Jian
      Lu resigned as our Chief Financial Officer, Secretary and Director on
      October 8, 2007.
  (3)
                Joseph
      Levinson joined the Board of Directors of the Company and became in charge
      of Investor Relations for the Company  in May 2007. Mr. Levinson
      resigned in January 2009.  As compensation for his services, the
      Company agreed to pay Mr. Levinson received: (1) USD $60,000 per year,
      payable in equal quarterly installments; (2) a monthly grant during his
      term of his services of 1,000 shares of the Company’s common stock; (3) an
      initial annual grant of a stock option to purchase 300,000 shares of the
      Company's common stock, with an exercise price of $6.15 per share (the
      “2007 Stock Option”) under the China 3C Group 2005 Equity Incentive Plan;
      and (4) a subsequent annual grant of a stock option to purchase an
      additional 300,000 shares of the Company's common stock, with an exercise
      price of $1.82 (the “2008 Stock Option”) under the China 3C Group 2005
      Equity Incentive Plan  It was later determined that due to the
      expiration of the China 3C Group 2005 Equity Incentive Plan on December
      31, 2006, the 2007 Stock Option and the 2008 Stock Option could not be
      validly granted.


34




Grants
of Plan-Based Awards





No plan
based award was granted to any of the Company’s NEOs as of December 31,
2008.




Outstanding
Equity Awards At Fiscal Year-End





There
were no outstanding unexercised options, unvested stock or other equity
incentive plan awards held by any of the Company’s NEOs as of December 31,
2008.





Option
Exercises And Stock Vested





There
were no exercises of stock options, stock appreciation rights and/or similar
investment nor was there any vesting of stock, restricted stock, restricted
stock units or similar instruments during the year ended December 31, 2008 for
any of the Company’s NEOs.





Pension
Benefits





We do not
sponsor any pension benefit plans.





Nonqualified
Deferred Compensation





We do not
maintain any non-qualified defined contribution or deferred compensation plans.
Our Compensation Committee, which is comprised solely of “outside directors” as
defined for purposes of Section 162(m) of the Internal Revenue Code, may elect
to provide our officers and other employees with non-qualified defined
contribution or deferred compensation benefits if the Compensation Committee
determines that doing so is in our best interests.





Potential
Payments Upon Termination or Change in Control





None.





Employment
Agreements




On May 7,
2007 the Board of Directors appointed Joseph J. Levinson to serve as a member of
the Board of Directors of the Company and to be in charge of the Company’s
investor relations. As compensation for his services, Mr. Levinson received: (1)
$60,000 per year, payable in equal quarterly installments; (2) a monthly grant
during his term of his services of 1,000 shares of the Company’s common stock;
(3) an initial annual grant of a stock option to purchase 300,000 shares of the
Company's common stock, with an exercise price of $6.15 per share (the “2007
Stock Option”) under the China 3C Group 2005 Equity Incentive Plan; and (4) a
subsequent annual grant of a stock option to purchase an additional 300,000
shares of the Company's common stock, with an exercise price of $1.82 (the “2008
Stock Option”) under the China 3C Group 2005 Equity Incentive Plan. In addition,
the Company agreed that Mr. Levinson would receive (1) $2,500 for each Board
meeting that he attends, (2) $2,000 for each meeting of a committee of the Board
that he attends, (3) $5,000 upon being named the chairman of any Board
committee, and (4) $4,500 as a one time bonus upon joining the
Board.  It was later determined that due to the expiration of the
China 3C Group 2005 Equity Incentive Plan on December 31, 2006, the 2007 Stock
Option and the 2008 Stock Option were not validly granted. Pursuant to the terms
of the Compensation Agreement dated as of November 27, 2008 between Mr. Levinson
and the Company, Mr. Levinson acknowledged that the 2007 Stock Option and the
2008 Stock Option were not and will not be granted and in consideration for his
services as a Director accepted the issuance of 125,000 shares of the Company’s
common stock.  The 125,000 shares of the Company’s common stock were
issued to Mr. Levinson on January 7, 2009.




35





Compensation
of Directors





Messrs.
Berents and Levinson, prior to his resignation in January 2009, receive $2,500
per Board meeting that they attend, $2,000 per meeting of a committee of the
Board that they attend, and an annual fee of $5,000 for serving as a chairman of
a Board committee.





Upon joining the Board of Directors on
December 8, 2006, Ken Berents entered into a Board of Directors Agreement with
the Company, pursuant to which he receives an annual salary of $75,000 payable
in monthly installments at the beginning of each month that Mr. Berents is a
member of the Board of Directors. In addition, Mr. Berents receives an annual
fee of $5,000 for being named Chairman of the Audit Committee. Mr. Berents
received an option grant to purchase 50,000 shares of common stock of the
Company upon execution of his Board of Directors Agreement and is entitled to
receive 30,000 shares on each anniversary of such date thereafter, provided Mr.
Berents is a member of the Board of Directors at such time. The exercise price
of the initial grant of 50,000 shares shall be based on the closing price of the
common stock of the Company on December 7, 2006 and for each future option grant
the closing price of the Company common stock on the anniversary of such date.
All option grants will vest upon issuance and will have an exercise period of
ten years from date of issuance so long as Mr. Berents is a member of the Board
of Directors at such time. In the event that Mr. Berents is no longer a member
of the Board of Directors, his exercise period for all vested options will be
twenty-four months from the anniversary date of his departure from the Board of
Directors.





The following table summarizes
compensation that our directors earned during 2008 for services as members of
the Company’s Board.





DIRECTOR
      COMPENSATION




Name
            
            Fees
              Earned or
              Paid in
              Cash
            
            Stock
              Awards
              ($) (1)
            
            Option
              Awards
              ($) (2)
            
            Non-Equity
              Incentive
              Plan
              Compensation
              ($)
            
            Change in
              Pension
              Value
      and
              Nonqualified
              Deferred
              Compensation
              Earnings ($)
            
            All
              Other
              Compensation
              ($)
            
            Total
              ($)Kenneth
      T. Berents
            
            $
            80,000
            
            
            
            $
            19,398
            (3)
            -
            
            
            -
            
            -
            
            
            99,398Wei
      Kang Gu
            
            
            -
            
            -
            
            
            -
            
            -
            
            
            -
            
            -
            
            
            -Joseph
      J. Levinson
            
            $
            60,000
            
            $118,000
            (4)
            
            -
            
            -
            
            
            -
            
            -
            
            
            277,398Chenghua
      Zhu
            
            $
            -
            
            -
            
            
            -
            
            -
            
            
            -
            
            -
            
            
            -Mingjun
      Zhu
            
            $
            -
            
            -
            
            
            -
            
            -
            
            
            -
            
            -
            
            
            -Rongjin
      Weng
            
            $
            -
            
            -
            
            
            -
            
            -
            
            
            -
            
            -
            
            
            -




(1)
Valuation based on dollar amount recognized for financial statement reporting
purposes pursuant to FAS 123(R) with respect to 2008.





(2)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to
2008.





(3) The
Board of Directors Agreement dated December 8, 2006, provides for a stock option
grant of 30,000 shares to be made to Mr. Kenneth Berents in December 2008 at an
exercise price equivalent to the prevailing market price of the stock, all of
which options shall be vested and exercisable as of December 31,
2008.





(4) Mr.
Joseph Levinson received a grant of 125,000 shares pursuant to the terms of the
Compensation Agreement dated November 27, 2008.





