UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-K/A


(Amendment
No. 2)





x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
              For
      the fiscal year ended December 31,
      2007ORo
            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
      filer x
            Non-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 52,671,438 shares of voting and non-voting common
equity stock held by non-affiliates of the registrant was approximately $325
million as of June 29, 2007, 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 $6.19 per share, as reported on the
OTC Bulletin Board Market.




As of
March 14, 2008, there were 52,671,438 shares of the registrant’s common stock
outstanding.




Documents
incorporated by reference: None















EXPLANATORY
NOTE





We are
filing this Amendment No. 2 to Annual Report on Form 10-K/A to (a) amend the
business description in Item 1 of Part I, (b) amend the disclosure of our June
2007 equity compensation plan in Item 5 of Part II, (c) amend Item 7 of Part II
to amend our Management’s Discussion and Analysis of Financial Condition and
Results of Operations, (d) amend Item 9A(T) of Part II to amend our disclosure
of internal controls and procedures relating to our financial reporting, (e)
amend Item 10 of Part III to amend or disclosure relating to our directors,
executive officers and corporate governance, (f) amend Item 11 of Part III to
amend our disclosure relating to our executive compensation, and (g) amend the
consolidated financial statements and the notes to the financial statements
contained in the Report of Independent Registered Public Accounting
Firm.





Except as
specifically referenced herein, this Amendment No. 2 to Annual Report on Form
10-K/A does not reflect any event occurring subsequent to April 2, 2008, the
filing date of the original report.















CHINA
3C GROUP




Table
of Contents





PagePART IItem 1
                      
                      Business
                      
                      1Item 1A
                      
                      Risk
      Factors
                      
                      8Item 1B
                      
                      Unresolved
      Staff Comments
                      
                      12Item 2
                      
                      Properties
                      
                      12Item 3
                      
                      Legal
      Proceedings
                      
                      13Item 4
                      
                      Submission
      of Matters to a Vote of Security Holders
                      
                      13PART IIItem 5
                      
                      Market
      for the Registrant’s Common Stock, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                      
                      14Item 6
                      
                      Selected
      Financial Data
                      
                      15Item 7
                      
                      Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      
                      16Item 7A
                      
                      Quantitative
      and Qualitative Disclosure About Market Risk
                      
                      23Item 8
                      
                      Financial
      Statements and Supplementary Data
                      
                      24Item 9
                      
                      Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                      
                      24Item
      9A(T)
                      
                      Controls
      and Procedures
                      
                      24Item 9B
                      
                      Other
      Information
                      
                      25PART IIIItem 10
                      
                      Directors,
      Executive Officers and Corporate Governance
                      
                      26Item 11
                      
                      Executive
      Compensation
                      
                      30Item 12
                      
                      Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                      
                      33Item 13
                      
                      Certain
      Relationships and Related Transactions, and Director
      Independence
                      
                      34Item 14
                      
                      Principal
      Accountant Fees and Services
                      
                      35PART IVItem 15
                      
                      Exhibits
      and Financial Statement Schedules
                      
                      37Index
      to Consolidated Financial Statements










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 (formerly Sun Oil & Gas Corp.) (referred to herein as the “Company”,
“we” or “us”) was incorporated on August 20, 1998 under the laws of the State of
Nevada as Editworks, Ltd. In 2001, the Company changed its name to Trilucent
Technologies Corp. The Company changed its name to Anza Innovations, Inc. in
2003. In 2004, the Company changed its name to Gaofeng Gold Corp. and then later
in 2004 to Sun Oil & Gas Corporation. In December 2005, we changed our name
to China 3C Group. We are engaged in the business of the sale and distribution
of mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and
MP4 players, iPods, electronic dictionaries, CD players, radio Walkmans and
audio systems.




Due to
our change to a new “stores in stores” business operation model, our number of
sales increased substantially during 2007. We continued to establish more
“stores in stores” in Eastern China. More than 800 “stores in stores” were
established or acquired by the end of 2006. This new business operation model
results in expanded marketing channels, thus positively stimulating the growth
of sales.




During
2006 we acquired two companies whose main products are digital products and
small home electronics. These acquisitions further brought in considerable sales
and profit to the Company.





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.




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.




1




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 CFDL owning 100% of ZYXD, as
previously was the case, CFDL entered into contractual arrangements with ZYXD
whereby CFDL owns a 100% interest in the revenues of ZYXD. CFDL does not have an
equity interest in ZYXD but is deemed to have all the economic benefits and
liabilities by contract. Under this structure, ZYXD 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 ZYXD
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 ZYXD 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.





Our
Business


Zhejiang
Yong Xin Digital Technology Company Limited (“ZYX”)




In 2001,
ZYX started its fax machine distribution business and is currently an authorized
agent for many well known brand fax machines. ZYXD entered into the cell phone
market in 2003, and is currently authorized agent for Chinese brands like Sang
Da, Da Xian, and Jin Zhen cell phones. The internal structure of ZYXD includes
CEO office, financial department, audit department, human resource department
and marketing department.




ZYX is a
large-scale distribution channel manager integrating the selling, circulation
and modern logistics of 3C products (communication products, information
technology (“IT”) products and digital products) in China. Distribution channel
management is the integration of key business processes from end user through to
original suppliers that provide products, services and information that add
value for customers and other stakeholders. In the fax machine industry, ZYX
distributes products to both first and second tier retailers in China. First
tier retailers are defined as large retailing business centers and second tier
retailers are defined as small individual retail stores. ZYX allocates its
distribution channels according to the size and population of the cities in
which the retailers are located. Accordingly, ZYX distributes products mainly to
second tier retailers in bigger Chinese cities that have larger populations and
to first tier retailers in smaller Chinese cities that have relatively smaller
populations, which results in cutting the cost of shipping and enables the
products to reach all areas.




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 the company’s sales.




As a
retailer of electronics products with thousands of customers who pay at point of
sale, the Company does not have any material backlog of orders.




ZYX does
not have a research and development department and does not initiate any
advertising or promotion activities on the products because it is not the
manufacturer. However, ZYX coordinates with the promotional activities initiated
or planned by the product manufacturers. ZYX focuses on circulation and
distribution activity and thereby eliminate unnecessary expenses. In addition,
ZYX manages credit risk by having its own credit system with the retailer
customers, and provides different policies or benefits on the payment and credit
period according to different credit level of the customers. ZYX strictly
follows all China state regulations regarding after sales services, including
policies allowing products to be returned and exchanged within seven days,
providing a one-year repair guarantee, and having specialists focus on after
sales services.




2


The
Company relies on rapid, just-in-time delivery of inventory and therefore does
not rely on a significant amount of inventory in its retail
locations.




ZYX’s
strategy is to establish distribution channels with chain stores selling
telecommunication products, digital products, and IT products, primarily
focusing in East China. ZYX plans to transition from the cord telephone market
and focus on fax machines, cell phones and other digital and IT products
throughout China.




The main
competitors of ZYX include Hangzhou Guang Tong Company, Hangzhou Yin Dun
Company, Hangzhou Qing Teng Company, Hangzhou Si Tong Company, and Zhejiang Shen
You Electrical Appliance Company. Nevertheless, none of these competitors reach
the size of ZYX.





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




HWD was
incorporated on March 30, 1998 under the laws of the Peoples Republic of China.
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.




The five
largest suppliers for HWD are Shenzhen Sang Da Hui Tong Electronics Company
Limited, Shenzhen Yang Guang Xin Ke Digital Technology Company Limited, Shenzhen
Jie Pu Lin Holding Company Limited, Shenzhen Lian Sheng (Shi Dai) Technology
Company Limited, and Hangzhou Wei Hua Communication Equipment Company Limited.
The five largest customers for HWDA are Tai Zhou Yi Tong Communication Equipment
Company Limited, Wen Zhou Heng Da Electronics Company Limited, Shao Xing Yin Hai
Cell Phones Market, Shao Xing Peng Fei Communication Equipment Company Limited,
and Ci Xi Guang Da Communication Equipment Company Limited.




Given the
wide diversity of HWD’s customer base, the loss of any single customer is not
expected to have a material adverse affect on the Company’s business and
operations.




HWD
mainly distributes its products through retail “stores within stores” located in
major department stores throughout the “Huadong” region of China (consisting of
the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not spend
a material amount of money on research and development, and did not have a
significant backlog for 2007.




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 the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, HWD does not have
any material backlog of orders. The Company did not spend a material amount of
money on research and development in 2007. HWD contributed approximately 30% of
revenue to the Company in 2007.




There are
no material effects from compliance with environmental laws.




The main
competitors of HWD include Telephone World, Hangzhou Yindun, Shanghai Guangda,
Changjiang Tianyin and Hangzhou Zhenghua. Additionally, there are Ningbo Haishu,
and Zhongyu. These competitors typically have only a fraction of our
sales.






3


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




YYX was
incorporated on July 18, 1997 under the laws of the Peoples Republic of China.
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
focuses in Philips fax machines and China’s top local brands  Feng Da and CJT fax
machines.




The five
largest suppliers for YYX are Guangdong Feng Da High Technology Company Limited,
Hangzhou Sen Rui Da Trading Company Limited, Shanghai Rong Duo Trading Company
Limited, Shanghai Zhong Fang Electronics Company Limited, and Ningbo Zhong Xun
Electronics Company Limited. The five largest customers for YYX are Shanghai Guo
Mei Electrical Appliance Company Limited, Shanghai Jin Jiang Mai De Long
Shopping Mall Company Limited, Tai Zhou Shi Road Qiao Bo Xiong Electrical
Appliance Company Limited, Ningbo Hao You Duo Department Store Company Limited
(Ningbo Branch), and An Qing Mei Sheng Communication (An Qing Heng Da Technology
Company Limited).




Given the
wide diversity of YYX’s customer base, the loss of any single customer is not
expected to have a material adverse affect on the Company’s business and
operations.




YYX
mainly distributes its products through retail “stores within stores” located in
major department stores throughout the “Huadong” region of China (consisting of
the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not spend
a material amount of money on research and development, and did not have a
significant backlog for 2007.




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 the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, the Company does
not have any material backlog of orders. The Company did not spend a material
amount of money on research and development in 2007. YYX contributed
approximately 22% of revenue to the Company in 2007.




There are
no material effects from compliance with environmental laws.




On the
retail side we distribute 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 via 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 then compensated via margin they
earn on the products we sell. This model is similar to that employed by many
department stores in the US. On the other hand, this model is also different
from that 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 that found in the US. From our point of view,
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.




4





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




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.





Hangzhou
Sanhe Electronic Technology Ltd. (“HSE”)




HSE is a
home electronics retail chain in Eastern China. It has approximately 200 retail
outlets in Shanghai City, Zhejiang Province and Jiangsu Province. HSE
specializes in the sale of home electronics, including air conditioners, audio
systems, speakers (92 different types of models) and DVD players (272 different
types of models). In 2006, HSE expanded its business to the televisions
industry, and has received sales agent licenses from TCL, Chuangwei and Haier.
HSE is headquartered in HangZhou city, China. Its major markets are Zhejiang,
Jiangsu and Shanghai.




Given the
wide diversity of HSE’s customer base, the loss of any single customer is not
expected to have a material adverse affect on the Company’s business and
operations.




HSE
mainly distributes its products through retail “stores within stores” located in
major department stores throughout the “Huadong” region of China (consisting of
the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not spend
a material amount of money on research and development., and did not have a
significant backlog for 2007.




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 the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, the HSE does not
have any material backlog of orders. HSE did not spend a material amount of
money on research and development. HSE contributed approximately 25% of revenue
to the Company in 2007.




There are
no material effects from compliance with environmental laws.




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.





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




SJ&H
is a consumer electronics retail chain in Eastern China. It has approximately
180 retail outlets in Shanghai City and Jiangsu Province. The company
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.




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 the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, SJ&H did not
have any material backlog of orders. The Company did not spend a material amount
of money on research and development in 2007. SJ&H contributed approximately
25% of revenue to the Company in 2007.




There are
no material effects from compliance with environmental laws.




5




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.





Customers





No
customer contributed more than 10% of the Company’s revenue.





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.




Additionally,
during summer month we can experience a slowdown in sales. We therefore
generally use the summer months to concentrate on opening additional stores to
offset the decline in sales per store.





Employees




The
Company currently has 1051 employees, all of which are full time employees
located in China. ZYX has 250 employees, YYX has 45 employees, HWD has 280
employees, HSE has 257 employees, and SJ&H has 189 employees.




The
Company has no collective bargaining agreements with any unions.




Recent
Developments





In
January and February of 2008, snowstorms swept across much of China, including
much of the area around Jiangsu and Zhejiang provinces, the Company’s major
points of operations. First, while the snow storms had less impact in major
cities like Shanghai, in other areas of the operating region (Jiangsu, Anhui and
Zhejiang provinces) snow storms had a much larger impact on transport systems
that take people and products to stores. In addition to impacting traffic at
stores where we have outlets, transportation impediments had a substantive
impact on our ability to replenish products on the shelves. Because we operate
on only several days of inventory, it is management’s belief that the supply
chain interruptions resulted in a significant number of lost sales.





Additionally,
the Company believes gross margin is expected to stabilize in the 13-14% range
in 2008 because of the following reasons:





·
            The
      Company pays concession fees, or leasing fees, to its retail partners.
      These fees are typically passed on to the customers by being included in
      the price of goods sold. Approximately 50% of these concession agreements
      have fixed payments which are not tied to sales. As such, when sales per
      store decreases, as happened in the first quarter due to the snow storms,
      the leasing fees do not change which leads to decreased gross
      margin.





·
            The
      Company believes the majority of anticipated gross margin decreases in
      2008, will be caused by increased competition. The “Huadong” region where
      the Company operates has experienced the growth of competitors who are
      increasingly utilizing a “store-in-store” model. As a result, management
      anticipates a potential need to lower its pricing to maintain its
      competitive advantage.




6




These
factors along with increased transportation costs as well as efforts by the
government to control inflation which is expected to have a slight impact on
consumer spending, are expected to result in a gross margin in the range of
13-14% for fiscal 2008.





While
sales are expected to decrease in the first quarter by approximately 15%-20%,
the Company believes it will be in a position for overall sales to increase in
the mid-single digits for the remaining three quarters of the year. The lower
year-over-year sales growth trends expected for 2Q08-4Q08 are primarily due to
anticipated effects related to increased competition and a leveling of growth.
These projections do not take into account any impact related to future
acquisitions.





The
Company believes that sales and margin trends can improve over time as it
focuses its efforts on internal cost controls, improved logistics coordination,
greater economies of scale, closure of underperforming store counters, expansion
of well performing stores, adding new store counters in more productive
locations, additional product introductions, new customer and supplier
agreements, customer marketing and after sales support initiatives, acquisition
opportunities and an increase in the overall managerial efficiency of the
Company.





The
Company currently has approximately $25 million of cash on its balance sheet,
which it currently plans to use for consideration in connection with potential
acquisitions.




