DBUB GROUP, INC - FORM 10-K/A

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EX-32.1 - CERTIFICATION - DBUB GROUP, INC	v306678_ex32-1.htm
EX-31.1 - CERTIFICATION - DBUB GROUP, INC	v306678_ex31-1.htm
EX-32.2 - CERTIFICATION - DBUB GROUP, INC	v306678_ex32-2.htm
EX-31.2 - CERTIFICATION - DBUB GROUP, INC	v306678_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

(Mark One)

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

For the fiscal year ended December 31, 2010

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 000-28767

CHINA 3C GROUP

(Exact name of registrant as specified in its charter)

Nevada

88-0403070

(State or Other Jurisdiction of Incorporation or

Organization)

(I.R.S. Employer Identification No.)

368 HuShu Nan Road

HangZhou City, Zhejiang Province, China 310014

(Address of Principal Executive Offices) (Zip Code)

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

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

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

Common Stock, $0.001 par value

Title of class

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer x

(Do not check if a smaller reporting company)

Smaller reporting company ¨

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

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

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

Documents incorporated by reference: None.

Explanatory Note

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

Except as indicated above, no changes other than corrections of typographical errors have been made.

CHINA 3C GROUP

Table of Contents

		PAGE
PART I		4

Item 1	Business	4

Item 1A	Risk Factors	12

Item 1B	Unresolved Staff Comments	17

Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 7A	Quantitative and Qualitative Disclosure About Market Risk	38

Item 8	Financial Statements and Supplementary Data	39

Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	39

Item 9A(T)	Controls and Procedures	39

Item 9B	Other Information	41

Item 15	Exhibits, Financial Statement Schedules	41

	Index to Consolidated Financial Statements	F-1

Forward Looking Statements

We have included and from time to time may make in our public filings, press releases or other public statements, certain statements, including, without limitation, those under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions. You are cautioned not to place undue reliance on these forward-looking statements. In addition, our management may make forward-looking statements to analysts, investors, representatives of the media and others. These forward-looking statements are not historical facts and represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and beyond our control.

PART I

ITEM 1. BUSINESS

Overview

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

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

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

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

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

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

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

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

Organizational Structure

(All dollar amounts in thousands)

China 3C was incorporated on August, 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital Technology Company Limited (“Zhejiang”), Yiwu Yong Xin Communication Limited (“Yiwu”), Hangzhou Wandda Electronics Company Limited (“Wang Da”), Hangzhou Sanhe Electronic Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic Development Company Limited (“Joy & Harmony”) were incorporated under the laws of the Peoples Republic of China (“PRC” or “China”) on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25, 2003, respectively. China 3C owns 100% of CFDL and CFDL own 100% of the capital stock of Joy & Harmony and Sanhe. Until August 14, 2007, when it made the change to its ownership structure described in the next paragraph in order to comply with certain requirements of PRC law, CFDL owned 100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. On March 10, 2009 Zhejiang set up a new operating entity, Hangzhou Letong Digital Technology Co., Ltd. (“Letong”) to establish an electronic retail franchise operation for China 3C Group. On July 6, 2009, Zhejiang and Yiwu acquired Jinhua. Jinhua was incorporated under the laws of PRC on December 27, 2001.

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

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

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

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

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

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

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

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

Our Business

Information About Our Segments

During fiscal 2010, we operated in five reportable segments:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hangzhou Sanhe Electronic Technology Limited (“Sanhe”)

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

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

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

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

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

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

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

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

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

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

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

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

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

Jinhua Baofa Logistic Litmited (“Jinhua”)

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

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

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

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

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

Intellectual Property

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

Seasonality and Quarterly Fluctuations

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

Working Capital

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

Customers

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

Backlog

We do not have a material amount of backlog orders.

Government Contracts

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

Competition

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

Research and Development

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

Environmental Matters

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

Employees

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

The Company has no collective bargaining agreements with any unions.

ITEM 1A. RISK FACTORS

Risk Factors Associated with Our Business

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

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

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

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

Our business will be harmed if we are unable to maintain our supplier alliance agreements with favorable terms and conditions. We have certain exclusive licensing/distribution agreements with key suppliers in a number of product categories in the Eastern China area, in particular Zhejiang and Jiangsu province and Shanghai City. Our business will be harmed if we are unable to maintain these favorable agreements or are limited in our ability to gain access to additional like agreements with our key suppliers.

