UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


x
            Quarterly
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
quarterly period ended:March 31, 2010





Or




 ̈
            Transition
      Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of
      1934





For the
transition period from ______________ to _______________





Commission
File Number: 000-53155




VLOV
INC.


(Exact
name of registrant as specified in its charter)




Nevada
              
              20-8658254(State
      or other jurisdiction of incorporation of origination)
              
              (I.R.S.
      Employer Identification
Number)





11/F.,
      Xiamen Guanyin Shan International Commercial Operation Centre, A3-2
      124
                  Hubin
      Bei Road, Siming District
                  Xiamen,
      Fujian Province
                  People’s
      Republic of China
                
                N/A(Address
      of principal executive offices)
                
                (Zip
      code)





(86595)
2345999





(Registrant’s
telephone number, including area code)








(Former
name, former address and former fiscal year, if changed since last
report)




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





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





Large
      accelerated filer   ̈
                
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                
                Smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No x





APPLICABLE
ONLY TO CORPORATE ISSUERS:





Indicate
the number of shares outstanding of each issuer’s classes of common stock, as of
the latest practicable date: 16,767,258 shares issued and outstanding as of
May 10, 2010.





TABLE OF CONTENTS




TO
QUARTERLY REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED MARCH 31, 2010





PagePART
      I
                                                          
                                                          FINANCIAL
      INFORMATIONItem
      1.
                                                          
                                                          Financial
      Statements (unaudited)
                                                          
                                                          F-1Consolidated
      Balance Sheets as of March 31, 2010 (unaudited) and December 31,
      2009
                                                          
                                                          F-1Consolidated
      Statements of Income and Comprehensive Income for the three months ended
      March 31, 2010 and 2009 (unaudited)
                                                          
                                                          F-2Consolidated
      Statements of Cash Flows for the three months ended March 31, 2010 and
      2009 (unaudited)
                                                          
                                                          F-3Notes
      to the Consolidated Financial Statements
                                                          
                                                          F-4Item
      2.
                                                          
                                                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                          
                                                          4Item
      3.
                                                          
                                                          Quantitative
      and Qualitative Disclosures about Market Risk
                                                          
                                                          10Item
      4.
                                                          
                                                          Controls
      and Procedures
                                                          
                                                          10PART
      II
                                                          
                                                          OTHER
      INFORMATIONItem
      1.
                                                          
                                                          Legal
      Proceedings
                                                          
                                                          12Item
      1A.
                                                          
                                                          Risk
      Factors
                                                          
                                                          12Item
      2.
                                                          
                                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                          
                                                          12Item
      3.
                                                          
                                                          Defaults
      Upon Senior Securities
                                                          
                                                          12Item
      4.
                                                          
                                                          ReservedItem
      5.
                                                          
                                                          Other
      Information
                                                          
                                                          12Item
      6.
                                                          
                                                          Exhibits
                                                          
                                                          13Signatures
                                                          
                                                          
                                                          
                                                          14




2


CAUTION
REGARDING FORWARD-LOOKING INFORMATION





All
statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q”) for
VLOV Inc., other than statements of historical facts, that address future
activities, events or developments are forward-looking statements, including,
but not limited to, statements containing the words “believe,” “anticipate,”
“expect” and words of similar import.  These statements are based on
certain assumptions and analyses made by us in light of our experience and our
assessment of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate under the
circumstances.  However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks and
uncertainties that may cause actual results to differ materially.





Such
risks include, among others, the following: national and local general economic
and market conditions; our ability to sustain, manage or forecast our growth;
raw material costs and availability; new product development and introduction;
existing government regulations and changes in, or the failure to comply with,
government regulations; adverse publicity; competition; the loss of significant
customers or suppliers; fluctuations and difficulty in forecasting operating
results; changes in business strategy or development plans; business
disruptions; the ability to attract and retain qualified personnel; the ability
to protect technology; and other factors referenced in this and previous
filings.





Consequently,
all of the forward-looking statements made in this Form 10-Q are qualified by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.


3





PART
I - FINANCIAL INFORMATION





Item
      1.
            Financial
      Statements





VLOV,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands)




March 31, 2010
                                                                              
                                                                              
                                                                              December 31,(unaudited)
                                                                              
                                                                              
                                                                              2009ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                                                              
                                                                              $
                                                                              11,634
                                                                              
                                                                              
                                                                              $
                                                                              11,036Time
      deposits
                                                                              
                                                                              
                                                                              2,240
                                                                              
                                                                              
                                                                              
                                                                              -Accounts
      and other receivables
                                                                              
                                                                              
                                                                              11,174
                                                                              
                                                                              
                                                                              
                                                                              9,191Amount
      due from a director
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              2,428Trade
      deposits
                                                                              
                                                                              
                                                                              333
                                                                              
                                                                              
                                                                              
                                                                              2,309Inventories
                                                                              
                                                                              
                                                                              2,362
                                                                              
                                                                              
                                                                              
                                                                              285Prepaid
      expenses
                                                                              
                                                                              
                                                                              717
                                                                              
                                                                              
                                                                              
                                                                              763Total
      current assets
                                                                              
                                                                              
                                                                              28,460
                                                                              
                                                                              
                                                                              
                                                                              26,012Property,
      plant and equipment, net
                                                                              
                                                                              
                                                                              953
                                                                              
                                                                              
                                                                              
                                                                              966Land
      use rights
                                                                              
                                                                              
                                                                              260
                                                                              
                                                                              
                                                                              
                                                                              263TOTAL
      ASSETS
                                                                              
                                                                              $
                                                                              29,673
                                                                              
                                                                              
                                                                              $
                                                                              27,241LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
                                                                              
                                                                              $
                                                                              1,837
                                                                              
                                                                              
                                                                              $
                                                                              2,565Accrued
      expenses and other payables
                                                                              
                                                                              
                                                                              595
                                                                              
                                                                              
                                                                              
                                                                              583Amount
      due to a director
                                                                              
                                                                              
                                                                              97
                                                                              
                                                                              
                                                                              
                                                                              30Derivative
      liability - common stock warrants
                                                                              
                                                                              
                                                                              6,025
                                                                              
                                                                              
                                                                              
                                                                              3,684Short-term
      bank loans
                                                                              
                                                                              
                                                                              587
                                                                              
                                                                              
                                                                              
                                                                              734Income
      taxes payable
                                                                              
                                                                              
                                                                              1,416
                                                                              
                                                                              
                                                                              
                                                                              1,601Total
      current liabilities
                                                                              
                                                                              
                                                                              10,557
                                                                              
                                                                              
                                                                              
                                                                              9,197Non-current
      Liabilities:Other
      payable
                                                                              
                                                                              
                                                                              75
                                                                              
                                                                              
                                                                              
                                                                              75Total
      liabilities
                                                                              
                                                                              
                                                                              10,632
                                                                              
                                                                              
                                                                              
                                                                              9,275Stockholders’
      Equity:Common
      stock, $0.00001 par value, 100,000,000 shares authorized, 16,667,957 and
      16,667,957 shares issued and outstanding as of March 31, 2010 and December
      31, 2009, respectively
                                                                              
                                                                              
                                                                              1
                                                                              
                                                                              
                                                                              
                                                                              1Preferred
      stock, $0.00001 par value, 100,000,000 shares authorized, 2,796,721 and
      2,796,721 shares issued and outstanding as of March 31, 2010 and December
      31, 2009, respectively (liquidation preference $7,998,622)
                                                                              
                                                                              
                                                                              4,003
                                                                              
                                                                              
                                                                              
                                                                              4,003Additional
      paid-in capital
                                                                              
                                                                              
                                                                              6,319
                                                                              
                                                                              
                                                                              
                                                                              6,319Statutory
      reserve
                                                                              
                                                                              
                                                                              913
                                                                              
                                                                              
                                                                              
                                                                              913Retained
      earnings
                                                                              
                                                                              
                                                                              7,244
                                                                              
                                                                              
                                                                              
                                                                              6,173Accumulated
      other comprehensive income
                                                                              
                                                                              
                                                                              561
                                                                              
                                                                              
                                                                              
                                                                              560Total
      stockholders' equity
                                                                              
                                                                              
                                                                              19,041
                                                                              
                                                                              
                                                                              
                                                                              17,969TOTAL
      LIABILITIES AND  STOCKHOLDERS' EQUITY
                                                                              
                                                                              $
                                                                              29,673
                                                                              
                                                                              
                                                                              $
                                                                              27,241




See
accompanying notes to consolidated financial statements


F-1


VLOV,
INC.


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(Amounts
in thousands, except per share data)


(Unaudited)





Three Months Ended March 31,2010
                                
                                
                                2009Net
      sales
                                
                                $
                                18,067
                                
                                
                                $
                                17,865Cost
      of sales
                                
                                
                                11,145
                                
                                
                                
                                11,467Gross
      profit
                                
                                
                                6,922
                                
                                
                                
                                6,398Operating
      expenses:Selling
      expenses
                                
                                
                                1,484
                                
                                
                                
                                745General
      and administrative expenses
                                
                                
                                835
                                
                                
                                
                                6162,319
                                
                                
                                
                                1,361Income
      from operations
                                
                                
                                4,603
                                
                                
                                
                                5,037Other
      income (expenses):Change
      in fair value of derivative liability
                                
                                
                                (2,341
                                )
                                
                                
                                -Interest
      income
                                
                                
                                26
                                
                                
                                
                                7Interest
      expense
                                
                                
                                (22
                                )
                                
                                
                                (14
                                )(2,297
                                )
                                
                                
                                (7
                                )Income
      before provision for income taxes
                                
                                
                                2,266
                                
                                
                                
                                5,030Provision
      for income taxes
                                
                                
                                1,195
                                
                                
                                
                                1,257Net
      income
                                
                                
                                1,071
                                
                                
                                
                                3,773Other
      comprehensive income:Foreign
      currency translation adjustment
                                
                                
                                (1
                                )
                                
                                
                                16Comprehensive
      income
                                
                                $
                                1,070
                                
                                
                                $
                                3,789Basic
      earnings per share
                                
                                $
                                0.06
                                
                                
                                $
                                0.25Diluted
      earnings per share
                                
                                $
                                0.06
                                
                                
                                $
                                0.25Weighted
      average number of common shares outstanding:Basic
                                
                                
                                16,667,955
                                
                                
                                
                                15,312,000Diluted
                                
                                
                                17,263,035
                                
                                
                                
                                15,312,000





See
accompanying notes to consolidated financial statements




F-2




VLOV,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Amounts
in thousands)


(Unaudited)





Three
      Months Ended March 31,2010
                              
                              
                              2009Cash
      flows from operating activities:Net
      income
                              
                              $
                              1,071
                              
                              
                              $
                              3,773Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                              
                              
                              17
                              
                              
                              
                              26Change
      in fair value of derivative liability
                              
                              
                              2,341
                              
                              
                              