Availability
of SEC Filings




The
Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy and information statements and amendments
to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may
read and copy these materials at the Securities and Exchange Commission’s
(“SEC”) Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The
public may obtain information on the operation of the public reference room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding the Company and other companies that file materials
with the SEC electronically. You may also obtain copies of the Company’s reports
filed with the SEC, free of charge, on our website at
http://www.china3cgroup.com.






7




ITEM 1A.   RISK FACTORS





Risks
Associated With Our Common Stock





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




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




We do not intend
to pay dividends on our common stock.  The Company’s two operating
subsidiaries in China paid $525,460 in dividends during 2005, but there are no
plans for paying dividends in the foreseeable future. We intend to retain
earnings, if any, to provide funds for the implementation of our new business
plan.  We do not intend to declare or pay any dividends in the foreseeable
future.  Therefore, there can be no assurance that holders of common stock
will receive any additional cash, stock or other dividends on their shares of
common stock until we have funds, which the Board of Directors determines, can
be allocated to dividends.





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





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




8




It is very
difficult to predict the sales cycle for our products . If we are unable
to successfully select and introduce new products or fail to keep pace with the
rapid advances in technology, our business condition will be negatively
impacted. The duration and product selection involved in our sales cycle
is dependent on a number of factors, including immediate product availability,
pricing, features, product complexity, economic environment, and customer
financial condition. If potential customers take longer than we expect to decide
to purchase our products, or if our customers decide on a different
product/feature set than available from our existing supplier agreements, the
financial condition and results of our operations will be adversely
affected.





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





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





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





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





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.




9




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





Risks
Related to Doing Business in China





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





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





Any change in
policy by the Chinese government could adversely affect investments in Chinese
businesses. Changes in policy could result in imposition of restrictions
on currency conversion, imports or the source of suppliers, as well as new laws
affecting joint ventures and foreign-owned enterprises doing business in China.
Although China has been pursuing economic reforms for the past two decades,
events such as a change in leadership or social disruptions that may occur upon
the proposed privatization of certain state-owned industries could significantly
affect the government’s ability to continue with its reform.





We face economic
risks in doing business in China.    As a developing
nation, China’s economy is more volatile than that of developed Western
industrial economies. It differs significantly from that of the U.S. or a
Western European Country in such respects as structure, level of development,
capital reinvestment, resource allocation and self-sufficiency. Only in recent
years has the Chinese economy moved from what had been a command economy through
the 1970s to one that during the 1990s encouraged substantial private economic
activity. In 1993, the Constitution of China was amended to reinforce such
economic reforms. The trends of the 1990s indicate that future policies of the
Chinese government will emphasize greater utilization of market forces. For
example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinated to the state-owned companies, which are the
mainstay of the Chinese economy. However, there can be no assurance that, under
some circumstances, the government’s pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of China could have a
significant adverse effect on economic conditions in the country as a whole and
on the economic prospects for our Chinese operations.




The Chinese legal
and judicial system may negatively impact foreign investors.    In 1982, the National
People’s Congress amended the Constitution of China to authorize foreign
investment and guarantee the “lawful rights and interests” of foreign investors
in China. However, China’s system of laws is not yet comprehensive. The legal
and judicial systems in China are still rudimentary, and enforcement of existing
laws is inconsistent. Many judges in China lack the depth of legal training and
experience that would be expected of a judge in a more developed country.
Because the Chinese judiciary is relatively inexperienced in enforcing the laws
that do exist, anticipation of judicial decision-making is more uncertain than
would be expected in a more developed country. It may be impossible to obtain
swift and equitable enforcement of laws that do exist, or to obtain enforcement
of the judgment of one court by a court of another jurisdiction. China’s legal
system is based on written statutes; a decision by one judge does not set a
legal precedent that is required to be followed by judges in other cases. In
addition, the interpretation of Chinese laws may be varied to reflect domestic
political changes.




10




The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that a
change in leadership, social or political disruption, or unforeseen
circumstances affecting China’s political, economic or social life, will not
affect the Chinese government’s ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business and
prospects.





The
practical effect of the People’s Republic of China legal system on our business
operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference. In
addition, these laws guarantee the full enjoyment of the benefits of corporate
Articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of the
several states. Similarly, the People’s Republic of China accounting laws
mandate accounting practices, which are not consistent with U.S. Generally
Accepted Accounting Principles. China’s accounting laws require that an annual
“statutory audit” be performed in accordance with People’s Republic of China
accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
reports and statements to designated financial and tax authorities, at the risk
of business license revocation. Second, while the enforcement of substantive
rights may appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the “United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958).” Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.





Economic
Reform Issues





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





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





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




11




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





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





Risk
Factors Associated with Our Business




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





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




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




ITEM 1B. UNRESOLVED STAFF
COMMENTS





None.




ITEM
2. PROPERTIES





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




12


YYXC





1.
            Shanghai
      office: lease term: one year (June 2007 - June
  2008)


2.
            Yiwu
      headquarter office: lease term: one year (Aug. 2007 - Aug.
      2008)


3.
            Apartments:1)
      A3 Yiwu building, Yiwu village, Lease term: 6 months (Sep. 2007 - Mar.
      2008); 2) Qiancheng District, Yiwu, Lease term one year (Nov. 2007 - Nov.
      2008).





HWDA





1.
            West-town
      computer center offices: Lease term: one year for office 1 (July 2007 -
      July 2008); one year for office 2 (Aug. 2007 - Aug.
  2008).


2.
            Suite
      417 and Suite 608, 347 Shaoxin Road: Lease term: 3 months (Oct. 2007 -
      Jan. 2008).


3.
            Apartments:
      Taizhou tower, Lease term one year (Oct. 2007- Oct.
  2008).





HSET





1.
            Yuanhua
      office: Lease term one year (Aug. 2007 - July
  2008).


2.
            Hangzhou
      Qunying office: Lease Term six months (Nov. 2007 - Apr.
    2008).


3.
            Apartments:
      Hangzhou: Lease Term three months (Jan. 2008 - Mar.
  2008).





Shanghai





1.
            Wuxi
      Tower office: Lease term three months (Jan. 2008 - Mar.
    2008).


2.
            Warehouse:
      Shanghai, Lease term: two months (Jan. 2008 - Feb.
  2008).





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




ITEM
3. LEGAL PROCEEDINGS





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




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





There
were no matters submitted to the stockholders in the fourth quarter of 2007
required to be disclosed.






13




PART II




ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON
STOCK, 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, 2006 and December 31, 2007:





low
      bid*
                      
                      
                      high
      bid*2006Quarter
      ended March 31
                      
                      $
                      1.00
                      
                      
                      $
                      9.24Quarter
      ended June 30
                      
                      $
                      1.75
                      
                      
                      $
                      7.50Quarter
      ended September 30
                      
                      $
                      1.55
                      
                      
                      $
                      4.75Quarter
      ended December 31
                      
                      $
                      1.08
                      
                      
                      $
                      4.95low
      bid*
                      
                      
                      high
      bid*2007Quarter
      ended March 31
                      
                      $
                      3.14
                      
                      
                      $
                      6.95Quarter
      ended June 30
                      
                      $
                      5.10
                      
                      
                      $
                      8.00Quarter
      ended September 30
                      
                      $
                      3.45
                      
                      
                      $
                      8.50Quarter
      ended December 31
                      
                      $
                      3.08
                      
                      
                      $
                      5.66







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





Stockholders





As of the
close of business on March 14, 2008, there were approximately 91 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’s four operating entities in China paid no dividends during 2007. The
Company has no plans to declare cash dividends on its common stock in the
future. There are no restrictions that limit the ability of the Company to
declare cash dividends on our common stock and the Company does not believe that
there are any that are likely to do so in the future.




Securities
authorized for issuance under equity compensation plans





The
following is a summary of all of our equity compensation plans as of December
31, 2007.





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
                              equitycompensation
                              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 “Plan”) expired on December 31,
2006. No further grants may be made under the Plan..




14




Repurchase
of Securities




We did
not repurchase any of shares of our common stock during the fourth quarter of
2007.





Recent
Sales of Unregistered Securities




None.




Equity
Compensation Plan Information





Pursuant
to the terms of the China 3C Group 2005 Equity Incentive Plan (the “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 Plan.  The Plan expired on December 31, 2006.





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, 2007, 2006 and 2005 and the selected consolidated
balance sheet data as of December 31, 2007 and 2006 are derived from our audited
consolidated financial statements included elsewhere in this
Report.





The
selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003,
and the selected consolidated financial data for the years ended December 31,
2004 and 2003, are derived from our audited consolidated financial statements
not included in this annual report.





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.”




15




Year
      Ended December 31,2007
                                                                            
                                                                            
                                                                            2006
                                                                            
                                                                            
                                                                            2005
                                                                            
                                                                            
                                                                            2004
                                                                            
                                                                            
                                                                            2003Statements
      of Operations Data:Sales,
      net
                                                                            
                                                                            
                                                                            276,026,673
                                                                            
                                                                            
                                                                            
                                                                            148,218,848
                                                                            
                                                                            
                                                                            
                                                                            32,588,634
                                                                            
                                                                            
                                                                            
                                                                            24,701,995
                                                                            
                                                                            
                                                                            
                                                                            9,260,300Cost
      of sales
                                                                            
                                                                            
                                                                            226,656,242
                                                                            
                                                                            
                                                                            
                                                                            125,411,758
                                                                            
                                                                            
                                                                            
                                                                            28,325,332
                                                                            
                                                                            
                                                                            
                                                                            21,577,365
                                                                            
                                                                            
                                                                            7,864,411Gross
      profit
                                                                            
                                                                            
                                                                            49,370,431
                                                                            
                                                                            
                                                                            
                                                                            22,807,090
                                                                            
                                                                            
                                                                            
                                                                            4,263,302
                                                                            
                                                                            
                                                                            
                                                                            3,124,630
                                                                            
                                                                            
                                                                            
                                                                            1,395,889General
      and administrative expenses
                                                                            
                                                                            
                                                                            13,614,500
                                                                            
                                                                            
                                                                            
                                                                            5,544,924
                                                                            
                                                                            
                                                                            
                                                                            1,706,869
                                                                            
                                                                            
                                                                            
                                                                            782,241
                                                                            
                                                                            
                                                                            546,184Income
      from operations
                                                                            
                                                                            
                                                                            35,755,931
                                                                            
                                                                            
                                                                            
                                                                            17,262,166
                                                                            
                                                                            
                                                                            
                                                                            2,556,433
                                                                            
                                                                            
                                                                            
                                                                            2,342,389
                                                                            
                                                                            
                                                                            
                                                                            849,705Other
      (Income) ExpenseInterest
      income
                                                                            
                                                                            
                                                                            (88,413
                                                                            )
                                                                            
                                                                            
                                                                            (31,293
                                                                            )
                                                                            
                                                                            
                                                                            (10,156
                                                                            )
                                                                            
                                                                            
                                                                            (5,348
                                                                            )
                                                                            
                                                                            
                                                                            (4,569
                                                                            )Other
      expense
                                                                            
                                                                            
                                                                            74,215
                                                                            
                                                                            
                                                                            
                                                                            100,646
                                                                            
                                                                            
                                                                            
                                                                            17,364
                                                                            
                                                                            
                                                                            
                                                                            9,440
                                                                            
                                                                            
                                                                            
                                                                            4,871Interest
      expense
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            7,565
                                                                            
                                                                            
                                                                            
                                                                            2,954
                                                                            
                                                                            
                                                                            
                                                                            1,104
                                                                            
                                                                            
                                                                            348Total
      Other (Income) Expense
                                                                            
                                                                            
                                                                            (14,198
                                                                            )
                                                                            
                                                                            
                                                                            76,918
                                                                            
                                                                            
                                                                            
                                                                            10,162
                                                                            
                                                                            
                                                                            
                                                                            5,196
                                                                            
                                                                            
                                                                            
                                                                            650Income
      before income taxes
                                                                            
                                                                            
                                                                            35,770,129
                                                                            
                                                                            
                                                                            
                                                                            17,185,248
                                                                            
                                                                            
                                                                            
                                                                            2,546,271
                                                                            
                                                                            
                                                                            
                                                                            2,337,193
                                                                            
                                                                            
                                                                            
                                                                            849,055Provision
      for income taxes
                                                                            
                                                                            
                                                                            12,850,429
                                                                            
                                                                            
                                                                            
                                                                            5,908,122
                                                                            
                                                                            
                                                                            
                                                                            1,088,021
                                                                            
                                                                            
                                                                            
                                                                            231,096
                                                                            
                                                                            
                                                                            -Net
      income
                                                                            
                                                                            
                                                                            22,919,700
                                                                            
                                                                            
                                                                            
                                                                            11,277,126
                                                                            
                                                                            
                                                                            
                                                                            1,458,250
                                                                            
                                                                            
                                                                            
                                                                            2,106,097
                                                                            
                                                                            
                                                                            
                                                                            849,055Net
      income per share:Basic
      & diluted
                                                                            
                                                                            
                                                                            0.44
                                                                            
                                                                            
                                                                            
                                                                            0.24
                                                                            
                                                                            
                                                                            
                                                                            0.04
                                                                            
                                                                            
                                                                            
                                                                            0.06
                                                                            
                                                                            
                                                                            0.02Weighted
      average number of shares outstanding:Basic
      & diluted
                                                                            
                                                                            
                                                                            52,671,438
                                                                            
                                                                            
                                                                            
                                                                            46,179,507
                                                                            
                                                                            
                                                                            
                                                                            35,133,427
                                                                            
                                                                            
                                                                            
                                                                            35,000,000
                                                                            
                                                                            
                                                                            35,000,000




Year
      Ended December 31,2007
                                            
                                            2006
                                            
                                            2005
                                            
                                            2004
                                            
                                            2003Balance
      Sheets Data:Cash
      and cash equivalents
                                            24,952,614
                                            
                                            
                                            6,498,450
                                            
                                            1,949,222
                                            
                                            469,658
                                            
                                            417,673Working
      capital
                                            36,917,850
                                            
                                            
                                            10,505,747
                                            
                                            3,634,989
                                            
                                            704,888
                                            
                                            (1,407,920
                                            )Total
      assets
                                            63,196,805
                                            
                                            
                                            39,987,575
                                            
                                            4,020,266
                                            
                                            1,492,006
                                            
                                            1,404,597Total
      liabilities
                                            5,792,722
                                            
                                            
                                            9,061,180
                                            
                                            341,615
                                            
                                            735,830
                                            
                                            2,754,517Total
      shareholders’ equity
                                            57,404,083
                                            
                                            
                                            30,926,395
                                            
                                            3,678,651
                                            
                                            756,176
                                            
                                            (1,349,920
                                            )





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





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




16




Overview





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





On
December 21, 2005, CFDL became a wholly owned subsidiary of China 3C Group
through a merger with a wholly owned subsidiary of the Company (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 now engaged in the business of mobile phone, facsimile machines, DVD
players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries,
CD players, radios, Walkman, and audio systems distribution. We sell and
distribute products through retail stores and secondary
distributors.





17




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





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





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 2007, approximately one-half of the Company’s leases
were variable based on sales, and the other half were fixed rents.