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

We have a material weakness in our internal control over financial reporting, and if we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of our shares may be adversely affected. We and our independent registered public accounting firm, in connection with the audit of the consolidated financial statements for the fiscal year ended December 31, 2010, have identified the following material weaknesses in our internal control over financial reporting: the ability of the Company to record transactions and provide disclosures in accordance with accounting principles generally accepted in the United States (US GAAP).

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We plan to take measures to remediate these deficiencies, such as providing additional training to our accounting staff in US GAAP. However, the implementation of these measures may not fully address the control deficiencies in our internal control over financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our shares, may be negatively impacted by a failure to accurately report financial results.

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

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

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

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

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

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

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

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

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

Risks Related to Doing Business in China

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

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

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

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

Due to various restrictions under PRC laws on the distribution of dividends by our PRC operating companies, we may not be able to pay dividends to our stockholders. The Wholly Foreign Owned Enterprise Law (1986), as amended and The Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended, contain the principal regulations governing dividend distributions by wholly foreign owned enterprises. Under these regulations, wholly foreign owned enterprises, such as Zhejiang, Wang Da and Joy & Harmony, may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, Zhejiang, Wang Da and Joy & Harmony are required to set aside a certain amount of any accumulated profits each year (a minimum of 10%, and up to half of its registered capital), to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of the PRC. If we ever determine to pay a dividend, we may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency for the payment of such dividends from the profits of Zhejiang, Wang Da and Joy & Harmony.

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

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

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

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

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

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

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

Risks Associated With Our Common Stock

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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

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

Overview (All dollar amounts in thousands)

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

On December 21, 2005, CFDL became a wholly owned subsidiary of China 3C through a merger with a wholly owned subsidiary of the Company (the “Merger Transaction”). China 3C acquired all of the issued and outstanding capital stock of CFDL pursuant to a the Merger Agreement dated at December 21, 2005 by and among China 3C, XY Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned subsidiary of China 3C and, in exchange for the CFDL shares, China 3C issued 35,000,000 shares of its common stock to the shareholders of CFDL, representing 93% of the issued and outstanding capital stock of China 3C at that time and cash of $500. On August 15, 2007, we executed a series of contractual agreements between Capital and Zhejiang. The contractual agreements give Capital and its equity owners an obligation, and having ability to absorb, any losses, and rights to receive returns; however, these contractual agreements did not change the equity ownership of Zhejiang. We did not dispose Capital’s actual equity ownership of Zhejiang when we execute the contractual agreements. Capital entered into share-holding entrustment agreements with five individuals: Zhenggang Wang, Yimin Zhang, Huiyi Lv,Xiaochun Wang and Zhongsheng Bao to hold 35%, 20%, 20%, 15% and 10%, respectively, of the equity interest of Zhejiang on behalf of Capital on November 21, 2005. The entrustment agreements confirm that CFDL is the actual owner of Zhejiang. CFDL enjoys the actual shareholder rights and has the right to obtain any benefits received by the nominal holders. Zhenggang Wang is the CEO and shareholder of China 3C Group. Yimin Zhang, Huiyi Lv, Xiaochun Wang and Zhongsheng Bao have no other relationship with China 3C Group. No consideration was given to these individuals who held the equity of Zhejiang on behalf of CFDL.

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

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

(2) The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the merger.

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

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

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

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

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

Results of Operations

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

Reportable Operating Segments

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

Yiwu Yong Xin Telecommunication Company, Limited or “Yiwu”

Hangzhou Wang Da Electronics Company, Limited or “Wang Da”

Hangzhou Sanhe Electronic Technology Limited or “Sanhe”

Shanghai Joy & Harmony Electronics Company Limited or “Joy & Harmony”

Jinhua Baofa Logistic Limited or “Jinhua”

Yiwu Yong Xin Telecommunication Company, Limited or “Yiwu”

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

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

	Year Ended December 31,						Percentage
Yiwu	2010			2009			Change
Revenue	$	20,251		$	44,375			(54.4	)%
Gross Profit	$	2,328		$	5,129			(54.6	)%
Gross Margin		11.5	%		11.6	%		(0.1	)%
Operating (Loss)	$	(2,456	)	$	(612	)		(301.3	)%