                              -(Increase)
      decrease in assets:Accounts
      receivables
                              
                              
                              (1,983
                              )
                              
                              
                              (1,627
                              )Trade
      deposits
                              
                              
                              1,975
                              
                              
                              
                              -Inventories
                              
                              
                              (2,077
                              )
                              
                              
                              23Prepaid
      expenses
                              
                              
                              46
                              
                              
                              
                              (22
                              )Increase
      (decrease) in liabilities:Accounts
      payable
                              
                              
                              (728
                              )
                              
                              
                              1,485Accrued
      expenses and other payables
                              
                              
                              14
                              
                              
                              
                              (284
                              )Income
      and other tax payables
                              
                              
                              (185
                              )
                              
                              
                              (47
                              )Net
      cash provided by operating activities
                              
                              $
                              491
                              
                              
                              $
                              3,327Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                              
                              
                              (1
                              )
                              
                              
                              -Time
      deposits
                              
                              
                              (2,240
                              )
                              
                              
                              -Amount
      due to/from a director
                              
                              
                              2,494
                              
                              
                              
                              -Net
      cash provided by investing activities
                              
                              $
                              253
                              
                              
                              $
                              -Cash
      flows from financing activities:Proceeds
      from debt financing
                              
                              
                              293
                              
                              
                              
                              440Payments
      of short-term debt
                              
                              
                              (440
                              )
                              
                              
                              (293
                              )Payments
      of dividend *
                              
                              
                              -
                              
                              
                              
                              (5,128
                              )Net
      cash used in financing activities
                              
                              
                              (147
                              )
                              
                              
                              (4,981
                              )Effect
      of exchange rate changes
                              
                              
                              1
                              
                              
                              
                              (5
                              )Net
      (decrease) increase in cash and cash equivalents
                              
                              
                              598
                              
                              
                              
                              (1,659
                              )Cash
      and cash equivalents, beginning of period
                              
                              
                              11,036
                              
                              
                              
                              2,863Cash
      and cash equivalents, end of period
                              
                              $
                              11,634
                              
                              
                              $
                              1,204Supplemental
      disclosure of cash flow information:Interest
      paid
                              
                              $
                              2
                              
                              
                              $
                              14Income
      taxes paid
                              
                              $
                              1,092
                              
                              
                              $
                              571




See
accompanying notes to consolidated financial statements




*The dividend was paid to the
private shareholders prior to the reverse merger.


F-3


VLOV,
INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(1)
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES





(a)
            Description
      of business and organization





VLOV Inc.
(the “Company”) was incorporated on October 30, 2006 in the State of Nevada,
under the name Sino Charter, Inc. The Company changed its name to VLOV, Inc. on
March 20, 2009.





On
February 13, 2009, the Company completed a stock exchange transaction with the
stockholders of Peng Xiang Peng Fei Investments Limited (“PXPF”), whereby
14,560,000 restricted shares of common stock were issued to the stockholders of
PXPF in exchange for 100% of the common stock of PXPF (the “Share Exchange”).
The completion of the Share Exchange resulted in a change of
control.





The Share
Exchange has been accounted for as a reverse acquisition and recapitalization of
the Company whereby PXPF is deemed to be the accounting acquirer (legal
acquiree) and the Company is the accounting acquiree (legal acquirer). The
accompanying consolidated financial statements are in substance those of PXPF
and the Company is deemed to be a continuation of the business of
PXPF.  At the time of the reverse merger with PXPF, the Company had no
assets or liabilities and the 1,454,421 shares of its common stock outstanding
immediately prior to the time of the Share Exchange have been accounted for at
their par value at the time of the transaction.





PXPF is a
limited liability company incorporated on April 30, 2008 in the British Virgin
Islands. PXPF designs, manufactures and sells fashion apparel under the brand
name “VLOV”. All current operations of the Company are in the People’s Republic
of China (“China” or the “PRC”).





The
Company does not conduct any substantive operations of its own and conducts its
primary business operations through a variable interest entity, Jinjiang Yinglin
Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by the
Company’s subsidiary, Dong Rong Capital Investment Limited (“HK Dong Rong”). HK
Dong Rong is a limited liability company incorporated in Hong Kong on January 5,
2005 originally under the name Korea Jinduren International Dress Limited
(“Korea Jinduren”) and was acquired by PXPF from the majority shareholders of
PXPF on September 22, 2008.





Yinglin
Jinduren is a limited company incorporated without shares in the PRC on January
19, 2002, of which the initial paid-in capital of RMB10,000,000 ($1,237,000) was
funded by the majority shareholders of PXPF. The management of Yinglin Jinduren
is comprised of Mr. Qingqing Wu as Chairman and Executive Director, and Mr.
Zhifan Wu as Executive Director.  Mr. Qingqing Wu is the Company’s
Chief Executive Officer, President and Chairman of the Board of Directors, and
Mr. Zhifan Wu is a Company director. Mr. Qingqing Wu and Mr. Zhifan Wu, who are
brothers, hold 65.91% and 34.09%, respectively, of the ownership interests of
Yinglin Jinduren.





PRC law
currently has limits on foreign ownership of domestic PRC companies. To comply
with these foreign ownership restrictions, on December 28, 2005, HK Dong Rong
(then known as Korea Jinduren) entered into certain exclusive agreements with
Yinglin Jinduren and its shareholders. Pursuant to these agreements, HK Dong
Rong provides exclusive consulting services to Yinglin Jinduren in return for a
consulting services fee which is equal to Yinglin Jinduren’s net profits. Prior
to the Exchange Agreement, however, certain dividends were paid from net income
to the equity owners of Yinglin Jinduren. In addition, Yinglin Jinduren’s
shareholders have pledged their equity interests in Yinglin Jinduren to HK Dong
Rong, irrevocably granted HK Dong Rong an exclusive option to purchase, to the
extent permitted under PRC law, all or part of the equity interests in Yinglin
Jinduren and agreed to entrust all the rights to exercise their voting power to
the person(s) appointed by HK Dong Rong. Through these contractual arrangements,
HK Dong Rong has the ability to control Yinglin Jinduren’s daily operations and
financial affairs, appoint its senior executives and approve all matters
requiring shareholder approval. As part of these contractual arrangements, HK
Dong Rong and Yinglin Jinduren entered into an operating agreement which,
amongst other matters, precludes Yinglin Jinduren from borrowing money, selling
or acquiring assets, including intellectual property rights, providing
guarantees to third parties or assigning any business agreements, without the
prior written consent of HK Dong Rong. HK Dong Rong also agreed that, if any
guarantee for Yinglin Jinduren’s performance of any contract or loan was
required, HK Dong Rong would provide such guarantee to Yinglin
Jinduren.





As a
result of these contractual arrangements, HK Dong Rong is entitled to
receive the expected residual returns of Yinglin
Jinduren.  Additionally, although Yinglin Jinduren has been
profitable, in the event that Yinglin Jinduren were to incur losses,
HK Dong Rong would be obligated to absorb a majority of the risk of loss from
Yinglin Jinduren’s activities as a result of its inability to receive payment
for its accumulated consulting fees that are equal to Yinglin Jinduren’s
net income. The Company believes that the equity investors in Yinglin Jinduren
do not have the characteristics of a controlling financial interest, and that
the Company is the primary beneficiary of the operations and residual returns of
Yinglin Jinduren and, in the event of losses, would be required to absorb a
majority of such losses. Accordingly, the Company consolidates Yinglin
Jinduren’s results, assets and liabilities in the accompanying financial
statements. Due to the contractual arrangements, the net income and
interest allocable to the noncontrolling interest is zero.


F-4





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





The
Company’s consolidated assets do not include any collateral for Yinglin
Jinduren’s obligations. The creditors of Yinglin Jinduren do not have recourse
to the general credit of the Company.





On
November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the
PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital
of $8 million. As of December 31, 2009, $4 million has been contributed to China
Dong Rong and the remaining registered capital will be contributed within two
years after the date of incorporation. It is the intention of the Company and
the equity owners of Yinglin Jinduren to transfer the business operations of
Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred
as of March 31, 2010.





Effective
April 27, 2010, Mr. Yushan Zheng resigned as the Company’s chief financial
officer and was replaced by Mr. Bennet P. Tchaikovsky.





(b)
            Basis
      of presentation and consolidation





The
accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America.





As
previously described, the Company, through its wholly owned subsidiary HK Dong
Rong, consolidates Yinglin Jinduren as Yinglin Jinduren is considered to be a
variable interest entity (VIE) and the Company is considered to be its primary
beneficiary.





Because
the Company and Yinglin Jinduren are under common control, the initial
measurement of the assets and liabilities of Yinglin Jinduren for the purpose of
consolidation by the Company was at book value. The Company has had no other
business activities except for the exclusive agreements with Yinglin Jinduren
and its shareholders.





The
consolidated financial statements include the financial statements of the
Company, its subsidiary and the variable interest entity, Yinglin Jinduren. All
significant inter-company transactions and balances between the Company, its
subsidiary and the variable interest entity are eliminated upon
consolidation.





(c)
            Use
      of Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements relate primarily to
returns, sales allowances and customer chargebacks, the valuation of long-lived
assets and the identification and valuation of derivative
instruments. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined to be
necessary. Actual results could differ from these estimates.





(d)
            Accounting
      Pronouncements





In June
2009, the Financial Accounting Standards Board (‘‘FASB’’) issued a statement
establishing the FASB Accounting Standards CodificationTM (the “FASB ASC" or the
“Codification"). The Codification became the single source of authoritative U.S.
generally accepted accounting principles (‘‘US GAAP’’) recognized by the FASB to
be applied by non-governmental entities. Rules and interpretive releases
of the United States Securities and Exchange Commission under authority of
federal securities laws are also sources of authoritative US GAAP for SEC
registrants. The Codification did not change existing US GAAP but incorporated
existing accounting and reporting standards into a new topical structure with a
new referencing system. Authoritative standards included in the Codification are
designated by their Accounting Standards Codification (‘‘ASC’’) topical
reference, and new standards will be designated as Accounting Standards Updates
(‘‘ASU’’), with a year and assigned sequence number. We have updated our
references to US GAAP to reflect the Codification.


F-5


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(e)
            Revenue
      Recognition





A
majority of the Company’s products are manufactured on its behalf by third
parties, based on orders for the Company’s products received from customers. The
Company is responsible for product design, product specification, pricing to the
customer, the choice of third-party manufacturer, product quality and credit
risk associated with the customer receivable. As such, the Company acts as a
principal and records revenues on a gross basis.





The
Company recognizes revenues when (a) the price to the customer is fixed or
determinable, (b) persuasive evidence of an arrangement exists, (c) delivery has
occurred and (d) collectability of the resulting receivable is reasonably
assured. Revenue from the sales of goods is recognized on the transfer of
significant risks and rewards of ownership, which generally coincides with the
time when the goods are delivered and the title has passed to the customer.
Revenue excludes value-added tax and is stated after deduction of trade
discounts and allowances.