Compensation
Committee Interlocks and Insider Participation





Members
of our Compensation Committee of the Board of Directors were Mingjun Zhu and Wei
Kang Gu. No member of our Compensation Committee was, or has been, an officer or
employee of the Company or any of our subsidiaries.





No member
of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of the Company or
another entity.





Compensation
Committee Report (1)





The goal
of the Company’s executive compensation policy is to ensure that an appropriate
relationship exists between executive compensation and the creation of
stockholder value, while at the same time attracting, motivating and retaining
experienced executive officers.





The
Compensation Committee has reviewed and discussed the discussion and analysis of
the Company’s compensation which appears above with management, and, based on
such review and discussion, the Compensation Committee recommended to the
Company’s Board of Directors that the above disclosure be included in this
Annual Report on Form 10-K.




36





The members of the Compensation
Committee are:





Mingjun Zhu, Chairman





Wei Kang Gu







(1)
  The material in the above Compensation Committee reports is not
soliciting material, is not deemed filed with the SEC and is not incorporated by
reference in any filing of the Company under the Securities Act of 1933, or the
Securities Exchange Act of 1934, whether made before or after the date of this
Form 10-K and irrespective of any general incorporation language in such
filing.




ITEM 12.   SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





The
following table sets forth certain information, as of April 14, 2009, concerning
shares of common stock of the Company, the only class of its securities that are
issued and outstanding, held by (1) each shareholder known by the Company
to own beneficially more than five percent of the common stock, (2) each
director of the Company, (3) each executive officer of the Company, and
(4) all directors and executive officers of the Company as a
group:





Amount and Nature
            
            Percentage ofof Beneficial
            
            Common StockName and Address of Beneficial
      Owner (1)
            
            Ownership
            
            (3)Zhenggang
      Wang
            
            
            9,725,000
            
            18.41
            %Weidong
      Huang
            
            
            0
            
            0Xiang
      Ma
            
            
            0
            
            0Chenghua
      Zhu
            
            
            0
            
            0Mingjun
      Zhu
            
            
            0
            
            0Rongjin
      Weng
            
            
            0
            
            0Wei
      Kang Gu
            
            
            0
            
            0Kenneth
      T. Berents
            
            
            110,000
            (4)
            *Joseph
      J. Levinson (5)
            
            
            145,000
            
            *Guerrilla
      Capital Management, LLC and Peter Siris (6)
            
            
            3,397,835
            
            6.43
            %All
      directors and executive officers as a group (8 persons)
            
            
            9,835,000
            
            18.61
            %




* Less
than One Percent.


(1)
            Unless otherwise indicated in the
      footnotes to the table, each shareholder shown on the table has sole
      voting and investment power with respect to the shares beneficially owned
      by him, her or it. Unless otherwise indicated in the footnotes to the
      table, the address for each shareholder is c/o: 368 HuShu Nan Road,
      HangZhou City, Zhejiang Province, China 310014. Percentages of less than
      one percent have been omitted from the table.




(2)
            Represents shares of common stock
      held jointly by Wen-An Chen and Huoqing
  Yang.




(3)
            Calculated on the basis of
      52,834,055 shares of common stock issued and outstanding as of April
      14, 2009 except that shares of common stock underlying options and
      warrants exercisable within 60 days of the date hereof are deemed to be
      outstanding for purposes of calculating the beneficial ownership of
      securities of the holder of such options or warrants.




(4)
            Represents shares of common stock
      issuable upon exercise of outstanding stock options (as described
      above).




(5)
            Joseph
      Levinson joined the Board of Directors of the Company and became in charge
      of Investor Relations for the Company  in May 2007. Mr. Levinson
      resigned in January 2009.  As compensation for his services, the
      Company agreed to pay Mr. Levinson received: (1) USD $60,000 per year,
      payable in equal quarterly installments; (2) a monthly grant during his
      term of his services of 1,000 shares of the Company’s common stock; (3) an
      initial annual grant of a stock option to purchase 300,000 shares of the
      Company'’s common stock, with an exercise price of $6.15 per share (the
      “2007 Stock Option”) under the China 3C Group 2005 Equity Incentive Plan;
      and (4) a subsequent annual grant of a stock option to purchase an
      additional 300,000 shares of the Company's common stock, with an exercise
      price of $1.82 (the “2008 Stock Option”) under the China 3C Group 2005
      Equity Incentive Plan  It was later determined that due to the
      expiration of the China 3C Group 2005 Equity Incentive Plan on December
      31, 2006, the 2007 Stock Option and the 2008 Stock Option could not be
      validly granted and in consideration for his services as a Director
      accepted the issuance of 125,000 shares of the Company’s common stock. The
      125,000 shares of the Company’s common stock were issued to Mr. Levinson
      on January 7, 2009.




(6)
            Based
      on information contained in a Schedule 13G filed by Guerrilla Capital
      Management, LLC and Peter Siris on February 24, 2009. The business address
      of Guerrilla Capital Management, LLC and Peter Siris is 237 Park Avenue,
      9th Floor, New York, New York 10017. Peter Siris has the sole power to
      vote and dispose or to direct the vote or the disposition of 35,200 shares
      of our common stock. Guerrilla Capital Management, LLC and Peter Siris
      have a shared power to vote and dispose or to direct the vote or the
      disposition of 3,362,635 shares of our common stock. Guerrilla Capital
      Management, LLC and Peter Siris disclaim beneficial ownership of our
      common stock except to the extent of their pecuniary
    interest.




37





ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Transactions
with Related Parties





There
have not been any transactions, or proposed transactions, during the last two
years, to which the Company was or is to be a party and the amount involved
exceeds $120,000, and in which any director or executive officer of the Company,
any nominee for election as a director, any security holder owning beneficially
more than five percent of the common stock of the Company, or any member of the
immediate family of the aforementioned persons had or is to have a direct or
indirect material interest.





Director
Independence




The
following members of the Company’s Board of Directors are “independent” under
Rule 4200(15) of the Nasdaq Stock Market listing standards: Rongjin Weng,
Weikang Gu, Mingjun Zhu, Chenghua Zhu and Kenneth Berents.




ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





On
January 5, 2009, the Company, on the recommendation of the Audit Committee of
its Board of Directors, engaged Goldman Parks Kurland Mohidin LLP (“GPKM”) as
its independent registered public accounting firm.  From April 20,
2006 to January 5, 2009 Morgenstern, Svoboda & Baer CPA’s P.C. (Morgenstern)
served as the Company’s independent registered public accounting
firm.





The
following represents fees for professional audit services rendered by
Morgenstern for the fiscal years ended December 31, 2007 and December 31,
2008.





Audit
Fees





The
aggregate fees billed by Morgenstern for professional services rendered for the
audit of the Company’s annual and quarterly financial statements for the years
ended December 31, 2008 and December 31, 2007 were $237,278 and
$228,000.





Audit
Related Fees





We
incurred no audit related fees to Morgenstern during the years ended December
31, 2008 and December 31, 2007.





Tax
Fees





Morgenstern
did not render any services for tax compliance, tax advice and tax planning
during fiscal years ended December 31, 2008 and December 31, 2007.





All
Other Fees





Morgenstern
did not bill us any additional fees that are not disclosed under audit fees,
audit related fees or tax fees during transition period fiscal years ended
December 31, 2008, 2007 and 2006.


