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:  
September 30, 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)









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: 18,008,272 shares issued and outstanding as of
November 12, 2010.





TABLE
OF CONTENTS




TO
QUARTERLY REPORT ON FORM 10-Q


FOR
THE QUARTER ENDED SEPTEMBER 30, 2010





PagePART
      I
                    
                    FINANCIAL
      INFORMATIONItem
      1.
                    
                    Financial
      Statements (unaudited)
                    
                    
                    4Consolidated
      Balance Sheets as of September 30, 2010 (unaudited) and December 31,
      2009
                    
                    
                    4Consolidated
      Statements of Income and Comprehensive Income for the three months and
      nine months ended September 30, 2010 and 2009 (unaudited)
                    
                    
                    5Consolidated
      Statements of Stockholder’ Equity and Comprehensive Income
      (unaudited)
                    
                    
                    6Consolidated
      Statements of Cash Flows for nine months ended September 30, 2010 and 2009
      (unaudited)
                    
                    
                    7Notes
      to the Consolidated Financial Statements
                    
                    
                    8Item
2.
                    
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    
                    23Item 3.
                    
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    
                    
                    31Item 4.
                    
                    Controls
      and Procedures
                    
                    
                    31PART II
                    
                    OTHER
      INFORMATIONItem 1.
                    
                    Legal
      Proceedings
                    
                    
                    31Item 1A.
                    
                    Risk
      Factors
                    
                    
                    31Item 2.
                    
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    
                    31Item 3.
                    
                    Defaults
      Upon Senior Securities
                    
                    
                    32Item
      4.
                    
                    Reserved
                    
                    
                    32Item 5.
                    
                    Other
      Information
                    
                    
                    32Item 6.
                    
                    Exhibits
                    
                    
                    32Signatures
                    
                    
                    
                    
                    35




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





VLOV,
INC.


CONSOLIDATED
BALANCE SHEETS


(Amounts
in thousands - except for share and per share data)





September 30,
                                    
                                    
                                    December 31,2010
                                    
                                    
                                    2009(unaudited)ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                    
                                    $
                                    7,149
                                    
                                    
                                    $
                                    11,036Time
      deposits
                                    
                                    
                                    3,020
                                    
                                    
                                    
                                    -Accounts
      and other receivables
                                    
                                    
                                    18,048
                                    
                                    
                                    
                                    9,191Amount
      due from a director
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,428Trade
      deposits
                                    
                                    
                                    5,796
                                    
                                    
                                    
                                    2,309Inventories
                                    
                                    
                                    256
                                    
                                    
                                    
                                    285Prepaid
      expenses
                                    
                                    
                                    116
                                    
                                    
                                    
                                    763Total
      current assets
                                    
                                    
                                    34,385
                                    
                                    
                                    
                                    26,012Property,
      plant and equipment, net
                                    
                                    
                                    948
                                    
                                    
                                    
                                    966Land
      use rights
                                    
                                    
                                    260
                                    
                                    
                                    
                                    263TOTAL
      ASSETS
                                    
                                    $
                                    35,593
                                    
                                    
                                    $
                                    27,241LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
                                    
                                    $
                                    2,250
                                    
                                    
                                    $
                                    2,565Accrued
      expenses and other payables
                                    
                                    
                                    842
                                    
                                    
                                    
                                    583Amount
      due to directors
                                    
                                    
                                    77
                                    
                                    
                                    
                                    30Derivative
      liability
                                    
                                    
                                    2,845
                                    
                                    
                                    
                                    3,684Short-term
      bank loans
                                    
                                    
                                    599
                                    
                                    
                                    
                                    734Income
      taxes payable
                                    
                                    
                                    1,372
                                    
                                    
                                    
                                    1,601Total
      current liabilities
                                    
                                    
                                    7,985
                                    
                                    
                                    
                                    9,197Non-current
      Liabilities:Other
      payable
                                    
                                    
                                    77
                                    
                                    
                                    
                                    75Total
      liabilities
                                    
                                    
                                    8,062
                                    
                                    
                                    
                                    9,272Commitments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Stockholders'
      Equity:Common
      stock, $0.00001 par value, 100,000,000 shares authorized,17,983,272 and
      16,667,957 shares respectively issued and outstanding
                                    
                                    
                                    1
                                    
                                    
                                    
                                    1Preferred
      stock, $0.00001 par value, 100,000,000 shares authorized, 1,489,656 and
      2,796,721 shares issued and outstanding respectively,
                                      (liquidation
      preference $4,260,416 and $7,998,622, respectively)
                                    
                                    
                                    2,133
                                    
                                    
                                    
                                    4,003Additional
      paid-in capital
                                    
                                    
                                    8,230
                                    
                                    
                                    
                                    6,319Statutory
      reserve
                                    
                                    
                                    913
                                    
                                    
                                    
                                    913Retained
      earnings
                                    
                                    
                                    15,154
                                    
                                    
                                    
                                    6,173Accumulated
      other comprehensive income
                                    
                                    
                                    1,100
                                    
                                    
                                    
                                    560Total
      stockholders' equity
                                    
                                    
                                    27,531
                                    
                                    
                                    
                                    17,969TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                                    
                                    $
                                    35,593
                                    
                                    
                                    $
                                    27,241





See
accompanying notes to consolidated financial statements





4





VLOV,
INC.


CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME


(Unaudited;
amounts in thousands - except for share and per share data)





Three Months Ended September
       30,
                                                        
                                                        
                                                        Nine Months Ended September 30,2010
                                                        
                                                        
                                                        2009
                                                        
                                                        
                                                        2010
                                                        
                                                        
                                                        2009Net
      sales
                                                        
                                                        $
                                                        13,063
                                                        
                                                        
                                                        $
                                                        13,882
                                                        
                                                        
                                                        $
                                                        49,105
                                                        
                                                        
                                                        $
                                                        45,823Cost
      of sales
                                                        
                                                        
                                                        7,643
                                                        
                                                        
                                                        
                                                        8,850
                                                        
                                                        
                                                        
                                                        29,918
                                                        
                                                        
                                                        
                                                        29,316Gross
      profit
                                                        
                                                        
                                                        5,420
                                                        
                                                        
                                                        
                                                        5,032
                                                        
                                                        
                                                        
                                                        19,187
                                                        
                                                        
                                                        
                                                        16,507Operating
      expenses:Selling
      expenses
                                                        
                                                        
                                                        1,399
                                                        
                                                        
                                                        
                                                        841
                                                        
                                                        
                                                        
                                                        5,442
                                                        
                                                        
                                                        
                                                        2,900General
      and administrative expenses
                                                        
                                                        
                                                        702
                                                        
                                                        
                                                        
                                                        520
                                                        
                                                        
                                                        
                                                        2,602
                                                        
                                                        
                                                        
                                                        1,5732,101
                                                        
                                                        
                                                        
                                                        1,361
                                                        
                                                        
                                                        
                                                        8,044
                                                        
                                                        
                                                        
                                                        4,473Income
      from operations
                                                        
                                                        
                                                        3,319
                                                        
                                                        
                                                        
                                                        3,671
                                                        
                                                        
                                                        
                                                        11,143
                                                        
                                                        
                                                        
                                                        12,034Other
      income (expenses):Change
      in fair value of derivative liability
                                                        
                                                        
                                                        992
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        818
                                                        
                                                        
                                                        
                                                        -Interest
      income
                                                        
                                                        
                                                        18
                                                        
                                                        
                                                        
                                                        3
                                                        
                                                        
                                                        
                                                        61
                                                        
                                                        
                                                        
                                                        14Interest
      expense
                                                        
                                                        
                                                        (15
                                                        )
                                                        
                                                        
                                                        (15
                                                        )
                                                        
                                                        
                                                        (52
                                                        )
                                                        
                                                        
                                                        (43
                                                        )995
                                                        
                                                        
                                                        
                                                        (12
                                                        )
                                                        
                                                        
                                                        827
                                                        
                                                        
                                                        
                                                        (29
                                                        )Income
      before provision for income taxes
                                                        
                                                        
                                                        4,314
                                                        
                                                        
                                                        
                                                        3,659
                                                        
                                                        
                                                        
                                                        11,970
                                                        
                                                        
                                                        
                                                        12,005Provision
      for income taxes
                                                        
                                                        
                                                        884
                                                        
                                                        
                                                        
                                                        922
                                                        
                                                        
                                                        
                                                        2,992
                                                        
                                                        
                                                        
                                                        3,183Net
      income
                                                        
                                                        
                                                        3,430
                                                        
                                                        
                                                        
                                                        2,737
                                                        
                                                        
                                                        
                                                        8,978
                                                        
                                                        
                                                        
                                                        8,822Other
      comprehensive income:Foreign
      currency translation adjustment
                                                        
                                                        
                                                        438
                                                        
                                                        
                                                        
                                                        7
                                                        
                                                        
                                                        
                                                        540
                                                        
                                                        
                                                        
                                                        14Comprehensive
      income
                                                        
                                                        $
                                                        3,871
                                                        
                                                        
                                                        $
                                                        2,744
                                                        
                                                        
                                                        $
                                                        9,518
                                                        
                                                        
                                                        $
                                                        8,836Allocation
      of net income for calculating basic earnings per share:Net
      income attributable to common shareholders
                                                        
                                                        
                                                        3,149
                                                        
                                                        
                                                        
                                                        2,737
                                                        
                                                        
                                                        
                                                        8,127
                                                        
                                                        
                                                        
                                                        8,822Net
      income attributable to preferred shareholders
                                                        
                                                        
                                                        281
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        851
                                                        
                                                        
                                                        
                                                        -Net
      income
                                                        
                                                        $
                                                        3,430
                                                        
                                                        
                                                        $
                                                        2,737
                                                        
                                                        
                                                        $
                                                        8,978
                                                        
                                                        
                                                        $
                                                        8,822Basic earnings
      per share- common
                                                        
                                                        $
                                                        0.18
                                                        
                                                        
                                                        $
                                                        0.17
                                                        
                                                        
                                                        $
                                                        0.47
                                                        
                                                        
                                                        $
                                                        0.56Diluted
      earnings per share
                                                        
                                                        $
                                                        0.18
                                                        
                                                        
                                                        $
                                                        0.17
                                                        
                                                        
                                                        $
                                                        0.47
                                                        
                                                        
                                                        $
                                                        0.56Weighted
      average number of common shares and participating preferred shares
      outstanding:Basic
                                                        