Results
of Operations





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





The
following table presents certain consolidated statement of operations
information stated as a percentage of total revenues. All financial information
is presented for the 12 months ended December 31, 2007 and 2006.





Net
sales





Net sales
for 2007 totaled $276,026,673, representing a significant year-over-year
increase of 86% as compared to $148,218,848 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 (Yiwu, Wangda, HSET and Shanghai) in 2007 increased by $127 million
as compared to the sales that consolidated into the Company from the acquisition
dates in 2006, in which, HSET and SJ&H increased 210% ($45.50 million) and
375% ($50.51 million), 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, Yiwu
Yongxin and Hangzhou Wangda increased 20% ($10.29 million) and 35% ($21.50
million), 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.





Cost
of Sales





Cost of
sales for 2007 totaled $226,656,242 or approximately 82.11% of net sales
compared to $125,411,758 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




YYXC
                          
                          HWDA
                          
                          HSET
                          
                          Shanghai1
                          
                          Fengda
      Technology Co., Ltd.
                          
                          Shenzhen
      Jiepulin Co., Ltd.
                          
                          Zhejiang
      Shaixinke Co., Ltd.
                          
                          Guangzhou
      Jinhuang Electronics Co., Ltd.2
                          
                          Shanghai
      Zhongfang Electronics Co., Ltd.
                          
                          Hangzhou
      Telecommunication
                            Equipments
      Co., Ltd.
                          
                          Shenzhen
      Aosike Electronics Co., Ltd.
                          
                          Shenzhen
      Dengjing Electronics Co., Ltd.3
                          
                          Shanghai
      Rongduo Business Co., Ltd.
                          
                          Shenzhen
      Jinfeng Datong Technology Co., Ltd.
                          
                          Hangzhou
      Ruiqi Electronics Co., Ltd.
                          
                          Dongguan
      Desheng General Electronics Co., Ltd.4
                          
                          Ninbo
      Zhongxun Electronics Co., Ltd.
                          
                          Liansheng
      Technology Co., Ltd.
                          
                          Shenzhen
      Deyuan Electronics Co., Ltd.
                          
                          Shanghai
      Network Equipment Co., Ltd5
                          
                          Hangzhou
      Shenruida Trade Co., Ltd.
                          
                          Shenzhen
      Sunshine Xinke Digital Technology Co., Ltd.
                          
                          Hangzhou
      Wanlian Electronics Co., Ltd.
                          
                          Shanghai
      Hanshun Trade Co., Ltd.6
                          
                          Shanghai
      Guangdian Equipment Co., Ltd.
                          
                          Hangzhou
      Tianchen Digital Telecommunication Co., Ltd.
                          
                          Guangzhou
      Fenda Audio Co., Ltd.
                          
                          Dongwan
      Gemei Electronics Co., Ltd.7
                          
                          Yiwu
      Wantong Telecom Equipment Co., Ltd.
                          
                          Shenzhen
      Sangdahuitong Electronics Co., Ltd.
                          
                          Shenzhen
      Chuangwei-RGB Electronics Co., Ltd.
                          
                          SONY-Shanghai
      Co., Ltd.8
                          
                          Aomeng
      Technology Co., Ltd.
                          
                          Hangzhou
      Qiuxin Internet Equipment Co., Ltd.
                          
                          Guangzhou
      Shengshida Electronics Company
                          
                          Shenyou
      Technology Co., Ltd.9
                          
                          Shanghai
      Meiyun Industry Co., Ltd.
                          
                          Huayu
      Telecom Equipment Co., Ltd.
                          
                          TCL
      Electronics Co., Ltd.
                          
                          Zhaohua
      Digital Technology Co., Ltd.10
                          
                          Shanghai
      Huoke Electronics Co., Ltd.
                          
                          Hangzhou
      Yingjie Trade Co., Ltd.
                          
                          Hangzhou
      Hengrong Trade Co., Ltd.
                          
                          Zhongshan
      Wanxin Electronics Co.,
Ltd.




18




Gross
Profit Margin





Gross
profit margin for 2007 increased to 17.9% compared to 15.4% for 2006. The gross
profit margin increased was mainly due to the increase of 5.5% of gross profit
margin of HSET 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 $13,614,500 or approximately 4.93%
of net sales, compared to $5,544,924 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.an the growth rate of
sales.





Income
from Operations





Income
from operations for 2007 was $35,755,931 or 12.95% of net sales as compared to
income from operations of $17,262,166 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 un an advantage in an inflationary environment in
2007.





Provision
for income taxes





Provision
for income taxes for 2007 was $12,850,429, representing year-over-year increase
of 117% as compared to $5,908,122 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 $22,919,700 or 8.30% of net sales for 2007 compared to $11,277,126 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.




19




Year
Ended December 31, 2006 compared to Year Ended December 31,
2005




Net
sales





Net sales
for 2006 totaled $148,218,848, representing a significant year-over-year
increase of 355% as compared to $32,588,634 for 2005. The increase was partially
due to the inclusion of $35,133,964 of sales from two newly acquired
subsidiaries (HSET and Shanghai) during 2006. The increase was also due to the
organic growth of YYXC and HWDA. In 2006, the sales of YYXC and HWDA were
approximately $51 million and $62 million respectively, an increase of 122% and
480% respectively compared with 2005.




Percentage
of sales





YYXC
                                      
                                      HWDA
                                      
                                      HSET
                                      
                                      ShanghaiRetail
      store
                                      
                                      
                                      59.43
                                      %
                                      57.45
                                      %
                                      74.39
                                      %
                                      76.61
                                      %Secondary
      Distributors
                                      
                                      
                                      40.57
                                      %
                                      42.55
                                      %
                                      25.61
                                      %
                                      23.39
                                      %




Cost
of Sales





Cost of
sales for 2006 totaled $125,411,758 or approximately 84.61% of net sales
compared to $28,325,532 or approximately 86.90% for 2005. 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 2006 due to the introduction
of new product models with higher gross profit margin. Also, we were able to
obtain the maximum discount privilege from our suppliers because of the
substantial increase of sales.




Top
Ten Suppliers of Each of Our Subsidiaries:




YYXC
                        
                        HWDA
                        
                        HSET
                        
                        Shanghai1
                        
                        Fengda
      Technology Co., Ltd.
                        
                        Shenzhen
      Jiepulin Co., Ltd.
                        
                        Zhejiang
      Shaixinke Co., Ltd.
                        
                        Guangzhou
      Jinhuang Electronics Co., Ltd.2
                        
                        Shanghai
      Zhongfang Electronics Co., Ltd.
                        
                        Hangzhou
      Telecommunication
                          Equipments
      Co., Ltd.
                        
                        Shenzhen
      Aosike Electronics Co., Ltd.
                        
                        Shenzhen
      Dengjing Electronics Co., Ltd.3
                        
                        Shanghai
      Rongduo Business Co., Ltd.
                        
                        Shenzhen
      Jinfeng Datong Technology Co., Ltd.
                        
                        Hangzhou
      Ruiqi Electronics Co., Ltd.
                        
                        Dongguan
      Desheng General Electronics Co., Ltd.4
                        
                        Ninbo
      Zhongxun Electronics Co.,Ltd.
                        
                        Liansheng
      Technology Co., Ltd.
                        
                        Shenzhen
      Deyuan Electronics Co., Ltd.
                        
                        Shanghai
      Network Equipment Co., Ltd.5
                        
                        Hangzhou
      Shenruida Trade Co., Ltd.
                        
                        Shenzhen
      Sunshine Xinke Digital Technology Co., Ltd.
                        
                        Hangzhou
      Wanlian Electronics Co., Ltd.
                        
                        Shanghai
      Hanshun Trade Co., Ltd.6
                        
                        Shanghai
      Guangdian Equipment Co., Ltd.
                        
                        Hangzhou
      Tianchen Digital Telecommunication Co., Ltd.
                        
                        Guangzhou
      Fenda Audio Co., Ltd.
                        
                        Dongwan
      Gemei Electronics Co., Ltd.7
                        
                        Yiwu
      Wantong Telecom Equipment Co., Ltd.
                        
                        Shenzhen
      Sangdahuitong Electronics Co., Ltd.
                        
                        Shenzhen
      Chuangwei-RGB Electronics Co., Ltd.
                        
                        SONY-Shanghai
      Co., Ltd.8
                        
                        Aomeng
      Technology Co., Ltd.
                        
                        Hangzhou
      Qiuxin Internet equipment Co., Ltd.
                        
                        Guangzhou
      Shengshida Electronics Company
                        
                        Shenyou
      Technology Co., Ltd.9
                        
                        Shanghai
      Meiyun Industry Co., Ltd.
                        
                        Huayu
      Telecom Equipment Co., Ltd.
                        
                        TCL
      Electronics Co., Ltd.
                        
                        Zhaohua
      Digital Technology Co., Ltd.10
                        
                        Shanghai
      Huoke Electronics Co., Ltd
                        
                        Hangzhou
      Yingjie Trade Co., Ltd.
                        
                        Hangzhou
      Hengrong Trade Co., Ltd.
                        
                        Zhongshan
      Wanxin Electronics Co.,
Ltd.




20




Gross
Profit Margin





Gross
profit margin for 2006 was 15.39% compared to 13.08% for 2005. The increase was
partially due to the inclusion of the newly acquired subsidiaries. The average
profit margin for the newly acquired companies is approximately 18%. The
increase was also due to the increase in consumer demand and improvement in
product mix.





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.





Operating
Expense





General
and administrative expense for 2006 totaled $5,544,924 or approximately 3.74% of
net sales, compared to $1,706,869 or approximately 5.2% for 2005. The decrease
of 1.46% was due to the inclusion of the newly acquired subsidiaries. The
increase in the general and administrative expense was also caused by the
corresponding increase in sales. However, the increase rate of general and
administrative expense is lower than the growth rate of sales.





Income
from Operations





Income
from operations for 2006 was $17,262,166 or 11.65% of net sales as compared to
income from operations of $2,556,433 for 2005 or 7.84% of net sales. The
increase was due to our acquisitions during 2006, an increase in consumer demand
and improvement in product mix.





Interest
Expense





Interest
expense for 2006 totaled $7,565 compared to $2,954 for 2005. The increase was
due to the inclusion in our financial statements of our newly acquired
subsidiary Shanghai Joy & Harmony Electronics Company Limited.





Provision
for income taxes





Provision
for income taxes for 2006 was $5,908,122, representing year-over-year increase
of 443% as compared to $1,088,021 for 2005. The effective rate of income tax was
33% for both 2006 and 2005. The increase was due to a significant increase in
taxable income.





Net
Income





Net
income was $11,277,126 or 7.61% of net Sales for 2006 compared to $1,458,250 or
4.47% of net Sales for 2005. The increase in percentage was due to the factors
stated above, including lower cost of goods, lower operating expenses and high
profit margin from the newly acquired companies.





Retail
locations




The
following table reflects a roll forward during the fiscal year ended December
31, 2006 and during the fiscal year ended December 31, 2007of our retail locations
during each period (i.e. number of stores opened, number of stores closed and
number of stores open at the end of the period).Store within
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 within stores” in
four main areas, Shanghai, Zhejiang, Jiangsu and Anhui. The Company’s retail
locations are all “store within store” locations in 2006 and 2007.





Wangda
                    
                    
                    Yongxin
                    
                    
                    Sanhe
                    
                    
                    Joy
      & Harmony
                    
                    
                    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
                    
                    
                    
                    908






21




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







(
      In square feet)
                  
                  Wangda
                  
                  
                  Yongxin
                  
                  
                  Sanhe
                  
                  
                  Joy
      & Harmony
                  
                  
                  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




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







(In
      US dollars)
                      
                      Wangda
                      
                      
                      Yongxin
                      
                      
                      Sanhe
                      
                      
                      Joy
      & Harmony
                      
                      
                      Average2006
                      
                      
                      1,440
                      
                      
                      
                      690
                      
                      
                      
                      1,497
                      
                      
                      
                      1,871
                      
                      
                      
                      9952007
                      
                      
                      1,666
                      
                      
                      
                      703
                      
                      
                      
                      1,617
                      
                      
                      
                      2,244
                      
                      
                      
                      1,420




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 within store,” for which sales of that “store within 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 within
store.”




Opened
and closed “stores within 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 within store.”  Prior to opening a new “store within store”
we are usually approached by a large-scale department store or supermarket that
offer us the opportunity to open a “store within 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 within 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 within
stores.”.







(In
      US dollars)
                  
                  Wangda
                  
                  
                  Yongxin
                  
                  
                  Sanhe
                  
                  
                  Joy
      & Harmony
                  
                  
                  Average2006
                  
                  
                  13,800
                  
                  
                  
                  8,700
                  
                  
                  
                  17,400
                  
                  
                  
                  17,700
                  
                  
                  
                  12,7002007
                  
                  
                  15,300
                  
                  
                  
                  8,500
                  
                  
                  
                  18,000
                  
                  
                  
                  20,200
                  
                  
                  
                  17,900




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 can be severe in
certain years. Additionally, during summer month we can experience a slowdown in
sales. We therefore generally use the summer months to concentrate on opening
additional stores to offset the decline in sales per store.




22




The
following table sets forth, for the periods presented, our unaudited quarterly
results of operations for the eight quarters ended December 31, 2007. 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/A. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period.