(f)
            Cash
      and Cash Equivalents





For
purposes of the statement of cash flows, the Company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents comprise cash at bank and on hand and
demand deposits with banks.





(g)
            Accounts
      receivable





Accounts
receivable, which are unsecured, are stated at the amount the Company expects to
collect. The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company evaluates the collectability of its accounts receivable based on a
combination of factors, including customer credit-worthiness and historical
collection experience. Management reviews the receivable aging and adjusts the
allowance based on historical experience, financial condition of the customer
and other relevant current economic factors. As of March 31, 2010, all of the
trade receivable balances were aged less than 90 days. Management
has determined no allowance for uncollectible amounts is
required.





(h)
            Depreciation
      and Amortization





Property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Depreciation of property, plant and equipment is computed
using the straight-line method based on the following estimated useful
lives:





Buildings
              30
      yearsFurniture,
      fixtures and equipment
              5
      yearsMotor
      vehicles
              5
      yearsOffice
      equipment
              3
      to 5 yearsPlant
      and machinery
              5
      to 15 years





(i)
            Inventories





Inventories
are stated at the lower of cost or market value, determined by the weighted
average method. Work-in-progress and finished goods inventories consist of raw
materials, direct labor and overhead associated with the manufacturing
process.





(j)
            Foreign
      Currency Translation





The
Company has its local currency, Renminbi (“RMB”), as its functional currency.
The consolidated financial statements of the Company are translated from RMB
into U.S. Dollars (“US$”).  Accordingly, all assets and liabilities are
translated at the exchange rates prevailing at the balance sheet dates, all
income and expenditure items are translated at the average rates for each of the
periods and equity accounts, except for retained earnings, are translated at the
rate at the transaction date. Retained earnings reflect the cumulative net
income (loss) translated at the average rates for the respective periods since
inception less dividends translated at the rate at the transaction
date.


F-6


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





RMB is
not a fully convertible currency. All foreign exchange transactions involving
RMB must take place either through the People's Bank of China (the "PBOC") or
other institutions authorized to buy and sell foreign exchange.  The
exchange rates adopted for the foreign exchange transactions are the rates of
exchange quoted by the PBOC, which are determined largely by supply and demand.
The rates of exchange quoted by the People's Bank of China on March 31, 2010 and
December 31, 2009 were US$1.00 to RMB 6.84 and RMB 6.84, respectively. The
average translation rates of US$1.00 to RMB 6.84 and RMB 6.85 were applied to
the income statement accounts for the three months ended March 31, 2010 and
2009, respectively.




Translation
adjustments are recorded as other comprehensive income in the consolidated
statement of stockholders equity and comprehensive income and as a separate
component of stockholders equity.





Commencing
from July 21, 2005, China adopted a managed floating exchange rate regime based
on market demand and supply with reference to a basket of currencies. Since
then, the PBOC administers and regulates the exchange rate of US$ against RMB
taking into account the demand and supply of RMB, as well as domestic and
foreign economic and financial conditions.





(k)
            Land
      Use Rights and Intangible Assets





All land
in the PRC is owned by the government and cannot be sold to any individual or
company. However, the government grants the user a “land use right” to use the
land.




Land use
right is stated at cost less accumulated amortization and impairment losses.
Amortization is calculated on the straight-line method over the estimated useful
life of 50 years. The Company’s land use right expires in 2054.





Intangible
assets of the Company are reviewed annually to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of March 31, 2010, the Company expects these assets to be fully
recoverable.





(l)
            Long-Lived
      Assets





The
Company estimates the future undiscounted cash flows to be derived from an asset
to assess whether or not a potential impairment exists when events or
circumstances indicate the carrying value of a long-lived asset may be impaired.
If the carrying value exceeds the Company’s estimate of future undiscounted cash
flows, the Company then calculates the impairment as the excess of the carrying
value of the asset over the Company’s estimate of its fair market
value.





(m)
            Comprehensive
      Income





The
Company’s only component of other comprehensive income is foreign currency
translation gains and losses. The foreign currency translation gains/(losses)
for the three months ended March 31, 2010 and 2009 were US$(1,000) and US$16,000
respectively. Accumulated other comprehensive income is recorded as a separate
component of stockholders’ equity.





(n)
            Income
      Taxes





The
Company is mainly subject to income taxes in the PRC. Significant judgment is
required in determining the provision for income taxes. There are many
transactions and calculations for which the ultimate tax determination is
uncertain during the ordinary course of business. The Company recognizes
liabilities for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these matters is
different from the amounts that were initially recorded, such differences will
impact the income tax and deferred tax provisions in the period in which such
determination is made.


F-7


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates applicable to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.




The
Company evaluates its uncertain tax positions and prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken (or expected to be taken) in a tax
return.





(o)
            Advertising
      Costs





Advertising
costs are expensed in the period in which the advertisements are first run.
Advertising expense for the three months ended March 31, 2010 and 2009 were
approximately US$1.37 million and US$0.70 million, respectively. Advertising
costs include advertising subsidy expense which is accrued based on the terms in
effect with distributors and paid when all attaching conditions have been
completed.





(p)
            Shipping
      and Handling Costs





Shipping
and handling costs are expensed as incurred and included in cost of
sales.





(q)
            Research
      and Development Costs





The
Company charges all product design and development costs to expense when
incurred. Product design and development costs aggregated approximately US$0.51
million and US$0.41 million for the three months ended March 31, 2010 and 2009,
respectively.





(r)
            Derivative
      Financial Instruments





We do not
use derivative instruments to hedge exposures to cash flow, market, or foreign
currency risks.





We review
the terms of convertible debt or convertible preferred stock that we issue to
determine whether there are embedded derivative instruments, including the
embedded conversion option, that are required to be bifurcated and accounted for
separately as a derivative financial instrument. Also, in connection with the
sale of convertible debt or equity instruments, we may issue freestanding
warrants that may, depending on their terms, be accounted for as derivative
instrument liabilities, rather than as equity.





Derivative
financial instruments are initially measured at their fair value. For derivative
financial instruments that are accounted for as liabilities, the derivative
instrument is initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported as charges or credits to
income. For option-based derivative financial instruments, we use a binomial
option pricing model to value the derivative instruments.





(s)
            Fair
      Value of Financial Instruments





The
carrying amounts of the Company’s financial instruments, which principally
include cash and cash equivalents, time deposits, accounts receivable and
accounts payable, approximate their fair values due to the relatively short
maturity of such instruments.





The
carrying amount of the Company’s short-term borrowings approximates their fair
value based upon current rates and terms available to the Company for similar
debt.





Warrants
that are recorded as derivative instrument liabilities are carried at their fair
value, with changes in the fair value reported as charges or credits to income
each period.


F-8


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(t)
            Earnings
      Per Share





Basic net
income per share is computed by dividing net income attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted-average number of common shares used in the
basic earnings per share calculation plus the number of common shares that would
be issued assuming exercise or conversion of all potentially dilutive common
stock equivalents outstanding. We exclude equity instruments from the
calculation of diluted earnings per share if the effect of including such
instruments is anti-dilutive.





(u)
            New
      Accounting Pronouncements





The
following lists the Accounting Standards Codification Updates that are relevant
to the Company’s consolidated financial statements and were effective during the
periods covered by these financial statements. These pronouncements, however,
did not have material impact on the Company’s financial statements.





Pronouncement
              
              Issued
              
              TitleASU
      No. 2009-15
              
              October 
      2009
              
              Accounting
      for Own-Share Lending Arrangements in Contemplation of Convertible Debt
      Issuance or Other FinancingASU
      No. 2009-16
              
              December 
      2009
              
              Transfers
      and Servicing (Topic 860): Accounting for Transfers and Financial
      Assets.ASU
      No. 2010-01
              
              January 
      2010
              
              Equity
      (Topic 505):  Accounting for Distributions to Shareholders with
      Components of Stock and Cash – a consensus of the FASB Emerging Issues
      Task ForceASU
      No. 2010-02
              
              January 
      2010
              
              Consolidation
      (Topic 810):  Accounting and Reporting for Decreases in
      Ownership of a Subsidiary – a Scope ClarificationASU
      No. 2010-05
              
              January
      2010
              
              Compensation  -
      Stock Compensation (Topic718): Escrowed Share Arrangements and the
      Presumption of Compensation





The
following pronouncements will become effective after the periods covered by
these financial statements. The Company is assessing their impact, but does not
believe that the adoption of these pronouncements will have a material impact on
the Company’s financial statements.





Pronouncement
              
              Issued
              
              TitleASU
      No. 2009-13
              
              October 
      2009
              
              Revenue
      Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a
      consensus of the FASB Emerging Issues Task ForceASU
      No. 2009-17
              
              December 
      2009
              
              Consolidations
      (Topic 810):  Improvements to Financial Reporting by Enterprises
      Involved with Variable Interest EntitiesASU
      No. 2010-06
              
              January
      2010
              
              Fair
      Value Measurements and Disclosures (Topic 820): Improving Disclosures
      about Fair Value MeasurementsASU
      No. 2010-09
              
              February
      2010
              
              Subsequent
      Events (Topic 855): Amendments to Certain Recognition and Disclosure
      RequirementsASU
      No. 2010-11
              
              March  2010
              
              Derivatives
      and Hedging (Topic 815): Scope Exception Related to Embedded Credit
      Derivatives


F-9


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





At its
meeting on March 18, 2010, the FASB’s Emerging Issues Task Force reached a
consensus on five issues (the "Issues"). The Issues were ratified by the
FASB at its meeting on March 31, 2010, and the related Accounting Standards
Codification Updates to be issued will become authoritative accounting guidance.
None of these Issues are anticipated to have a material effect on the
Company’s consolidated financial statements.





(2)
            TIME
      DEPOSITS





Time
deposits (in thousands):





March 31,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Time
      deposits
                    
                    $
                    2,240
                    
                    
                    $
                    -$
                    2,240
                    
                    
                    $
                    -





Time
deposits represent amounts deposited with Xiamen International Bank and will
mature on September 30, 2010.





(3)
            AMOUNT
      DUE FROM A DIRECTOR





The
Company raised capital from October 2009 to December 2009 by issuing convertible
preferred stocks, common stock and warrants.





To avoid
currency translation losses from RMB appreciation against the US$ and given
China’s currency conversion controls over business enterprises, the Company
withdrew part of the net proceeds from the capital raise (US$2,428,000) and
converted the amount into RMB. This amount was then deposited into a personal
account held in trust by one of the Company’s directors, Mr. Qingqing
Wu.





The RMB
remained on deposit in the director’s bank account until March 29, 2010, when it
was withdrawn, converted into US$ and deposited into the Company's HK Dong Rong
account.