                                                        
                                                        17,874,371
                                                        
                                                        
                                                        
                                                        16,000,000
                                                        
                                                        
                                                        
                                                        17,199,755
                                                        
                                                        
                                                        
                                                        15,773,187Diluted
                                                        
                                                        
                                                        19,472,376
                                                        
                                                        
                                                        
                                                        16,000,000
                                                        
                                                        
                                                        
                                                        19,001,350
                                                        
                                                        
                                                        
                                                        15,773,187





See
accompanying notes to consolidated financial statements





5




VLOV,
INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME


(Unaudited;
amounts in thousands- except for share and per share data)




AccumulatedAdditional
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  OtherCommon stock
                                                  
                                                  
                                                  Preferred stock
                                                  
                                                  
                                                  paid-in
                                                  
                                                  
                                                  Statutory
                                                  
                                                  
                                                  Comprehensive
                                                  
                                                  
                                                  Retained
                                                  
                                                  
                                                  Stockholders’Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  Shares
                                                  
                                                  
                                                  Amount
                                                  
                                                  
                                                  capital
                                                  
                                                  
                                                  reserve
                                                  
                                                  
                                                  income
                                                  
                                                  
                                                  earnings
                                                  
                                                  
                                                  equityBalance
      at January 1, 2009
                                                  
                                                  
                                                  14,560,000
                                                  
                                                  
                                                  $
                                                  1
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  $
                                                  -
                                                  
                                                  
                                                  $
                                                  1,236
                                                  
                                                  
                                                  $
                                                  913
                                                  
                                                  
                                                  $
                                                  543
                                                  
                                                  
                                                  $
                                                  4,876
                                                  
                                                  
                                                  $
                                                  7,569Shares
      issued in reverse merger acquisition
                                                  
                                                  
                                                  1,440,000
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Foreign
      currency translation
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  15
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  15Payments
      of dividend
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  (5,145
                                                  )
                                                  
                                                  
                                                  (5,145
                                                  )Net
      income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  8,822
                                                  
                                                  
                                                  
                                                  8,822Balance
      at September 30, 2009 (unaudited)
                                                  
                                                  
                                                  16,000,000
                                                  
                                                  
                                                  
                                                  1
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,236
                                                  
                                                  
                                                  
                                                  913
                                                  
                                                  
                                                  
                                                  558
                                                  
                                                  
                                                  
                                                  8,553
                                                  
                                                  
                                                  
                                                  11,261Shares
      issued in reverse merger acquisition
                                                  
                                                  
                                                  14,421
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Sale
      of preferred stock and warrants
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2,796,721
                                                  
                                                  
                                                  
                                                  7,999
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  7,999Sale
      of common stock and warrants
                                                  
                                                  
                                                  653,536
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,870
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,870Fair
      value of warrant liability
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (3,996
                                                  )
                                                  
                                                  
                                                  (698
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (4,694
                                                  )Preferred
      stock - beneficial conversion feature
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (4,003
                                                  )
                                                  
                                                  
                                                  4,003
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -Preferred
      stock - deemed dividend
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  4,003
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (4,003
                                                  )
                                                  
                                                  
                                                  -Issuance
      fees and costs
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (92
                                                  )
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (92
                                                  )Net
      income
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  1,623
                                                  
                                                  
                                                  
                                                  1,623Foreign
      currency translation adjustment
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  2
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  3Balance
      at December 31, 2009
                                                  
                                                  
                                                  16,667,957
                                                  
                                                  
                                                  $
                                                  1
                                                  
                                                  
                                                  
                                                  2,796,721
                                                  
                                                  
                                                  $
                                                  4,003
                                                  
                                                  
                                                  $
                                                  6,319
                                                  
                                                  
                                                  $
                                                  913
                                                  
                                                  
                                                  $
                                                  560
                                                  
                                                  
                                                  $
                                                  6,173
                                                  
                                                  
                                                  $
                                                  17,969Net
      income
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  8,978
                                                  
                                                  
                                                  
                                                  8,978Foreign
      Currency translation adjustment
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  540
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  540Conversion
      of preferred stock to common stock
                                                  
                                                  
                                                  1,307,065
                                                  
                                                  
                                                  
                                                  -
                                                  
                                                  
                                                  
                                                  (1,307,065
                                                  )
                                                  
                                                  
                                                  (1,870
                                                  )
                                                  
                                                  
                                                  1,870
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  -Warrants
      converted
                                                  
                                                  
                                                  8,250
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  41
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  
                                                  41Balance
      at September 30, 2010 (unaudited)
                                                  
                                                  
                                                  17,983,272
                                                  
                                                  
                                                  $
                                                  1
                                                  
                                                  
                                                  
                                                  1,489,656
                                                  
                                                  
                                                  $
                                                  2,133
                                                  
                                                  
                                                  $
                                                  8,230
                                                  
                                                  
                                                  $
                                                  913
                                                  
                                                  
                                                  $
                                                  1,100
                                                  
                                                  
                                                  $
                                                  15,154
                                                  
                                                  
                                                  $
                                                  27,531




See
accompanying notes to consolidated financial statements





6





VLOV,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited;
amounts in thousands)





Nine
      months Ended September 30,2010
                                    
                                    
                                    2009Cash
      flows from operating activities:Net
      income
                                    
                                    $
                                    8,978
                                    
                                    
                                    $
                                    8,822Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                    
                                    
                                    53
                                    
                                    
                                    
                                    71Change
      in fair value of derivative liability
                                    
                                    
                                    (818
                                    )
                                    
                                    
                                    -(Increase)
      decrease in assets:Accounts
      receivable
                                    
                                    
                                    (8,521
                                    )
                                    
                                    
                                    509Trade
      deposits
                                    
                                    
                                    (2,615
                                    )
                                    
                                    
                                    -Inventories
                                    
                                    
                                    35
                                    
                                    
                                    
                                    (277)Prepaid
      expenses
                                    
                                    
                                    (114
                                    )
                                    
                                    
                                    (7
                                    )Increase
      (decrease) in liabilities:Accounts
      payable
                                    
                                    
                                    (361
                                    )
                                    
                                    
                                    3,007Accrued
      expenses and other payables
                                    
                                    
                                    266
                                    
                                    
                                    
                                    (585
                                    )Income
      and other tax payables
                                    
                                    
                                    (256
                                    )
                                    
                                    
                                    (184
                                    )Net
      cash provided by (used in) operating activities
                                    
                                    
                                    (3,352
                                    )
                                    
                                    
                                    11,356Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    -Time
      deposits
                                    
                                    
                                    (3,020
                                    )
                                    
                                    
                                    -Net
      cash used in investing activities
                                    
                                    
                                    (3,027
                                    )
                                    
                                    
                                    --Cash
      flows from financing activities:Pledged
      bank deposits
                                    
                                    
                                    -
                                    
                                    
                                    
                                    88Amount
      due to/from a director
                                    
                                    
                                    2,468
                                    
                                    
                                    
                                    -Proceeds
      from debt financing
                                    
                                    
                                    294
                                    
                                    
                                    
                                    440Payments
      of short-term debt
                                    
                                    
                                    (441
                                    )
                                    
                                    
                                    (293
                                    )Warrants
      exercised
                                    
                                    
                                    22
                                    
                                    
                                    
                                    -Payments
      of dividend *
                                    
                                    
                                    
                                    
                                    
                                    
                                    (5,131
                                    )Net
      cash provided by (used in) financing activities
                                    
                                    
                                    2,343
                                    
                                    
                                    
                                    (4,896
                                    )Effect
      of exchange rate changes
                                    
                                    
                                    149
                                    
                                    
                                    
                                    5Net
      increase in cash and cash equivalents
                                    
                                    
                                    (3,887
                                    )
                                    
                                    
                                    6,465Cash
      and cash equivalents, beginning of period
                                    
                                    
                                    11,036
                                    
                                    
                                    
                                    2,863Cash
      and cash equivalents, end of period
                                    
                                    $
                                    7,149
                                    
                                    
                                    $
                                    9,328Supplemental
      disclosure of cash flow information:Interest
      paid
                                    
                                    $
                                    52
                                    
                                    
                                    $
                                    43Income
      taxes paid
                                    
                                    $
                                    3,208
                                    
                                    
                                    $
                                    2,605




See
accompanying notes to consolidated financial statements





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





7





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(1)
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES





(a)
            Description of business and
      organization





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





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.





The
Company does not conduct any substantive operations of its own; all of the
Company’s operations are conducted by a variable interest entity, Jinjiang
Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by
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. PXPF is a limited liability company incorporated in the British Virgin
Islands (“BVI”) on April 30, 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. 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 Share Exchange, however, certain dividends were declared and paid from
Yinglin Jinduren’s net income to its equity owners. In addition, Yinglin
Jinduren’s equity owners have pledged their equity interests in Yinglin Jinduren
to HK Dong Rong, irrevocably granted HK Dong Rong an exclusive option to
purchase 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.





8




VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(1)
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES (CONTINUED)





(a)
            Description of business and
      organization (continued)





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.





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 September 30, 2010, $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 September 30, 2010.





(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 equity owners. 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.




In the
opinion of management, the accompanying unaudited consolidated financial
statements of the Company contain all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation of the
consolidated balance sheets as of September 30, 2010 and December 31,
2009, the consolidated statements of operations and comprehensive income for the
three and nine months ended September 30, 2010 and 2009, and the
consolidated statements of cash flows for the nine months ended September
30, 2010 and 2009. The accompanying unaudited consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial
information and the instructions to Rule 10-01 of Regulation S-X of
the Securities and Exchange Commission (the “SEC”). Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. The results of operations for the three and nine months
ended September 30, 2010 are not necessarily indicative of the results of
operations to be expected for the full fiscal year. These financial statements
should be read in conjunction with the Company’s Annual Report on Form 10-K
for the year ended December 31, 2009.




(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.





9




VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(1)
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES (CONTINUED)





(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 revenue 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)
            Time
    Deposits





The
Company, at times, invests excess funds in time deposits with original maturity
dates beyond three months. The Company intends and has the ability to hold its
held-to-maturity securities to maturity, and therefore carries such investments
at amortized cost. The
carrying value of time deposits approximated the fair value of securities at
September 30, 2010.