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

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

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

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

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

	Year Ended December 31,						Percentage
Wang Da	2010			2009			Change
Revenue	$	43,801		$	58,744			(25.4	)%
Gross Profit	$	3,728		$	6,600			(43.5	)%
Gross Margin		8.5	%		11.2	%		(2.7	)%
Operating (Loss)	$	(3,156	)	$	(262	)		(1,104.6	)%

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

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

Hangzhou Sanhe Electronic Technology Limited or “Sanhe”

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

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

	Year Ended December 31,						Percentage
Sanhe	2010			2009			Change
Revenue	$	42,427		$	53,385			(20.5	)%
Gross Profit	$	4,426		$	8,627			(48.7	)%
Gross Margin		10.4	%		16.2	%		(5.8	)%
Operating (Loss)	$	(4,122	)	$	(741	)		(456.3	)%

For the year ended December 31, 2010, Sanhe generated revenue of $42,427, a decrease of $10,958 or 20.5% compared to $53,385for the year ended December 31, 2009. Gross profit decreased $4,201 or 48.7% from $8,627 for the year ended 2009 to $4,426 for the year ended 2010. The decrease in revenue was primarily due to the shrinking market in DVD players and small home electronics as well as the closing of 11 stores in 2010. Operating losses was $4,122 in 2010, increased $3,381 or 456.3% compared to $741 in 2009. The increase in operating losses was primarily a result of higher labor cost and management fees paid to department stores as a percentage of sales.

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

Goodwill Impairment

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

Shanghai Joy & Harmony Electronics Company Limited or “Joy & Harmony”

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

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

	Year Ended December 31,						Percentage
Joy & Harmony	2010			2009			Change
Revenue	$	40,247		$	56,660			(29.0	)%
Gross Profit	$	5,460		$	9,421			(42.0	)%
Gross Margin		13.6	%		16.6	%		(3.0	)%
Operating Income (Loss)	$	(3,151	)	$	1,012			(411.4	)%

For the year ended December 31, 2010, Joy & Harmony generated revenue of $40,247, a decrease of $16,413 or 29.0% compared to $56,660 for the year ended December 31, 2009. Gross profit decreased $3,961 or 42.0% from $9,421 for the year ended 2009 to $5,460 for the year ended 2010. The decrease in revenue was primarily due to a more competitive consumer electronics market as well as closing of 22 stores in 2010. The number of electronics stores located in the area where Joy & Harmony’s stores are located has increased in 2010. In addition, many small manufacturers closed down and large manufacturers raised the price of consumer electronics, which forced Joy & Harmony to discontinue some of its products. This caused sales to decline. Operating losses was $3,151 in 2010, a decrease of $4,163 or 411.4% compared to operating income of $1,012 in 2009.

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

Goodwill Impairment

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

e)	Jinhua Baofa Logistic Limited or “Jinhua”

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

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

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

Jinhua	Year Ended December 31, 2010			For the period from July 1 to December 31, 2009
Revenue	$	10,691		$	5,573
Gross Profit	$	1,402		$	1,713
Gross Margin		13.1	%		30.7	%
Operating Income (Loss)	$	(68	)	$	1,098

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

Net sales

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

Percentage of sales

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

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

	Yiwu			Wang Da			Sanhe			Joy & Harmony			Total
Retail		66.2	%		68.3	%		70.1	%		70.6	%		68.8	%
Wholesale		33.8	%		31.7	%		29.9	%		29.4	%		31.2	%

Cost of Sales

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

Top Ten Suppliers of Each of Our Subsidiaries in 2010

	Yiwu	Wang Da	Sanhe	Joy & Harmony	Jinhua
1	Fengda Technology Company Limited	Shenzhen Tianyin Telecommunication Company Limited	Hangzhou Xietong Trade Company Limited	SONY(China) Company Limited (Shanghai)	Zhejiang Sheng Tong Logistic Company Limited

2	Ninbo Zhongxun Electronics Company Limited	Hangzhou Weihua Telecommunication Company Limited	Zhejiang Zhuocheng Digital Electronics Company Limited	Shanghai Ganshun Trade Company Limited	Hangzhou Shenzhou Transportation Company Limited