(4)
            INVENTORIES





Inventories
consist of the following (in thousands):





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Raw
      materials
                      
                      $
                      760
                      
                      
                      $
                      145Work
      in process
                      
                      
                      164
                      
                      
                      
                      15Finished
      goods
                      
                      
                      1,438
                      
                      
                      
                      125$
                      2,362
                      
                      
                      $
                      285




F-10


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(5)
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment is summarized as follows (in thousands):





March 31,
                        
                        
                        December 31,2010
                        
                        
                        2009(unaudited)Buildings
                        
                        $
                        914
                        
                        
                        $
                        914Furniture,
      fixtures and equipment
                        
                        
                        83
                        
                        
                        
                        83Motor
      vehicles
                        
                        
                        196
                        
                        
                        
                        196Office
      equipment
                        
                        
                        25
                        
                        
                        
                        24Plant
      and machinery
                        
                        
                        207
                        
                        
                        
                        207Total
      property, plant and equipment
                        
                        
                        1,425
                        
                        
                        
                        1,424Less
      : accumulated depreciation
                        
                        
                        (472
                        )
                        
                        
                        (458
                        )Property,
      plant and equipment, net
                        
                        $
                        953
                        
                        
                        $
                        966





There was
no capitalized interest during the three months ended March 31, 2010 and
2009.





(6)
            LAND
      USE RIGHTS





The
Company’s land use right is summarized as follows (in thousands):





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Land
      use right
                      
                      $
                      315
                      
                      
                      $
                      315Less:
      accumulated amortization
                      
                      
                      (55
                      )
                      
                      
                      (52
                      )Land
      use right, net
                      
                      $
                      260
                      
                      
                      $
                      263





There was
no capitalized interest during the three months ended March 31, 2010 and
2009.





(7)
            ACCRUED
      EXPENSES AND OTHER PAYABLES





Accrued
expenses and other payables are summarized as follows (in
thousands):





March 31,
                            
                            
                            December 31,2010
                            
                            
                            2009(unaudited)Current
      portion:Accrued
      salaries and wages
                            
                            $
                            90
                            
                            
                            $
                            165Accrued
      expenses
                            
                            
                            392
                            
                            
                            
                            305Advertising
      subsidies payables
                            
                            
                            113
                            
                            
                            
                            113$
                            595
                            
                            
                            $
                            583Non-current
      portion:Advertising
      subsidies payables
                            
                            
                            75
                            
                            
                            
                            75$
                            670
                            
                            
                            $
                            658


F-11


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010




(8)
              RELATED
      PARTY TRANSACTIONS





March 31
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Amount
      due from a director:Mr. Qingqing Wu
                      
                      $
                      -
                      
                      
                      $
                      2,428,000Amount
      due to a director:Mr. Qingqing
      Wu
                      
                      $
                      97,000
                      
                      
                      $
                      30,000




Please
see Note 3 regarding the amount due from a director.





The
amount due to a director is unsecured, interest-free and repayable on
demand.





Pursuant
to trademark licensing agreements license contracts with Mr. Qingqing Wu, a
Company director, the Company has the rights to use four trademarks which are
owned by the director without consideration, although to date, the Company has
not utilized these trademarks. The director is in the process of transferring
these trademarks to the Company. Costs associated with the transfer of these
trademarks are not significant.





(9)
            DERIVATIVE
      FINANCIAL INSTRUMENTS





On
October 27, November 17 and December 1, 2009, respectively, the Company issued
723,052, 675,308 and 326,767 common stock purchase warrants (the “Warrants”),
respectively. Each Warrant entitles its holder to purchase one share of common
stock of the Company at an exercise price of $3.43 per share (subject to certain
adjustments) for a period of three years. The Company is entitled to redeem the
Warrants for the then applicable exercise price (currently $3.43) if the
volume-weighted average price of our common stock for 20 consecutive days
exceeds 200% of the then applicable exercise price.





The
Company uses a binomial option pricing model to value these Warrants. In valuing
the Warrants at the time they were issued and at March 31, 2010, the Company
used the market price of its common stock on the date of valuation, an expected
dividend yield of 0% and the remaining period to the expiration date of the
Warrants. All Warrants can be exercised by the holder at any time.





Because
of the limited historical trading period of the Company’s common stock, the
expected volatility of its common stock over the remaining life of the Warrants,
which has been estimated at 85%, is based on a review of the volatility of
entities considered by management as comparable. The risk-free rates of return
used ranged from 1.14% to 1.66%, based on constant maturity rates published by
the U.S. Federal Reserve, applicable to the remaining life of the
Warrants.





At March
31, 2010, the following derivative liabilities related to common stock warrants
were outstanding:





Issue Date
                          
                          Expiration Date
                          
                          # of
                            Warrants
                          
                          
                          Exercise
                            Price Per
                            Share
                          
                          
                          Value -
                            December 31,
                            2009
                          
                          
                          Value -
                            March 31,
                            2010October
      27, 2009
                          
                          October
      27, 2012
                          
                          
                          723,052
                          
                          
                          $
                          3.43
                          
                          
                          $
                          1,538,959
                          
                          
                          $
                          2,522,980November
      17 2009
                          
                          November
      17, 2012
                          
                          
                          675,308
                          
                          
                          
                          3.43
                          
                          
                          
                          1,440,952
                          
                          
                          
                          2,359,286December
      1, 2009
                          
                          December
      1, 2012
                          
                          
                          326,767
                          
                          
                          
                          3.43
                          
                          
                          
                          704,510
                          
                          
                          
                          1,142,5321,725,127
                          
                          
                          
                          
                          
                          
                          $
                          3,684,421
                          
                          
                          $
                          6,024,798




F-12





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





During
the three months ended March 31, 2010, the Company recognized a loss of
$2,340,377 from the change in fair value of the warrant liability.





Assets
and liabilities measured at fair value are classified in their entirety based on
the lowest level of input that is significant to their fair value measurement.
The Company’s derivative financial instruments which are required to be measured
at fair value on a recurring basis are measured at fair value using Level 3
inputs. Level 3 inputs are unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of the assets or
liabilities.





The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value using Level 3 inputs during the quarter ended
March 31, 2010:





WarrantsBalance
      – December 31, 2009
                                    
                                    $
                                    3,684,421Fair
      value adjustments
                                    
                                    
                                    2,340,377Balance
      – March 31, 2010
                                    
                                    $
                                    6,024,798




Estimating
the fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock, which may exhibit significant
volatility. Because derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.





(10)
            SHORT-TERM
      BORROWINGS





The
carrying amounts of the Company’s borrowings are as follows (in
thousands):





March 31 ,2010
                      
                      
                      December 31 ,2009Amount
                      
                      
                      Interest
                        Rate
                      
                      
                      Amount
                      
                      
                      Interest
                        Rate(unaudited)Bank
      loan
                      
                      $
                      587
                      
                      
                      
                      7.700
                      %
                      
                      $
                      734
                      
                      
                      
                      7.700
                      %





As of
March 31, 2010, the short-term borrowings were secured by a personal guarantee
granted by Mr. Qingqing Wu, a director of the Company.





(11)
            COMMON
      STOCK





The
Company is authorized to issue 100,000,000 shares of common stock, $0.00001 par
value. The Company had 1,454,421 common shares outstanding prior to the Share
Exchange with PXPF, and, as described in Note 1, issued 14,560,000 common
shares to the shareholders of PXPF in connection with the Share
Exchange.  For accounting purposes, the shares issued to the
shareholders of PXPF are assumed to have been outstanding on January 1, 2008 and
the 1,454,421 shares held by the existing shareholders of the Company prior to
the Share Exchange on February 13, 2009 are assumed to have been issued on that
date in exchange for the net assets of the Company.





On
December 1, 2009, the Company sold 653,534 shares of common stock to certain
accredited investors.





At March
31, 2010, 16,667,957 shares of common stock were issued and
outstanding.


F-13


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(12)
            PREFERRED
      STOCK





The
Company is authorized to issue 100,000,000 shares of preferred stock, $0.00001
par value, of which 2,800,000 shares have been designated as Series A
Convertible Preferred Stock.





On
October 27 and November 17, 2009, the Company sold 1,446,105 and 1,350,616
shares, respectively, of its Series A Convertible Preferred Stock (the
“Preferred Shares”) to certain accredited investors. Each Preferred Share is
convertible into one share of common stock, at a conversion price of $2.86 per
share (subject to certain adjustments) at any time at the holder’s option, and
will automatically convert if the common stock is qualified for listing on
either the NASDAQ Capital Market or the NYSE Amex Equities. The designation,
rights, preferences and other terms and provisions of the Preferred Shares are
set forth in the Certificate of Designation filed with the Nevada Secretary of
State on October 23, 2009. The Preferred Shares are entitled to participate in
any dividends declared and paid on the common stock on an as-converted basis.
Preferred Shares holders are also entitled to notice of any stockholders’
meeting and vote together with common stock holders on an as-converted basis.
The Preferred Shares have a liquidation preference of $2.86 per share, plus any
accrued but unpaid dividends. At March 31, 2010, 2,796,721 Preferred Shares were
outstanding, with an aggregate liquidation preference of
$7,998,622.





(13)
            EARNINGS
      PER SHARE




The
following table sets forth the computation of basic and diluted earnings per
share:





(a)
            Basic





Basic
earnings per share is calculated by dividing the profit attributable to equity
holders of the company by the weighted average number of ordinary shares and
participating preferred shares outstanding during the year.





Three Months Ended March 31,2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)Income attributable
      to common shareholders of the Company
                      
                      
                      1,071
                      
                      
                      
                      3,773Weighted
      average number of common shares outstanding
                      
                      
                      16,667,955
                      
                      
                      
                      15,312,000




(b)
            Diluted





Diluted
earnings per share is calculated by adjusting the weighted average number of
common shares outstanding to assume conversion of all dilutive potential common
shares. The Company has one category of dilutive potential common shares: the
Warrants issued in connection with the Preferred Shares Financing and Common
Shares Financing in 2009. The Warrants are assumed to have been converted into
common shares and the calculation is done to determine the number of shares that
could have been acquired at fair value (determined as the average annual market
share price of the Company’s common stock) based on the monetary value of the
subscription rights attached to outstanding Warrants.  The Preferred Shares
as converted to common stock have been excluded from the diluted earnings per
share because to do so would be anti-dilutive. The number of shares
calculated as above is compared with the number of shares that would have been
issued assuming the exercise of the Warrants.