(h)
            Accounts
      receivable





Accounts
receivable, including associated value added taxes, are unsecured, and are
stated at the amount the Company expects to collect. The Company may maintain
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. Interest is not normally charged on accounts
receivables. As of September 30, 2010, approximately $2.6 million of
accounts receivable were aged greater than 90 days. Management has determined no
allowance for uncollectible amounts is required.





(i)
            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
            5
      yearsPlant
      and machinery
            5
      to 15 years





(j)
            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.





(k)
            Foreign Currency
      Translation





The
Company has the PRC’s 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.





10




VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(1)
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES (CONTINUED)





(k)
            Foreign Currency Translation
      (continued)





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 September 30, 2010 and
December 31, 2009 were US$1.00 to RMB 6.68 and RMB 6.83, respectively. The
average translation rates of US$1.00 to RMB 6.76 and US$1.00 to RMB 6.80 was
applied to the income statement accounts for the three and nine months ended
September 30, 2010, respectively. The average translation rate of US$1.00 to RMB
6.84 was applied to the income statement accounts for the three and nine months
ended September 30, 2009.





Translation
adjustments are recorded as other comprehensive income (loss) in the
consolidated statements 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.





(l)
            Land use
      rights





All land
in the PRC is state-owned 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 September 30, 2010, the Company expects these assets to be fully
recoverable.





(m)
            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.





(n)
            Comprehensive
      Income





The
Company’s only component of other comprehensive income is foreign currency
translation gains and losses. The foreign currency translation gains for the
three months and nine months ended September 30, 2010 were US$438,000 and
US$540,000, respectively. The foreign currency translation gains for the three
months and nine months ended September 30, 2009 were US$7,000 and US$14,000,
respectively. Accumulated other comprehensive income is recorded as a separate
component of stockholders’ equity.





(o)
            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.





11





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(1)
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES (CONTINUED)





(o)
            Income Taxes
      (continued)





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.





(p)
            Advertising
      Costs





Advertising
costs are expensed and reflected in selling expenses on the consolidated
statements of income and comprehensive income in the period in which the
advertisements are first run. Advertising expense for the three months ended
September 30, 2010 and 2009 were approximately US$1.37 million and US$0.75
million, respectively, and approximately US$4.11 million and US$2.19 million for
the nine months ended September 30, 2010 and 2009, 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.





(q)
            Shipping and Handling
      Costs





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





(r)
            Research and Development
      Costs





The
Company charges all product design and development costs to expense when
incurred and are reflected in general and administrative expenses on the
consolidated statements of income and comprehensive income. Product design and
development costs aggregated approximately US$0.32 million and US$0.34 million
for the three months ended September 30, 2010 and 2009, respectively, and
approximately US$1.28 million and US$1.12 million for the nine months ended
September 30, 2010 and 2009, respectively.





(s)
            Derivative Financial
      Instruments





The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.





The
Company reviews the terms of convertible debt or convertible preferred stock
that it issues 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, the Company
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, the Company uses a
binomial option pricing model to value the derivative instruments.





(t)
            Fair Value of Financial
      Instruments





The
carrying amounts of the Company’s financial instruments, which principally
include cash and cash equivalents, 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 bank loans 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.





12





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(1)
            SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES (CONTINUED)





(u)
            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. Equity instruments are excluded from the
calculation of diluted earnings per share if the effect of including such
instruments is anti-dilutive.





(v)
            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. 2009-17
            
            December
      2009
            
            Consolidations
      (Topic 810): Improvements to Financial Reporting by Enterprises Involved
      with Variable Interest EntitiesASU
      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 (Topic 718): 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. 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





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.





13





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(2)
            TIME
    DEPOSITS





Time
deposits (in thousands):





September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(unaudited)Time
      deposits
                  
                  $
                  3,020
                  
                  
                  $
                  -





Time
deposits represent amounts deposited with Xiamen International Bank and mature
on March 31, 2011.





(3)
            INVENTORIES





Inventories
consist of the following (in thousands):





September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Raw
      materials
                    
                    $
                    -
                    
                    
                    $
                    145Work
      in process
                    
                    
                    9
                    
                    
                    
                    15Finished
      goods
                    
                    
                    247
                    
                    
                    
                    125$
                    256
                    
                    
                    $
                    285





(4)
            PROPERTY, PLANT AND
      EQUIPMENT





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





September 30,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Buildings
                      
                      $
                      933
                      
                      
                      $
                      914Furniture,
      fixtures and equipment
                      
                      
                      85
                      
                      
                      
                      83Motor
      vehicles
                      
                      
                      200
                      
                      
                      
                      196Office
      equipment
                      
                      
                      32
                      
                      
                      
                      24Plant
      and machinery
                      
                      
                      211
                      
                      
                      
                      207Total
      property, plant and equipment
                      
                      
                      1,461
                      
                      
                      
                      1,424Less
      : accumulated depreciation
                      
                      
                      (513
                      )
                      
                      
                      (458
                      )$
                      948
                      
                      
                      $
                      966





There was
no capitalized interest for the nine months ended September 30, 2010 and the
years ended December 31, 2009. During the third quarter of 2010, the Company
stopped its direct manufacturing of certain products and is now outsourcing all
manufacturing to third parties. The Company is in the process of evaluating any
impairment to its fixed assets and will address such impairment in its
annual financial statements. The
Company believes that any such impairment will not be material to the Company’s
financial statements.





14





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(5)
            LAND USE
      RIGHTS





Land use
rights are summarized as follows (in thousands):





September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(unaudited)Land
      use rights
                    
                    $
                    321
                    
                    
                    $
                    315Less
      : accumulated amortization
                    
                    
                    (61
                    )
                    
                    
                    (52
                    )$
                    260
                    
                    
                    $
                    263





There was
no capitalized interest for the nine months ended September 30, 2010 and the
year ended December 31, 2009.





(6)
            ACCRUED EXPENSES AND OTHER
      PAYABLES





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





September 30,
                      
                      
                      December 31,2010
                      
                      
                      2009(unaudited)Current
      portion:Accrued
      salaries and wages
                      
                      $
                      46
                      
                      
                      $
                      165Accrued
      expenses (1)
                      
                      
                      692
                      
                      
                      
                      305Advertising
      subsidies payables
                      
                      
                      104
                      
                      
                      
                      113$
                      842
                      
                      
                      $
                      583Non-current
      portion:Advertising
      subsidies payables
                      
                      
                      77
                      
                      
                      
                      75$
                      919
                      
                      
                      $
                      658





(1)
Represents $691,000 in estimated liquidated damages relating to the Company’s
fourth quarter 2009 financings. The Company was required to register the shares
of common stock issued and issuable in connection with the financings, including
the shares underlying the preferred stock and warrants issued in the financings,
pursuant to an effective registration statement by May 16, 2010. The
registration statement was filed on December 17, 2009, but has not yet been
declared effective. Accordingly, the Company has accrued $691,000 and $300,000
as of September 30, 2010 and December 31, 2009, respectively, for
estimated liquidated damages it expects to be required to pay to the investors
in the financings. Pursuant to the agreements entered into in connection with
the financings, the total amount of liquidated damages that the Company may be
subject to is $987,000.





15





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(7)
            RELATED PARTY
      TRANSACTIONS





September 30,
                  
                  
                  December 31,2010
                  
                  
                  2009(unaudited)Amount
      due from a director (in thousands):Mr.
      Qingqing Wu
                  
                  $
                  -
                  
                  
                  $
                  2,428Amounts
      due to directors/officers (in thousands):Mr.
      Qingqing Wu (1)
                  
                  
                  -
                  
                  
                  
                  30Mr.
      Bennet Tchaikovsky (2)
                  
                  
                  43Ms.
      Ying (Teresa) Zhang (2)
                  
                  
                  34Total
                  
                  $
                  77
                  
                  
                  $
                  30





(1)
            The
      amount due to this director is unsecured, interest-free and repayable on
      demand.


(2)
            Represents
      share based compensation owed to the respective
      parties.





Mr.
Qingqing Wu currently has four trademarks registered in his name that were
intended to be transferred to Yinglin Jinduren for no consideration prior to the
closing of the Exchange Transaction. As such transfers could not be timely
effected, Mr. Wu entered into trademark license contracts with Yinglin Jinduren
on February 12, 2009, pursuant to which he perpetually granted Yinglin Jinduren
the rights to use these trademarks for no consideration. Mr. Wu is also in the
process of transferring the trademarks to Yinglin Jinduren for no consideration
as originally intended, although such transfers have not been completed. To
date, Yinglin Jinduren has not utilized these trademarks, and the Company
considers the value of these trademarks to be de minimis.




(8)
            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 the Company’s 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 September 30, 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 0.44% to 0.46%, based on constant maturity rates published by
the U.S. Federal Reserve, applicable to the remaining life of the
Warrants.





At
September 30, 2010, the following derivative liabilities related to common stock
warrants were outstanding:





Numbers of warrants
                                
                                
                                ValueIssue date
                                
                                Expiration date
                                
                                Exercise price
                                  per share
                                
                                
                                September
                                  30, 2010
                                
                                
                                December 31,
                                  2009
                                
                                
                                September
                                  30, 2010
                                
                                
                                December 31,
                                  2009October
      27, 2009
                                
                                October
      27, 2012
                                
                                $
                                3.43
                                
                                
                                
                                723,052
                                
                                
                                
                                723,052
                                
                                
                                $
                                1,193,676
                                
                                
                                $
                                1,538,959November
      17, 2009
                                
                                November
      17, 2012
                                
                                $
                                3.43
                                
                                
                                
                                667,059
                                
                                
                                
                                675,308
                                
                                
                                
                                1,107,084
                                
                                
                                
                                1,440,952December
      1, 2009
                                
                                December
      1, 2012
                                
                                $
                                3.43
                                
                                
                                
                                326,767
                                
                                
                                
                                326,767
                                
                                
                                
                                544,177
                                
                                
                                
                                704,5101,716,878
                                
                                
                                
                                1,725,127
                                
                                
                                $
                                2,844,937
                                
                                
                                $
                                3,684,421





16





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(8)
            DERIVATIVE FINANCIAL INSTRUMENTS
      (CONTINUED)





During
the nine months ended September 30, 2010, the Company recognized an unrealized
gain of $817,000 related to the change in the fair value of these derivative
instrument liabilities.