3	Shanghai Zhongfang Electronics Company Limited	Hangzhou Tianchen Digital Telecommunication Company Limited	Shanghai Haier Industrial and Trade Company	Huaqi Information Digital Technology Company Limited (Shanghai)	Shanghai Sheng Hui Transportation Company Limited

4	Hangzhou Senruida Trade Company Limited	Hangzhou Liandong Telecommunication Equipment Company Limited	Shenzhen Chuangwei-RGB Electronics Company	Shanghai Caitong Digital Technology Company Limited	Shanghai Hong Wei Transportation Company Limited

5	Shanghai Hongyi Office Supplies Company Limited	Shanghai Post&Telecom Appliances Company (Hangzhou)	TCL Electronics Company Limited	Shanghai Bohui Electronics Company Limited	Jiaxingshi Guohong Vehicle Transportation Company Limited

6	Shanghai Guangdian Equipment Company Limited	Hangzhou Qiuxin Internet Equipment Company Limited	Qingdao Haixin Electronics Limited　Hangzhou branch	Shanghai Yiqike Industrial and Trade Company Limited	Guangzhou Shuntong Transportation Company Limited

7	Yiwu Wantong Telecom Equipment Company Limited	Shenzhen Liansheng Technology Company Limited	Shenzhen Asicer Electronics Company Limited	Shanghai Tande Electronics Technology Company Limited	Shanghai Shenghui Transportation Company Limited

8	Jiaxing Yage Electronics Company Limited	Hangzhou Jiuxin Telecommunication Appliances Company Limited	Dongguang Lebang Electronics Limited	Shenzhen Dejing Electronics Company Limited	Hefei Yuan Shun Da Transportation Company Limited

9	Shanghai Huoke Electronics Company Limited	Hangzhou Fuyin Trade Company Limited	Zhejiang Saixin Technology Limited	Chongqing Zhaohua Digital Technology Company Limited	Zhuhai Zhijie Transportation Company Limited

10	Shanghai Rongduo Business Company Limited	Shenzhen Jinfeng Datong Technology Company Limited	Zhongshan Longdi Electronics Limited	Dongguan Gemei Technology Company Limited	Sanming Yunlin Vehicle Transportation Company Limited

Gross Profit Margin

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

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

General and Administrative Expenses

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

Income (Loss) from Operations

Operating loss for 2010 was $24,837, or (16.7)% of net sales compared to $608, or (0.3)% of net sales for 2009. Declined sales and gross margin and increased general and administration expenses led to the decline in income from operations.

Provision for income taxes

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

Net Income (loss)

Net loss was $(24,927) or (16.8)% of net sales for 2010 compared to $1,213 or (0.6) % of net sales for 2009. Net income decreased primarily due to a decrease in sales and gross margin and an increase in general administration expenses.

Foreign currency translation adjustments

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

	2010		2009
RMB/US$ exchange rate at year end		0.15170		0.14626
Average RMB/US$ exchange rate for the years		0.14792		0.14618

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

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

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

Yiwu Yong Xin Telecommunication Company, Limited or “Yiwu”

Hangzhou Wang Da Electronics Company, Limited or “Wang Da”

Hangzhou Sanhe Electronic Technology Limited or “Sanhe”

Shanghai Joy & Harmony Electronics Company Limited or “Joy & Harmony”

Jinhua Baofa Logistic Limited or “Jinhua”

Yiwu Yong Xin Telecommunication Company, Limited or “Yiwu”

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

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

	Year Ended December 31,						Percentage
Yiwu	2009			2008			Change
Revenue	$	44,375		$	63,370			(30.0	)%
Gross Profit	$	5,129		$	9,978			(48.6	)%
Gross Margin		11.6	%		15.8	%		(4.2	)%
Operating Income (Loss)	$	(612	)	$	7,615			(108.0	)%

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

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

Hangzhou Wang Da Electronics Company, Limited or “Wang Da”

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

	Year Ended December 31,						Percentage
Wang Da	2009			2008			Change
Revenue	$	58,744		$	102,935			(42.9	)%
Gross Profit	$	6,600		$	16,313			(59.5	)%
Gross Margin		11.2	%		15.9	%		(4.7	)%
Operating Income (Loss)	$	(262	)	$	11,527			(102.3	)%