Three Months Ended March 31,2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)Income
      attributable to common shareholders of the Company
                      
                      
                      1,091
                      
                      
                      
                      3,773Weighted
      average number of common shares outstanding
                      
                      
                      16,667,955
                      
                      
                      
                      15,312,000Diluted
      effect of stock warrants
                      
                      
                      595,080
                      
                      
                      
                      -Weighted
      average shares used in diluted computation
                      
                      
                      17,263
      ,035
                      
                      
                      
                      15,312,000


F-14


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(14)
            INCOME
      TAXES





The
provisions for income tax expense were as follows (in thousands):





Three Months Ended March 31,2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)PRC
      enterprise income tax - current
                      
                      $
                      1,195
                      
                      
                      $
                      1,257





The
Company is mainly subject to income taxes in the PRC and provision for the PRC
corporate income tax was calculated based on the statutory tax rate of 33% on
the assessable income arose in or before year 2007. Pursuant to the PRC
Enterprise Income Tax Law (the “Income Tax Law”) passed by the Tenth National
People’s Congress on 16 March 2007, the PRC income tax rates for domestic and
foreign enterprises are unified at 25% effective from January 1, 2008. The
enactment of the Income Tax Law is not expected to have any significant
financial effect on the amounts accrued in the consolidated balance sheet in
respect of taxation payable and deferred taxation.





The
following table reconciles the US statutory rates to the Company's effective tax
rate for three months ended March 31, 2010 and 2009:





For
      Three Months Ended March 31,2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)U.S.
      statutory rates
                    
                    
                    34
                    %
                    
                    
                    34
                    %Foreign
      income not recognized in U.S.
                    
                    
                    (34
                    )
                    
                    
                    (34
                    )China
      income tax rate
                    
                    
                    25
                    
                    
                    
                    25Effective
      tax rate
                    
                    
                    25
                    %
                    
                    
                    25
                    %





The
following table reconciles the theoretical tax expense calculated at the
statutory rates to the Company’s effective tax expense for the three months
ended March 31, 2010 and 2009 respectively.





Reconciliation
of effective tax expense (in thousands):


For
      Three Months Ended March 31,2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)Theoretical
      tax expense calculated at PRC statutory enterprise income tax rate of
      25%
                    
                    $
                    567
                    
                    
                    $
                    1,257Tax
      effect of non-deductible expenses
                    
                    
                    585
                    
                    
                    
                    —Other
                    
                    
                    43
                    
                    
                    
                    —Effective
      tax expense
                    
                    $
                    1,195
                    
                    
                    $
                    1,257




The
applicable rate of Hong Kong profits tax for the three months ended March 31,
2010 and 2009 was 16.5%. However, no provision for Hong Kong profits tax has
been made for the quarter ended March 31, 2010 and 2009 as the Company did not
carry on any business subject to the Hong Kong profits tax.





PXPF is a
company incorporated as an international company in the BVI and is fully exempt
from Domestic Corporate Tax of the BVI.





As of the
balance sheet dates presented, there were no deferred tax assets or
liabilities.


F-15





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010





(15)
            STATUTORY
      RESERVES





Under PRC
regulations, Yinglin Jinduren may pay dividends only out of its accumulated
profits, if any, determined in accordance with PRC GAAP.  In addition,
it is required to set aside at least 10% of its after-tax net profits each year,
if any, to fund the statutory reserves until the balance of the reserves reaches
50% of its registered capital.  The statutory reserves are not
distributable in the form of cash dividends to the Company but can be used to
make up prior year cumulative losses. As of March 31, 2010, the registered
capital was RMB 10,000,000 and the statutory reserves have been fully
funded.





(16)
            LEASE
      COMMITMENTS





The
Company leases certain premises under long-term, non-cancelable leases and
year-to-year leases. These leases are accounted for as operating leases. Rent
expense amounted to US$18,000 and US$11,000 for the quarter ended March 31, 2010
and 2009 respectively.





Future
minimum payments under long-term, non-cancelable leases as of March 31, 2010,
are as follows (in thousands):





Future
                          minimum
                          paymentsNine
      Months Ending December 31:2010
                        
                        $
                        53Year
      Ending December 31:2011
                        
                        
                        702012
                        
                        
                        54$
                        177





(17)
            BUSINESS
      AND CREDIT CONCENTRATIONS





The
Company operates in the fashion apparel industry and generates all of its sales
in the PRC. The fashion apparel industry is impacted by the general economy.
Changes in the marketplace would significantly affect management’s estimates and
the Company’s performance.





The
Company had distribution agreements with 12 distributors at March 31, 2010. The
Company had the following concentrations of business with each distributor
(customer) constituting greater than 10% of the Company’s sales:




Three
      months ended March 31,2010
                                            
                                            
                                            2009(unaudited)
                                            
                                            
                                            (unaudited)DistributorsDistributor
      A
                                            
                                            
                                            14.85
                                            %
                                            
                                            
                                            20.19
                                            %Distributor
      B
                                            
                                            
                                            *
                                            %
                                            
                                            
                                            12.11
                                            %Distributor
      C
                                            
                                            
                                            *
                                            %
                                            
                                            
                                            10.06
                                            %Distributor
      D
                                            
                                            
                                            13.71
                                            %
                                            
                                            
                                            13.46
                                            %Distributor
      E
                                            
                                            
                                            13.74
                                            %
                                            
                                            
                                            11.03
                                            %




F-16


VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


MARCH 31, 2010





The
Company’s accounts receivable concentrations of distributors (customers)
constituting
greater than 10% of the Company's accounts receivable wereas
follows:




March 31,2010
                            
                            
                            2009(unaudited)
                            
                            
                            (unaudited)DistributorsDistributor
      A
                            
                            
                            10.96
                            %
                            
                            
                            16.47
                            %Distributor
      B
                            
                            
                            10.39
                            %
                            
                            
                            14.37
                            %Distributor
      C
                            
                            
                            14.66
                            %
                            
                            
                            12.06
                            %Distributor
      D
                            
                            
                            12.74
                            %
                            
                            
                            10.69
                            %Distributor
      E
                            
                            
                            *
                            
                            
                            
                            10.65
                            %Distributor
      F
                            
                            
                            10.09
                            %
                            
                            
                            10.63
                            %





The
Company had the following concentrations of business with each vendor
constituting greater than 10% of the Company’s purchases:





Three
      Months Ended March 31,2010
                            
                            
                            2009(unaudited)
                            
                            
                            (unaudited)VendorsVendor
      A
                            
                            
                            13.75
                            %
                            
                            
                            10.74
                            %Vendor
      B
                            
                            
                            11.15
                            %
                            
                            
                            11.15
                            %Vendor
      C
                            
                            
                            *
                            
                            
                            
                            17.00
                            %Vendor
      D
                            
                            
                            10.82
                            %
                            
                            
                            *





The above
concentrations make the Company vulnerable to a near-term severe impact should
the relationships be terminated.





* The
concentration is less then 10%





(18)
            BENEFIT
      PLAN





Pursuant
to the relevant regulations of the PRC government, Yinglin Jinduren participates
in a local municipal government retirement benefits scheme (the “Scheme”),
whereby Yinglin Jinduren is required to contribute a certain percentage of the
basic salaries of its employees to the Scheme to fund their retirement benefits.
Contributions under the Scheme are charged to the income statement as incurred.
Contributions to the Scheme were US$29,000 and US$43,000 for the quarter ended
March 31, 2010 and 2009 respectively.





(19)
            SUBSEQUENT
      EVENTS





On April
27, 2010, Mr. Yushan Zheng voluntarily resigned as the Company’s Chief Financial
Officer and the board of directors appointed Mr. Bennet P. Tchaikovsky to
replace Mr. Zheng.


F-17




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





The
following management’s discussion and analysis should be read in conjunction
with our consolidated financial statements and the notes thereto that are
included elsewhere in this report. In addition to historical information, the
following discussion contains certain forward-looking statements within the
“safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. These statements relate to our future plans, objectives, expectations and
intentions. These statements may be identified by the use of words such as “may,
“will,” “could,” “expect,, “anticipate,” “intend,” “believe, “estimate,” “plan,”
“predict” and similar terms or terminology, or the negative of such terms or
other comparable terminology. Although we believe the expectations expressed in
these forward-looking statements are based on reasonable assumptions within the
bound of our knowledge of our business, our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to such differences include, but are not limited to, those discussed
in the “Risk Factors” section of our annual report on Form 10-K for the year
ended December 31, 2009 and filed with the SEC on April 15, 2010.  We
undertake no obligation to update publicly any forward-looking statements for
any reason even if new information becomes available or other events occur in
the future.





Our
financial statements are prepared in U.S. Dollars and in accordance with
accounting principles generally accepted in the United States. See “Exchange
Rates” below for information concerning the exchanges rates at which Renminbi
were translated into U.S. Dollars at various pertinent dates and for pertinent
periods.





Overview





We design, develop, manufacture, distribute and sell
casual apparel and clothing products in the PRC targeted toward middle-class
Chinese men under the brand name “V·LOV”.  We sell our products to our
independent distributors, each of whom is granted rights to market and sell our
products in a defined market or territory.  As of March 31, 2010, we
had agreements with 12 distributors throughout northern, central and southern
China.  After distributors place purchase orders for our products,
such products are manufactured by us and our outsourced manufacturers and
delivered to our distributors.  As of March 31, 2010, our distributors
owned and operated 742 points of sales, or POS, across the PRC, including
counters, concessions and free standing stores and
store-in-stores.  We maintain and exercise control over advertising
and marketing activities from our headquarters in Fujian, China, where we set
the tone for integrity, consistency and direction of the V·LOV brand image
throughout China.





All of
our business operations are carried out by our variable interest entity Jinjiang
Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which we control through
contractual arrangements between Yinglin Jinduren and our wholly-owned
subsidiary Dong Rong Capital Investment Limited (“HK Dong Rong”), a Hong Kong
company formerly known as Korea Jinduren International Dress
Limited.  Through these contractual arrangements, we have the ability
to control Yinglin Jinduren’s daily operations and financial affairs, appoint
its senior executives and approve all matters requiring shareholder approval,
and receive a fee equal to Yinglin Jinduren’s net income. As a result of these
contractual arrangements, we are considered the primary beneficiary of Yinglin
Jinduren’s operations. Accordingly, we consolidate Yinglin Jinduren’s results,
assets and liabilities in our financial statements.  Mr. Qingqing Wu,
our Chairman Chief Executive Officer, and his brother Mr. Zhifan Wu, a director
of our Company, hold 65.91% and 34.09%, respectively, of the ownership interests
of Yinglin Jinduren.





We also
have a wholly-owned PRC subsidiary through HK Dong Rong called Dong Rong (China)
Co., Ltd. (“China Dong Rong”). It is our intention and that of the equity owners
of Yinglin Jinduren to transfer all of the business operations currently
conducted by Yinglin Jinduren to China Dong Rong sometime in 2010. As of March
31, 2010 and through the date of this report, however, such transfer has not
occurred and China Dong Rong currently conducts no business
activities.





Critical
Accounting Policies





Our
management’s discussion and analysis of our financial condition and results of
operations are based on our financial statements that have been prepared in
accordance with accounting principles generally accepted in the United
States.  The preparation of these financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods.  On an ongoing basis, we evaluate our
estimates and assumptions.  We base our estimates on historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates under
different assumptions or conditions.