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 nine months
ended September 30, 2010:





Warrants (in
                      thousands)Balance
      – December 31, 2009
                    
                    
                    3,684Exercised
                    
                    
                    (21
                    )Fair
      value adjustments
                    
                    
                    (818
                    )Balance
      – September 30, 2010
                    
                    
                    2,845





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.





(9)
            SHORT-TERM
      BORROWINGS





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





September
      30, 2010
                    
                    
                    December 31, 2009Interest
                    
                    
                    
                    
                    
                    InterestAmount
                    
                    
                    Rate
                    
                    
                    Amount
                    
                    
                    RateBank
      loan
                    
                    $
                    599
                    
                    
                    
                    7.700
                    %
                    
                    $
                    734
                    
                    
                    
                    7.700
                    %





As of
September 30, 2010, the short-term borrowings were secured by a personal
guarantee granted by Mr. Qingqing Wu, a director of the Company.





(10)
            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.





During
the nine months ended September 30, 2010, 8,250 warrants and 1,307,065 shares of
convertible preferred stock were exercised and converted into 8,250 and
1,307,065 shares of common stock.





On March
10, 2010, the Company’s board of directors agreed to issue 10,000 restricted
shares of common stock to a director in quarterly installments of 2,500 shares
beginning with the quarter ending June 30, 2010. The trading value of the
granted shares on March 10, 2010 was $6.00 per share for a total value of
$60,000. $34,000 was charged as expense for the three and nine months ended
September 30, 2010.





On April
27, 2010, the Company’s board of directors agreed to issue 20,000 shares of
common stock to its chief financial officer (“CFO”) during the term of a
one-year agreement, which would vest as follows: 3,562 shares on June 30, 2010,
5,041 shares on September 30, 2010, 5,041 shares on December 31, 2010, 4,932
shares on March 31, 2010 and 1,424 shares on April 26, 2010.  The
trading value of the granted shares on April 27, 2010 was $5.00 per share for a
total value of $100,000, $25,000 and $43,000 were charged as compensation
expense for the three and nine months ended September 30, 2010.





A summary
of the status of the Company’s non-vested shares as of September 30, 2010, and
changes during the nine months ended September 30, 2010, is presented
below:





Weighted-AverageGrant
      DateNon-vested Shares
                  
                  Shares
                  
                  
                  Fair ValueNon-vested
      at January 1, 2010
                  
                  
                  -
                  
                  
                  
                  -Granted
                  
                  
                  30,000
                  
                  
                  $
                  5.33Vested
                  
                  
                  (13,063
                  )
                  
                  $
                  5.33Forfeited
                  
                  
                  -
                  
                  
                  
                  -Non-vested
      at September 30, 2010
                  
                  
                  16,397
                  
                  
                  $
                  5.33





As of
September 30, 2010, there was $83,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted by the board
of directors. This cost is expected to be recognized by April 26, 2011. The
total fair value of shares vested during the nine months ended September 30,
2010 was $77,000.





As
of September 30, 2010, 17,983,272 shares of common stock were issued and
outstanding.





17




VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(11)
            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 (the “Preferred Share”).





On
October 27 and November 17, 2009, the Company sold 1,446,105 and 1,350,616
Preferred Shares, respectively, 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. Each Preferred Share is entitled to
participate in any dividends declared and paid on the common stock on an
as-converted basis. Holders of the Preferred Shares are also entitled to notice
of any stockholders’ meeting and vote together with common stock holders on an
as-converted basis. Each Preferred Share has a liquidation preference of $2.86
per share, plus any accrued but unpaid dividends. During the nine months ended
September 30, 2010, 1,307,065 Preferred Shares were converted, and at September
30, 2010, 1,489,656 Preferred Shares were outstanding, with an aggregate
liquidation preference of $4,260,416.





(12)
            EARNINGS PER
      SHARE





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




(a)
            Basic





“Basic
earnings per share - common” is calculated by dividing
the net income attributable to common shareholders of
the Company by the weighted average number of common shares. Using the two class
method pursuant to ASC 260-10-45, the Company allocated its net income to
preferred and common shareholders during the three and nine months ended
September 30, 2010, based on the number of common shares outstanding during the
periods shown (taking into account the number of preferred shares converted into
common shares at the end of such periods on a 1-for-1 basis), and participating
preferred shares outstanding during the periods shown.





Three Months Ended September
      30,
                      
                      
                      Nine Months Ended September
      30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Income
      attributable to common shareholders of the Company
                      
                      
                      3,149
                      
                      
                      
                      2,737
                      
                      
                      
                      8,127
                      
                      
                      
                      8,822Income
      attributable to preferred shareholders of the Company
                      
                      
                      281
                      
                      
                      
                      -
                      
                      
                      
                      851
                      
                      
                      
                      -Net
      income
                      
                      $
                      3,430
                      
                      
                      $
                      2,737
                      
                      
                      $
                      8,978
                      
                      
                      $
                      8,822Weighted
      average number of common shares outstanding
                      
                      
                      17,874,371
                      
                      
                      
                      16,000,000
                      
                      
                      
                      17,199,755
                      
                      
                      
                      15,773,187





(b)
            Diluted





Diluted
earnings per share is calculated by adjusting the weighted average number of
common shares outstanding assuming conversion of all dilutive potential common
shares. The Company has two categories of dilutive potential common shares: the
Preferred Shares issued in October and November 2009 (the “Preferred Shares
Financing”), and the Warrants issued in connection with both the Preferred
Shares Financing and the shares of common stock sold in December 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 that
were outstanding at the end of the respective periods are assumed to have been
converted into common shares on a 1-for-1 basis. Since the Preferred Shares are
included in the diluted calculation, net income (attributable to both common and
preferred shareholders) is used. As the strike price of the warrants, $3.43 was
greater than the closing price of the Company’s stock on September 30, 2010,
$3.40, the warrants are considered to be anti-dilutive and are excluded from the
diluted earnings per share computation.




Three Months Ended September 30,
                        
                        
                        Nine Months Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Net
      income
                        
                        $
                        3,430
                        
                        
                        $
                        2,737
                        
                        
                        $
                        8,978
                        
                        
                        $
                        8,822Weighted
      average number of common shares outstanding
                        
                        
                        17,874,371
                        
                        
                        
                        16,000,000
                        
                        
                        
                        17,199,755
                        
                        
                        
                        15,773,187Adjustment
      for:Preferred
      stock
                        
                        
                        1,598,005
                        
                        
                        
                        
                        
                        
                        
                        1,801,596Warrants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -19,472,376
                        
                        
                        
                        16,000,000
                        
                        
                        
                        19,001,350
                        
                        
                        
                        15,773,187





18





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(13)
            INCOME
    TAXES





The
provision for income taxes for three and nine months ended September 30, 2010
and 2009 consisted of the following (in thousands):





Three months ended September 30
                    
                    
                    Nine months ended September 302010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Provision
      for current income tax – China
                    
                    $
                    884
                    
                    
                    $
                    922
                    
                    
                    $
                    2,992
                    
                    
                    $
                    3,183





As of
September 30, 2010 and December 31, 2009, the Company did not have any
significant temporary differences and carry forwards that may result in deferred
tax.





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 the three and nine months ended September 30, 2010 and
2009:





Three and Nine months Ended September 30,2010
                      
                      
                      2009U.S
      Statutory rates
                      
                      
                      34
                      %
                      
                      
                      34
                      %Foreign
      income not recognized in the U.S.
                      
                      
                      (34
                      )%
                      
                      
                      (34
                      )%China
      income tax rate
                      
                      
                      25
                      %
                      
                      
                      25
                      %Effective
      tax rate
                      
                      
                      25
                      %
                      
                      
                      25
                      %





19





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(13)
            INCOME TAXES
      (CONTINUED)





The
following table reconciles the theoretical tax expense calculated at the
statutory tax rate to the Company’s effective tax expense for the three and nine
months ended September 30, 2010 and 2009:





(in thousands)
                                
                                Three months ended September 30
                                
                                
                                Nine months ended September 302010
                                
                                
                                2009
                                
                                
                                2010
                                
                                
                                2009(Unaudited)
                                
                                
                                (Unaudited)
                                
                                
                                (Unaudited)
                                
                                
                                (Unaudited)Theoretical
      tax expense at PRC statutory tax rate of 25%
                                
                                $
                                1,079
                                
                                
                                $
                                915
                                
                                
                                $
                                2,993
                                
                                
                                $
                                3,001Tax
      expense effect of non-deductible expenses
                                
                                
                                54
                                
                                
                                
                                7
                                
                                
                                
                                205
                                
                                
                                
                                182Tax
      expense effect of non-taxable valuation change (Warrant
      liability)
                                
                                
                                (249
                                )
                                
                                
                                —
                                
                                
                                
                                (206
                                )
                                
                                
                                ——
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Effective
      tax expense
                                
                                $
                                884
                                
                                
                                $
                                922
                                
                                
                                $
                                2,992
                                
                                
                                $
                                3,183





Non-deductible
expenses for the three and nine months ended September 30, 2010 primarily
consisted of expenses incurred outside of the PRC which are not deductible in
computing the income tax for the PRC.





The
applicable rate of Hong Kong profits tax for the nine months ended September 30,
2010 and 2009 was 16.5%. However, no provision for Hong Kong profits tax has
been made for the nine months ended September 30, 2010 and 2009 as HK Dong Rong
did not carry on any business subject to 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.





(14)
            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 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 September 30, 2010, the registered capital of
Yinglin Jinduren was RMB 10,000,000 and the statutory reserves have been fully
funded.





(15)
            LEASE
      COMMITMENTS





The
Company leases a premise under a long-term, non-cancelable lease. The
lease is accounted for as an operating lease. Rent expense amounted to
US$0 and US$19,000 for the three months ended September 30, 2010 and 2009,
respectively. Rent expense amounted to US$35,000 and US$41,000 for the nine
months ended September 30, 2010 and 2009, respectively.