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

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

Hangzhou Sanhe Electronic Technology Limited or “Sanhe”

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

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

	Year Ended December 31,						Percentage
Sanhe	2009			2008			Change
Revenue	$	53,385		$	70,243			(24.0	)%
Gross Profit	$	8,627		$	12,444			(30.7	)%
Gross Margin		16.2	%		17.7	%		(1.5	)%
Operating Income (Loss)	$	(741	)	$	7,509			(109.9	)%

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

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

Shanghai Joy & Harmony Electronics Company Limited or “Joy & Harmony”

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

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

	Year Ended December 31,						Percentage
Joy & Harmony	2009			2008			Change
Revenue	$	56,660		$	74,096			(23.5	)%
Gross Profit	$	9,421		$	9,906			(57.1	)%
Gross Margin		16.6	%		13.4	%		3.2	%
Operating Income	$	1,012		$	7,406			(86.3	)%

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

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

Jinhua Baofa Logistic Limited or “Jinhua”

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

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

Net sales

Net sales for 2009 totaled $218,994, representing a year-over-year decrease of 29.5% compared to $310,645 for 2008. The decrease was attributable to the closing of 101 stores in stores in 2009 as well as the negative effect of global economic slowdown.

Percentage of sales

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

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

	Yiwu			Wang Da			Sanhe			Joy & Harmony
Retail		68.7	%		69.9	%		67.6	%		69.7	%
Wholesale		31.3	%		30.1	%		32.4	%		30.3	%

Cost of Sales

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

Top Ten Suppliers of Each of Our Subsidiaries in 2009

	Yiwu	Wang Da	Sanhe	Joy & Harmony	Jinhua
1	Fengda Technology Company Limited	Shanghai Post & Telecom Appliances Co - Hangzhou	Zhejiang Zhuocheng Digital Electronics Company Limited	Shanghai Ganshun Trade Company Limited	Zhejiang Sheng Tong Logistic Company Limited

2	Hangzhou Shenruida Trade Company Limited	Shenzhen Tianyin Telecommunication Company Limited	Hangzhou Xietong Trade Co., Limited	Huaqi Information Digital Technology Company Limited (aigo) – Shanghai	Shanghai Hong Wei Transportation Company Limited

3	Shanghai Zhongfang Electronics Company Limited	Hangzhou Tianchen Digital Telecommunication Company Limited	Shanghai Haier Industrial and Trade Company	SONY- Shanghai Company Limited	Hangzhou Shenzhou Transportation Company Limited

4	Wenzhou Jingwei Company	Hangzhou Qiuxin Internet Equipment Company Limited	Zhejiang Saixin Technology Limited	Shanghai Jingming Technology Company Limited	Jiaxingshi Guohong Vehicle Transportation Company Limited

5	Ninbo Zhongxun Electronics Company Limited	Hangzhou Weihua Telecommunication Company Limited	Shenzhen Chuangwei-RGB Electronics Company	Shanghai China-tex Electronic System Company Limited	Shanghai Sheng Hui Transportation Company Limited

6	Shanghai Hongyi Office Supplies Company Limited	Hangzhou Chaoyue Telecommunication Company Limited	TCL Electronics Company Limited	Shanghai Caitong Digital Technology Company Limited	Guangzhou Shuntong Transportation Company Limited

7	Shanghai Guangdian Equipment Company Limited	Shenzhen Liansheng Technology Company Limited	Qingdao Haixin Electronics Limited　Hangzhou branch	Beijing Broadcom Information Technology Company Limited	Shanghai Shenghui Transportation Company Limited

8	Yiwu Wantong Telecom Equipment Company Limited	Hangzhou Huayu Telecommunication Appliances Company Limited	Dongguang Lebang Electronics Limited	Chongqing Zhaohua Digital Technology Company Limited	Hefei Yuan Shun Da Transportation Company Limited

9	Shanghai Rongduo Business Company Limited	Shenzhen Jinfeng Datong Technology Company Limited	Zhongshan Longdi Electronics Limited	Shanghai Jinling Network Equipment Company Limited	Zhuhai Zhijie Transportation Company Limited

10	Shanghai Huoke Electronics Company Limited	Shenzhen Jiepulin Company Limited	Shenzhen Aosike Electronics Company Limited	Shenzhen Dejing Electronics Company Limited	Sanming Yunlin Vehicle Transportation Company Limited

Gross Profit Margin

Gross profit margin in 2009 decreased to 14.4% compared to 15.7% in 2008. The gross profit margin decrease was mainly attributed to the fact that many small manufacturers of computers, communication and consumer products exited the market and current manufacturers raised the cost of goods due to the global economic slowdown. The decrease in gross margin was also due to the increase in sales rebate paid to suppliers.