The
following represents fees for professional audit services rendered by GPKM for
the fiscal year ended December 31, 2008.
 
 Audit
Fees
 
 The
aggregate fees billed by our current auditors, GPKM, for professional services
rendered for the audit of our annual financial statements for the year ended
December 31, 2008 was $150,000.
 
 Audit
Related Fees
 
 We
incurred no audit related fees to GPKM during the year ended December 31,
2008.
 
 Tax
Fees
 
 GPKM did
not render any services for tax compliance, tax advice and tax planning during
the fiscal year ended December 31, 2008.
 
 All
Other Fees
 
 GPKM did
not bill us any additional fees that are not disclosed under audit fees, audit
related fees or tax fees during the fiscal year ended December 31,
2008.




38





Audit
Committee Pre-Approval Process, Policies and Procedures




The Audit
Committee has adopted pre-approval policies for all services, including both
audit and non-audit services, provided by our independent
auditors.  For audit services, each year the independent auditor
provides the Audit Committee with an engagement letter outlining the scope of
the audit services proposed to be performed during the year, which must be
formally accepted by the Audit Committee before the audit
commences.  The independent auditor also submits an audit services fee
proposal, which also must be approved by the Committee before the audit
commences.  The audit, tax, and all other fees and services described
above were pre-approved for 2007 and 2008.





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:





·
            Compensation
      Agreement, dated November 27, 2008, between China 3C Group and Joseph
      Levinson.





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





(c)           Not
applicable.





39





EXHIBIT
INDEX




Exhibit
              No
            
            Document
      Description3.1
            
            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 )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 U.S. 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
    )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, filed herewith14.1
            
            Code
      of Business Conduct and Ethics (11)21.1
            
            List
      of Subsidiaries, filed herewith31.1
            
            Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002, filed herewith.31.2
            
            Certification
      of the Principal Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of
      the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002, filed herewith.32.1
            
            Certification
      of Chief 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 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.




40




(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.




(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.





41





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 15th day of
April 2009.




CHINA
      3C GROUP/s/
      Zhenggang WangZhenggang
      WangChief
      Executive Officer and Chairman




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
            
            
            
            April
      15, 2009Zhenggang
      Wang
            
            Chief
      Executive Officer and Chairman/s/
      Xiang MaXiang
      Ma
            
            President
            
            April
      15, 2009/s/
      Weidong HuangWeidong
      Huang
            
            Chief
      Financial Officer
            
            April
      15, 2009/s/
      Chenghua ZhuChenghua
      Zhu
            
            Director
            
            April
      15, 2009/s/
      Mingjun ZhuMingjun
      Zhu
            
            Director
            
            April
      15, 2009/s/
      Rongjin WengRongjin
      Weng
            
            Director
            
            April
      15, 2009/s/
      Wei Kang GuWei
      Kang Gu
            
            Director
            
            April
      15, 2009/s/
      Kenneth T. BerentsKenneth
      T. Berents
            
            Director
            
            April
      15, 2009





42


CHINA
3C GROUP AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





DECEMBER
31, 2008




TABLE OF
CONTENTS




Report
      of Independent Registered Public Accounting Firm
            
            F-1Report
      of Independent Registered Public Accounting Firm
            
            F-2Consolidated
      Balance Sheets
            
            F-3Consolidated
      Statements of Income
            
            F-4Consolidated
      Statements of Stockholders’ Equity
            
            F-5Consolidated
      Statements of Cash Flows
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-7
      - F-19





43


Report of Independent
Registered Public Accounting Firm
 
 Board of
Directors and Stockholders of
 China 3C
Group
 
 We have
audited the accompanying consolidated balance sheet of China 3C Group ( the
Company) as of December 31, 2008, and the related consolidated statements of
income, stockholders’ equity and comprehensive income, and cash flows for the
year ended December 31, 2008. We also have audited China 3C Group’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). China 3C Group ‘s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control. Our responsibility is to
express an opinion on these financial statements and an opinion on the company’s
internal control over financial reporting based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards required that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding on internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our audit.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting 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 the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, 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.
 
 A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weaknesses were identified:
 
 ·
              The
      Company did not identify material sales cut-off errors as part of its
      period end closing process. This sales cut-off error resulted in
      understatement of sales and accounts receivable by approximately $4.2
      million, cost of goods sold and pre-tax income by approximately $3.6
      million, and $0.6 million, respectively, and overstatement of inventory by
      $3.6 million. This error was corrected in the financial
      statements.
  ·
              Lack
      of technical accounting expertise among financial staff regarding US GAAP
      and the requirements of the PCAOB, and regarding preparation of financial
      statements.
  These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2008 consolidated financial
statements of the Company as of and for the year ended December 31,
2008.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China 3C Group as of December 31,
2008, and the results of its operations and its cash flows for the year ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.
  Also in
our opinion, because of the effect of the aforementioned material
weaknesses  on the achievement of the objectives of the internal
control criteria, China 3C Group did not maintained effective internal control
over financial reporting as of December 31, 2008  based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Our opinion on the
effectiveness of internal control over financial reporting does not affect our
opinion on the consolidated financial statements.
 
 /S/Goldman
Parks Kurland Mohidin LLP
 Encino,
California
 April 13,
2009





F-1





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




CERTIFIED
PUBLIC ACCOUNTANTS


40
Exchange Place, Suite 1820


New York,
NY 10005


TEL:
(212) 925-9490


FAX:
(212) 226-9134


E-MAIL:
MORGENCPA@CS.COM




Report of Independent
Registered Public Accounting Firm





Board of
Directors and Stockholders of


China 3C
Group





We have
audited the accompanying consolidated balance sheets of China 3C Group as of
December 31, 2007 and 2006, and the related consolidated statements of income,
stockholders’ equity and comprehensive income, and cash flows for the year ended
December 31, 2007 and 2006. We also have audited China 3C Group’s internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). China 3c Group ‘s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control. Our responsibility is to
express an opinion on these financial statements and an opinion on the company’s
internal control over financial reporting based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards required that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding on internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our audits.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting 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 the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, 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.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China 3C Group as of December 31,
2007 and 2006, and the results of its operations and its cash flows for the year
ended December 31, 2007 and 2006, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, China
3C Group maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).





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





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


Certified
Public Accountants





New York,
New York


March 4,
2008


except
for Notes 2 and 15, as to which the date is October 31, 2008




F-2


CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS


December
      31,
              
              
              December
      31,2008
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              32,157,831
              
              
              $
              24,952,614Accounts
      receivable, net
              
              
              23,724,587
              
              
              
              8,077,533Inventories
              
              
              8,971,352
              
              
              
              6,725,371Advance
      to supplier
              
              
              2,491,518
              
              
              
              2,572,285Prepaid
      expenses and other current assets
              
              
              87,773
              
              
              
              382,769Total
      current assets
              
              
              67,433,061
              
              
              
              42,710,572Property,
      plant and equipment, net
              
              
              64,100
              
              
              
              89,414Goodwill
              
              
              20,348,278
              
              
              
              20,348,278Deposit
      for acquisition of subsidiary
              
              
              7,318,501
              
              
              
              -Refundable
      deposits
              
              
              32,076
              
              
              
              48,541Total
      assets
              
              $
              95,196,016
              
              
              $
              63,196,805LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
              
              $
              5,417,327
              
              
              $
              3,108,235Income
      tax payable
              
              
              2,140,624
              
              
              