Future
minimum payments under long-term, non-cancelable leases as of September 30,
2010, are as follows (in thousands):





Future
                      minimum
                      paymentsThree
      months Ending December 31:2010
                    
                    $
                    18Year
      Ending December 31:2011
                    
                    
                    702012
                    
                    
                    54$
                    142





20




VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)





(16)
            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 sells its product to its distributors. As of September 30, 2010, the
Company had distribution agreements with 12 distributors and the following
concentrations of business with each distributor (customer) constituting greater
than 10% of the Company’s sales:





Three Months Ended September
      30,
                        
                        
                        Nine
      months Ended September 30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009DistributorsDistributor
      A
                        
                        
                        16.15
                        %
                        
                        
                        17.57
                        %
                        
                        
                        15.96
                        %
                        
                        
                        19.36
                        %Distributor
      B
                        
                        
                        12.79
                        %
                        
                        
                        13.86
                        %
                        
                        
                        12.93
                        %
                        
                        
                        13.54
                        %Distributor
      C
                        
                        
                        11.68
                        %
                        
                        
                        11.53
                        %
                        
                        
                        12.66
                        %
                        
                        
                        11.17
                        %Distributor
      D
                        
                        
                        *
                        
                        
                        
                        10.55
                        %
                        
                        
                        *
                        
                        
                        
                        11.66
                        %Distributor
      E
                        
                        
                        *
                        
                        
                        
                        10.11
                        %
                        
                        
                        *
                        
                        
                        
                        10.09
                        %





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





Three Months Ended September
      30,
                      
                      
                      Nine
      months Ended September 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009VendorsVendor
      A
                      
                      
                      *
                      
                      
                      
                      11.06
                      %
                      
                      
                      10.73
                      %
                      
                      
                      10.64
                      %Vendor
      B
                      
                      
                      *
                      
                      
                      
                      11.02
                      %
                      
                      
                      *
                      
                      
                      
                      13.12
                      %Vendor
      C
                      
                      
                      *
                      
                      
                      
                      10.18
                      %
                      
                      
                      *
                      
                      
                      
                      *Vendor
      D
                      
                      
                      *
                      
                      
                      
                      *
                      %
                      
                      
                      10.13
                      %
                      
                      
                      *





The
Company had the following concentrations of business with each distributor
constituting greater than 10% of the Company’s trade receivables:





Nine
      months Ended September 30,2010
                      
                      
                      2009DistributorsDistributor
      A
                      
                      
                      17.14
                      %
                      
                      
                      *
                      %Distributor
      B
                      
                      
                      13.65
                      %
                      
                      
                      10.86
                      %Distributor
      C
                      
                      
                      13.97
                      %
                      
                      
                      21.68
                      %Distributor
      D
                      
                      
                      *
                      
                      
                      
                      10.10
                      %





21





VLOV,
INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 (UNAUDITED)




(16)
            BUSINESS AND CREDIT
      CONCENTRATIONS (CONTINUED)





The
Company had the following concentrations of business with each creditor
constituting greater than 10% of the Company’s trade payables:





Nine
      months Ended September 30,2010
                      
                      
                      2009CreditorsCreditor
      A
                      
                      
                      *
                      
                      
                      
                      10.43
                      %Creditor
      B
                      
                      
                      *
                      
                      
                      
                      10.41
                      %Creditor
      C
                      
                      
                      17.21
                      %
                      
                      
                      *Creditor
      D
                      
                      
                      13.37
                      %
                      
                      
                      *Creditor
      E
                      
                      
                      13.23
                      %
                      
                      
                      *Creditor
      F
                      
                      
                      11.98
                      %
                      
                      
                      *Creditor
      G
                      
                      
                      10.57
                      %
                      
                      
                      *Creditor
      G
                      
                      
                      10.30
                      %
                      
                      
                      *





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





* The
concentration is less then 10%





(17)
            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$12,000 and US$44,000 for the three months
ended September 30, 2010 and 2009, respectively, and US$78,000 and US$133,000
for the nine months ended September 30, 2010 and 2009,
respectively.





22




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 September 30, 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 November 3, 2010, our
distributors owned and operated 526 points of sales, or POS, across the PRC,
including counters, concessions, 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.





Our goal
is to provide stylish, fashion-forward clothing, to our target customer, the
male Chinese consumer aged 20 to 45. To achieve this goal, we must maintain our
brand image and make our brand more exclusive. We, along with our distributors,
believe that certain types of POS (counters and concessions) lessen our overall
brand value. Accordingly, since the beginning of this year, our distributors
have closed over 271 counters and concessions. Conversely, we believe that
certain POS, mainly stand-alone stores, enhance brand value. Thus, our
distributors plan to open 30 to 40 stand-alone locations by the end of this
year. To date, our distributors have been willing to make such investments
because we have increased our marketing budget significantly as a percentage of
our revenue and because of our ability to produce clothing that we believe is
reflective of our brand image. Ultimately, our goal is for our distributors to
move towards stand-alone stores as this will continue to enhance our brand value
amongst our target consumer base.





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 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 for no consideration sometime
in 2010. As of 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.


23


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:





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. 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 revenue 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.





Our
accounts receivable aging was as follows for the periods below (amounts in
thousands):





From Date of Invoice to Customer:
                        
                        September
      30, 2010
                        
                        
                        December 31, 20090-30
      days
                        
                        $
                        8,853
                        
                        
                        $
                        6,91431-60
      days
                        
                        
                        2,308
                        
                        
                        
                        2,19061-90
      days
                        
                        
                        4,178
                        
                        
                        
                        -91-120
      days
                        
                        
                        2,600
                        
                        
                        
                        -121
      days and above
                        
                        
                        -
                        
                        
                        
                        -Allowance
      for bad debts
                        
                        
                        -
                        
                        
                        
                        -Total
      Accounts Receivable
                        
                        $
                        17,939
                        
                        
                        $
                        9,104




24


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.





All
receivables categorized over 61 days as of September 30, 2010 were collected as
of November 2, 2010.





Other
receivables were $109,000 and $87,000 as of September 30, 2010 and December 31,
2009, respectively.





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 September 30, 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
September 30, 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.





Results
of Operations





Comparison
of Three and Nine months ended September 30, 2010 and September 30,
2009





Three Month Periods Ended September 30,
                      
                      
                      Nine Month Periods Ended September 30,2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010(Amounts in thousands, in U.S. Dollars, except for
                        percentages)
                      
                      
                      (Amounts in thousands, in U.S. Dollars, except for
                        percentages)Net
      Sales
                      
                      $
                      13,882
                      
                      
                      
                      100.0
                      %
                      
                      $
                      13,063
                      
                      
                      
                      100.0
                      %
                      
                      $
                      45,823
                      
                      
                      
                      100.0
                      %
                      
                      $
                      49,105
                      
                      
                      
                      100.0
                      %Gross
      Profit
                      
                      
                      5,032
                      
                      
                      
                      36.2
                      %
                      
                      
                      5,420
                      
                      
                      
                      41.5
                      %
                      
                      
                      16,507
                      
                      
                      
                      36.0
                      %
                      
                      
                      19,187
                      
                      
                      
                      39.1
                      %Operating
      Expense
                      
                      
                      1,361
                      
                      
                      
                      9.8
                      %
                      
                      
                      2,101
                      
                      
                      
                      16.1
                      %
                      
                      
                      4,473
                      
                      
                      
                      9.8
                      %
                      
                      
                      8,044
                      
                      
                      
                      16.4
                      %Income
      From Operations
                      
                      
                      3,671
                      
                      
                      
                      26.4
                      %
                      
                      
                      3,319
                      
                      
                      
                      25.4
                      %
                      
                      
                      12,034
                      
                      
                      
                      26.3
                      %
                      
                      
                      11,143
                      
                      
                      
                      22.7
                      %Other
      Expenses / (Income)
                      
                      
                      12
                      
                      
                      
                      0.1
                      %
                      
                      
                      (995
                      )
                      
                      
                      (7.6
                      )%
                      
                      
                      29
                      
                      
                      
                      0.1
                      %
                      
                      
                      (827)
                      
                      
                      
                      (1.7
                      )%Income
      tax expenses
                      
                      
                      922
                      
                      
                      
                      6.6
                      %
                      
                      
                      884
                      
                      
                      
                      6.8
                      %
                      
                      
                      3,183
                      
                      
                      
                      6.9
                      %
                      
                      
                      2,992
                      
                      
                      
                      6.1
                      %Net
      Income
                      
                      $
                      2,737
                      
                      
                      
                      19.7
                      %
                      
                      $
                      3,430
                      
                      
                      
                      26.3
                      %
                      
                      $
                      8,822
                      
                      
                      
                      19.3
                      %
                      
                      $
                      8,978
                      
                      
                      
                      18.3
                      %




25


Net
Sales





Net sales
for the three months ended September 30, 2010 were $13,063,000, a decrease
of 5.9% from $13,882,000 for the same period in 2009, while net sales for the
nine months ended September 30, 2010 were $49,105,000, an increase of 7.2% from
$45,823,000 for the same period of 2009.  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. We design and create samples, which are
presented to our distributors at our semi-annual previews for their selection
and purchase based on what they believe will sell most effectively at their POS.
Additionally, we set guidelines for our distributors as to how our products are
to be advertised and displayed. We believe that our sales are driven by
marketing and advertising as well as by creating fashionable designs. The
decrease in our sales for the three months ended September 30, 2010 was
primarily attributable to decreases in sales to distributors in Jiangxi,
Zhejiang and Yunnan provinces due to their closing of counters and
concessions. The increase in sales for the nine months ended September 30, 2010
was a result of our stronger sales results during the second quarter of
2010.





Since
2009, we have been devoting our marketing efforts in the northeastern provinces
because of the market opportunities for our products in these provinces with
high concentrations of second and third tier cities. We have continued to
upscale our product offerings to our distributors and have been working with our
distributors to sell our products primarily via free standing store and
store-in-store POS and not through counter and concession POS as we believe that
free standing stores and store-in-stores strengthen our brand image with
consumers. In this regard, our distributors have collectively closed more than
271 counters and concessions since March 31, 2010 in preparation of opening new
free standing stores and store-in-stores. We anticipate that our distributors
will open between 30 to 40 stand alone stores that reflect VLOV’s upscale brand
image by December 31, 2010.