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

General and Administrative Expenses

General and administrative (“G&A”) expenses for 2009 totaled $32,126, or 14.7% of net sales, compared to $14,132, or 4.6% of net sales for 2008. G&A expenses as a percentage of net sales increased 10.1% due to salary increase of $4,600 in 2009 compared to 2008, additional $1,116 G&A expenses due to acquisition of Jinhua, increase in management fee and additional expenses in relation to the new direct stores and franchise stores.

Income (Loss) from Operations

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

Provision for income taxes

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

Net Income (loss)

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

Retail locations

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

	Wang Da			Yiwu			Sanhe			Joy & Harmony			Total
Locations at Jan. 1, 2008		237			274			211			186			908
Opened during year 2008		37			34			24			43			138
Closed during year 2008		(18	)		(13	)		(1	)		-			(32	)
Locations at Dec. 31, 2008		256			295			234			229			1014

Opened during year 2009		-			1			-			1			2
Closed during year 2009		(23	)		(42	)		(24	)		(12	)		(101	)
Locations at Dec. 31, 2009		233			254			210			218			915

Opened during year 2010		11			2			-			-			13
Closed during year 2010		(73	)		(1	)		(11	)		(22	)		(107	)
Locations at Dec. 31, 2010		171			255			199			196			821

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

(In square feet)	Wang Da			Yiwu			Sanhe			Joy & Harmony			Total
Areas at Jan. 1, 2008		26,928			40,708			29,295			21,001			117,932
Opened during year 2008		5,698			5,270			3,888			6,020			20,876
Closed during year 2008		(1,890	)		(1,724	)		(112	)		-			(3,726	)
Areas at Dec. 31, 2008		30,736			44,254			33,071			27,021			135,082

Opened during year 2009		-			210			-			142			352
Closed during year 2009		(3,105	)		(4,704	)		(2,832	)		(1,368	)		(12,009	)
Areas at Dec. 31, 2009		27,631			39,760			30,239			25,795			123,425

Opened during year 2010		860			2,258			-			-			3,118
Closed during year 2010		(93	)		(9,555	)		(1,131	)		(2,272	)		(13,051	)
Areas at Dec. 31, 2010		28,398			32,463			29,108			23,523			113,492

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

(In US dollars)	Wang Da		Yiwu		Sanhe		Joy & Harmony		Average
2008		1,910		812		1,301		1,802		1,467
2009		2,079		1,058		1,709		1,996		1,710
2010		1,489		577		1,410		1,485		905

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

(In US dollars)	Wang Da		Yiwu		Sanhe		Joy & Harmony		Average
2008		21,700		11,900		17,300		20,400		18,900
2009		14,878		9,464		13,880		15,221		13,122
2010		10,219		4,510		7,563		9,789		7,723

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

(1) stores are in the same address;

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

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

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

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

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

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

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

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

QUARTERLY RESULTS OF OPERATIONS

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

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

(amounts in thousands of US dollars)

	Three Months Ended
	12/31/2010			9/30/2010			6/30/2010			3/31/2010			12/31/2009			9/30/2009			6/30/2009		3/31/2009
Sales, net	$	43,560		$	36,308		$	37,428			40,798		$	46,501		$	43,955		$	51,126	$	77,412

Cost of sales		36,004			33,725			33,506			37,433			35,075			39,942			45,106		67,353
Gross profit (loss)		7,556			2,583			3,922			3,365			11,426			4,013			6,020		10,059

General and administrative expenses		26,487			5,074			5,488			5,214			16,270			5,621			4,749		5,486
Income (loss) from operations		(18,931	)		(2,491	)		(1,566	)		(1,849	)		(4,844	)		(1,608	)		1,271		4,573