              2,684,487Total
      liabilities
              
              
              7,557,951
              
              
              
              5,792,722Stockholders'
      equityCommon
      stock, $0.001 par value, 100,000,000 million sharesauthorized,
      52,673,938 and 52,673,938 issued and outstanding as ofDecember
      31, 2008 and December 31, 2007, respectively
              
              
              52,674
              
              
              
              52,674Additional
      paid-in capital
              
              
              19,465,776
              
              
              
              19,465,776Subscription
      receivable
              
              
              (50,000
              )
              
              
              (50,000
              )Statutory
      reserve
              
              
              11,109,379
              
              
              
              7,234,295Other
      comprehensive income
              
              
              5,272,104
              
              
              
              1,872,334Retained
      earnings
              
              
              51,788,132
              
              
              
              28,829,004Total
      stockholders' equity
              
              
              87,638,065
              
              
              
              57,404,083Total
      liabilities and stockholders' equity
              
              $
              95,196,016
              
              
              $
              63,196,805


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


F-3


CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
 Year
      Ended
                
                
                Year
      Ended
                
                
                Year
      EndedDecember
      31,
                
                
                December
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2006Net
      sales
                
                $
                310,644,661
                
                
                $
                276,026,673
                
                
                $
                148,218,848Cost
      of sales
                
                
                262,002,877
                
                
                
                226,656,242
                
                
                
                125,411,758Gross
      profit
                
                
                48,641,784
                
                
                
                49,370,431
                
                
                
                22,807,090Selling,
      general and administrative expenses
                
                
                14,132,473
                
                
                
                13,614,500
                
                
                
                5,544,924Income
      from operations
                
                
                34,509,311
                
                
                
                35,755,931
                
                
                
                17,262,166Other
      (income) expenseInterest
      income
                
                
                (146,344
                )
                
                
                (88,413
                )
                
                
                (31,293
                )Other
      income
                
                
                (1,149,537
                )
                
                
                -
                
                
                
                -Other
      expense
                
                
                359,682
                
                
                
                74,215
                
                
                
                100,646Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                7,565Total
      other (income) expense
                
                
                (936,199
                )
                
                
                (14,198
                )
                
                
                76,918Income
      before income taxes
                
                
                35,445,510
                
                
                
                35,770,129
                
                
                
                17,185,248Provision
      for income taxes
                
                
                8,611,298
                
                
                
                12,850,429
                
                
                
                5,908,122Net
      income
                
                $
                26,834,212
                
                
                $
                22,919,700
                
                
                $
                11,277,126Foreign
      currency translation adjustments
                
                
                3,399,770
                
                
                
                427,616
                
                
                
                167,621Comprehensive
      income
                
                $
                30,233,982
                
                
                $
                23,347,316
                
                
                $
                11,444,747Net
      loss available to common shareholders per share:Basic
      and Diluted
                
                $
                0.51
                
                
                $
                0.44
                
                
                $
                0.24Weighted
      average shares outstanding:Basic
      and Diluted
                
                
                52,673,938
                
                
                
                52,671,438
                
                
                
                46,179,507




See
accompanying notes, which are an integral part of these consolidated financial
statements


F-4


CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
  Shares
              
              
              Additional
              
              
              
              
              
              
              
              
              Deferred
              
              
              Other
              
              
              
              
              
              TotalCommon
      Stock
              
              
              To
      Be
              
              
              Paid-In
              
              
              Subscription
              
              
              Statutory
              
              
              Consulting
              
              
              Comprehensive
              
              
              Retained
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Issued
              
              
              Capital
              
              
              Receivable
              
              
              Reserve
              
              
              Expense
              
              
              Income
              
              
              Earnings
              
              
              EquityBalance
      at December 31, 2005
              
              
              39,870,077
              
              
              $
              39,870
              
              
              $
              502,000
              
              
              $
              2,113,310
              
              
              $
              (50,000
              )
              
              $
              402,030
              
              
              $
              (387,945
              )
              
              $
              74,950
              
              
              $
              984,435
              
              
              $
              3,678,650Stock
      issued
              
              
              8,980,000
              
              
              
              8,980
              
              
              
              (502,000
              )
              
              
              493,020
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              -Foreign
      currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              167,621
              
              
              
              
              
              
              
              167,621Transfer
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,438,717
              
              
              
              
              
              
              
              
              
              
              
              (2,438,717
              )
              
              
              -Transfer
      to prepaid
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              387,945
              
              
              
              
              
              
              
              
              
              
              
              387,945Purchase
      acquisition
              
              
              3,638,861
              
              
              
              3,639
              
              
              
              
              
              
              
              14,746,361
              
              
              
              
              
              
              
              480,008
              
              
              
              
              
              
              
              185,045
              
              
              
              
              
              
              
              15,415,053Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              11,277,126
              
              
              
              11,277,126Balance
      at December 31, 2006
              
              
              52,488,938
              
              
              
              52,489
              
              
              
              -
              
              
              
              17,352,691
              
              
              
              (50,000
              )
              
              
              3,320,755
              
              
              
              -
              
              
              
              427,616
              
              
              
              9,822,844
              
              
              
              30,926,395Stock
      based compensation
              
              
              185,000
              
              
              
              185
              
              
              
              
              
              
              
              2,113,085
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,113,270Foreign
      currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,444,718
              
              
              
              
              
              
              
              1,444,718Transfer
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,913,540
              
              
              
              
              
              
              
              
              
              
              
              (3,913,540
              )
              
              
              -Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              22,919,700
              
              
              
              22,919,700Balance
      at December 31, 2007
              
              
              52,673,938
              
              
              
              52,674
              
              
              
              -
              
              
              
              19,465,776
              
              
              
              (50,000
              )
              
              
              7,234,295
              
              
              
              -
              
              
              
              1,872,334
              
              
              
              28,829,004
              
              
              
              57,404,083Foreign
      currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,399,770
              
              
              
              
              
              
              
              3,399,770Transfer
      to statutory reserve
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,875,084
              
              
              
              
              
              
              
              
              
              
              
              (3,875,084
              )
              
              
              -Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              26,834,212
              
              
              
              26,834,212Balance
      at December 31, 2008
              
              
              52,673,938
              
              
              $
              52,674
              
              
              $
              -
              
              
              $
              19,465,776
              
              
              $
              (50,000
              )
              
              $
              11,109,379
              
              
              $
              -
              
              
              $
              5,272,104
              
              
              $
              51,788,132
              
              
              $
              87,638,065




See
accompanying notes, which are an integral part of these consolidated financial
statements


F-5


CHINA
3C GROUP AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS


December
      31,
                
                
                December
      31,
                
                
                December
      31,2008
                
                
                2007
                
                
                2006Operating
      activities:Net
      income
                
                $
                26,834,212
                
                
                $
                22,919,700
                
                
                $
                11,277,126Adjustments
      to reconcile net loss to net cashprovided
      by operating activities:Depreciation
                
                
                36,116
                
                
                
                40,714
                
                
                
                20,191Gain
      on asset disposition
                
                
                (2,161
                )
                
                
                -
                
                
                
                (936
                )Provision
      for bad debts
                
                
                261,515
                
                
                
                9,021
                
                
                
                82,686Stock
      based compensation
                
                
                336,668
                
                
                
                2,113,270
                
                
                
                -Amortization
      of deferred consulting expense
                
                
                -
                
                
                