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





Three Month Periods Ended September 30,
                              
                              
                              Nine Month Periods Ended September 30,2009
                              
                              
                              2010
                              
                              
                              
                              
                              
                              2009
                              
                              
                              2010(Amounts in thousands, in U.S. Dollars,
                                except for percentages)
                              
                              
                              (Amounts in thousands, in U.S. Dollars,
                                except for percentages)$
                              
                              
                              % of net
                                sales
                              
                              
                              $
                              
                              
                              % of net
                                sales
                              
                              
                              Growth
                                (Decline)
                                in 2010
                                compared
                                with
                                2009
                              
                              
                              $
                              
                              
                              % of net
                                sales
                              
                              
                              $
                              
                              
                              % of net
                                sales
                              
                              
                              Growth
                                (Decline)
                                in 2010
                                compared
                                with
                                2009Beijing
                              
                              $
                              641
                              
                              
                              
                              4.6
                              %
                              
                              $
                              616
                              
                              
                              
                              4.7
                              %
                              
                              
                              (3.9)
                              %
                              
                              $
                              2,108
                              
                              
                              
                              4.6
                              %
                              
                              $
                              2,554
                              
                              
                              
                              5.2
                              %
                              
                              
                              21.2
                              %Zhejiang
                              
                              
                              2,440
                              
                              
                              
                              17.6
                              %
                              
                              
                              2,109
                              
                              
                              
                              16.2
                              %
                              
                              
                              (13.6)
                              %
                              
                              
                              8,873
                              
                              
                              
                              19.3
                              %
                              
                              
                              7,836
                              
                              
                              
                              16.0
                              %
                              
                              
                              (11.7
                              )%Shandong
                              
                              
                              1,600
                              
                              
                              
                              11.5
                              %
                              
                              
                              1,525
                              
                              
                              
                              11.7
                              %
                              
                              
                              (4.7)
                              %
                              
                              
                              5,119
                              
                              
                              
                              11.2
                              %
                              
                              
                              6,214
                              
                              
                              
                              12.7
                              %
                              
                              
                              21.4
                              %Jiangxi
                              
                              
                              1,465
                              
                              
                              
                              10.6
                              %
                              
                              
                              1,150
                              
                              
                              
                              8.8
                              %
                              
                              
                              (21.5)
                              %
                              
                              
                              5,342
                              
                              
                              
                              11.6
                              %
                              
                              
                              4,099
                              
                              
                              
                              8.4
                              %
                              
                              
                              (23.8
                              )%Yunnan
                              
                              
                              1,404
                              
                              
                              
                              10.1
                              %
                              
                              
                              1,048
                              
                              
                              
                              8.0
                              %
                              
                              
                              (25.4)
                              %
                              
                              
                              4,622
                              
                              
                              
                              10.1
                              %
                              
                              
                              3,960
                              
                              
                              
                              8.0
                              %
                              
                              
                              (14.3
                              )%Shanxi
                              
                              
                              1,001
                              
                              
                              
                              7.2
                              %
                              
                              
                              907
                              
                              
                              
                              6.9
                              %
                              
                              
                              (9.4)
                              %
                              
                              
                              3,300
                              
                              
                              
                              7.2
                              %
                              
                              
                              3,395
                              
                              
                              
                              6.9
                              %
                              
                              
                              2.9
                              %Liaoning
                              
                              
                              1,135
                              
                              
                              
                              8.2
                              %
                              
                              
                              1,115
                              
                              
                              
                              8.5
                              %
                              
                              
                              (1.8)
                              %
                              
                              
                              3,256
                              
                              
                              
                              7.1
                              %
                              
                              
                              4,387
                              
                              
                              
                              8.9
                              %
                              
                              
                              34.8
                              %Hubei
                              
                              
                              1,923
                              
                              
                              
                              13.9
                              %
                              
                              
                              1,671
                              
                              
                              
                              12.8
                              %
                              
                              
                              (13.1)
                              %
                              
                              
                              6,205
                              
                              
                              
                              13.6
                              %
                              
                              
                              6,351
                              
                              
                              
                              12.9
                              %
                              
                              
                              2.4
                              %Henan
                              
                              
                              1,006
                              
                              
                              
                              7.2
                              %
                              
                              
                              844
                              
                              
                              
                              6.5
                              %
                              
                              
                              (16.1)
                              %
                              
                              
                              3,328
                              
                              
                              
                              7.3
                              %
                              
                              
                              3,286
                              
                              
                              
                              6.7
                              %
                              
                              
                              (1.3)
                              %Guangxi
                              
                              
                              945
                              
                              
                              
                              6.8
                              %
                              
                              
                              869
                              
                              
                              
                              6.7
                              %
                              
                              
                              (8.04)
                              %
                              
                              
                              3,101
                              
                              
                              
                              6.8
                              %
                              
                              
                              3,298
                              
                              
                              
                              6.7
                              %
                              
                              
                              6.4
                              %Sichuan
                              
                              
                              228
                              
                              
                              
                              1.6
                              
                              
                              
                              330
                              
                              
                              
                              2.5
                              %
                              
                              
                              44.7
                              %
                              
                              
                              228
                              
                              
                              
                              0.5
                              %
                              
                              
                              2,103
                              
                              
                              
                              4.3
                              %
                              
                              
                              823.4
                              %Fujian
                              
                              
                              94
                              
                              
                              
                              0.7
                              %
                              
                              
                              879
                              
                              
                              
                              6.7
                              %
                              
                              
                              835.1
                              %
                              
                              
                              341
                              
                              
                              
                              0.7
                              %
                              
                              
                              1,622
                              
                              
                              
                              3.3
                              %
                              
                              
                              375.7
                              %Total
      Net Sales
                              
                              $
                              13,882
                              
                              
                              
                              100.0
                              %
                              
                              $
                              13,063
                              
                              
                              
                              100.0
                              %
                              
                              
                              (5.9)
                              %
                              
                              $
                              45,823
                              
                              
                              
                              100.0
                              %
                              
                              $
                              49,105
                              
                              
                              
                              100.0
                              %
                              
                              
                              7.2
                              %




26


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 net sales.




Three Month Periods Ended September 30,
                        
                        
                        Nine Month Periods Ended September 30,2009
                        
                        
                        2010
                        
                        
                        2009
                        
                        
                        2010(Amounts in thousands, in U.S. Dollars, except
                          for percentages)
                        
                        
                        (Amounts in thousands, in U.S. Dollars, except
                          for percentages)Net Sales
                        
                        $
                        13,882
                        
                        
                        
                        100.0
                        %
                        
                        $
                        13,063
                        
                        
                        
                        100.0
                        %
                        
                        $
                        45,823
                        
                        
                        
                        100.0
                        %
                        
                        $
                        49,105
                        
                        
                        
                        100.00
                        %O.E.M.
      Finished Goods
                        
                        
                        8,124
                        
                        
                        
                        58.5
                        %
                        
                        
                        6,841
                        
                        
                        
                        52.4
                        %
                        
                        
                        26,798
                        
                        
                        
                        58.5
                        %
                        
                        
                        28,235
                        
                        
                        
                        57.5
                        %Raw
      Materials
                        
                        
                        517
                        
                        
                        
                        3.7
                        %
                        
                        
                        632
                        
                        
                        
                        4.8
                        %
                        
                        
                        1,706
                        
                        
                        
                        3.7
                        %
                        
                        
                        1,198
                        
                        
                        
                        2.4
                        %Labor
                        
                        
                        165
                        
                        
                        
                        1.2
                        %
                        
                        
                        -
                        
                        
                        
                        -
                        %
                        
                        
                        643
                        
                        
                        
                        1.4
                        %
                        
                        
                        333
                        
                        
                        
                        0.7
                        %Overhead
      and Other Expenses
                        
                        
                        44
                        
                        
                        
                        0.3
                        %
                        
                        
                        170
                        
                        
                        
                        1.3
                        %
                        
                        
                        169
                        
                        
                        
                        0.4
                        %
                        
                        
                        152
                        
                        
                        
                        0.3
                        %Total
      Cost of Sales
                        
                        
                        8,850
                        
                        
                        
                        63.8
                        %
                        
                        
                        7,643
                        
                        
                        
                        58.5
                        %
                        
                        
                        29,316
                        
                        
                        
                        64.0
                        %
                        
                        
                        29,918
                        
                        
                        
                        60.9
                        %Gross
      Profit
                        
                        $
                        5,032
                        
                        
                        
                        36.3
                        %
                        
                        $
                        5,420
                        
                        
                        
                        41.5
                        %
                        
                        $
                        16,507
                        
                        
                        
                        36.0
                        %
                        
                        $
                        19,187
                        
                        
                        
                        39.1
                        %





We
presently outsource 100% of our manufacturing to third parties, based on orders
for our products that we receive from our distributors based on the clothing
samples we design and create. 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 to
O.E.M. manufacturers. Our plan is continue outsourcing our manufacturing needs. O.E.M.
finished goods cost, representing our purchase of finished products from the
O.E.M. manufacturers, accounted for 52.4% and 57.5% of our sales for the three
months and nine months periods ended September 30, 2010, respectively, compared
to 58.5%  and 58.5% for the same periods in 2009,
respectively.




Total
cost of sales for the three months and nine months periods ended September 30,
2010 was $7,643,000 and $29,918,000, respectively, a decrease of 14.6% from
$8,850,000 for the same three-month period in 2009, and a decrease of 0.4% from
$29,316,000 for the same nine-month period in 2009, primarily due to increased
production efficiency through outsourcing to O.E.M. manufacturers as well as
lower sales in the third quarter of 2010. As a percentage of net sales, our cost
of sales was 58.5% and 60.9% for the three months and nine months ended
September 30, 2010 respectively, down slightly from 63.8% and 64.0% for the same
three-month and nine-month periods in 2009, respectively. Consequently, gross
margin as a percentage of net sales increased to 41.5% and 39.1% for the three
months and nine months ended September 30, 2010, respectively, from 36.3% and
36.0% in the same periods in 2009, respectively. Our gross margin increased
mainly due to increased production efficiency through outsourcing to O.E.M.
manufacturers and a 5% price increase to our distributors.