Our
significant accounting policies are described in Note 1 to our consolidated
financial statements.  Our critical accounting policies are those
where we have made the most difficult, subjective or complex judgments in making
estimates, and/or where these estimates can significantly impact our financial
results under different assumptions and conditions. Our critical accounting
policies are:


4





Basis
of presentation and consolidation





As
discussed above and in Note 1 to our consolidated financial statements, our
operations are conducted through Yinglin Jinduren, a PRC company in which the
equity interests are held by Mr. Qingqing Wu, our chief executive officer, and
his brother Mr. Zhifan Wu, a director of our Company. Through contractual
arrangements, we control the daily operations of Yinglin Jinduren, as well as
all matters requiring shareholder approval.  We receive a fee equal to
Yinglin Jinduren’s net income and, in the event it were to incur losses, would
be expected to absorb those losses through our inability to collect the
accumulated net income due to us.  As a result, we are considered to
be the primary beneficiary of Yinglin Jinduren’s operations and accordingly we
consolidate its assets, liabilities and results of operations in our
consolidated financial statements.  We have no operations other than
those conducted through Yinglin Jinduren.





Revenue
Recognition





A
majority of our products are manufactured on our behalf by third parties, based
on orders for our products received from customers. We are responsible for
product design, product specification, pricing to the customer, the choice of
third party manufacturer, product quality and credit risk associated with the
customer receivable. As such, the Company acts as a principal, not as an agent,
and records revenues on a gross basis.





We
recognize revenues in accordance with FASB ASC 605-10-S99-1 when (a) the price
to the customer is fixed or determinable, (b) persuasive evidence of an
arrangement exists, (c) delivery has occurred and (d) collectability of the
resulting receivable is reasonably assured. Revenue from the sales of goods is
recognized on the transfer of significant risks and rewards of ownership, which
generally coincides with the time when the goods are delivered to the carrier
designated by the customer and title passes to the customer.




Accounts
receivable





Accounts
receivable, which are unsecured, are stated at the amount we expect to collect.
We continuously monitor collections and payments from our customers (our
distributors) and maintain a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that have been
identified. Historically, our credit losses have not been significant and within
our expectations; however, we cannot guarantee that we will continue to
experience the same credit loss rates that have been experienced in the past. On
average, we collect our receivables within 90 days. Our ability to collect is
attributed to the steps that we take prior to extending credit to our
distributors as discussed above. If we are having difficulty collecting from a
distributor, we take the following steps: cease existing shipments to the
distributor, visit the distributor to request payment on past due invoice, and
if necessary, take legal recourse. If all of these steps are unsuccessful,
management would then determine whether or not the receivable should be written
off.





Income
Taxes





We are
subject to income taxes, primarily in the PRC. We believe we have adequately
provided for all taxes due but amounts asserted by tax authorities could be
greater or less than the amounts we have accrued. We have concluded all PRC
corporate income tax matters through March 31, 2010 and do not anticipate
adjustments as a result of any tax audits within the next twelve
months.





Derivative
instruments





In
connection with the sale of debt or equity instruments, we may sell warrants to
purchase our common stock. In certain circumstances, these warrants may be
classified as derivative liabilities, rather than as equity. Additionally, the
debt or equity instruments may contain embedded derivative instruments, such as
conversion options, which in certain circumstances may be required to be
bifurcated from the associated host instrument and accounted for separately as a
derivative instrument liability.





The
identification of, and accounting for, derivative instruments is complex. Our
derivative instrument liabilities are re-valued at the end of each reporting
period, with changes in the fair value of the derivative liability recorded as
charges or credits to income in the period in which the changes occur. At March
31, 2010, the warrants that we issued in 2009 in connection with sales of our
series A convertible preferred stock and our common stock are accounted for as
derivative instrument liabilities, We determine the fair value of these
instruments using a binomial option pricing model. That model requires the use
of a number of assumptions, including our expected dividend yield and the
expected volatility of our common stock price over the life of the instruments.
Because of the limited trading history for our common stock, we have estimated
the future volatility of our common stock price based on the historical
experience of other entities considered comparable to us. The identification of,
and accounting for, derivative instruments and the assumptions used to value
them can significantly affect our financial statements.


5





Results
of Operations





Three Months
      Ended March 31,2010
                                    
                                    
                                    2009Amount
                                    
                                    
                                    
                                    %
      of total
                                      revenue
                                    
                                    
                                    
                                    Amount
                                    
                                    
                                    
                                    %
      of total
                                      revenue(Amounts in thousands, in U.S. Dollars, except for percentages)Net Sales
                                    
                                    $
                                    18,067
                                    
                                    
                                    
                                    100.00
                                    %
                                    
                                    $
                                    17,865
                                    
                                    
                                    
                                    100.00
                                    %Gross
      Profit
                                    
                                    $
                                    6,922
                                    
                                    
                                    
                                    38.31
                                    %
                                    
                                    $
                                    6,398
                                    
                                    
                                    
                                    35.81
                                    %Operating
      Expense
                                    
                                    $
                                    2,297
                                    
                                    
                                    
                                    12.83
                                    %
                                    
                                    $
                                    1,361
                                    
                                    
                                    
                                    7.62
                                    %Income
      from Operations
                                    
                                    $
                                    4,603
                                    
                                    
                                    
                                    25.47
                                    %
                                    
                                    $
                                    5,037
                                    
                                    
                                    
                                    28.19
                                    %Other
      Expenses /(Income)
                                    
                                    $
                                    2,297
                                    
                                    
                                    
                                    12.71
                                    %
                                    
                                    $
                                    7
                                    
                                    
                                    
                                    0.04
                                    %Income
      Tax Expenses
                                    
                                    $
                                    1,195
                                    
                                    
                                    
                                    6.61
                                    %
                                    
                                    $
                                    1,257
                                    
                                    
                                    
                                    7.04
                                    %Net
      Income
                                    
                                    $
                                    1,071
                                    
                                    
                                    
                                    5.93
                                    %
                                    
                                    $
                                    3,773
                                    
                                    
                                    
                                    21.11
                                    %





Sales





Sales
were $18,067,000 for the three months ended March 31, 2010, compared with
$17,865,000 for the same period in 2009, an increase of $202,000 or
1.13%.  We generate revenue primarily from the sales of our apparel
products to our distributors, who sell them at retail locations throughout
northern, central and southern China.  These retail locations, also
known as points of sales (“POS”), include counters, concessions, free standing
stores and store-in-stores. We do not own or operate any V·LOV retail locations
ourselves; the POS are established and owned by our distributors, each of whom
operates its network of POS directly or through third-party retail operators.
The slight increase in our sales was primarily attributable to our marketing
efforts in northeastern China, including Beijing, Shandong and Liaoning. Since
2009, we have been devoting our marketing efforts in these regions because of
the number of second to third-tier cities in northeastern China that we believe
are potential markets for our products. As a result of such focused marketing
efforts, we recorded sales increases to our distributors for these regions
ranging from 16.26% to 51% as detailed in the table below. At the same time, our
sales to distributors for southern regions such as Zhejiang, Jiangxi, and Yunnan
declined due to distributor underperformance. We are undertaking an evaluation
of our underperforming distributors including POS location, physical store
environment, and marketing strategies. By taking
these steps, we hope to improve the underperformance of these
distributors.





The
following table sets forth the geographical breakdown of our total sales revenue
for the periods indicated:




Three Months ended March 31,2010
                                                                
                                                                2009(Amounts in thousands, in U.S. Dollars,
                                                                  except for percentages)$
                                                                
                                                                % of total
                                                                  sales revenue
                                                                
                                                                
                                                                $
                                                                
                                                                % of total
                                                                  sales revenue
                                                                
                                                                
                                                                Growth (Decline)
                                                                  in 2010
                                                                  compared
                                                                  with 2009Beijing
                                                                
                                                                $
                                                                951
                                                                
                                                                5.26
                                                                %
                                                                
                                                                $
                                                                818
                                                                
                                                                4.58
                                                                %
                                                                
                                                                
                                                                16.26
                                                                %Zhejiang
                                                                
                                                                $
                                                                2,683
                                                                
                                                                14.85
                                                                %
                                                                
                                                                $
                                                                3,607
                                                                
                                                                20.19
                                                                %
                                                                
                                                                
                                                                (25.62)
                                                                %Shandong
                                                                
                                                                $
                                                                2,482
                                                                
                                                                13.74
                                                                %
                                                                
                                                                $
                                                                1,970
                                                                
                                                                11.03
                                                                %
                                                                
                                                                
                                                                25.99
                                                                %Jiangxi
                                                                
                                                                $
                                                                1,198
                                                                
                                                                6.63
                                                                %
                                                                
                                                                $
                                                                2,163
                                                                
                                                                12.11
                                                                %
                                                                
                                                                
                                                                (44.61)
                                                                %Yunnan
                                                                
                                                                $
                                                                1,430
                                                                
                                                                7.91
                                                                %
                                                                
                                                                $
                                                                1,797
                                                                
                                                                10.06
                                                                %
                                                                
                                                                
                                                                (20.42)
                                                                %Shanxi
                                                                
                                                                $
                                                                1,222
                                                                
                                                                6.76
                                                                %
                                                                
                                                                $
                                                                1,285
                                                                
                                                                7.19
                                                                %
                                                                
                                                                
                                                                (4.90)
                                                                %Liaoning
                                                                
                                                                $
                                                                1,786
                                                                
                                                                9.89
                                                                %
                                                                
                                                                $
                                                                1,185
                                                                
                                                                6.63
                                                                %
                                                                
                                                                
                                                                50.72
                                                                %Hubei
                                                                
                                                                $
                                                                2,478
                                                                
                                                                13.72
                                                                %
                                                                
                                                                $
                                                                2,405
                                                                
                                                                13.46
                                                                %
                                                                
                                                                
                                                                3.04
                                                                %Henan
                                                                
                                                                $
                                                                1,305
                                                                
                                                                7.22
                                                                %
                                                                
                                                                $
                                                                1,303
                                                                
                                                                7.29
                                                                %
                                                                
                                                                
                                                                0.15
                                                                %Guangxi
                                                                
                                                                $
                                                                1,250
                                                                
                                                                6.92
                                                                %
                                                                
                                                                $
                                                                1,200
                                                                
                                                                6.72
                                                                %
                                                                
                                                                
                                                                4.17
                                                                %Sichuan
                                                                
                                                                $
                                                                870
                                                                
                                                                4.82
                                                                %
                                                                
                                                                $
                                                                -
                                                                
                                                                0.00
                                                                %
                                                                
                                                                
                                                                NA
                                                                %Fujian
                                                                
                                                                $
                                                                412
                                                                
                                                                2.28
                                                                %
                                                                
                                                                $
                                                                132
                                                                
                                                                0.74
                                                                %
                                                                
                                                                
                                                                212.12
                                                                %Total
      Net Sales
                                                                
                                                                $
                                                                18,067
                                                                
                                                                100.00
                                                                %
                                                                
                                                                $
                                                                17,865
                                                                
                                                                100.00
                                                                %
                                                                
                                                                
                                                                1.13
                                                                %




6





Cost
of Sales and Gross Profit Margin





The
following table sets forth the components of our cost of sales and gross profit
both in absolute amount and as a percentage of total net
sales.