                -
                
                
                
                387,945Effect
      of changes in:Accounts
      receivable
                
                
                (14,629,685
                )
                
                
                (73,483
                )
                
                
                (2,375,209
                )Inventories
                
                
                (1,731,535
                )
                
                
                (3,945,865
                )
                
                
                (487,593
                )Prepaid
      expenses and other current assets
                
                
                (4,387
                )
                
                
                (322,710
                )
                
                
                85,216Advance
      to supplier
                
                
                246,729
                
                
                
                (356,444
                )
                
                
                (848,848
                )Refundable
      deposits
                
                
                11,127
                
                
                
                (41,974
                )
                
                
                (5,929
                )Accounts
      payable and accrued expenses
                
                
                1,866,937
                
                
                
                1,143,572
                
                
                
                1,356,272Income
      tax payable
                
                
                (535,487
                )
                
                
                87,970
                
                
                
                1,477,695Net
      cash provided by operating activities
                
                
                12,690,049
                
                
                
                21,573,771
                
                
                
                10,968,616Investing
      activities:Purchase
      of property and equipment
                
                
                (11,088
                )
                
                
                (64,325
                )
                
                
                (30,591
                )Proceeds
      from asset sales
                
                
                2,447
                
                
                
                -
                
                
                
                1,508Deposit
      for acquisition of subsidiary
                
                
                (7,318,501
                )
                
                
                -
                
                
                
                -Net
      cash used in investing activities
                
                
                (7,327,142
                )
                
                
                (64,325
                )
                
                
                (29,083
                )Financing
      activities:Payments
      of acquisition notes - net of cash acquired
                
                
                -
                
                
                
                (4,500,000
                )
                
                
                (6,550,157
                )Payment
      of notes - other
                
                
                -
                
                
                
                -
                
                
                
                (7,769
                )Net
      cash provided by financing activities
                
                
                -
                
                
                
                (4,500,000
                )
                
                
                (6,557,926
                )Effect
      of exchange rate changes on cash and cash equivalents
                
                
                1,842,310
                
                
                
                1,444,718
                
                
                
                167,621Net
      increase in cash
                
                
                7,205,217
                
                
                
                18,454,164
                
                
                
                4,549,228Cash,
      beginning of period
                
                
                24,952,614
                
                
                
                6,498,450
                
                
                
                1,949,222Cash,
      end of period
                
                $
                32,157,831
                
                
                $
                24,952,614
                
                
                $
                6,498,450Supplemental
      disclosure of cash flow information:Interest
      paid
                
                $
                -
                
                
                $
                -
                
                
                $
                7,565Income
      taxes paid
                
                $
                9,155,161
                
                
                $
                12,762,459
                
                
                $
                3,534,155Supplemental
      disclosure of non-cash investing and financing activities:Purchased
      goodwill
                
                
                
                
                
                
                
                
                
                $
                (20,348,278
                )Fair
      value of assets purchased, less cash acquired
                
                
                
                
                
                
                
                
                
                $
                (5,451,879
                )Acquisition
      financed with stock issuance
                
                
                
                
                
                
                
                
                
                $
                14,750,000Acquisition
      financed with notes
                
                
                
                
                
                
                
                
                
                $
                12,500,000Net
      cash acquired in acquisitions
                
                
                
                
                
                
                
                
                
                $
                1,449,843


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, 2008




Note
1 - ORGANIZATION





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





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





On August
3, 2006, Capital completed the acquisition of a 100% interest in Sanhe for a
cash and stock transaction valued at approximately $8.75 million. The
consideration consisted of 915,751 newly issued shares of the Company’s common
stock and $5 million in cash.





On
November 28, 2006, Capital completed the acquisition of a 100% interest in Joy
& Harmony for a cash and stock transaction valued at approximately $18.5
million. The consideration consisted of 2,723,110 shares of the Company’s common
stock and $7.5 million in cash.





On August
15, 2007, the Company changed its ownership structure. As a result, instead of
Capital owning 100% of Zhejiang, Capital entered into contractual agreements
with Zhejiang whereby Capital owns a 100% interest in the revenues of Zhejiang.
Capital does not have an equity interest in Zhejiang, but enjoys all the
economic benefits. Under this structure, Zhejiang is now a wholly foreign owned
enterprise of Capital. The contractual agreements give Capital and its equity
owners an obligation, and having ability to absorb, any losses, and rights to
receive returns. Capital will be unable to make significant decisions about the
activities of Zhejiang and cannot carry out its principal activities without
financial support. These characteristics as defined in Financial Accounting
Standards Board (“FASB”) Interpretation 46, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of Zhejiang to be
consolidated with Capital and ultimately with China 3C Group.





F-7









The
Company is engaged in the business of resale and distribution of third party
products and generates approximately 100% of our revenue from resale of items
such as mobile phones, facsimile machines, DVD players, stereos, speakers, MP3
and MP4 players, iPods, electronic dictionaries, CD players, radio Walkmans and
audio systems.





Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“US GAAP”).  The Company’s functional currency is the Chinese
Renminbi, however the accompanying consolidated financial statements have been
translated and presented in United States Dollars.





Principles of
Consolidation





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




F-8





Currency
Translation





The
accounts of Zhejiang, Wang Da, Yiwu, Sanhe, and Joy & Harmony were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with Statement of Financial Accounts Standards (“SFAS”)
No. 52, “Foreign Currency Translation,” with the CNY as the functional currency.
According to SFAS No. 52, 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 SFAS No. 130, “Reporting Comprehensive
Income,” as a component of shareholders’ equity. Transaction gains and losses
are reflected in the income statement.





Use of
Estimates





The
preparation of financial statements in conformity with 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.




Accounts
Receivable





The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts
amounted to $365,318 and $103,803 as of December 31, 2008 and 2007,
respectively.








AdditionsDescription
            
            Balance
      at
              beginning
      of
              year
            
            
            (1)
      Charged to
              expenses
            
            
            (2)
      Charged to
              other
              comprehensive
              loss
            
            
            Deductions
            
            
            Balance at end
              of yearAllowance
      for doubtful receivables 2008
            
            $
            103,803
            
            
            $
            261,141
            
            
            $
            15,374
            
            
            $
            -
            
            
            $
            365,318Allowance
      for doubtful receivables 2007
            
            $
            90,780
            
            
            $
            9,021
            
            
            $
            4,002
            
            
            $
            -
            
            
            $
            103,803Allowance
      for doubtful receivables 2006
            
            $
            3,521
            
            
            $
            82,686
            
            
            $
            4,573
            
            
            $
            -
            
            
            $
            90,780





F-9




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, 2008 and 2007, inventory consisted entirely of
finished goods valued at $8,971,352 and $6,725,371, 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
      yearsOffice
      Equipment
            5
      years




As of
December 31, 2008 and 2007, property and equipment consisted of the
following:




2008
              
              
              2007Automotive
              
              $
              132,627
              
              
              $
              138,330Office
      equipment
              
              
              116,700
              
              
              
              105,612Sub
      Total
              
              
              249,327
              
              
              
              243,942Less:
      accumulated depreciation
              
              
              (185,227
              )
              
              
              (154,528
              )Total
              
              $
              64,100
              
              
              $
              89,414




Long-Lived
Assets




The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market values
are reduced for the cost of disposal. Based on its review, the Company believes
that, as of December 31, 2008 and 2007, there were no significant impairments of
its long-lived assets.