27


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





Three Months Ended Septembere 30,2010
                  
                  
                  2009Net Sales
                  
                  
                  Cost of
                    sales
                  
                  
                  Grossprofit
                  
                  
                  Gross
                    margin
                  
                  
                  Net Sales
                  
                  
                  Cost of
                    sales
                  
                  
                  Gross
                    profit
                  
                  
                  Gross
                    margin(Amounts in thousands, in U.S. Dollars, except for percentages)Beijing
                  
                  $
                  616
                  
                  
                  $
                  345
                  
                  
                  $
                  271
                  
                  
                  
                  44.0
                  %
                  
                  $
                  641
                  
                  
                  $
                  409
                  
                  
                  $
                  232
                  
                  
                  
                  36.2
                  %Zhejiang
                  
                  $
                  2,109
                  
                  
                  $
                  1,180
                  
                  
                  $
                  929
                  
                  
                  
                  44.1
                  %
                  
                  $
                  2,440
                  
                  
                  $
                  1,555
                  
                  
                  $
                  885
                  
                  
                  
                  36.3
                  %Shandong
                  
                  $
                  1,525
                  
                  
                  $
                  853
                  
                  
                  $
                  672
                  
                  
                  
                  44.1
                  %
                  
                  $
                  1,600
                  
                  
                  $
                  1,020
                  
                  
                  $
                  580
                  
                  
                  
                  36.3
                  %Jiangxi
                  
                  $
                  1,150
                  
                  
                  $
                  643
                  
                  
                  $
                  507
                  
                  
                  
                  44.1
                  %
                  
                  $
                  1,465
                  
                  
                  $
                  934
                  
                  
                  $
                  531
                  
                  
                  
                  36.3
                  %Yunnan
                  
                  $
                  1,048
                  
                  
                  $
                  586
                  
                  
                  $
                  462
                  
                  
                  
                  44.1
                  %
                  
                  $
                  1,404
                  
                  
                  $
                  895
                  
                  
                  $
                  509
                  
                  
                  
                  36.3
                  %Shaanxi
                  
                  $
                  907
                  
                  
                  $
                  508
                  
                  
                  $
                  399
                  
                  
                  
                  44.0
                  %
                  
                  $
                  1,001
                  
                  
                  $
                  638
                  
                  
                  $
                  363
                  
                  
                  
                  36.3
                  %Liaoning
                  
                  $
                  1,115
                  
                  
                  $
                  624
                  
                  
                  $
                  491
                  
                  
                  
                  44.0
                  %
                  
                  $
                  1,135
                  
                  
                  $
                  724
                  
                  
                  $
                  411
                  
                  
                  
                  36.2
                  %Hubei
                  
                  $
                  1,671
                  
                  
                  $
                  935
                  
                  
                  $
                  736
                  
                  
                  
                  44.1
                  %
                  
                  $
                  1,923
                  
                  
                  $
                  1,226
                  
                  
                  $
                  697
                  
                  
                  
                  36.3
                  %Henan
                  
                  $
                  844
                  
                  
                  $
                  472
                  
                  
                  $
                  372
                  
                  
                  
                  44.1
                  %
                  
                  $
                  1,006
                  
                  
                  $
                  641
                  
                  
                  $
                  365
                  
                  
                  
                  36.3
                  %Guangxi
                  
                  $
                  869
                  
                  
                  $
                  486
                  
                  
                  $
                  383
                  
                  
                  
                  44.1
                  %
                  
                  $
                  945
                  
                  
                  $
                  602
                  
                  
                  $
                  343
                  
                  
                  
                  36.3
                  %Sichuan
                  
                  $
                  330
                  
                  
                  $
                  185
                  
                  
                  $
                  145
                  
                  
                  
                  43.9
                  %
                  
                  $
                  228
                  
                  
                  $
                  146
                  
                  
                  $
                  82
                  
                  
                  
                  36.0
                  %Fujian
                  
                  $
                  879
                  
                  
                  $
                  826
                  
                  
                  $
                  53
                  
                  
                  
                  6.0
                  %
                  
                  $
                  94
                  
                  
                  $
                  60
                  
                  
                  $
                  34
                  
                  
                  
                  36.2
                  %Total
                  
                  $
                  13,063
                  
                  
                  $
                  7,643
                  
                  
                  $
                  5,420
                  
                  
                  
                  41.5
                  %
                  
                  $
                  13,882
                  
                  
                  $
                  8,850
                  
                  
                  $
                  5,032
                  
                  
                  
                  36.3
                  %





Nine Months Ended September 30,2010
                  
                  
                  2009Net
                    Sales
                  
                  
                  Cost of
                    sales
                  
                  
                  Gross
                    profit
                  
                  
                  Gross
                    margin
                  
                  
                  Net
                    Sales
                  
                  
                  Cost
                    of
                    sales
                  
                  
                  Gross
                    profit
                  
                  
                  Gross
                    margin(Amounts in thousands, in U.S. Dollars, except for percentages)Beijing
                  
                  $
                  2,554
                  
                  
                  $
                  1,543
                  
                  
                  $
                  1,011
                  
                  
                  
                  39.6
                  %
                  
                  $
                  2,108
                  
                  
                  $
                  1,348
                  
                  
                  $
                  760
                  
                  
                  
                  36.1
                  %Zhejiang
                  
                  $
                  7,836
                  
                  
                  $
                  4,718
                  
                  
                  $
                  3,118
                  
                  
                  
                  39.8
                  %
                  
                  $
                  8,873
                  
                  
                  $
                  5,675
                  
                  
                  $
                  3,198
                  
                  
                  
                  36.0
                  %Shandong
                  
                  $
                  6,214
                  
                  
                  $
                  3,751
                  
                  
                  $
                  2,463
                  
                  
                  
                  39.6
                  %
                  
                  $
                  5,119
                  
                  
                  $
                  3,274
                  
                  
                  $
                  1,845
                  
                  
                  
                  36.0
                  %Jiangxi
                  
                  $
                  4,099
                  
                  
                  $
                  2,468
                  
                  
                  $
                  1,631
                  
                  
                  
                  39.8
                  %
                  
                  $
                  5,342
                  
                  
                  $
                  3,417
                  
                  
                  $
                  1,925
                  
                  
                  
                  36.0
                  %Yunnan
                  
                  $
                  3,960
                  
                  
                  $
                  2,386
                  
                  
                  $
                  1,574
                  
                  
                  
                  39.8
                  %
                  
                  $
                  4,622
                  
                  
                  $
                  2,956
                  
                  
                  $
                  1,666
                  
                  
                  
                  36.1
                  %Shaanxi
                  
                  $
                  3,395
                  
                  
                  $
                  2,045
                  
                  
                  $
                  1,350
                  
                  
                  
                  39.8
                  %
                  
                  $
                  3,300
                  
                  
                  $
                  2,111
                  
                  
                  $
                  1,189
                  
                  
                  
                  36.0
                  %Liaoning
                  
                  $
                  4,387
                  
                  
                  $
                  2,645
                  
                  
                  $
                  1,742
                  
                  
                  
                  39.7
                  %
                  
                  $
                  3,256
                  
                  
                  $
                  2,083
                  
                  
                  $
                  1,173
                  
                  
                  
                  36.0
                  %Hubei
                  
                  $
                  6,351
                  
                  
                  $
                  3,827
                  
                  
                  $
                  2,524
                  
                  
                  
                  39.7
                  %
                  
                  $
                  6,205
                  
                  
                  $
                  3,969
                  
                  
                  $
                  2,236
                  
                  
                  
                  36.0
                  %Henan
                  
                  $
                  3,286
                  
                  
                  $
                  1,981
                  
                  
                  $
                  1,305
                  
                  
                  
                  39.7
                  %
                  
                  $
                  3,328
                  
                  
                  $
                  2,128
                  
                  
                  $
                  1,200
                  
                  
                  
                  36.1
                  %Guangxi
                  
                  $
                  3,298
                  
                  
                  $
                  1,987
                  
                  
                  $
                  1,311
                  
                  
                  
                  39.8
                  %
                  
                  $
                  3,101
                  
                  
                  $
                  1,984
                  
                  
                  $
                  1,117
                  
                  
                  
                  36.0
                  %Sichuan
                  
                  $
                  2,103
                  
                  
                  $
                  1,280
                  
                  
                  $
                  823
                  
                  
                  
                  39.1
                  %
                  
                  $
                  228
                  
                  
                  $
                  146
                  
                  
                  $
                  82
                  
                  
                  
                  36.0
                  %Fujian
                  
                  $
                  1,622
                  
                  
                  $
                  1,287
                  
                  
                  $
                  335
                  
                  
                  
                  20.7
                  %
                  
                  $
                  341
                  
                  
                  $
                  225
                  
                  
                  $
                  116
                  
                  
                  
                  34.0
                  %Total
                  
                  $
                  49,105
                  
                  
                  $
                  29,918
                  
                  
                  $
                  19,187
                  
                  
                  
                  39.1
                  %
                  
                  $
                  45,823
                  
                  
                  $
                  29,316
                  
                  
                  $
                  16,507
                  
                  
                  
                  36.0
                  %





Selling,
General and Administrative Expenses





Three Months Ended September 30,
                          
                          
                          Nine months Ended September 30,2009
                          
                          
                          2010
                          
                          
                          2009
                          
                          
                          2010$
                          
                          
                          % of
                            Total
                            Net Sales
                          
                          
                          $
                          
                          
                          % of
                            Total
                            Net Sales
                          
                          
                          $
                          
                          
                          % of
                            Total
                            Net Sales
                          
                          
                          $
                          
                          
                          % of
                            Total
                            Net Sales(Amounts in thousands, in U.S. Dollars,
                            except for percentages)
                          
                          
                          (Amounts in thousands, in U.S. Dollars,
                            except for percentages)Gross Profit
                          
                          $
                          5,032
                          
                          
                          
                          36.2
                          %
                          
                          $
                          5,420
                          
                          
                          
                          41.5
                          %
                          
                          $
                          16,507
                          
                          
                          
                          36.0
                          %
                          
                          $
                          19,187
                          
                          
                          
                          39.1
                          %Operating
      Expenses:Selling
      Expenses
                          
                          
                          841
                          
                          
                          
                          6.1
                          %
                          
                          
                          1,399
                          
                          
                          
                          10.7
                          %
                          
                          
                          2,900
                          
                          
                          
                          6.3
                          %
                          
                          
                          5,442
                          
                          
                          
                          11.1
                          %General
      and Administrative Expenses
                          
                          
                          520
                          
                          
                          
                          3.7
                          %
                          
                          
                          702
                          
                          
                          
                          5.4
                          %
                          
                          
                          1,573
                          
                          
                          
                          3.4
                          %
                          
                          
                          2,602
                          
                          
                          
                          5.3
                          %Total
                          
                          
                          1,361
                          
                          
                          
                          9.8
                          %
                          
                          
                          2,101
                          
                          
                          
                          16.1
                          %
                          
                          
                          4,473
                          
                          
                          
                          9.8
                          %
                          
                          
                          8,044
                          
                          
                          
                          16.4
                          %Income
      from Operations
                          
                          $
                          3,671
                          
                          
                          
                          26.4
                          %
                          
                          $
                          3,319
                          
                          
                          
                          23.4
                          %
                          
                          $
                          12,034
                          
                          
                          
                          26.3
                          %
                          
                          $
                          11,143
                          
                          
                          
                          22.7
                          %





Selling
expenses for the three months ended September 30, 2010 increased by 66.3% to
$1,399,000 as compared to the same period in 2009, and increased by 87.7% to
$5,442,000 for the nine months ended September 30, 2010 as compared to for the
same periods in 2009.   For the three months ended September 30,
2010, our selling expenses increased as a result of branding, marketing and
advertising expenses. For the nine months ended September 30, 2010, the increase
was mainly due to the expenses associated with our Fall 2010 preview held
in May 2010 and to increased advertising costs. In order to increase our
brand image and awareness, we anticipate that our selling expenses will continue
to increase in absolute dollars as well as a percentage of sales. 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.