Three
      Months Ended12/31/2007
                                                
                                                
                                                9/30/2007
                                                
                                                
                                                6/30/2007
                                                
                                                
                                                3/31/2007
                                                
                                                
                                                12/31/2006
                                                
                                                
                                                9/30/2006
                                                
                                                
                                                6/30/2006
                                                
                                                
                                                3/31/2006Sales,
      net
                                                
                                                $
                                                69,108,145
                                                
                                                
                                                $
                                                57,896,861
                                                
                                                
                                                $
                                                64,498,473
                                                
                                                
                                                $
                                                84,523,194
                                                
                                                
                                                $
                                                63,575,983
                                                
                                                
                                                $
                                                42,573,920
                                                
                                                
                                                $
                                                28,618,196
                                                
                                                
                                                $
                                                13,450,749Cost
      of sales
                                                
                                                
                                                57,891,581
                                                
                                                
                                                
                                                45,113,474
                                                
                                                
                                                
                                                53,060,275
                                                
                                                
                                                
                                                70,590,912
                                                
                                                
                                                
                                                53,569,362
                                                
                                                
                                                
                                                35,974,772
                                                
                                                
                                                
                                                24,347,343
                                                
                                                
                                                
                                                11,520,281Gross
      profit
                                                
                                                
                                                11,216,564
                                                
                                                
                                                
                                                12,783,387
                                                
                                                
                                                
                                                11,438,198
                                                
                                                
                                                
                                                13,932,282
                                                
                                                
                                                
                                                10,006,621
                                                
                                                
                                                
                                                6,599,148
                                                
                                                
                                                
                                                4,270,853
                                                
                                                
                                                
                                                1,930,468General
      and administrative expenses
                                                
                                                
                                                4,017,300
                                                
                                                
                                                
                                                2,856,805
                                                
                                                
                                                
                                                3,014,233
                                                
                                                
                                                
                                                3,726,162
                                                
                                                
                                                
                                                2,483,656
                                                
                                                
                                                
                                                1,652,278
                                                
                                                
                                                
                                                903,938
                                                
                                                
                                                
                                                505,052Income
      from operations
                                                
                                                
                                                7,199,264
                                                
                                                
                                                
                                                9,926,582
                                                
                                                
                                                
                                                8,423,965
                                                
                                                
                                                
                                                10,206,120
                                                
                                                
                                                
                                                7,522,965
                                                
                                                
                                                
                                                4,946,870
                                                
                                                
                                                
                                                3,366,915
                                                
                                                
                                                
                                                1,425,416Other
      (Income) ExpenseInterest
      income
                                                
                                                
                                                (30,990
                                                )
                                                
                                                
                                                (25,977
                                                )
                                                
                                                
                                                (17,655
                                                )
                                                
                                                
                                                (13,791
                                                )
                                                
                                                
                                                (13,685
                                                )
                                                
                                                
                                                (9,261
                                                )
                                                
                                                
                                                (4,249
                                                )
                                                
                                                
                                                (4,098
                                                )Other
      expense
                                                
                                                
                                                61,421
                                                
                                                
                                                
                                                7,101
                                                
                                                
                                                
                                                (1,171
                                                )
                                                
                                                
                                                6,864
                                                
                                                
                                                
                                                71,282
                                                
                                                
                                                
                                                23,592
                                                
                                                
                                                
                                                281
                                                
                                                
                                                
                                                5,491Interest
      expense
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                7,403
                                                
                                                
                                                
                                                22
                                                
                                                
                                                
                                                54
                                                
                                                
                                                
                                                86Total
      Other (Income) Expense
                                                
                                                
                                                30,431
                                                
                                                
                                                
                                                (18,876
                                                )
                                                
                                                
                                                (18,826
                                                )
                                                
                                                
                                                (6,927
                                                )
                                                
                                                
                                                65,000
                                                
                                                
                                                
                                                14,353
                                                
                                                
                                                
                                                (3,914
                                                )
                                                
                                                
                                                1,479Income
      before income taxes
                                                
                                                
                                                7,168,833
                                                
                                                
                                                
                                                9,945,458
                                                
                                                
                                                
                                                8,442,791
                                                
                                                
                                                
                                                10,213,047
                                                
                                                
                                                
                                                7,457,965
                                                
                                                
                                                
                                                4,932,517
                                                
                                                
                                                
                                                3,370,829
                                                
                                                
                                                
                                                1,423,937Provision
      for income taxes
                                                
                                                
                                                2,787,417
                                                
                                                
                                                
                                                3,372,489
                                                
                                                
                                                
                                                2,941,264
                                                
                                                
                                                
                                                3,749,259
                                                
                                                
                                                
                                                2,580,937
                                                
                                                
                                                
                                                1,708,663
                                                
                                                
                                                
                                                1,108,133
                                                
                                                
                                                
                                                510,389Net
      income
                                                
                                                $
                                                4,381,416
                                                
                                                
                                                $
                                                6,572,969
                                                
                                                
                                                $
                                                5,501,527
                                                
                                                
                                                $
                                                6,463,788
                                                
                                                
                                                $
                                                4,877,028
                                                
                                                
                                                $
                                                3,223,854
                                                
                                                
                                                $
                                                2,262,696
                                                
                                                
                                                $
                                                913,548Net
      income per share:Basic
      & diluted
                                                
                                                $
                                                0.08
                                                
                                                
                                                $
                                                0.12
                                                
                                                
                                                $
                                                0.10
                                                
                                                
                                                $
                                                0.12
                                                
                                                
                                                $
                                                0.11
                                                
                                                
                                                $
                                                0.07
                                                
                                                
                                                $
                                                0.05
                                                
                                                
                                                $
                                                0.02Weighted
      average number of shares outstanding:Basic
      & diluted
                                                
                                                
                                                52,671,438
                                                
                                                
                                                
                                                52,608,938
                                                
                                                
                                                
                                                52,608,938
                                                
                                                
                                                
                                                52,578,938
                                                
                                                
                                                
                                                46,179,507
                                                
                                                
                                                
                                                44,817,953
                                                
                                                
                                                
                                                44,360,077
                                                
                                                
                                                
                                                44,360,077





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 $24,952,614 at December 31, 2007 and current
assets totaled $42,710,572 at December 31, 2007. The Company’s total current
liabilities were $5,792,722 at December 31, 2007. Working capital at December
31, 2007 was $36,917,850. During 2007, net cash provided by operating activities
was $21,573,771.





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





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


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


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






23




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





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




Year
      Ended December 31,2007
                          
                          
                          2006
                          
                          
                          2005Net
      cash provided by operating activities
                          
                          $
                          21,574
                          
                          
                          $
                          10,969
                          
                          
                          $
                          944Net
      cash used in investing activities
                          
                          
                          (64
                          )
                          
                          
                          (29
                          )
                          
                          
                          (2
                          )Net
      cash (used in) provided by financing
activities
                          
                          
                          (4,500
                          )
                          
                          
                          (6,558
                          )
                          
                          
                          518Effect
      of exchange rate change on cash and cash
      equivalents
                          
                          
                          1,444
                          
                          
                          
                          167
                          
                          
                          
                          20Net
      increase in cash and cash equivalents
                          
                          
                          18,454
                          
                          
                          
                          4,549
                          
                          
                          
                          1,480Cash
      and cash equivalents at beginning of year
                          
                          
                          6,498
                          
                          
                          
                          1,949
                          
                          
                          
                          470Cash
      and cash equivalents at end of year
                          
                          $
                          24,953
                          
                          
                          $
                          6,498
                          
                          
                          $
                          1,949





Operating
Activities





Net cash
generated from operating activities increased to $21.6 million in 2007 from
$10.9 million in 2006. This increase was mainly attributable to several
factors, including (i) the substantial increase in net income of
$22.9 million in 2007 compared to net income of $11.3 million in 2006;
(ii) the increase in add-back of non-cash expenses, mainly consisting of
share-based compensation of $2.1 million in 2007; (iii) the decrease in
accounts receivable resulting from control of settlement, partially offset by an
increase of $3.4 million in inventory primarily due to stock reserve for
expansion of stores and an decrease of $1.4 million in income tax
payable.





Net cash
generated from operating activities increased to $10.9 million in 2006 from
$0.9 million in 2005. This increase was mainly attributable to several
factors, including (i) the substantial increase in net income of
$11.3 million in 2006 compared to net income of $1.4 million earned in
2005; (ii) the increase of 1.6 in accounts payable and accrued expenses;
(iii) the increase of $1.3 million in income tax payable, partially offset
by an increase of $2 million in accounts receivable primarily due to promotion
for business.





Investing
Activities





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
equipments. Net cash used in investing activities increased to $29 thousand
in 2006 from $2 thousand in 2005 primarily due to our purchase of
additional office equipments





Financing
Activities





Net cash
used in financing activities decreased to $4.5 million in 2007 from
$6.5 million in 2006, due to payment of notes of $4.5 million for
acquisition of Shanghai Joy & Harmony in 2007 and $6.5 million for
acquisition of Hangzhou Sanhe and Shanghai Joy & Harmony in 2006. Net cash
from financing activities was ($6.5) million in 2006 compared to
$0.5 million in 2005, mainly due to payment of acquisition notes of $6.5
million for acquisition of Hangzhou Sanhe and Shanghai Joy & Harmony in 2006
and capital contribution of $1.2 million offset by dividend payment of $0.5
million and payment to related parties of $0.2 million in 2005.





Capital
Expenditures





Total
capital expenditures during 2007 were $64,325 for purchase of fixed assets as
compared to $30,591 for 2006. Given the low level of capital requirements needed
to open additional “stores within stores” the Company believes its funds are
sufficient to support its organic growth. The Company’s cash resources grew from
approximately $6.5 million as of December 31, 2006 to approximately $25 million
as of December 31, 2007.





Working Capital Requirements





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




24





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.


Customers
only have a right of return if products are damaged. In practice, returns are
very rare, both in our store and at other similar stores in China. However, if
the customer does return a product to us that is defective, we return the
product to our suppliers and we adjust our inventory accounts.





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,
2007:




Payment
      Due by PeriodLess than 1
                                
                                
                                
                                
                                
                                More thanTotal
                                
                                year
                                
                                1-3 years
                                
                                3-5 years
                                
                                5
      yearsContractual
      ObligationsOperating
      lease obligations
                                
                                $
                                254,417
                                
                                
                                $
                                140,775
                                
                                
                                $
                                97,192
                                
                                
                                $
                                16,450
                                
                                
                                $
                                —Purchase
      obligations
                                
                                
                                1,167,763
                                
                                
                                
                                1,167,763
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                —Total
      contractual obligations
                                
                                $
                                1,422,180
                                
                                
                                $
                                1,308,538
                                
                                
                                $
                                97,192
                                
                                
                                $
                                16,450
                                
                                
                                $
                                —






25




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, 2007, approximately all of our sales
are denominated in foreign currencies. We expect that foreign currencies will
continue to represent a similarly significant percentage of our sales in the
future. Selling, marketing and administrative costs related to these sales are
largely denominated in the same respective currency, thereby mitigating our
transaction risk exposure. We therefore believe that the risk of a significant
impact on our operating income from foreign currency fluctuations is not
substantial. However, for sales not denominated in U.S. dollars, if there is an
increase in the rate at which a foreign currency is exchanged for U.S. dollars,
it will require more of the foreign currency to equal a specified amount of U.S.
dollars than before the rate increase. In such cases and if we price our
products in the foreign currency, we will receive less in US. dollars than we
did before the rate increase went into effect. If we price our products in U.S.
dollars and competitors price their products in local currency, an increase in
the relative strength of the U.S. dollar could result in our price not being
competitive in a market where business is transacted in the local
currency.





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





Interest
Rate Risk





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





Inflation





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





Currency
Exchange Fluctuations





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




26





Concentration
of Credit Risk





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





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





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





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




ITEM 8.   FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA





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




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





None.





ITEM
9A(T). 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, 2007, 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.




27





Management’s
Report on Internal Control over Financial Reporting





Our
independent registered public accounting firm, Morgenstern, Svoboda & Baer
CPA’s P.C., who also audited our consolidated financial statements,
independently assessed the effectiveness of our internal control over financial
reporting, as stated in their report which is included in this Annual Report on
Form 10-K/A. 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.





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In addition,
in 2007, we engaged a consulting firm to assist our management in evaluating and
strengthening our internal control over financial reporting with the objective
of full compliance with the Sarbanes-Oxley Act of 2002. Based on our evaluation,
our principal executive officer and principal financial officer have concluded
that during the period covered by this report, our internal controls over
financial reporting were effective.




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/A that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




ITEM
9B. OTHER INFORMATION





There is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of the fiscal year covered by this Form 10-K/A but not
reported.







28





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 March 14, 2008.





Name
                          
                          Age
                          
                          PositionZhenggang Wang
                          
                          39
                          
                          Chief Executive Officer, Chairman of the BoardWeidong Huang
                          
                          37
                          
                          Chief Financial OfficerXiang Ma
                          
                          33
                          
                          PresidentChenghua Zhu
                          
                          32
                          
                          DirectorMingjun Zhu
                          
                          39
                          
                          DirectorRongjin Weng
                          
                          44
                          
                          DirectorWei Kang Gu
                          
                          69
                          
                          DirectorKenneth T. Berents
                          
                          60
                          
                          Director, Chairman Audit CommitteeJoseph J. Levinson
                          
                          31
                          
                          Director





Zhenggang
Wang, Chairman of the Board, Chief Executive Officer, Chairman of the
Board




Mr. Wang,
has been the Company’s chairman and chief executive officer and a member 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. There are no family relationships between Mr. Wang and the
directors, executive officers, or persons nominated or chosen by the Company to
become directors or executive officers. During the last two years, there have
been no transactions to which the Company was a party in which Mr. Wang (or
any member of his immediate family) had a direct or indirect material
interest.





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 Co., Ltd., 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.




29




Mr. Huang
does not hold any directorships with reporting companies in the United States.
There are no family relationships between Mr. Liu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. There have been no transactions to which the
Company was a party in which Mr. Huang (or any member of his immediate family)
had a direct or indirect material interest.





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, 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. There are no family relationships between Mr. Ma and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been no
transactions to which the Company was a party in which Mr. Ma (or any member of
his immediate family) had a direct or indirect material interest.





Chenghua
Zhu, Director





Ms. Zhu
has been a director 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. There are no family relationships between Ms. Zhu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been no
transactions to which the Company was a party in which Ms. Zhu (or any member of
his immediate family) had a direct or indirect material interest.





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. There are no family relationships between Mr. Zhu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been no
transactions to which the Company was a party in which Mr. Zhu (or any member of
his immediate family) had a direct or indirect material interest.





Rongjin
Weng, Director





Mr. Weng
has been a director since December 2005.  Mr. Weng is Chairman of
Langsha Group. He established Langsha Knitting Company Limited in 1995, and has
served as its chairman and chief executive officer since that time. The company
has experienced a 500,000% growth in assets during the past 11 years. Currently,
Langsha is the largest sock manufacturer in China with annual revenue of $100
million. Mr. Weng holds a Master degree in Business Administration.




30




Mr. Weng
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Mr. Weng and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. Other than the Merger Transaction, during the
last two years, there have been no transactions to which the Company was a party
in which Mr. Weng (or any member of his immediate family) had a direct or
indirect material interest.




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. There are no family relationships between Mr. Gu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been no
transactions to which the Company was a party in which Mr. Gu (or any member of
his immediate family) had a direct or indirect material interest.





Kenneth
T. Berents, Director, Chairman Audit Committee





Mr.
Berents has a 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. There are no family relationships between Mr. Berents and the
directors, executive officers, or persons nominated or chosen by the Company to
become directors or executive officers. During the last two years, there have
been no transactions to which the Company was a party in which Mr. Berents (or
any member of his immediate family) had a direct or indirect material
interest.





Joseph
J. Levinson





Mr.
Levinson has been a director of the Company since May 2007. Mr. Levinson was
employed from January 2006 to May 2007 as Chief Financial Officer and a member
of the Board of Directors of Global Pharmatech (OTCBB: GBLP), a Chinese
pharmaceutical manufacturer. Since 2006 Mr. Levinson has also served as an
Advisor to Broadline Capital, which is a private equity investment firm. From
2006 until February 2007 Mr. Levinson was employed as Chief Financial Officer of
PacificNet, which is involved in call center outsourcing. From 2004 to 2006 Mr.
Levinson was employed as Chief Financial Officer for BDL Media, a company based
in China that marketed print and online media. Previously Mr. Levinson had been
employed as a Manager by KPMG and Deloitte and Touche, international accounting
firms. In 1994 Mr. Levinson was awarded a B.S. by SUNY - Buffalo with a
concentration in accounting and finance.