Fair Value of Financial
Instruments




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




Revenue
Recognition





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%, 65% and   73% 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 2008, 2007 and 2006,
      respectively and is mainly achieved through two broad
      categories:





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.




F-10




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
      32%, 35% and 27% of the Company's revenue comes from wholesale during
      2008, 2007 and 2006, respectively. Recognition of income in wholesales is
      based on the contract terms. In 2008, the main contract terms on wholesale
      agreed that payments be paid 10 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 10 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.





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.





Return
policies





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





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





In light
of the aforesaid PRC laws and regulations and the Company's arrangements with
suppliers, we do not provide an accrual for any estimated losses on subsequent
sale of the return of products.  As a result we do not engage in assessing
levels of inventory in the distribution channel, product obsolescence and/or
introductions of new products, as none of those factors have any impact on us
with respect to estimating losses on subsequent sale of returned goods. 
Third party market research report and consumer demand study is not used to make
estimates of goods returned.




F-11





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.





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 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.





Shipping and handling
fees





The
Company follows Emerging Issues Task Force (“EITF”) No. 00-10, Accounting for
Shipping and Handling Fees and Costs.  The Company does not charge its
customers for shipping and handling. The Company classifies shipping and
handling fees as part of General and administrative expenses which were
$244,000, $219,000 and $117,000 for 2008, 2007 and 2006,
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 or “selling
at an allowance (discount)”. The management fees are accounted for (1) in the
form of service charges which are reflected in general and administrative
expenses, or (2) in the form of “selling at an allowance (discount)”, as a
deduction of sales, which means, the expenses are directly deducted at a certain
percentage on sales. Such management fees were $ 3,824,000, $3,645,000 and
$1,375,000 in general and administrative expenses and deductions of $12,687,000,
$7,749,000 and $3,675,000 in sales for 2008, 2007 and 2006,
respectively.




Share Based
Payment




In December 2002, the FASB issued SFAS
No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of SFAS 123.” This statement amended SFAS 123, “Accounting for
Stock-Based Compensation,” to provide alternative methods of transition for a
voluntary charge to the fair value based method of accounting for stock-based
employee compensation. In addition, this statement amended the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Effective for 2006 the Company adopted SFAS 123 (R), “Share-Based
Payment” which supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees” and eliminates the intrinsic value method that was provided in
SFAS 123 for accounting of stock-based compensation to employees. The Company
made no employee stock-based compensation grants before December 31, 2005 and
therefore has no unrecognized stock compensation related liabilities or expense
unvested or vested prior to 2006.





Advertising





Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense was $360,000, $116,000 and $58,000 for
2008, 2007 and 2006, respectively.




F-12




Other
Income




Other
income was $1,149,537 for the year ended December 31, 2008. Other income
consists of the following:




2008Advertising
      service income
            
            $
            648,575Repair
      service income
            
            
            28,770Commission
      income from China Unicom
            
            
            470,004Gain
      on disposal of PPE
            
            
            2,189Total
      other income
            
            $
            1,149,537





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




Basic and Diluted Earnings
per Share




Earnings
per share are calculated in accordance with SFAS No. 128, “Earnings per Share.”
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period. If
convertible shares and stock options are anti-dilutive, the impact of conversion
is not included in the diluted net income per share. Excluded from the
calculation of diluted earnings per share for 2008, 2007 and 2006 were 430,000,
400,000, and 50,000 options, respectively, as they were not
dilutive.




Statement of Cash
Flows




In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the functional currency, in our
case the CNY. As a result, amounts related to changes in assets and liabilities
reported on the statement of cash flows will not necessarily agree with the
changes in the corresponding balances on the balance sheet.




Concentration of Credit
Risk




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




Segment
Reporting





SFAS No.
131, “Disclosure about Segments of an Enterprise and Related Information,”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. The Company operates in four segments (see Note
13).





Recent Accounting
Pronouncements





In July
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes- an
Interpretation of FASB Statement 109”(“FIN No. 48”). FIN No. 48 clarifies the
accounting for Income Taxes by prescribing the minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. It also provides guidance on derecognition, measurement,
classification, interest and penalties, accounting in interim periods,
disclosure and transition and clearly scopes income taxes out of SFAS No. 5,
“Accounting for Contingencies.” FIN No. 48 was effective for fiscal years
beginning after December 15, 2006. The adoption of this statement had no impact
on the Company’s consolidated financial statements.




F-13





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This
statement defines fair value, establishes a framework for measuring fair value
in US GAAP, and expands disclosures about fair value measurements. This
statement applies under other accounting pronouncements that require or permit
fair value measurements, the Board having previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, this statement does not require any new fair value measurements.
However, for some entities, the application of this statement will change
current practice. This statement was effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of this statement had no impact on the
Company’s consolidated financial statements.





In
September 2006, the SEC issued SAB 108. SAB 108 was issued to provide
interpretive guidance on how the effects of the carryover reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
The provisions of SAB 108 were effective for the Company for its December 31,
2006 year-end. The adoption of SAB 108 had no impact on the Company’s
consolidated financial statements.





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





In
December 2007, FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations.” SFAS 141R changes how a reporting enterprise accounts for
the acquisition of a business. SFAS 141R requires an acquiring entity to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value, with limited exceptions, and applies to a wider
range of transactions or events. SFAS 141R is effective for fiscal years
beginning on or after December 15, 2008 and early adoption and
retrospective application is prohibited. The adoption of SFAS 141(R) will have a
material impact on future acquisitions.





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





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





On May 8,
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” which will provide framework for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with US GAAP for nongovernmental entities. With the issuance of SFAS
No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing
literature to accounting literature.  The Company is currently assessing
the impact of SFAS No. 162 on its financial position and results of
operations.





Note
3 – ADVANCES TO
SUPPLIERS




Advances
to suppliers represent advance payments to suppliers for the purchase of
inventory. As of December 31, 2008 and 2007, the Company had paid $2,491,518 and
$2,572,285, respectively, as advances to suppliers.




Note 4 - COMMON
STOCK




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





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




F-14





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





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





Joseph
Levinson joined the Board of Directors of the Company and became in charge of
Investor Relations for the Company  in May 2007. As compensation for
his services, the Company agreed to pay Mr. Levinson a monthly grant during his
term of his services of 1,000 shares of the Company’s common
stock.  As of December 31, 2008, Mr. Levinson has received 20,000
shares of common stock.  Mr. Levinson resigned in January
2009.





Pursuant
to the terms of the Compensation Agreement dated as of November 27, 2008 between
Mr. Levinson and the Company, Mr. Levinson acknowledged that (1) the initial
annual grant of a stock option to purchase 300,000 shares of the Company’s
common stock, with an exercise price of $6.15 per share under the China 3C Group
2005 Plan, and (2) a subsequent annual grant of a stock option to purchase an
additional 300,000 shares of the Company's common stock, with an exercise price
of $1.82 under the China 3C Group 2005 Plan were not and will not be granted and
in consideration for his services as a Director accepted the issuance of 125,000
shares of the Company’s common stock.





Note
5 - STOCK WARRANTS,
OPTIONS, AND COMPENSATION





The
Company amortized the fair value of the warrants, $400,000, over the period of
the agreement.  The fair value of the warrants was calculated assuming
293% volatility, term of the warrant of 3 years, risk free rate of 4% and
dividend yield of 0%. For 2006, $387,945 of consulting fee was expensed relating
to the warrants.