Three
      Months ended March 31,2010
                      
                      
                      2009Amount
                      
                      
                      
                      %
      of total
                        revenue
                      
                      
                      
                      Amount
                      
                      
                      
                      %
      of total
                        revenue(Amounts in thousands, in U.S. Dollars, except for percentages)Total
      Net Sales
                      
                      $
                      18,067
                      
                      
                      
                      100.00
                      %
                      
                      $
                      17,865
                      
                      
                      
                      100.00
                      %O.E.M.
      Finished Goods Cost
                      
                      $
                      10,881
                      
                      
                      
                      60.23
                      %
                      
                      $
                      10,685
                      
                      
                      
                      59.81
                      %Raw
      Materials
                      
                      $
                      149
                      
                      
                      
                      0.82
                      %
                      
                      $
                      465
                      
                      
                      
                      2.60
                      %Labor
                      
                      $
                      74
                      
                      
                      
                      0.41
                      %
                      
                      $
                      169
                      
                      
                      
                      0.95
                      %Overhead
      and Other Expenses
                      
                      $
                      41
                      
                      
                      
                      0.23
                      %
                      
                      $
                      148
                      
                      
                      
                      0.83
                      %Total
      Cost of Sales
                      
                      $
                      11,145
                      
                      
                      
                      61.69
                      %
                      
                      $
                      11,467
                      
                      
                      
                      64.19
                      %Gross
      Profit
                      
                      $
                      6,922
                      
                      
                      
                      38.31
                      %
                      
                      $
                      6,398
                      
                      
                      
                      35.81
                      %




A
majority of our products are manufactured on our behalf by third parties, based
on orders for our products that we receive from our distributors. Historically,
we have outsourced to two types of manufacturers: (1) sub-contractors, which
require us to provide them with the raw materials for our products, and (2)
O.E.M. manufacturers, that supply their own raw materials. Beginning in
2009, we have shifted our outsourcing entirely to O.E.M.
manufacturers.





As we
shifted away from sub-contracting manufacturing entirely to O.E.M. manufacturing
in 2009, the components of our cost of sales have correspondingly shifted. Raw
material costs accounted for 0.82% of our total net sales for the three months
ended March 31, 2010, compared with 2.60% for the same period in 2009. With the
shift to O.E.M. manufacturing, O.E.M. finished goods cost, representing our
purchase of finished products from the O.E.M. manufacturers, correspondingly
increased, accounting for 60.23% of our total net sales for the three months
ended March 31, 2010, compared with 59.81% for the same period in
2009.





Labor
cost accounted for 0.41% of our total net sales for the three months ended March
31, 2010, compared with 0.95% for the same period in 2009. The decrease was
primarily attributable to a decrease in our own manufacturing
activities.





Similarly,
overhead and other expenses relating to cost of sales also decreased, down to
0.23% of our total net sales for the three months ended March 31, 2010, compared
with 0.83% for the same period in 2009.





Total
cost of sales for the three months ended March 31, 2010 was $11,145,000, a
decrease of 2.81% from $11,467,000 for the same period in 2009. As a percentage
of total net sales, our cost of sales decreased to 61.69% of total net sales for
the three months ended March 31, 2010, down from 64.19% of total net sales for
the same period in 2009. Consequently, gross margin as a percentage of total net
sales increased to 38.31% for the three months ended March 31, 2010 from 35.81%
for the same period in 2009. Our gross margin increased mainly due to an
increase of 15% in our average selling prices.


7





The
following table sets forth our total net sales, cost of sales, gross profit and
gross margin of the geographic market segments for the periods
indicated.





Three Months ended March 31,2010
                            
                            
                            2009Net Sales
                            
                            
                            Cost of
                              sales
                            
                            
                            Gross
                              profit
                            
                            
                            Gross
                              profit %
                            
                            
                            Net Sales
                            
                            
                            Cost of
                              sales
                            
                            
                            Gross
                              profit
                            
                            
                            Gross
                              profit %(Amounts
      in thousands, in U.S. Dollars, except for percentages)Beijing
                            
                            $
                            951
                            
                            
                            $
                            587
                            
                            
                            $
                            364
                            
                            
                            
                            38.28
                            %
                            
                            $
                            818
                            
                            
                            $
                            525
                            
                            
                            $
                            293
                            
                            
                            
                            35.82
                            %Zhejiang
                            
                            $
                            2,683
                            
                            
                            $
                            1,653
                            
                            
                            $
                            1,030
                            
                            
                            
                            38.39
                            %
                            
                            $
                            3,607
                            
                            
                            $
                            2,315
                            
                            
                            $
                            1,292
                            
                            
                            
                            35.82
                            %Shandong
                            
                            $
                            2,482
                            
                            
                            $
                            1,530
                            
                            
                            $
                            952
                            
                            
                            
                            38.36
                            %
                            
                            $
                            1,970
                            
                            
                            $
                            1,265
                            
                            
                            $
                            705
                            
                            
                            
                            35.79
                            %Jiangxi
                            
                            $
                            1,198
                            
                            
                            $
                            739
                            
                            
                            $
                            459
                            
                            
                            
                            38.31
                            %
                            
                            $
                            2,163
                            
                            
                            $
                            1,389
                            
                            
                            $
                            774
                            
                            
                            
                            35.78
                            %Yunnan
                            
                            $
                            1,430
                            
                            
                            $
                            882
                            
                            
                            $
                            548
                            
                            
                            
                            38.32
                            %
                            
                            $
                            1,797
                            
                            
                            $
                            1,153
                            
                            
                            $
                            644
                            
                            
                            
                            35.84
                            %Shanxi
                            
                            $
                            1,222
                            
                            
                            $
                            753
                            
                            
                            $
                            469
                            
                            
                            
                            38.38
                            %
                            
                            $
                            1,285
                            
                            
                            $
                            825
                            
                            
                            $
                            460
                            
                            
                            
                            35.80
                            %Liaoning
                            
                            $
                            1,786
                            
                            
                            $
                            1,101
                            
                            
                            $
                            685
                            
                            
                            
                            38.35
                            %
                            
                            $
                            1,185
                            
                            
                            $
                            760
                            
                            
                            $
                            425
                            
                            
                            
                            35.86
                            %Hubei
                            
                            $
                            2,478
                            
                            
                            $
                            1,528
                            
                            
                            $
                            950
                            
                            
                            
                            38.34
                            %
                            
                            $
                            2,405
                            
                            
                            $
                            1,544
                            
                            
                            $
                            861
                            
                            
                            
                            35.80
                            %Henan
                            
                            $
                            1,305
                            
                            
                            $
                            805
                            
                            
                            $
                            500
                            
                            
                            
                            38.31
                            %
                            
                            $
                            1,303
                            
                            
                            $
                            836
                            
                            
                            $
                            467
                            
                            
                            
                            35.84
                            %Guangxi
                            
                            $
                            1,250
                            
                            
                            $
                            771
                            
                            
                            $
                            479
                            
                            
                            
                            38.32
                            %
                            
                            $
                            1,200
                            
                            
                            $
                            770
                            
                            
                            $
                            430
                            
                            
                            
                            35.83
                            %Sichuan
                            
                            $
                            870
                            
                            
                            $
                            536
                            
                            
                            $
                            334
                            
                            
                            
                            38.39
                            %
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            
                            NA
                            %Fujian
                            
                            $
                            412
                            
                            
                            $
                            260
                            
                            
                            $
                            152
                            
                            
                            
                            36.89
                            %
                            
                            $
                            132
                            
                            
                            $
                            85
                            
                            
                            $
                            47
                            
                            
                            
                            35.61
                            %Total
                            
                            $
                            18,067
                            
                            
                            $
                            11,145
                            
                            
                            $
                            6,922
                            
                            
                            
                            38.31
                            %
                            
                            $
                            17,865
                            
                            
                            $
                            11,467
                            
                            
                            $
                            6,398
                            
                            
                            
                            35.81
                            %





Selling,
General and Administrative Expenses





Three Months ended 31,2010
                        
                        
                        2009$
                        
                        
                        % of Total
                          Net Sales
                        
                        
                        $
                        
                        
                        % of Total
                          Net Sales(Amounts in thousands, in U.S. Dollars, except for percentages)Gross Profit
                        
                        $
                        6,922
                        
                        
                        
                        38.31
                        %
                        
                        $
                        6,398
                        
                        
                        
                        35.81
                        %Operating
      Expenses:Selling
      Expenses
                        
                        
                        1,484
                        
                        
                        
                        8.22
                        %
                        
                        
                        745
                        
                        
                        
                        4.17
                        %General
      and Administrative Expenses
                        
                        
                        835
                        
                        
                        
                        4.62
                        %
                        
                        
                        616
                        
                        
                        
                        3.45
                        %Total
                        
                        
                        2,319
                        
                        
                        
                        12.84
                        %
                        
                        
                        1,361
                        
                        
                        
                        7.62
                        %Income
      from Operations
                        
                        
                        4,603
                        
                        
                        
                        25.47
                        %
                        
                        
                        5,037
                        
                        
                        
                        28.19
                        %





Selling
expenses were $1,484,000 for the three months ended March 31, 2010, compared
with $745,000 for the same period in 2009, an increase of $739,000 or
99.19%.  The increase was mainly due to increase in advertising
expenses related to our marketing efforts in northeastern China, from $696,000
for the three months ended March 31, 2009 to $1,364,000 for the three months
ended March 31, 2010. We expect that our selling expenses will continue to
increase as we continue our marketing efforts to support our existing
distribution network as well as to penetrate potential new markets in these
regions.


8





General and
administrative expenses increased to $835,000 for the three months ended March
31, 2010, from $616,000 for the same period in 2009, an increase of $218,000 or
35.39%.  The increase was mainly due to an increase in research and
development expense.





Change
in Fair Value of Derivative Liability




We issued
common stock purchase warrants to the investors in our financings completed from
October 2009 through December 2009.  As of December 31, 2009, these
warrants had a carrying value of $3,684,000. These warrants are accounted for at
fair value as derivative instruments and are marked-to-market each period, with
changes in the fair value charged or credited to income each period. Due to the
increase in our stock price from December 31, 2009 to March 31, 2010, the
derivative liability correspondingly increased resulting in a loss of
$2,341,000.  The carrying value for the derivative liability as of
March 31, 2010 was $6,025,000. In future periods, we may experience significant
gains or losses, as the value of these warrants fluctuates in response to
changes in our stock price.