31




Mr.
Levinson is also a director of China Aoxing Pharmaceutical Company, Inc., a
maker of analgesic drugs that is listed on the OTCBB. There are no family
relationships between Mr. Levinson and the directors, executive officers, or
persons nominated or chosen by the Company to become directors or executive
officers. During the last two years, there have been no transactions to which
the Company was a party in which Mr. Levinson (or any member of his immediate
family) had a direct or indirect material interest.





Todd
Mavis





Todd
Mavis served as a member of the Board of Directors from January 2007 until his
resignation in December 2007.





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.





Family
Relationships





There are
no family relationships among the officers and directors of the
Company.





Involvement
in Certain Legal Proceedings





To our
knowledge, during the past five years, our officers and directors: have not
filed a petition under the federal bankruptcy laws or any state insolvency law,
nor had a receiver, fiscal agent or similar officer appointed by a court for the
business or present of such a person, or any partnership in which (s)he was a
general partner at or within two years before the time of such filing, or any
corporation or business association of which (s)he was an executive officer
within two years before the time of such filing; were not convicted in a
criminal proceeding or named subject of a pending criminal proceeding (excluding
traffic violations and other minor offenses); were not the subject of any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him from
or otherwise limiting their respective activities.





Compliance
with Section 16 (a) of the Exchange Act





Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934 during our
most recent fiscal year and Forms 5 and amendments thereto furnished to us with
respect to our most recent fiscal year, certain officers, directors and owners
of 10% or more of our outstanding shares have not filed Forms 3, 4 and 5
required by Section 16(a) of the Securities Exchange Act of 1934, as amended.
The following individuals have not filed Form 3s: Weidong Huang, Xiang Ma,
Weikang Gu and Joseph Levinson.





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 is filed as Exhibit 14 to this annual report. 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.






32




Audit
Committee





Our Audit
Committee consists of Chairman Kenneth T. Berents and members Rongjin Weng and
Chenghua Zhu. The Board of Directors of the Company has determined that Mr.
Berents is the audit committee financial expert.





Compensation
Committee





Our
Compensation Committee consists of Chairman Wei Kang Gu 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 Chairman Mingjun Zhu
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.




ITEM
11. EXECUTIVE COMPENSATION





Compensation
Discussion And Analysis





The
Compensation Committee of our board of directors and our CEO, CFO 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.
All of the members of our Compensation Committee, Mingjun Zhu and Wei Kang Gu,
are independent directors.





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 CEO 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.






33




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 CEO,
CFO 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 2007 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
2007.








SUMMARY COMPENSATION TABLEName and
                                            principal
                                            position
                                          Year
                                          
                                          Salary ($)
                                          
                                          Bonus ($)
                                          
                                          Stock
                                            Awards
                                            ($)
                                          
                                          Option
                                            Awards
                                            ($)
                                          
                                          Non-Equity
                                            Incentive Plan
                                            Compensation
                                            ($)
                                          
                                          Nonqualified
                                            Deferred
                                            Compensation
                                            Earnings ($)
                                          
                                          All Other
                                            Compensation
                                            ($)
                                          
                                          Total ($)Zhenggang
      Wang, CEO
                                          2007
                                          
                                          $
                                          59,600
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          59,6002006
                                          
                                          $
                                          15,000
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          15,0002005
                                          
                                          $
                                          15,000
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          15,000Jian
      Liu, Former CFO
                                          2007
                                          
                                          $
                                          53,000
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          53,0002006
                                          
                                          $
                                          15,000
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          15,0002005
                                          
                                          $
                                          15,000
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          15,000Weidong
      Huang, CFO
                                          2007
                                          
                                          $
                                          5,000
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          $
                                          5,000(partial
                                            year)
                                          (1)2006
                                          
                                          $
                                          02005
                                          
                                          $
                                          0Joseph
      Levinson, Director(2)
                                          2007
                                          
                                          
                                          16,000
                                          
                                          
                                          
                                          
                                          13,930
                                          
                                          967,500
                                          
                                          
                                          -
                                          
                                          -
                                          
                                          -
                                          
                                          
                                          997,430







(1)
Through October 8, 2007.


(2)
Became Director in May 2007.





Grants
of Plan-Based Awards





No plan
based award was granted to any of the executive officers named in the Company’s
Summary Compensation Table as of December 31, 2007.






34




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 executive officers named in the
Company’s Summary Compensation Table as of December 31, 2007.





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, 2007 for
any of the executive officers named in the Company’s Summary Compensation
Table.





Pension
Benefits





We do not
sponsor any qualified or non-qualified defined 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 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.





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 is entitled
to receive: (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; and (3) an annual grant of Stock Options to purchase up
to 300,000 shares of common stock of the Company. 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.





Potential
Payments Upon Termination or Change in Control





None.





Compensation
of Directors





Messrs.
Berents and Levinson, and Mr,.Mavis prior to his resignation in December 2007,
receive $2,500 per Board meeting that they attend, $2,000 per meeting of a
committee of the Board that they attend, and $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
was given a one-time payment 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 Company entered into Board of
Directors Agreement with Todd Mavis on January 2, 2007 , pursuant to which he
received $4,500 upon joining the Board of Directors of the Company and an annual
salary of seventy five thousand dollars payable in monthly installments at the
beginning of each month that Mr. Mavis was a member of the Board of
Directors.  Mr. Mavis received an option grant to purchase 50,000
shares of common stock of the Company upon execution of his Board of Directors
Agreement and 30,000 shares on each anniversary of such




35


date
thereafter, provided Mr. Mavis 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 January 2, 2007 and for
each future option grant the closing price of the Company common stock on the
anniversary of such date. All option grants vested upon issuance and have an
exercise period of ten years from date of issuance so long as Mr. Mavis is a
member of the Board of Directors at such time. According to the terms of his
Board of Director Agreement, Mr. Mavis has an exercise period for all vested
options that is 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 2007
for services as members of our Board.





DIRECTOR
      COMPENSATIONName
                                    
                                    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
                                    
                                    $
                                    75,000
                                    
                                    
                                    
                                    97,230
                                    (3)
                                    -
                                    
                                    
                                    -
                                    
                                    -
                                    
                                    
                                    172,230Wei
      Kang Gu
                                    
                                    
                                    -
                                    
                                    -
                                    
                                    -
                                    
                                    -
                                    
                                    
                                    -
                                    
                                    -
                                    
                                    
                                    -Joseph
      J. Levinson
                                    
                                    $
                                    16,000
                                    
                                    13,930(6
                                    )
                                    967,500
                                    (4)
                                    -
                                    
                                    
                                    -
                                    
                                    -
                                    
                                    
                                    997,430Todd
      Mavis
                                    
                                    $
                                    75,000
                                    
                                    -
                                    
                                    64,188
                                    (5)
                                    -
                                    
                                    
                                    -
                                    
                                    -
                                    
                                    
                                    139,188Chenghua
      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 2007.





(2)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to
2007.




(3) Mr.
Kenneth Berents received a stock option grant of 30,000 shares in December, 2007
at an exercise price equivalent to the prevailing market price of the stock, all
of which vested are were exercisable as of December 31, 2007.





(4) Mr.
Joseph Levinson received a stock option grant of 300,000 shares in May, 2007 at
an exercise price of $6.15 per share, all of which vested are were exercisable
as of December 31, 2007.





(5) Mr.
Todd Mavis received a stock option grant of 50,000 shares in January, 2007 at an
exercise price equivalent to the prevailing market price of the Company’s stock,
all of which vested are were exercisable as of December 31, 2007.




(6)
Joseph Levinson was granted 5,000 shares of common stock in 2007. All 5,000
shares were granted in September 2007.




There are
no relationships among any of the directors.




36




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/A.





The
members of the Compensation Committee are:





Mingjun
Zhu, Chair





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/A 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 March 14, 2008, 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 Natureof Beneficial
                        
                        Percentage ofName and Address of Beneficial
      Owner (1)
                        
                        Ownership
                        
                        Common Stock
      (3)Zhenggang
      Wang
                        
                        
                        9,625,000
                        
                        18.34
                        %Weidong
      Huang
                        
                        
                        0
                        
                        0Xiang
      Ma
                        
                        
                        0
                        
                        0Chenghua
      Zhu
                        
                        
                        0
                        
                        0Mingjun
      Zhu
                        
                        
                        0
                        
                        0Rongjin
      Weng
                        
                        
                        0
                        
                        0Wei
      Kang Gu
                        
                        
                        0
                        
                        0Kenneth
      T. Berents
                        
                        
                        80,000
                        (4)
                        *Joseph
      J. Levinson
                        
                        
                        305,000
                        (4)
                        0.59*
                        %Weiyi
      Lv
                        
                        
                        5,495,000
                        
                        10.47
                        %Yimin
      Zhang
                        
                        
                        5,495,000
                        
                        10.47
                        %Xiaochun
      Wang
                        
                        
                        4,130,000
                        
                        7.87
                        %Wen-An
      Chen (2)
                        
                        
                        4,000,000
                        
                        7.62
                        %Huoqing
      Yang (2)
                        
                        
                        4,000,000
                        
                        7.62
                        %Zhongsheng
      Bao
                        
                        
                        2,730,000
                        
                        5.20
                        %All
      directors and executive officers as a group (9 persons)
                        
                        
                        9,725,000
                        
                        18.53
                        %







* Less
than One Percent.






37




(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 52,671,438  shares of common stock issued and
      outstanding as of March 14, 2008 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).





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





Related
Transactions





Since
October 2005, Zhenggang Wang, our CEO and Chairman of the Board of
Directors, a former shareholder of CFDL and its sole director, has served as the
chairman of the board and the chief executive officer of the Company and has
been a member of the board of directors of the Company. China US Bridge Capital
Limited, a former shareholder of CFDL, has been a holder of the Company’s common
stock since October 2005. Immediately prior to the Merger Transaction, it
held approximately 4.6% of the Company’s issued and outstanding common
stock.





Except as
otherwise disclosed herein or incorporated herein by reference, 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, 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.





Independent
Directors




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




38




ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES





On April
20, 2006 the Company retained Morgenstern & Company, CPA’s, P.C.
(“Morgenstern”) to serve as the Company’s principal independent
accountant.





The
following represents fees for professional audit services rendered by
Morgenstern for the fiscal year ended December 31, 2006 and December 31,
2007.





Audit
Fees





The
aggregate fees billed by our current auditors, Morgenstern, for professional
services rendered for the audit of our annual financial statements for the year
ended December 31, 2007 and 2006 were $228,000 and $99,184.





Audit
Related Fees





We
incurred no audit related fees to Morgenstern and Kabani during the year ended
December 31, 2006.





Tax
Fees





Our
principal accountants did not render any services for tax compliance, tax advice
and tax planning during transition period ended December 31, 2007 and 2006
fiscal year, respectively.





All
Other Fees





Our
principal accountants did not bill us any additional fees that are not disclosed
under audit fees, audit related fees or tax fees in each of the last two
calendar years.




Audit
Committee Pre-Approval Process, Policies and Procedures




We have
an Audit Committee which is composed of Kenneth T. Berents (Chairman), Chenghua
Zhu and Rongjin Weng. Our principal accountants have performed their audit
procedures in accordance with pre-approved policies and procedures established
by our Audit Committee.  Our principal auditors have informed our Audit
Committee of the scope and nature of each service provided.





In
accordance with the SEC’s auditor independence rules, the Audit Committee has
established the following policies and procedures by which it approves in
advance any audit or permissible non-audit services to be provided to the
Company by its independent auditor.





Prior to
the engagement of the independent auditor for any fiscal year’s audit,
management submits to the Audit Committee for approval lists of recurring audit,
audit-related, tax and other services expected to be provided by the auditor
during that fiscal year. The Audit Committee adopts pre-approval schedules
describing the recurring services that it has pre-approved, and is informed on a
timely basis, and in any event by the next scheduled meeting, of any such
services rendered by the independent auditor and the related fees.





The fees
for any services listed in a pre-approval schedule are budgeted, and the Audit
Committee requires the independent auditor and management to report actual fees
versus the budget periodically throughout the year. The Audit Committee will
require additional pre-approval if circumstances arise where it becomes
necessary to engage the independent auditor for additional services above the
amount of fees originally pre-approved. Any audit or non-audit service not
listed in a pre-approval schedule must be separately pre-approved by the Audit
Committee on a case-by-case basis. Every request to adopt or amend a
pre-approval schedule or to provide services that are not listed in a
pre-approval schedule must include a statement by the independent auditors as to
whether, in their view, the request is consistent with the SEC’s rules on
auditor independence.




39




The Audit
Committee will not grant approval for:





·
            any
      services prohibited by applicable law or by any rule or regulation of the
      SEC or other regulatory body applicable to the Company;·
            provision
      by the independent auditor to the Company of strategic consulting services
      of the type typically provided by management consulting firms;
      or·
            the
      retention of the independent auditor in connection with a transaction
      initially recommended by the independent auditor, the tax treatment of
      which may not be clear under the Internal Revenue Code and related
      regulations and which it is reasonable to conclude will be subject to
      audit procedures during an audit of the Company’s financial
      statements.





Tax
services proposed to be provided by the auditor to any director, officer or
employee of the Company who is in an accounting role or financial reporting
oversight role must be approved by the Audit Committee on a case-by-case basis
where such services are to be paid for by the Company, and the Audit Committee
will be informed of any services to be provided to such individuals that are not
to be paid for by the Company.





In
determining whether to grant pre-approval of any non-audit services in the “all
other” category, the Audit Committee will consider all relevant facts and
circumstances, including the following four basic guidelines:





·
            whether
      the service creates a mutual or conflicting interest between the auditor
      and the Company;·
            whether
      the service places the auditor in the position of auditing his or her own
      work;·
            whether
      the service results in the auditor acting as management or an employee of
      the Company; and·
            whether
      the service places the auditor in a position of being an advocate for the
      Company.




40





PART
IV




ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES





(a)
Financial Statements and Schedules





The
financial statements are set forth under Item 8 of this Annual Report on
Form 10-K/A. Financial statement schedules have been omitted since they are
either not required, not applicable, or the information is otherwise
included.





(b)
Exhibit Listing




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 Ltd., Colin Wilson, Alliance Capital Management,
      Inc., Hanzhong Fang and China U.S. Bridge Capital, Ltd.(3)10.2
                    
                    
                    Consulting
      Services Agreement dated as of November 1, 2005 between Capital
      Development Limited and Zhejiang Yong Xing Digital Technology Co., Ltd. (4
      )10.3
                    
                    
                    Operating
      Agreement dated as of November 1, 2005 between Capital Development Limited
      and Zhejiang Yong Xing Digital Technology Co., Ltd. (4 )10.4
                    
                    
                    Proxy
      and Voting Agreement dated as of November 1, 2005 between Capital
      Development Limited and Zhejiang Yong Xing Digital Technology Co., Ltd. (4
      )10.5
                    
                    
                    Option
      Agreement dated as of November 1, 2005 between Capital Development Limited
      and Zhejiang Yong Xing Digital Technology Co., Ltd. (4 )10.6
                    
                    
                    Equity
      Pledge Agreement dated as of November 1, 2005 between Capital Development
      Limited and Zhejiang Yong Xing Digital Technology Co., Ltd. (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 Co. Ltd., 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 )




41





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 )14.1
              
              
              Code
      of Business Conduct and Ethics (11)21.1
              
              
              List
      of Subsidiaries (11)23.1
              
              
              Consent
      of Kabani & Company, Inc.31.1
              
              
              Certification
      of Chief Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002, 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.99.1
              
              
              Press
      Release dated March 27, 2008 (11)


_________________


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


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


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


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


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


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


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


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


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


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


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




42





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 31 st day of
October 2008.