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





On
January 2, 2007, the Company issued to Todd Mavis, a newly appointed Board
member, an option to purchase 50,000 shares of common stock at the closing price
as of January 2, 2007. The options expire 10 years from issuance. As of December
17, 2007, Todd Mavis resigned. The option was retained by Mr.
Mavis.





Joseph
Levinson joined the Board of Directors of the Company and became in charge of
Investor Relations for the Company  in May 2007. Mr. Levinson resigned
in January 2009.  As compensation for his services, the Company agreed
to pay Mr. Levinson (1) an initial annual grant of a stock option to purchase
300,000 shares of the Company’s common stock, with an exercise price of $6.15
per share (the “2007 Stock Option”) under the China 3C Group 2005 Plan; and (2)
a subsequent annual grant of a stock option to purchase an additional 300,000
shares of the Company’s common stock, with an exercise price of $1.82 (the “2008
Stock Option”) under the China 3C Group 2005 Plan  It was later
determined that due to the expiration of the China 3C Group 2005 Plan on
December 31, 2006, the 2007 Stock Option and the 2008 Stock Option were not and
will not be granted and in consideration for his services as a Director accepted
the issuance of 125,000 shares of the Company’s common stock.  The
125,000 shares of the Company’s common stock were issued to Mr. Levinson on
January 7, 2009.





On
December 8, 2007, the Company issued to Ken Berents an option (incentive stock
options) to purchase 30,000 shares of common stock at the closing price as of
December 7, 2007. The options expire 10 years from issuance.





The Board
of Directors Agreement dated December 8, 2006, provides for a stock option grant
of 30,000 shares to be made to Mr. Kenneth Berents in December 2008 at an
exercise price equivalent to the prevailing market price of the stock, all of
which options shall be vested and exercisable as of December 31,
2008.




Stock
options— All options issued have a ten-year life and were fully vested upon
issuance. The option holder has no voting or dividend rights. The grant price
was equal the market price at the date of grant. The Company records the expense
of the stock options over the related vesting period. The options were valued
using the Black-Scholes option-pricing model at the date of grant stock option
pricing.  The following summarizes the terms of options granted during
2008, 2007 and 2006.





2008Expected
      Volatility
            
            
            130
            %Expected
      term (in years)Todd
      L. Mavis
            
            
            1Kenneth
      T. Berents
            
            
            9Joseph
      Levinson
            
            
            -Expected
      dividends
            
            
            -Risk-free
      rate of return (weighted average)
            
            
            2
            %Weighted
      average grant-date fair value
            
            
            0.90-6.15





F-15





The
expected term represents the estimated average period of time that the options
remain outstanding. The expected volatility is based on the historical
volatility of the Company’s stock price. No dividend payouts were assumed, as
the Company has no plans to declare dividends during the expected term of the
stock options. The risk-free rate of return reflects the weighted average
interest rate offered for zero coupon treasury bonds over the expected term of
the options. Based upon this calculation and pursuant to EITF 96-18, the company
recorded expenses of $337,000 and $900,000 for these options for 2008 and 2007,
respectively.





The
following summarizes the option activity for the year ended 2008.


Options
              
              
              Weighted-Average
                Exercise
                Price
              
              
              Weighted-
                Average
                Remaining
      Contractual
                Life
                (Years)
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at December 31, 2007
              
              
              400,000
              
              
              $
              5.61
              
              
              
              8.13
              
              
              $
              -Granted
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at December 31, 2008
              
              
              400,000
              
              
              
              5.61
              
              
              
              7.13
              
              
              
              -Vested
      and expected to vest at December 31, 2008
              
              
              400,000
              
              
              
              5.61
              
              
              
              7.13
              
              
              
              -Exercisable
      at December 31, 2008
              
              
              400,000
              
              
              
              5.61
              
              
              
              7.13
              
              
              
              -


Outstanding
options by exercise price consisted of the following as of December 31,
2008.




Options
      Outsanding
              
              
              Options
      ExercisableExercise
      Price
              
              
              Number
      of Shares
              
              
              Weighted
                Average
                Remaining
      Life (Years)
              
              
              Weighted
                Average
                Exercise
      Price
              
              
              Number
                of
      Shares
              
              
              Weighted
                Average
                Exrcise
                Price$
              3.80
              
              
              
              50,000
              
              
              
              1.0
              
              
              $
              3.80
              
              
              
              50,000
              
              
              $
              3.804.16
              
              
              
              50,000
              
              
              
              8.0
              
              
              
              4.16
              
              
              
              50,000
              
              
              
              4.166.15
              
              
              
              300,000
              
              
              
              8.0
              
              
              
              6.15
              
              
              
              300,000
              
              
              
              6.15




Note
6 - COMPENSATED
ABSENCES




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





Note
7 - INCOME
TAXES





The
Company, through its subsidiaries, Zhejiang, Wang Da, Sanhe, and Yiwu, is
governed by the Income Tax Laws of the PRC. Operations in the United States of
America have incurred net accumulated operating losses of approximately
$2,366,000 as of December 31, 2008 for income tax purposes. However, a 100%
allowance has been recorded on the deferred tax asset of approximately $ 804,000
due to uncertainty of its realization.




F-16




Pursuant
to the PRC Income Tax Laws, from January 1, 2008, the Enterprise Income Tax
(“EIT) is at a statutory rate of 25%. In 2006 and 2007, EIT was at a statutory
rate of 33%, which is comprises of 30% national income tax and 3% local income
tax.




Income
tax expense consisted of the following for 2008, 2007 and 2006.


December
      31, 2008
              
              U.S.
              
              
              State
              
              
              International
              
              
              TotalCurrent
              
              $
              -
              
              
              $
              800
              
              
              $
              8,610,498
              
              
              $
              8,611,298Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              -
              
              
              $
              800
              
              
              $
              8,610,498
              
              
              $
              8,611,298December
      31, 2007
              
              U.S.
              
              
              State
              
              
              International
              
              
              TotalCurrent
              
              $
              -
              
              
              $
              800
              
              
              $
              2,683,687
              
              
              $
              2,684,487Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              -
              
              
              $
              800
              
              
              $
              2,683,687
              
              
              $
              2,684,487December
      31, 2006
              
              U.S.
              
              
              State
              
              
              International
              
              
              TotalCurrent
              
              $
              -
              
              
              $
              800
              
              
              $
              5,907,322
              
              
              $
              5,908,122Deferred
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              -
              
              
              $
              800
              
              
              $
              5,907,322
              
              
              $
              5,908,122




Reconciliation
of the differences between the statutory U.S. Federal income tax rate and the
effective rate is as follows for 2008, 2007 and 2006.




2008
            
            
            2007
            
            
            2006US
      statutory rate
            
            
            34
            %
            
            
            34
            %
            
            
            34
            %Tax
      rate difference
            
            
            (9
            )%
            
            
            (1
            )%
            
            
            (1
            )%Increase
      in valuation allowance
            
            
            (1
            )%
            
            
            -
            
            
            
            -Effective
      rate
            
            
            24
            %
            
            
            33
            %
            
            
            33
            %




Note
8 - COMMITMENTS




The
Company leases various office facilities under operating leases that terminate
through 2011. The Company also has management agreements that terminated in
2007. Rent expense for 2008, 2007 and 2006 was $274,000, $145,000 and $99,000,
respectively. The future minimum obligations under these agreements are as
follows as of December 31, 2008:




2009
            
            $
            274,0002010
            
            $
            72,4002011
            
            $
            16,400




In
addition, the Company is committed to pay $140,000 under an advertising
agreement expiring March 31, 2009.