28


General
and administrative expenses increased by 35.0% from $520,000 for the three
months ended September 30, 2009 to $702,000 for the same period in 2010, and
increased by 65.5% from $1,573,000 for the nine months ended September 30, 2009
to $2,602,000 for the same period in 2010.  The increase was mainly
due to the increase in expenses related to operating as a U.S.
public company and $391,000 in liquidated damages accrued for the nine
months ended September 30, 2010 from not having an effective registration
statement registering the shares of common stock issued in connection with our
fourth quarter 2009 financings, including the shares underlying the preferred
stock and warrants issued in the financings. As we continue to further improve
our operating infrastructure and incur expenses related to being a U.S. public
company, we anticipate that our general and administrative expenses will
continue to increase in absolute dollars as well as a percentage of total
revenues.





Change
in Fair Value of Derivative Liability





We issued
common stock purchase warrants to the investors in our financings completed in
October, November and December 2009. 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 and do not
impact cash flow as these are non-cash charges. During the three and nine months
ended September 30, 2010, we recorded a gains of $992,000 and $817,000,
respectively. 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





Income
tax expense for the three months and nine months ended September 30, 2010
amounted to $884,000 and $2,992,000, respectively, compared to $922,000 and
$3,183,000 for the same three-month and nine-month periods in 2009,
respectively.  Our statutory income tax rate for 2010 is 25%, the same
as in 2009.





The
following table reconciles the theoretical tax expense calculated at the
statutory rates to the Company’s effective tax expense for the nine months ended
September 30, 2010 and 2009 respectively.





Reconciliation
of effective tax expense (in thousands):


Three and Nine months Ended September
                            30,2010
                          
                          
                          2009Theoretical
      tax expense calculated at PRC statutory enterprise income tax rate of
      25%
                          
                          $
                          2,993
                          
                          
                          $
                          3,001Tax
      effect of non-deductible expenses
                          
                          
                          (1
                          )
                          
                          
                          182Effective
      tax expense
                          
                          $
                          2,992
                          
                          
                          $
                          3,183





Net
Income





As a
result of the foregoing, net income for the three months and nine months ended
September 30, 2010 was $3,430,000 and $8,978,000, respectively, an increase of
25.3% from $2,737,000 for the same three-month period in 2009 and an increase of
1.7% from $8,822,000 for the same nine-month period in 2009.





Liquidity
and Capital Resources





Net cash
used in operating activities in the nine months ended September 30, 2010 was
$3,352,000, compared with net cash provided by operating activities of
$11,356,000 in the same period of 2009, a decrease of $14,739,000. This
decrease was primarily attributable an increase in accounts receivable of
$9,030,000 and an increase in trade deposits of $4,564,000. Our accounts
receivable balance increased as some distributors paid later, but within trade
terms. As of November 2, 2010, we collected all receivables that were aged over
60 days as of September 30, 2010. Our trade deposit balance increased as a
result of engaging new suppliers that we expect to utilize over future
periods.





Net
cash used in investing activities was $3,027,000 in the nine
months ended September 30, 2010, compared with $nil cash provided by investing
activities in the same period of 2009. The net cash used in investing activities
was mainly due to a time deposit balance made of $3,020,000 which matured on
September 30, 2010 and was subsequently reinvested into a time deposit with a
maturity date of March 31, 2011.





Net
cash provided by financing activities was $2,343,000 in the nine
months ended September 30, 2010, compared with net cash used in financing
activities of $4,896,000 in the same period of 2009. This increase in net cash
provided by financing activities was primarily due to repayment from a director
of $2,409,000 on March 29, 2010. Additionally, dividends in the amount of
$5,131,000 were declared and paid by Yinglin Jinduren to its equity owners
during the nine months ended September 30, 2009 (prior to our share exchange
transaction with PXPF in February 2009). No dividends have been declared or paid
since, including during the nine months ended September 30,
2010.


29


As of
September 30, 2010, we had cash and cash equivalents of $7,149,000, total
current assets of $35,593,000 and current liabilities of $5,140,000, which is
net of the $2,848,000 derivative liability.  The $2,848,000 derivative
liability relating to our warrants will be allocated to equity when the warrants
are exercised and eliminated when the warrants expire. The $2,848,000 derivative
liability does not require a 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. Our cash balance as of November 12, 2010 was
$7,229,000.





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.





The
following tables summarize our contractual obligations as of September 30, 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
                          
                          $
                          599
                          
                          
                          $
                          599
                          
                          
                          $
                          -Operating
      Leases
                          
                          
                          142
                          
                          
                          
                          18
                          
                          
                          
                          124Total
      Contractual Obligations:
                          
                          $
                          741
                          
                          
                          $
                          617
                          
                          
                          $
                          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.





30




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
September 30, 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.





Our
current accounting staff continues to remain relatively inexperienced with
respect to U.S. GAAP-based reporting and SEC rules and regulations, and will
require additional training to be able to timely and properly account for
complex transactions such as our sales of preferred stock, common stock and
warrants in October, November and December 2009. As a result, the ability of our
financial control environment to mitigate material
misstatement from being prevented or detected remained lacking as of the
evaluation date. In April 2010, the Company retained a CFO on a part-time basis
to assist with the preparation of the Company’s financial statements in
accordance with U.S. GAAP. Additionally, the Company engaged an outside
consultant to assist with the valuation of the securities issued in connection
with its fourth quarter 2009 financings. The Company looks to take such other
steps as necessary to address the weakness in its accounting staff, the
effectiveness of which will not be known until the Company performs a test in
connection with management’s tests of internal control over financial reporting
to be undertaken 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 September 30, 2010 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





Item 1.
            Legal
      Proceedings.





None




Item 1A.
            Risk
    Factors.





As of and
for the nine months ended September 30, 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.





During
the three months ended September 30, 2010, the Company issued an aggregate of
415,905 shares of common stock to certain of the investors in the Company’s
financing completed in November 2009 (the “Financing”), when these investors
converted an aggregate of 415,905 shares of the Company’s series A convertible
preferred stock issued to them in connection with the Financing.





During
the three months ended September 30, 2010, the Company also issued 1,750
shares of common stock to one investor in the Financing when this investor
exercised the common stock purchase warrants issued to him in connection
with the Financing. The exercise price of the warrants is $3.43 per share, and
the Company received gross proceeds of $6,003 from such warrant
exercise.





The
foregoing shares of common stock were issued to these investors in reliance upon
the exemption from securities registration afforded by Rule 506 of Regulation D
under the Securities Act of 1933, as amended.


31





Item 3.
            Defaults upon Senior
      Securities.





None





Item 4.
            Reserved.





Item 5.
            Other
      Information.





None





Item 6.
            Exhibits.





EXHIBIT
INDEX





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)4.5
              
              Form
      of Common Stock Purchase Warrant issued to American Capital Ventures, Inc.
      (14)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)





32





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)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)10.19
              
              Loanout
      Agreement with Worldwide Officers, Inc. dated April 27, 2010
      (13)10.20
              
              Director
      Offer Letter with Jianhui Wang dated June 1, 2010 (15)10.21
              
              Regional
      Distributorship Agreement between Yinglin Jinduren and C-002 of Mingzhu
      100 Market dated May 25, 2009 (14)10.22
              
              Regional
      Distributorship Agreement between Yinglin Jinduren and Jinyang
      Commerce Co., Ltd. dated dated May 25, 2009 (14)10.23
              
              Regional
      Distributorship Agreement between Yinglin Jinduren and Jinduren Store,
      Tianqiao District, Jinan dated May 25, 2009 (14)10.24
              
              Regional
      Distributorship Agreement between Yinglin Jinduren and Clothwork
      Apparel, Wanma Plaza dated May 25, 2009 (14)31.1
              
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *31.2
              
              Certifications
      pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act
      of 1934, as amended *32.1
              
              Certifications
      pursuant to 18 U.S.C. Section 1350 *32.2
              
              Certifications
      pursuant to 18 U.S.C. Section 1350 *99.1
              
              Legal
      Opinion of Allbright Law Offices
(13)





*
            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.


33





(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.





(13)
            Filed on May 3, 2010, as an
      exhibit to our Current Report on Form 8-K, and incorporated herein by
      reference.





(14)
            Filed on October 27, 2010, as an
      exhibit to our Amendment to Registration Statement on Form S-1/A, and
      incorporated herein by
reference.





(15)
            Filed on June 3,
      2010,  as an exhibit to our Current Report on Form 8-K, and
      incorporated herein by
reference.


34


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:
      November 15, 2010
                    By:
                    /s/
      Qingqing WuQingqing
      WuChief
      Executive
Officer




Date:
      November 15, 2010
                      By:
                      /s/
      Bennet P. TchaikovskyBennet
      P. TchaikovskyChief
      Financial
Officer




35