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 WangZhenggang
      Wang
                                                
                                                Chief
      Executive Officer and Chairman
                                                
                                                October
      31, 2008/s/
      Xiang MaXiang
      Ma
                                                
                                                President
                                                
                                                October
      31, 2008/s/
      Weidong HuangWeidong
      Huang
                                                
                                                Chief
      Financial Officer
                                                
                                                October
      31, 2008/s/
      Chenghua ZhuChenghua
      Zhu
                                                
                                                Director
                                                
                                                October
      31, 2008/s/
      Mingjun ZhuMingjun
      Zhu
                                                
                                                Director
                                                
                                                October
      31, 2008/s/
      Rongjin WengRongjin
      Weng
                                                
                                                Director
                                                
                                                October
      31, 2008/s/
      Wei Kang GuWei
      Kang Gu
                                                
                                                Director
                                                
                                                October
      31, 2008Kenneth
      T. Berents
                                                
                                                Director
                                                
                                                October
      31, 2008Joseph
      J. Levinson
                                                
                                                Director
                                                
                                                October
      31,
2008




43




CHINA
3C GROUP AND SUBSIDIARIES





CONSOLIDATED
FINANCIAL STATEMENTS





DECEMBER
31, 2007











44










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 Cash Flow
                F-5Consolidated
      Statements of Stockholders Equity
                F-6Notes
      to Consolidated Financial Statements
                F-7
      - F-22







45




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







F-1





Report of
Independent Registered Public Accounting Firm





Board of
Directors and Stockholders of


China 3C
Group and Subsidiaries, Inc.





We have
audited the accompanying consolidated statements of income, stockholders'
equity, and cash flows of China 3C Group and Subsidiaries, Inc. (a Nevada
corporation) for the year ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of the operations of China 3C
Group and Subsidiaries, Inc. and their consolidated cash flows for the year
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles.






/s/
Kabani & Company, Inc.


Certified
Public Accountants





Los
Angeles, California


March 10,
2006








F-2





CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED BALANCE
      SHEETSAS
      OF DECEMBER 31, 2007 AND DECEMBER
31,2006






12/31/2007
                                                          
                                                          
                                                          12/31/2006ASSETSCurrent
      AssetsCash
      and cash equivalents
                                                          
                                                          $
                                                          24,952,614
                                                          
                                                          
                                                          $
                                                          6,498,450Accounts
      receivable, net
                                                          
                                                          
                                                          8,077,533
                                                          
                                                          
                                                          
                                                          8,013,071Inventory
                                                          
                                                          
                                                          6,725,371
                                                          
                                                          
                                                          
                                                          2,779,506Advance
      to supplier
                                                          
                                                          
                                                          2,572,285
                                                          
                                                          
                                                          
                                                          2,215,841Prepaid
      expenses
                                                          
                                                          
                                                          382,769
                                                          
                                                          
                                                          
                                                          60,059Total
      Current Assets
                                                          
                                                          
                                                          42,710,572
                                                          
                                                          
                                                          
                                                          19,566,927Property
      & equipment, net
                                                          
                                                          
                                                          89,414
                                                          
                                                          
                                                          
                                                          65,803Goodwill
                                                          
                                                          
                                                          20,348,278
                                                          
                                                          
                                                          
                                                          20,348,278Refundable
      deposits
                                                          
                                                          
                                                          48,541
                                                          
                                                          
                                                          
                                                          6,567Total
      Assets
                                                          
                                                          $
                                                          63,196,805
                                                          
                                                          
                                                          $
                                                          39,987,575LIABILITIES AND STOCKHOLDERS’
      EQUITYCurrent
      LiabilitiesAccounts
      payable and accrued expenses
                                                          
                                                          $
                                                          3,108,235
                                                          
                                                          
                                                          $
                                                          1,964,663Income
      tax payable
                                                          
                                                          
                                                          2,684,487
                                                          
                                                          
                                                          
                                                          2,596,517Notes
      payable
                                                          
                                                          
                                                          -
                                                          
                                                          
                                                          
                                                          4,500,000Total
      Current Liabilities
                                                          
                                                          
                                                          5,792,722
                                                          
                                                          
                                                          
                                                          9,061,180Stockholders’
      EquityCommon
      stock, $.001 par value, 100,000,000   shares authorized, 52,673,938
      and 52,488,938 issued and outstanding
                                                          
                                                          
                                                          52,674
                                                          
                                                          
                                                          
                                                          52,489Additional paid
      in capital
                                                          
                                                          
                                                          19,465,776
                                                          
                                                          
                                                          
                                                          17,352,691Subscription
      receivable
                                                          
                                                          
                                                          (50,000
                                                          )
                                                          
                                                          
                                                          (50,000
                                                          )Statutory
      reserve
                                                          
                                                          
                                                          7,234,295
                                                          
                                                          
                                                          
                                                          3,320,755Other
      comprehensive income
                                                          
                                                          
                                                          1,872,334
                                                          
                                                          
                                                          
                                                          427,616Retained
      earnings
                                                          
                                                          
                                                          28,829,004
                                                          
                                                          
                                                          
                                                          9,822,844Total
      Stockholders’ Equity
                                                          
                                                          
                                                          57,404,083
                                                          
                                                          
                                                          
                                                          30,926,395Total
      Liabilities and Stockholders’ Equity
                                                          
                                                          $
                                                          63,196,805
                                                          
                                                          
                                                          $
                                                          39,987,575








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








F-3




CHINA 3C GROUP AND
    SUBSIDIARIESCONSOLIDATED STATEMENTS OF
      INCOMEFOR
      YEARS ENDED DECEMBER 31, 2007, 2006 AND
2005






2007
                                            
                                            
                                            2006
                                            
                                            
                                            2005Sales,
      net
                                            
                                            $
                                            276,026,673
                                            
                                            
                                            $
                                            148,218,848
                                            
                                            
                                            $
                                            32,588,634Cost
      of sales
                                            
                                            226,656,242
                                            
                                            
                                            125,411,758
                                            
                                            
                                            28,325,332Gross
      profit
                                            
                                            
                                            49,370,431
                                            
                                            
                                            22,807,090
                                            
                                            
                                            4,263,302General
      and administrative expenses
                                            
                                            13,614,500
                                            
                                            
                                            5,544,924
                                            
                                            
                                            1,706,869Income
      from operations
                                            
                                            35,755,931
                                            
                                            
                                            17,262,166
                                            
                                            
                                            2,556,433Other
      (Income) ExpenseInterest
      income
                                            
                                            (88,413 )
                                            
                                            
                                            (31,293 )
                                            
                                            
                                            (10,156 )Other
      expense
                                            
                                            74,215
                                            
                                            
                                            100,646
                                            
                                            
                                            17,364Interest
      expense
                                            
                                            -
                                            
                                            
                                            7,565
                                            
                                            
                                            2,954Total
      Other (Income) Expense
                                            
                                            (14,198 )
                                            
                                            
                                            
                                            76,918
                                            
                                            
                                            
                                            10,162Income
      before income taxes
                                            
                                            35,770,129
                                            
                                            
                                            17,185,248
                                            
                                            
                                            2,546,271Provision
      for income taxes
                                            
                                            12,850,429
                                            
                                            
                                            5,908,122
                                            
                                            
                                            1,088,021Net
      income
                                            
                                            $
                                            22,919,700
                                            
                                            
                                            $
                                            11,277,126
                                            
                                            
                                            $
                                            1,458,250Net
      income per share:Basic
      & diluted
                                            
                                            $
                                            0.44
                                            
                                            
                                            $
                                            0.24
                                            
                                            
                                            $
                                            0.04Weighted
      average number of shares outstanding:Basic
      & diluted
                                            
                                            52,671,438
                                            
                                            
                                            46,179,507
                                            
                                            
                                            35,133,427







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








F-4





CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH
      FLOWSFOR
      YEARS ENDED DECEMBER 31, 2007, 2006 AND
2005






2007
                                                        
                                                        
                                                        2006
                                                        
                                                        
                                                        2005CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Income
                                                        
                                                        $
                                                        22,919,700
                                                        
                                                        
                                                        $
                                                        11,277,126
                                                        
                                                        
                                                        $
                                                        1,458,250Adjustments to
      reconcile net income to net cash   provided by operating
      activities:Depreciation
                                                        
                                                        40,714
                                                        
                                                        
                                                        20,191
                                                        
                                                        
                                                        17,420Gain on
      asset disposition
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (936
                                                        )Provision for
      bad debts
                                                        
                                                        9,021
                                                        
                                                        
                                                        82,686
                                                        
                                                        
                                                        
                                                        -Stock
      based compensation
                                                        
                                                        
                                                        2,113,270
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        225,680Amortization of
      deferred consulting expense
                                                        
                                                        -
                                                        
                                                        
                                                        387,945
                                                        
                                                        
                                                        
                                                        12,055Shares
      to be issued to consultants
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        498,000(Increase) /
      decrease in assets:Accounts
      receivables
                                                        
                                                        
                                                        (73,483
                                                        )
                                                        
                                                        
                                                        (2,375,209
                                                        )
                                                        
                                                        
                                                        (286,498
                                                        )Inventory
                                                        
                                                        (3,945,865 )
                                                        
                                                        
                                                        (487,593 )
                                                        
                                                        
                                                        
                                                        (421,658
                                                        )Prepaid
      expense
                                                        
                                                        
                                                        (322,710
                                                        )
                                                        
                                                        
                                                        85,216
                                                        
                                                        
                                                        
                                                        (42,522
                                                        )Advance
      to supplier
                                                        
                                                        (356,444 )
                                                        
                                                        
                                                        (848,848 )
                                                        
                                                        
                                                        
                                                        (372,000
                                                        )Deposits
                                                        
                                                        
                                                        (41,974
                                                        )
                                                        
                                                        
                                                        (5,929
                                                        )
                                                        
                                                        
                                                        1,288Increase
      / (decrease) in current liabilities:Accounts
      payable and accrued expenses
                                                        
                                                        
                                                        1,143,572
                                                        
                                                        
                                                        
                                                        1,356,272
                                                        
                                                        
                                                        
                                                        (267,816
                                                        )Income
      tax payable
                                                        
                                                        87,970
                                                        
                                                        
                                                        1,477,695
                                                        
                                                        
                                                        
                                                        122,067Total
      Adjustments
                                                        
                                                        
                                                        (1,345,929
                                                        )
                                                        
                                                        
                                                        (308,510
                                                        )
                                                        
                                                        
                                                        (513,984
                                                        )Net
      cash provided by operating activities
                                                        
                                                        
                                                        21,573,771
                                                        
                                                        
                                                        
                                                        10,968,616
                                                        
                                                        
                                                        
                                                        944,266CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase of
      property & equipment
                                                        
                                                        (64,325 )
                                                        
                                                        
                                                        (30,591 )
                                                        
                                                        
                                                        
                                                        (2,308
                                                        )Proceeds from
      asset sales
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,508
                                                        
                                                        
                                                        
                                                        -Net
      cash used by Investing activities
                                                        
                                                        (64,325 )
                                                        
                                                        
                                                        (29,083 )
                                                        
                                                        
                                                        
                                                        (2,308
                                                        )CASH
      FLOWS FROM FINANCING ACTIVITIESCapital
      contribution to subsidiary before acquisition
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,210,000Dividends
      paid
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        (529,140 )Proceed
      on loan from related parties
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        97,760Payments on
      loan to related parties
                                                        
                                                        -
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        (250,877 )Payments of
      acquisition notes - net of cash acquired
                                                        
                                                        
                                                        (4,500,000
                                                        )
                                                        
                                                        
                                                        (6,550,157
                                                        )
                                                        
                                                        
                                                        -Payments of
      notes - other
                                                        
                                                        -
                                                        
                                                        
                                                        (7,769 )
                                                        
                                                        
                                                        
                                                        (9,807
                                                        )Net
      cash provided by financing activities
                                                        
                                                        
                                                        (4,500,000
                                                        )
                                                        
                                                        
                                                        (6,557,926
                                                        )
                                                        
                                                        
                                                        517,936Effect
      of exchange rate changes on cash and cash equivalents
                                                        
                                                        
                                                        1,444,718
                                                        
                                                        
                                                        
                                                        167,621
                                                        
                                                        
                                                        
                                                        19,670Net
      change in cash and cash equivalents
                                                        
                                                        
                                                        18,454,164
                                                        
                                                        
                                                        
                                                        4,549,228
                                                        
                                                        
                                                        
                                                        1,479,564Cash
      and cash equivalents, beginning balance
                                                        
                                                        6,498,450
                                                        
                                                        
                                                        1,949,222
                                                        
                                                        
                                                        
                                                        469,658Cash
      and cash equivalents, ending balance
                                                        
                                                        $
                                                        24,952,614
                                                        
                                                        
                                                        $
                                                        6,498,450
                                                        
                                                        
                                                        $
                                                        1,949,222SUPPLEMENTAL
      DISCLOSURES:Cash
      paid during the year for:Income
      tax payments
                                                        
                                                        $
                                                        12,762,459
                                                        
                                                        
                                                        $
                                                        3,534,155
                                                        
                                                        
                                                        
                                                        965,354Interest
      payments
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        7,565
                                                        
                                                        
                                                        
                                                        2,954Non
      cash transactions relating to acquisitionsPurchased
      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-5





CHINA
      3C GROUP AND SUBSIDIARIESCONSOLIDATED STATEMENT OF
      STOCKHOLDERS’ EQUITYFOR
      THE YEARS ENDED DECEMBER 31, 2007, 2006 AND
2005






Shares
                              
                              
                              Additional
                              
                              
                              Other
                              
                              
                              Deferred
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              TotalCommon Stock
                              
                              
                              to
      be
                              
                              
                              Paid-In
                              
                              
                              Comprehensive
                              
                              
                              Consulting
                              
                              
                              Subscription
                              
                              
                              Statutory
                              
                              
                              Retained
                              
                              
                              Stockholders’Shares
                              
                              
                              Amount
                              
                              
                              issued
                              
                              
                              Capital
                              
                              
                              Income
                              
                              
                              Expense
                              
                              
                              Receivable
                              
                              
                              Reserve
                              
                              
                              Earnings
                              
                              
                              EquityBalance
      December 31, 2004
                              
                              
                              35,000,000
                              
                              
                              $
                              35,000
                              
                              
                              $
                              -
                              
                              
                              $
                              267,500
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              70,379
                              
                              
                              $
                              383,297
                              
                              
                              $
                              756,176Changes
      due to recapitalization
                              
                              
                              2,613,282
                              
                              
                              2,613
                              
                              
                              
                              
                              