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.





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, 2008 and 2007, the Company had allocated $11,109,379 and $7,234,295,
respectively, to these non-distributable reserve funds.





F-17




Note
10 - OTHER
COMPREHENSIVE INCOME





The
detail of other comprehensive income as included in stockholders’ equity for
2008 and 2007 and 2006 is as follows:





Foreign Currency
      Translation Adjustment
            
            
            Total
              Accumulated
              Other
              Comprehensive
              IncomeBalance
      at December 31, 2005
            
            $
            74,950
            
            
            $
            74,950Change
      for 2006
            
            
            352,666
            
            
            
            352,666Balance
      at December 31, 2006
            
            
            427,616
            
            
            
            427,616Change
      for 2007
            
            
            1,444,718
            
            
            
            1,444,718Balance
      at December 31, 2007
            
            
            1,872,334
            
            
            
            1,872,334Change
      for 2008
            
            
            3,399,770
            
            
            
            3,399,770Balance
      at December 31, 2008
            
            $
            5,272,104
            
            
            $
            5,272,104




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
2008, 2007 and 2006, no customer accounted for more than 10% of the Company’s
sales.  As of December 31, 2008 and 2007, the Company had no
individual customers or vendors that comprised more than 10% of the Company’s
accounts receivable or accounts payable.





Note 13 -   SEGMENT
INFORMATION





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





We have
identified four reportable segments required by SFAS 131: (1) mobile phone, (2)
home electronics, (3) office communication product, and (4) consumer
electronics.




F-18





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




Year
      Ended December 31, 2008Mobile
                Phone
              
              
              Home
                Electronics
              
              
              Office
                Communication
                Product
              
              
              Consumer
                Electronics
              
              
              Other
              
              
              TotalSales,
      net
              
              $
              102,935
              
              
              $
              70,243
              
              
              $
              63,370
              
              
              $
              74,096
              
              
              $
              -
              
              
              $
              310,644Cost
      of sales
              
              
              86,622
              
              
              
              57,799
              
              
              
              53,392
              
              
              
              64,190
              
              
              
              -
              
              
              
              262,003Gross
      profit
              
              
              16,313
              
              
              
              12,444
              
              
              
              9,978
              
              
              
              9,906
              
              
              
              -
              
              
              
              48,641Income
      from operations
              
              
              11,527
              
              
              
              7,509
              
              
              
              7,615
              
              
              
              7,406
              
              
              
              452
              
              
              
              34,509Total
      assets
              
              $
              14,392
              
              
              $
              17,702
              
              
              $
              16,020
              
              
              $
              19,617
              
              
              $
              27,465
              
              
              $
              95,196
  Year
      Ended December 31, 2007Mobile
                Phone
              
              
              Home
                Electronics
              
              
              Office
                Communication
                Product
              
              
              Consumer
                Electronics
              
              
              Other
              
              
              TotalSales,
      net
              
              $
              83,496
              
              
              $
              67,157
              
              
              $
              61,385
              
              
              $
              63,988
              
              
              $
              -
              
              
              $
              276,026Cost
      of sales
              
              
              69,863
              
              
              
              50,923
              
              
              
              52,180
              
              
              
              53,690
              
              
              
              -
              
              
              
              226,656Gross
      profit
              
              
              13,633
              
              
              
              16,234
              
              
              
              9,205
              
              
              
              10,298
              
              
              
              -
              
              
              
              49,370Income
      from operations
              
              
              11,259
              
              
              
              11,504
              
              
              
              7,378
              
              
              
              8,755
              
              
              
              (3,140
              )
              
              
              35,756Total
      assets
              
              $
              14,922
              
              
              $
              14,839
              
              
              $
              12,869
              
              
              $
              13,087
              
              
              $
              7,479
              
              
              $
              63,196
  Year
      Ended December 31, 2006Mobile
                  Phone
                
                
                Home
                  Electronics
                
                
                Office
                  Communication
                  Product
                
                
                Consumer
                  Electronics
                
                
                Other
                
                
                TotalSales,
      net
                
                $
                61,992
                
                
                $
                21,660
                
                
                $
                51,092
                
                
                $
                13,474
                
                
                $
                -
                
                
                $
                148,218Cost
      of sales
                
                
                53,403
                
                
                
                17,624
                
                
                
                43,104
                
                
                
                11,280
                
                
                
                -
                
                
                
                125,411Gross
      profit
                
                
                8,589
                
                
                
                4,036
                
                
                
                7,988
                
                
                
                2,194
                
                
                
                -
                
                
                
                22,807Income
      from operations
                
                
                7,051
                
                
                
                2,579
                
                
                
                6,821
                
                
                
                1,878
                
                
                
                (1,067
                )
                
                
                17,262Total
      assets
                
                $
                7,362
                
                
                $
                5,759
                
                
                $
                7,499
                
                
                $
                6,521
                
                
                $
                12,846
                
                
                $
                39,987


Note 15 -   SUBSEQUENT
EVENTS





On March
13, 2009, the Company announced that Zhejiang formed Hangzhou Letong Digital
Technology Co., Ltd. (“Letong”) to establish an electronic retail franchise
operation for China 3C Group. China 3C plans on establishing its electronic
franchise stores in third tier and county-level cities in the Eastern China
region with future plans to expand outside of Eastern China into provincial
capitals and second-tier cities. Letong has commenced operations with $2.9
million in capital contributed by China 3C to be utilized specifically for the
marketing of the franchise plan and the build out of 15 direct stores, which
will be owned and operated by Letong and will serve as a model for
franchisees.





On
December 19, 2008, China 3C Group's subsidiaries, Zhejiang and Yiwu, entered
into an acquisition agreement with the shareholders of Jinhua Baofa Logistic
Limited, a company organized under the laws of the People's Republic of China
("Jinhua"), who own 100% of the equity interest in Jinhua in the aggregate.
Pursuant to the agreement Zhejiang will acquire 90% and Yiwu will acquire 10% of
the entire equity interests in Jinhua from the shareholders of Jinhua for a
total purchase price of RMB 120,000,000 payable as follows:





i.
              RMB
      50,000,000, within 10 business days after the execution of the
      agreement;





ii.
              RMB
      50,000,000 within 10 business days following the completion of the audit
      of Jinhua’s financial statements for the fiscal year ending December 31,
      2008, in accordance with generally accepted accounting principles in the
      U.S., which audit shall be completed no later than March 31, 2009;
      and





iii.
              the
      remaining RMB 20,000,000 no later than three months after the completion
      of Jinhua’s audit.





As of
December 31, 2008, the Company paid the first installment of RMB 50,000,000
(approximately $7.3 million) to the shareholders of Jinhua.





On April
4, 2009, China 3C Group's subsidiaries, Zhejiang and Yiwu, entered into an
amendment to the acquisition agreement dated December 19, 2008 with the
shareholders of Jinhua. The amended agreement changed from March 31, 2009 to
June 30, 2009 the date by which the parties have agreed that the audit of
Jinhua's financial statements for the fiscal year ended December 31, 2008 is
required to be completed. In the event that the audit is not completed by June
30, 2009, the agreement may be terminated.





F-19