Income
Tax Expenses




For the
three months ended March 31, 2010 and 2009, we were subject to income tax at a
rate of 25%. Income tax expense for the three months ended March 31, 2010 and
2009 amounted to $1,195,000 and $1,257,000 respectively. The decrease in income
tax expense was attributable to the decrease in income from
operations.





Liquidity
and Capital Resources





Net cash
provided by operating activities in the three months ended March 31, 2010 was
$491,000 compared with $3,327,000 net cash provided by operating activities in
the same period of 2009 resulting in a decrease of net cash provided by
operating activities of $2,836,000. This decrease was mainly attributable to an
increased inventory balance of $2,100,000 and a $356,000 increase in the
change of accounts receivable from the three months ended March 31, 2009 to
the three months ended March 31, 2010. Our accounts receivable balance increased
as some distributors paid later, but within credit terms. Our inventory balance
increased as a result of working with three new O.E.M. manufacturers who
required us to take delivery of finished products at our facility instead of
delivering them directly to our distributors which is our
standard business practice with all of our other O.E.M. manufacturers. We
anticipate that as we establish a history with these new manufacturers that we
will be able to have these manufacturers deliver finished products directly to
our distributors, thereby decreasing our inventory level.





Net
cash provided by investing activities was $253,000 in the three months
ended March 31, 2010, compared with $0 net cash provided by investing activities
in the same period of 2009. This increase was mainly due to expenses paid by a
director of behalf of the company and our director’s repayment of $2,428,000 on
March 29, 2010. These inflows for the three months ended March 31, 2010 were
offset by an outflow of $2,240,000 into a time deposit account in to our HK Dong
Rong account which will mature within 6 months.




Net cash
used in financing activities was $147,000 in the three months ended March 31,
2010, compared with net cash used in financing activities of $4,981,000 in the
same period of 2009. The decrease of net cash used in financing activities of
$4,834,000 resulted from dividends declared and paid by Yinglin Jinduren to its
equity owners during the three months ended March 31, 2009 (prior to our share
exchange transaction with PXPF in February 2009). No dividends were declared or
paid out during the three months ended March 31, 2010.





As of
March 31, 2010, we had cash and cash equivalents of $11,634,000, other current
assets of $16,826,000 and current liabilities, net of the derivative liability
of $4,512,000.  The $6,025,000 derivative liability relating to our
warrants will be allocated to equity when warrants are exercised and eliminated
when the warrants expire. The $6,025,000 derivative liability does not require
cash settlement. We presently finance our operations primarily from the cash
flow from our operations, and we anticipate that this will continue to be our
primary source of funds to finance our short-term cash needs.





Contractual
Obligations and Off-Balance Sheet Arrangements





Contractual
Obligations





We have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We present below a summary of the most significant
assumptions used in our determination of amounts presented in the tables in
order to assist in the review of this information within the context of our
consolidated financial position, results of operations, and cash
flows.


9





The
following tables summarize our contractual obligations as of March 31, 2010, and
the effect that these obligations are expected to have on our liquidity and cash
flows in future periods.





Payments Due by PeriodTotal
                      
                      
                      Less than 1
                        year
                      
                      
                      1 Year +(in thousands of dollars)Contractual Obligations:Total
      Indebtedness
                      
                      $
                      587
                      
                      
                      $
                      587
                      
                      
                      $
                      -Operating
      Leases
                      
                      
                      177
                      
                      
                      
                      53
                      
                      
                      
                      124Total
      Contractual Obligations:
                      
                      $
                      764
                      
                      
                      $
                      640
                      
                      
                      $
                      124




Total
indebtedness consists of installment loans from financial institutions in the
PRC.





Operating
lease amounts include minimum lease payments under our non-cancelable operating
leases for office facilities, as well as limited computer and office equipment
that we utilize under certain lease arrangements.





Off-Balance
Sheet Arrangements





Under the
operating agreement between our subsidiary HK Dong Rong and our variable
interest entity Yinglin Jinduren, it was agreed that, if any guarantee for the
performance of Yinglin Jinduren for any contract or loan was required, HK Dong
Rong would agree to provide such guarantee.  To date, no such
guarantees have been provided. We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any
third parties. We do not use off-balance sheet derivative financial instruments
to hedge or partially hedge interest rate exposure nor do we maintain any other
off-balance sheet arrangements for the purpose of credit enhancement, hedging
transactions, or other financial or investment purposes. We have not entered
into any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





We are a
“smaller reporting company” as defined by Regulations S-K and as such, are not
required to provide this information.





Item 4.
            Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





As of
March 31, 2010, we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended.  Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not effective at the
reasonable assurance level.





Remediation of
Material Weaknesses in Internal Control over Financial
Reporting





In our
annual report on Form 10-K for the year ended December 31, 2009, we reported the
following material weakness involving control activities:





Accounting
and Finance Personnel Weaknesses- The current
accounting staff is relatively inexperienced, and requires substantial training
so as to meet with the higher demands necessary to fulfill the requirements of
U.S. GAAP-based reporting and SEC rules and regulations. In reaching such
conclusion, the following factors were considered:





(a)
            how
      appropriately we complied with U.S. GAAP in accounting for transactions;
      and


10


(b)
            how
      accurately we prepared supporting information to provide to our
      independent auditors on a quarterly and annual
  basis.





The
Company’s management has identified the steps necessary to address the material
weaknesses described above, as follows:





(1)
            Recruit
      sufficient qualified accounting
personnel;





(2)
            Set
      up an internal audit department and assign more resources to enhance the
      internal audit function, especially in the supervision of complex,
      non-routine transactions;





(3)
            Involve
      both internal accounting and operations personnel and outside contractors
      with technical accounting expertise, as needed, early in the evaluation of
      complex, non-routine transactions to obtain additional guidance as to the
      application of U.S. GAAP to such transactions;
  and





(4)
            Improve
      the interaction among our management, audit committee, and other external
      advisors.





The
effectiveness of these remediation efforts will not be known until the Company
performs a test of these controls in connection with management’s tests of
internal controls over financial reporting that the Company will undertake as of
December 31, 2010.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting during the quarter
ended March 31, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.


11


PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings.





None





Item 1A.
            Risk Factors.





As of and
for the three months ended March 31, 2010, there were no material changes in our
risk factors from those disclosed in Part I, Item 1A, of our annual report on
Form 10-K as of and for the year ended December 31, 2009.





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds.





None





Item 3.
            Defaults upon Senior
Securities.




None





Item
      4.
            Reserved.





Item
      5.
            Other
      Information.





None


12


Item
      6.
            Exhibits.




Exhibit
                  Number
                
                Description2.1
                
                Share
      Exchange Agreement (1)3.1
                
                Articles
      of Incorporation (2)3.2
                
                Amendment
      to Articles of Incorporation (for 1-for-100 reverse stock split), filed
      with the Nevada Secretary of State on January 12, 2009
  (10)3.3
                
                Articles
      of Merger filed on March 4, 2009 and effective March 20, 2009
      (3)3.4
                
                Certificate
      of Correction filed on March 6, 2009 (3)3.5
                
                Certificate
      of Designation of Preferences, Rights and Limitations of Series A
      Convertible Preferred Stock, filed with the Nevada Secretary of State on
      October 23, 2009 (4)3.6
                
                Bylaws
      (2)3.7
                
                Amendment
      to the Bylaws (1)4.1
                
                Specimen
      Common Stock Certificate (2)4.2
                
                Specimen
      Series A Convertible Preferred Stock Certificate (4)4.3
                
                Form
      of Common Stock Purchase Warrant for the Preferred Shares Financing
      (4)4.4
                
                Form
      of Common Stock Purchase Warrant for the Common Shares Financing
      (6)10.1
                
                Consulting
      Services Agreement (1)10.2
                
                Operating
      Agreement (1)10.3
                
                Equity
      Pledge Agreement (1)10.4
                
                Option
      Agreement (1)10.5
                
                Voting
      Rights Proxy Agreement (1)10.6
                
                Share
      Purchase Binding Letter of Intent with ARC China, Inc. dated September 29,
      2009 (5)10.7
                
                Form
      of Securities Purchase Agreement for the Preferred Shares Financing
      (4)10.8
                
                Form
      of Escrow Agreement for the Preferred Shares Financing
  (4)10.9
                
                Form
      of Securities Purchase Agreement for the Common Shares Financing
      (6)10.10
                
                Supplemental
      Agreement dated February 18, 2009 (8)10.11
                
                Form
      of Director Offer Letter entered into with Ying Zhang and Jianwei Shen
      (11)10.12
                
                Bridge
      Loan and Financing Agreement dated June 11, 2008 (12)10.13
                
                Trademark
      License Contract for serial number 3871951 dated February 12, 2009
      (12)10.14
                
                Trademark
      License Contract for serial number 3884844 dated February 12, 2009
      (12)10.15
                
                Trademark
      License Contract for serial number 3884845 dated February 12, 2009
      (12)




13




10.16
                
                Trademark
      License Contract for serial number 4247545 dated February 12, 2009
      (12)10.17
                
                Form
      of Securities Purchase Agreement dated February 13, 2009
    (12)10.18
                
                Form
      of Securities Purchase Agreement dated February 12, 2009
    (12)14.1
                
                Code
      of Ethics (7)16.1
                
                Letter
      from Malone & Bailey CPA dated April 15, 2009 (9)21.1
                
                List
      of Subsidiaries (12)31.1
                
                Section
      302 Certification by the Corporation’s Chief Executive Officer
      *31.2
                
                Section
      302 Certification by the Corporation’s Chief Financial Officer
      *32.1
                
                Section
      906 Certification by the Corporation’s Chief Executive Officer
      *32.2
                
                Section
      906 Certification by the Corporation’s Chief Financial Officer
      *





* Filed
Herewith.





(1)
                Filed
      on February 13, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(2)
                Filed
      on February 9, 2007 as an exhibit to our Registration Statement on Form
      SB-2, and incorporated herein by reference.(3)
                Filed
      on March 20, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(4)
                Filed
      on October 30, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(5)
                Filed
      on October 5, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(6)
                Filed
      on December 2, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(7)
                Filed
      on March 7, 2008 as an exhibit to our Annual Report on Form 10-K, and
      incorporated herein by reference.(8)
                Filed
      on February 20, 2009 as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(9)
                Filed
      on April 15, 2009, as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(10)
                Filed
      on December 17, 2009, as an exhibit to our Registration Statement on Form
      S-1, and incorporated herein by reference.(11)
                Filed
      on March 16, 2010, as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by reference.(12)
                Filed
      on April 15, 2010, as an exhibit to our Annual Report on Form 10-K, and
      incorporated herein by
reference.




14


SIGNATURES





In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





VLOV
      INC.
                (Registrant)Date:
      May 17, 2010
              By:
              /s/ Qingqing WuQingqing
      WuChief
      Executive Officer




Date:
      May 17, 2010
              By:
              /s/ Bennet P. TchaikovskyBennet
      P. TchaikovskyChief
      Financial Officer


15