                              
                              1,226,387
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,229,000Shares
      issued for consulting fees
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              498,000
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              498,000Warrants
      issued for deferred consulting fees
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              400,000
                              
                              
                              
                              
                              
                              (387,945 )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              12,055Stock
      issued for guarantee fee
                              
                              
                              2,256,795
                              
                              
                              
                              2,257
                              
                              
                              
                              
                              
                              
                              
                              223,423
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              225,680Warrants
      exercised
                              
                              
                              
                              
                              
                              
                              
                              
                              4,000
                              
                              
                              (4,000 )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -Stock
      subscription receivable
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (50,000
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (50,000
                              )Dividend
      paid
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (525,460 )
                              
                              
                              (525,460 )Foreign
      currency translation adjustments
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              74,950
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              74,950Transfer
      to statutory reserve
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              331,651
                              
                              
                              (331,651 )
                              
                              
                              -Net
      income for the year ended December 31, 2005
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,458,250
                              
                              
                              
                              1,458,250Balance
      December 31, 2005
                              
                              
                              39,870,077
                              
                              
                              $
                              39,870
                              
                              
                              $
                              502,000
                              
                              
                              $
                              2,113,310
                              
                              
                              $
                              74,950
                              
                              
                              $
                              (387,945
                              )
                              
                              $
                              (50,000
                              )
                              
                              $
                              402,030
                              
                              
                              $
                              984,436
                              
                              
                              $
                              3,678,651Stock
      Issued
                              
                              
                              8,980,000
                              
                              
                              8,980
                              
                              
                              (502,000 )
                              
                              
                              493,020Foreign
      currency translation adjustments
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              167,621
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              167,621Income
      for the year ended December 31, 2006
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              11,277,126
                              
                              
                              
                              11,277,126Transfer
      to statutory reserve
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,438,717
                              
                              
                              
                              (2,438,717
                              )Purchase
      Acquisition
                              
                              
                              3,638,861
                              
                              
                              3,639
                              
                              
                              
                              
                              
                              
                              14,746,361
                              
                              
                              185,045
                              
                              
                              
                              
                              
                              
                              
                              
                              480,008
                              
                              
                              
                              
                              
                              
                              15,415,053Transferred
      To prepaid
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              387,945
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              387,945Balance
      December 31, 2006
                              
                              
                              52,488,938
                              
                              
                              $
                              52,489
                              
                              
                              -
                              
                              
                              $
                              17,352,691
                              
                              
                              $
                              427,616
                              
                              
                              -
                              
                              
                              $
                              (50,000
                              )
                              
                              $
                              3,320,755
                              
                              
                              $
                              9,822,844
                              
                              
                              $
                              30,926,395Foreign
      currency translation adjustments
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,444,718
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,444,718Stock
      based compensation
                              
                              
                              185,000
                              
                              
                              
                              185
                              
                              
                              
                              
                              
                              
                              
                              2,113,085
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,113,270Transfer
      to statutory reserve
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,913,540
                              
                              
                              
                              (3,913,540
                              )
                              
                              -Income
      for YearEnded
      December 31, 2007
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              22,919,700
                              
                              
                              
                              22,919,700Balance
      December 31, 2007
                              
                              
                              52,673,938
                              
                              
                              $
                              52,674
                              
                              
                              
                              
                              
                              
                              $
                              19,465,776
                              
                              
                              $
                              1,872,334
                              
                              
                              
                              
                              
                              
                              
                              (50,000
                              )
                              
                              $
                              7,234,295
                              
                              
                              $
                              28,829,004
                              
                              
                              $
                              57,404,083







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, 2007





Note 1 -   ORGANIZATION





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





On
December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
through a reverse merger (the “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 15, 2007, the
Company changed the ownership structure. As a result, instead of (Capital)
owning 100% of (Zhejiang) as previously disclosed, (Capital) has 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 (WOFE) 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 the company
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 (Capital) and
ultimately with China 3C Group.





The
Company is now engaged in the business of mobile phone, facsimile machines, DVD
players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries,
CD players, radios, Walkman, and audio systems distribution.





Acquisitions





(a)
Hangzhou Sanhe Electronic Technology Ltd.





On August
3, 2006, the Company completed the acquisition of a 100% interest in Hangzhou
Sanhe Electronic Technology Ltd. ("HSET") for a cash and stock transaction
valued at approximately US$8.75 million. This amount is included in the cost of
net assets and goodwill purchased.




The stock
consideration consisted of 915,751 newly issued shares of the Registrant’s
common stock, which were divided proportionally among the HSET Shareholders in
accordance with their respective ownership interests in HSET immediately before
the completion of the Share Exchange Transaction. The cash consideration
consisted of $5,000,000 in cash, again divided proportionally among the HSET
Shareholders in accordance with their respective ownership interests in HSET
immediately before the completion of the Share Exchange Transaction and payable
no later than the first anniversary of the Merger Transaction. The obligation to
pay the cash consideration is evidenced by two interest-free promissory notes
between the Registrant and each of the HSET Shareholders. The form of the
promissory note is attached as an exhibit to the Share Exchange
Agreement.




HSET is a
home electronics retail chain in Eastern China. It has 200 retail stores in
Shanghai City, Zhejiang Province and Jiangsu Province. The company specializes
in the sell of home electronics, including DVD players, audio systems, speakers,
televisions and air conditioners.





The main
purpose of the acquisition of the 100% interest in HSET is to increase the
Company’s presence, distribution markets, and increase product lines. The
purchase price was determined based on arms' length negotiations between China
3C and Hangzhou Sanhe Electronic Technology, Ltd.





The
acquisition had been accounted for as a purchase business combination and the
results of operations from the acquisition date have been included in the
Company's consolidated financial statements in accordance with SFAS 94. The
allocation of the purchase price is as follows:





Cash
      acquired
                            
                            $
                            1,235,283Accounts
      Receivable
                            
                            
                            1,207,653Inventory
                            
                            
                            667,504Trade
      Deposits
                            
                            
                            694,695Prepaid
      Expenses
                            
                            
                            2,333Property
      Plant & Equipment
                            
                            
                            966Goodwill
                            
                            
                            5,854,096Total
      assets acquired
                            
                            
                            9,662,530Liabilities
      assumedAccounts
      & Income Taxes payable
                            
                            
                            626,091Other
      payable
                            
                            
                            286,439Total
                            
                            $
                            8,750,000







F-7




The
excess of purchase price over tangible assets acquired and liabilities assumed
of $5,854,096 was recorded as goodwill. At the time of the acquisition no
identifiable intangibles assets existed under the contractual-legal or the
separability criterion as required under SFAS 141.





Prior to
the acquisition, Hangzhou Sanhe Electronic Technology, Ltd. prepared its
financial statements under accounting principles generally accepted in the
United States of America.




(b)
Shanghai Joy & Harmony Electronics Company Limited





On
November 28, 2006, the Company completed the acquisition of a 100% interest in
Shanghai Joy & Harmony Electronics Company Limited for a cash and stock
transaction valued at approximately US$18.5 million. This amount is included in
the cost of net assets and goodwill purchased.




The stock
consideration consisted of 2,723,110 shares of the Registrant’s common stock,
which were divided proportionally among the Shanghai Joy & Harmony
Electronics Company Limited Shareholders in accordance with their respective
ownership interests in Shanghai Joy & Harmony Electronics Company Limited
immediately before the completion of the Share Exchange Transaction. The cash
consideration consisted of $7,500,000 in cash, again divided proportionally
among the Shanghai Joy & Harmony Electronics Company Limited Shareholders in
accordance with their respective ownership interests in Shanghai Joy &
Harmony Electronics Company Limited immediately before the completion of the
Share Exchange Transaction. The Cash Component is payable by CHCG as follows:
$3,000,000 within 10 business days after the Closing and $4,500,000 is payable
six months after the Closing as evidenced by a promissory note.





Shanghai
Joy & Harmony Electronics Company Limited is engaged in the business of
distributing MP3 and MP4 players, iPod, electronic dictionaries, CD players,
radios, Walkman, and audio systems and speakers at company maintained shops at
various retail establishments.





The main
purpose of the acquisition of the 100% interest in Shanghai Joy & Harmony
Electronics Company Limited is to increase the Company’s presence, distribution
markets, and increase product lines. The purchase price was determined based on
arms' length negotiations between China 3C and Shanghai Joy & Harmony
Electronics Company Limited





The
acquisition had been accounted for as a purchase business combination and the
results of operations from the acquisition date have been included in the
Company's consolidated financial statements in accordance with SFAS 94. The
allocation of the purchase price is as follows:





Cash
      acquired
                            
                            $
                            214,561Accounts
      Receivable
                            
                            
                            3,599,680Inventory
                            
                            
                            1,021,435Trade
      Deposits
                            
                            
                            300,304Prepaid
      Expenses
                            
                            
                            4,387Property
      Plant & Equipment
                            
                            
                            11,342Goodwill
                            
                            
                            14,494,182Total
      assets acquired
                            
                            
                            19,645,891Liabilities
      assumedAccounts
      & Income Taxes payable
                            
                            
                            767,277Other
      payable
                            
                            
                            378,614Total
                            
                            $
                            18,500,000







F-8




The
excess of purchase price over tangible assets acquired and liabilities assumed
of $14,494,182 was recorded as goodwill. At the time of the acquisition no
identifiable intangibles assets existed under the contractual-legal or the
separability criterion as required under SFAS 141.





Prior to
the acquisition, Shanghai Joy & Harmony Electronics Company Limited prepared
its financial statements under accounting principles generally accepted in the
United States of America.





The
results of operations for Hangzhou Sanhe Electronic Technology Ltd. and Shanghai
Joy & Harmony Electronics Company Limited have been included in the
Company’s consolidated statements of operations since the completion of the
acquisitions during the year ended December 31, 2006. The following
unaudited pro forma financial information presents the combined results of the
Company and the 2006 acquisitions as if the acquisitions had occurred at the
beginning of 2005:




Year
      Ended
                      
                      
                      Year
      EndedDecember 31,
                      
                      
                      December 31,2006
                      
                      
                      2005Net
      revenues
                      
                      $
                      193,590,989
                      
                      
                      $
                      58,767,606Net
      income
                      
                      $
                      15,456,530
                      
                      
                      $
                      3,538,086Net
      income per share — basic
                      
                      $
                      0.33
                      
                      
                      $
                      0.09Net
      income per share — diluted
                      
                      $
                      0.33
                      
                      
                      $
                      0.09





Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





Basis of
Presentation





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





Translation
Adjustment




As of
December 31, 2007 and December 31, 2006, the accounts of Zhejiang, Wang Da,
Yiwu, Sanhe, and Joy & Harmony were maintained, and its financial statements
were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were
translated into U.S. Dollars (USD) in accordance with Statement of Financial
Accounts Standards (SFAS) No. 52, Foreign Currency Translation, with the CNY as
the functional currency. According to the Statement, all assets and liabilities
were translated at the current exchange rate, stockholders equity are translated
at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a component of shareholders equity. Transaction gains
and losses are reflected in the income statement.








F-9




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Use of
Estimates





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





Principles of
Consolidation




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





Risks and
Uncertainties




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





Contingencies




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





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





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








F-10




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Cash and Cash
Equivalents





Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.





Accounts
Receivable





The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts
amounted to $ 103,803 and $90,780 as at December 31, 2007 and December 31, 2006
respectively.





AdditionsDescription
                      
                      Balance
      at
                        beginning
      of
                        period
                      
                      
                      (1)
      Charged to
                        expenses
                      
                      
                      (2)
      Charged to
                        other
                        comprehensive
                        loss
                      
                      
                      Deductions
                      
                      
                      Balance at end
                        of periodAllowance
      for doubtful receivables 12/31/2007
                      
                      $
                      90,780
                      
                      
                      $
                      9,021
                      
                      
                      $
                      4,002
                      
                      
                      $
                      -
                      
                      
                      $
                      103,803Allowance
      for doubtful receivables 12/31/2006
                      
                      $
                      3,521
                      
                      
                      $
                      82,686
                      
                      
                      $
                      4,573
                      
                      
                      $
                      -
                      
                      
                      $
                      90,780




Inventories





Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The 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, 2007 and December 31, 2006 inventory consisted of
finished goods valued at $ 6,725,371 and $ 2,779,506 respectively. There were no
reserves for obsolete inventory as of December 31, 2007 and 2006.




Property, Plant &
Equipment




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





Furniture
      and Fixtures & Office Equipment
                5
      yearsAutomobile
                5
      years




As of
December 31, 2007 and 2006 Property, Plant & Equipment consist of the
following:




2007
                          
                          
                          2006Automobile
                          
                          $
                          138,330
                          
                          
                          $
                          103,749Office
      equipment
                          
                          
                          105,612
                          
                          
                          
                          75,869243,942
                          
                          
                          
                          179,618Accumulated
      depreciation
                          
                          
                          (154,528
                          )
                          
                          
                          (113,815
                          )$
                          89,414
                          
                          
                          $
                          65,803








F-11




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007




Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Long-Lived
Assets




Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
the accounting and reporting provisions of APB Opinion No. 30, ¡§Reporting the
Results of Operations for a Disposal of a Segment of a Business. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used in accordance with SFAS 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. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes that, as of
December 31, 2007 there were no significant impairments of its long-lived
assets.




Fair Value of Financial
Instruments




Statement
of financial accounting standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.




Revenue
Recognition





The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Revenue is generated from sales of 3C products through two
main revenue streams:-





i)
            Approximately
      65% of the Company's revenue comes from sales to individual customers at
      outlets installed inside department stores etc. (i.e. shops in shop model)
      and is mainly achieved through two broad
  categories:-





a)
            By
      way of sales of purchase contracts, agreeing payment be made 30 days from
      receipt of goods i.e. the Company will deliver goods to places designated
      by the customers and at the time of receipt of goods by the customers is
      confirmed, ownership and all risks associated to the goods are transferred
      to the customers, settlement will be made within 30 days;
    and





b)
            By
      way of joint control over inventory, revenue is recognized at the point of
      sales to end buyers at when ownership and all risks associated to the good
      are transferred to the end buyers through the company's sales people
      working at the outlets belonging to the
  customers.





Under
this method, goods are delivered to the outlets designated by the customers as
inventory in the outlets and the Company's sales people look after the inventory
and goods from the inventory are sold to end buyers who visit the outlets, on a
point of sales basis.





Over 80%
of the Company's retail business is achieved through this method;
and





ii)
            Approximately
      35% of the Company's revenue comes from wholesales. Recognition of income
      in wholesales is based on the terms of the contracts. In the year 2007,
      the main contracts terms on wholesales 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 :-





A)
              Shop in shop
  model:-





1)
            For
      goods sold under sales and purchase contracts, revenue is recognized when
      goods are received by customers;





2)
            For
      good at customers outlets to 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 point of sales to end
    buyer.







F-12




B) Wholesales





Revenue is recognized at the date of goods received by
customers.




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 $219,191
and $116,557 for the years ended December 31, 2007 and 2006,
respectively.





Vender
discounts





The
Company has extended its’ purchasing power to include preferred pricing
arrangements with certain vendors on certain products. These arrangements are
not contingent on any levels of volume and should be construed as vendor
discounts as opposed to rebates. The Company accrues these discounts as these
items are purchased in accordance with the matching principal under GAAP. The
discounts are recognized as a reduction in cost of sales and inventory as the
discounts are a reduction of the price of the vendor’s products.





Management fees paid to the
department stores under “stores in stores” 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 $3,645,400 and $1,375,100 in
general and administrative expenses, and deductions of $7,748,800 and $3,674,600
in sales for the years ended December 31, 2007 and 2006,
respectively.





Stock-Based
Compensation




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 the year beginning January 1,
2006 the Company has 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.








F-13




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007




Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Advertising




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




Income
Taxes




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




Basic and Diluted Earnings
per Share




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




Statement of Cash
Flows




In
accordance with SFAS No. 95, Statement of Cash Flows, cash flows from the
Company’s operations is based upon the local currencies. As a result, amounts
related to assets and liabilities reported on the statement of cash flows will
not necessarily agree with changes in the corresponding balances on the balance
sheet.




Recent Accounting
Pronouncements





In July
2006, the FASB issued Interpretation No. 48 (FIN 48). “ Accounting for uncertainty in Income
Taxe s - an
interpretation of FASB Statement 109” (“FIN No. 48”) . FIN 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 48 is effective for fiscal years beginning after
December 15, 2006. We did not have a material impact on our consolidated
financial position, results of operations or cash flows.








F-14




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Concentration of Credit
Risk




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




Segment
Reporting





Statement
of Financial Accounting Standards No. 131 (SFAS 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. We have identified
four reportable segments required by SFAS 131: (1) mobile phone, (2) home
electronics, (3) office communication product, (4) consumer
electronics.





Recent accounting
pronouncements





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





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





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








F-15




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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





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








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





In
September, 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statements applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial
statements.








F-16




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 2 -   SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)








In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87,
88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded statues in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting by
requiring an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements.





a.
            A
      brief description of the provisions of this Statementb.
            The
      date that adoption is requiredc.
            The
      date the employer plans to adopt the recognition provisions of this
      Statement, if earlier.





The
requirement to measure plan assets and benefit obligations as of the date of the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008.





The
Company believes that the adoption of these standards will have no material
impact on its financial statements.





In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 was issued to provide interpretive guidance
on how the effects of the carryover reversal of prior year misstatements should
be considered in quantifying a current year misstatement. The provisions of SAB
108 are effective for the Company for its December 31, 2006 year-end. The
adoption of SAB 108 had no impact on the Company’s consolidated financial
statements.





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




Note 3 -   ADVANCE
TO SUPPLIER




Advance
to suppliers represents payments to suppliers for payments of finished goods. As
of December 31, 2007 and December 31, 2006 the company had paid $2,572,285 and
$2,215,841, respectively as advances to supplies.








F-17




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007




Note 4-   NOTES
PAYABLE




Notes
Payable - Former Shareholders Shanghai Joy & Harmony Electronics Company
Limited as consideration for acquisition shares. Due six months after closing as
evidenced by a promissory note.





December
31, 2006 $ 4,500,000





Note 5 -   COMMON
STOCK




On
December 20, 2005, the Company completed a private offering of 1,000,000 shares
of its common stock at a per share price of $0.10 to an unaffiliated individual,
resulting in gross proceeds to the Company of $100,000. The proceeds were to be
used for the Company’s proposed plan to identify and complete a merger or
acquisition with private entities.





On
December 20, 2005, the Company issued a warrant to purchase 4,000,000
shares of its common stock to two individuals at $0.10 per share, which was the
fair value of the shares at the date of issuance. The warrant was issued as
consideration for financial consulting services to be provided from December 20,
2005 to December 19, 2006. The warrants were exercised on December 30, 2005. The
shares were issued subsequently in 2006.





On
December 21, 2005, the Company agreed to purchase all of the issued and
outstanding shares of Capital from its shareholders for approximately $500,000
in cash and 35,000,000 shares of the Company’s common stock, or approximately
93% of the total issued and outstanding shares.





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





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





On March
6, 2007, the Company issues 180,000 shares of common stock, $.001 par value,
issuable pursuant to the China 3C Group amended 2005 Equity Incentive Plan.
These shares under rule 405 and rule 144, respectively, under the Securities Act
of 1933, as amended, are deemed “restricted securities”.








F-18




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 5 -   COMMON
STOCK (continued)





On
December 21, 2005, the Company issued 2,256,795 shares of the Company’s common
stock to a company for guarantee fees related to the acquisition of Capital. The
guarantee was valued at $225,680, which was the fair value of the shares issued
at the date of the transaction and was expensed as consulting fees in the
statement of operations.





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





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





Note 6 -   STOCK
WARRANTS, OPTIONS, AND COMPENSATION





On
December 20, 2005, the Company issued a warrant for 4,000,000 shares to two
individuals with an exercise price of $0.10. The warrants were issued for
consulting services to be provided from December 20, 2005 to December 19, 2006.
The warrant was exercisable immediately and was exercised on December 30,
2005.




The
Company is amortizing the fair value of the warrants, $400,000, over the period
of the agreement. The fair value of the warrants was calculated assuming 293%
volatility, term of the warrant of 3 years , risk free rate of 4% and dividend
yield of 0%. For the year ended December 31, 2006 and December 31, 2005,
$387,945 and $12,055 of consulting fee was expensed relating to the warrants,
respectively.





On
December 8, 2006 the company issued to Ken Berents, a newly appointed Board
member, an option grant to purchase 50,000 shares of common stock at the closing
price as of December 7, 2006. Options expire 10 years from issuance.





On
January 2, 2007 the company issued to Todd Mavis, a newly appointed Board
member, an option grant to purchase 50,000 shares of common stock at the closing
price as of January 2 2007. Options expire 10 years from issuance. As of
December 17, 2007, the Board member resigned.





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





On May 7,
2007 the Board of Directors appointed Joseph Levinson to serve as a member of
the Board of Directors of the Company.


As
compensation for the services set forth herein, Mr. Levinson will
receive:





·
            A
      monthly grant during his Term of 1,000 shares of the Company’s Common
      Stock,




·
            An
      annual grant of Stock Options to purchase 300,000 shares of common stock
      of the Company. The annual grant of Stock Options shall vest immediately
      upon issuance. The exercise price of the initial grant of Stock Options
      shares shall be based on the closing price of the common stock of the
      Company on May 7, 2007.








F-19





CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 6 -   STOCK
WARRANTS, OPTIONS, AND COMPENSATION (continued)





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





Year
      endedDecember 31,
                      2007Expected
      Volatility
                    
                    
                    130
                    %Expected
      term (in years)Todd
      L. Mavis
                    
                    
                    2Kenneth
      T. Berents
                    
                    
                    9Joseph
      Levinson
                    
                    
                    9Expected
      dividends
                    
                    
                    -Risk-free
      rate of return (weighted average)
                    
                    
                    2
                    %Weighted
      average grant-date fair value
                    
                    
                    3.8-6.15




Expected
volatility is based on the historical volatility of the Company’s stock price.
The expected term represents the estimated average period of time that the
options remain outstanding. No dividend payouts were assumed, as the Company has
no plans to declare dividends during the expected term of the stock options. The
risk-free rate of return reflects the weighted average interest rate offered for
zero coupon treasury bonds over the expected term of the options.





Based
upon this calculation and pursuant to ETIF 96-18 the company recorded a $899,952
service period expense for these options for the year ending December 31,
2007.





AggregateExercise
                            
                            Remaining
                            
                            IntrinsicTotal
                            
                            Price
                            
                            Life
                            
                            ValueOUTSTANDING,
      DECEMBER 2006
                            
                            
                            50,000
                            
                            4.16
                            
                            9
                            
                            $
                            -Granted
      in 2007
                            
                            
                            50,000
                            
                            3.8
                            
                            2
                            
                            
                            -300,000
                            
                            6.15
                            
                            9
                            
                            
                            -Exercised
      in 2007
                            
                            
                            -
                            
                            -
                            
                            -
                            
                            
                            -OUTSTANDING,
      DECEMBER 2007
                            
                            
                            400,000
                            
                            
                            
                            
                            
                            
                            -




Note 7 -   STOCKEXCHANGE
AGREEMENT





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





As a
result of the exchange agreement, the reorganization was treated as an
acquisition by the accounting acquirer that is being accounted for as a
recapitalization and as a reverse merger by the legal acquirer for accounting
purposes. Pursuant to the recapitalization, all capital stock shares and amounts
and per share data were retroactively restated.








F-20




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007








Note 8 -   COMPENSATED
ABSENCES




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





Note 9 -   INCOME
TAXES





In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, treatment of interest and penalties, and
disclosure of such positions. Effective January 1, 2007, the Company
adopted the provisions of FIN 48, as required. As a result of implementing FIN
48, there has been no adjustment to the Company’s financial statements and the
adoption of FIN 48 did not have a material effect on the Company’s consolidated
financial statements for the year ended December 31, 2007.





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
$1,700,000 as of December 31, 2006 for income tax purposes. However, a hundred
percent allowance has been created on the deferred tax asset of approximately
$680,000 due to uncertainty of its realization.




Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT) is at a statutory
rate of 33%, which is comprises of 30% national income tax and 3% local income
tax.





The
following is a reconciliation of income tax expense:





12/31/2007
                            
                            U.S.
                            
                            
                            State
                            
                            
                            International
                            
                            
                            TotalCurrent
                            
                            $
                            -
                            
                            
                            $
                            800
                            
                            
                            $
                            2,683,687
                            
                            
                            $
                            2,684,487Deferred
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Total
                            
                            $
                            -
                            
                            
                            $
                            800
                            
                            
                            $
                            2,683,687
                            
                            
                            $
                            2,684,48712/31/2006
                            
                            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:





12/31/2007
                          
                          12/31/2006US
      statutory tax rate
                          
                          
                          34
                          %
                          34
                          %Foreign
      income not recognized in US
                          
                          
                          34
                          %
                          34
                          %PRC
      income tax
                          
                          
                          33
                          %
                          33
                          %Effective
      rate
                          
                          
                          33
                          %
                          33
                          %








F-21




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 10 -   COMMITTMENTS




The
Company leases various office facilities under operating leases that terminate
thru 2011. The Company also has management agreements that terminate in 2007.
Rent expense for the years ended December 31, 2007 and 2006 were $144,726, and
$99,169 respectively. The future minimum obligations under these agreements are
as follows:




2008
                  
                  $
                  140,7752009
                  
                  $
                  62,3802010
                  
                  $
                  34,8122011
                  
                  $
                  16,450




Note 11 -   STATUTORY
RESERVE





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





Statutory
Reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of December
31, 2007 and December 31, 2006, the Company had allocated $7,234,295 and
$3,320,755, respectively, to these non-distributable reserve funds.




Note 12 -   OTHER
COMPREHENSIVE INCOME




Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders equity, at December 31, 2007 and 2006 are as
follows:




Foreign
                                  Currency
                                  Translation
                                  Adjustment
                                
                                
                                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
                                
                                
                                $
                                1,872,334








F-22




CHINA
3C GROUP AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2007





Note 13   -   CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS





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





Note 14 -   MAJOR
CUSTOMERS AND CREDIT RISK





During
the years ended December 31, 2007, no customer accounted for more than 10% of
the company’s sales or accounts receivable. At December 31, 2007 four (4)
vendors comprised more than 31% of the company’s accounts payable. No vendors
accounted for more than 10% of the company’s purchases during 2007.





Note
15 -   SEGMENT INFORMATION





We
separately operate and prepare accounting and other financial reports to
management for four major business organizations (Hangzhou Wanda, Hangzhou
Sanhe, Yiwu Yongxin and Shanghai Joy & Harmony). Each of the individual
operating companies corresponds to different product groups.  Hangzhou
Wanda is mainly operating mobile phones, Hangzhou Sanhe is mainly operating home
appliances, Yiwu Yongxin is mainly operating office communication products, and
Shanghai Joy & Harmony is mainly operating consumer
electronics.





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





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





Year
      Ended December 31, 2007Office
                    
                    
                    
                    
                    
                    Others
                    
                    
                    TotalMobile
                    
                    
                    Home
                    
                    
                    communication
                    
                    
                    Consumerphone
                    
                    
                    electronics
                    
                    
                    product
                    
                    
                    electronicsSales,
      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, 2006Office
                    
                    
                    
                    
                    
                    Others
                    
                    
                    TotalMobile
                    
                    
                    Home
                    
                    
                    communication
                    
                    
                    Consumerphone
                    
                    
                    electronics
                    
                    
                    product
                    
                    
                    electronicsSales,
      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





Year
      Ended December 31, 2005Office
                    
                    
                    
                    Others
                    
                    TotalMobile
                    
                    Home
                    
                    communication
                    
                    Consumerphone
                    
                    electronics
                    
                    product
                    
                    electronicsSales,
      net
                    
                    $
                    10,300
                    
                    
                    $
                    -
                    
                    
                    $
                    22,288
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    32,588Cost
      of sales
                    
                    
                    9,000
                    
                    
                    
                    -
                    
                    
                    
                    19,325
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    28,325Gross
      profit
                    
                    
                    1,300
                    
                    
                    
                    -
                    
                    
                    
                    2,963
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,263Income
      from operations
                    
                    
                    994
                    
                    
                    
                    -
                    
                    
                    
                    2,300
                    
                    
                    
                    -
                    
                    
                    
                    (738
                    )
                    
                    
                    2,556Total
      assets
                    
                    $
                    689
                    
                    
                    $
                    -
                    
                    
                    $
                    2,131
                    
                    
                    $
                    -
                    
                    
                    $
                    1,200
                    
                    
                    $
                    4,020





Note 15 -   SUBSEQUENT
EVENTS





On July
13, 2007, China 3C Group (the “Company”) entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with certain investors (the “Investors”)
for the sale of an aggregate of 2,095,714 shares of the Company’s common stock,
$.001 par value per share (the “Shares”) and at a purchase price of $5.60 per
Share for an aggregate purchase price equal to approximately $11.74 million in a
transaction exempt from registration under the Securities Act of 1933, as
amended. In connection with the Transaction, the Company has agreed to provide
the Investors rights to register the Shares pursuant to the terms of a
registration rights agreement (the “Registration Rights Agreement”) to be
entered into upon the closing of the Transaction. The issuance of the Shares was
exempt from registration. As of September 30, 2007, the Company has received
notices from all investors that they have exercised their rights to terminate
their obligation under the agreement and not participate in the
transaction.





On
October 8, 2007 the Company issued press release, upon the resignation of former
CFO, the Company appointed Mr. Mr. Weidong Huang, CFO, to fill vacancy effective
as of this date.





On
January 2, 2008, the Company entered into a Consignment Agreement with Hangzhou
Lotour Digital Products Business Company Limited (“Lotour”), whereby Lotour
would act as an exclusive, value added reseller of the Company’s audio-visual
products, small household appliance, mobile phones and mobile phone accessories,
until December 31, 2008.








F-23