Other Income (Expense)
Interest income		31			24			22			25			26			29			25		29
Other income (expense)		(28	)		(75	)		(41	)		4			(20	)		(27	)		10		37
Total Other Income (Expense)		3			(51	)		(19	)		29			6			2			35		66
Income (loss) before income taxes		(18,928	)		(2,542	)		(1,585	)		(1,820	)		(4,838	)		(1,606	)		1,306		4,639

Provision for income taxes		(202	)		64			83			107			(1,021	)		144			392		1,199

Net income (loss)	$	(18,726	)	$	(2,606	)	$	(1,668	)		(1,927	)	$	(3,817	)	$	(1,750	)	$	914	$	3,440

Net income (loss) per share:
Basic & diluted	$	(0.34	)	$	(0.05	)	$	(0.03	)		(0.04	)	$	(0.07	)	$	(0.03	)	$	0.02	$	0.07

Weighted average number of shares outstanding:
Basic		54,831			54,831			54,831			54,831			54,831			53,931			53,931		52,834
Diluted		54,831			54,831			54,831			54,831			54,831			53,931			53,931		52,834

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

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

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

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

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

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

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

	Year Ended December 31,
	2010			2009			2008
Net cash provided (used) by operating activities	$	(4,698	)	$	7,112		$	12,690
Net cash used in investing activities		(22	)		(8,590	)		(7,327	)
Effect of exchange rate change on cash and equivalents		1,061			(772	)		1,842
Net increase in cash and equivalents		(3,659	)		(2,250	)		7,205
Cash and equivalents at beginning of year		29,908			32,158			24,953
Cash and equivalents at end of year	$	26,249		$	29,908		$	32,158

Operating Activities

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

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

		2010				2009				2008
Net cash (used in) provided by operating activities		$	(4,698	)		$	7,112			$	12,690

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

Investing activities

		2010				2009				2008
Net cash used in investment activities		$	(22	)		$	(8,590	)		$	(7,327	)

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

Financing Activities

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

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

Net change in cash and equivalents

		2010				2009				2008
Net change in cash and equivalents		$	(3,659	)		$	(2,250	)		$	7,205

Cash and equivalents

		2010				2009				2008
Cash and equivalents		$	26,249			$	29,908			$	32,158

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

(all amounts are denominated in thousands)

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

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

Capital Expenditures

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

Working Capital Requirements

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

Off-Balance Sheet Arrangements

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

Critical Accounting Policies

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

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

Revenue Recognition

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

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

After Sales Service

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

Tabular Disclosure of Contractual Obligations

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

(amounts in thousands of US dollars):

	Payment Due by Period
			Less than 1
Contractual Obligations	Total		year		1-3 years		3-5 years
Operating lease obligations	$	257	$	176	$	65	$	16
Advertising obligations		102		102		-		-
Total contractual obligations	$	359	$	278	$	65	$	16

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk

Fluctuations in the rate of exchange between the US dollar and foreign currencies, primarily the Chinese Renminbi, could adversely affect our financial results. During the fiscal year ended December 31, 2010, all of our sales were denominated in foreign currencies. We expect that foreign currencies will continue to represent a similarly significant percentage of our sales in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same respective currency, thereby mitigating our transaction risk exposure. We therefore believe that the risk of a significant impact on our operating income from foreign currency fluctuations is not substantial. However, for sales not denominated in US dollars, if there is an increase in the rate at which a foreign currency is exchanged for US dollars, it will require more of the foreign currency to equal a specified amount of US dollars than before the rate increase. In such cases and if we price our products in the foreign currency, we will receive less in US dollars than we did before the rate increase went into effect. If we price our products in US dollars and competitors price their products in local currency, an increase in the relative strength of the US dollar could result in our price not being competitive in a market where business is transacted in the local currency.

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

Interest Rate Risk

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

Inflation

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

Currency Exchange Fluctuations

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

Concentration of Credit Risk

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

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

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Management’s Report on Internal Control over Financial Reporting

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

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

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

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

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, and due to the material weakness described below, management concluded that our internal control over financial reporting was not effective as of December 31, 2010.

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

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

Remediation Initiative

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

Attestation Report of the Independent Registered Public Accounting Firm

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

Changes in Internal Control over Financial Reporting

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

ITEM 9B. OTHER INFORMATION

None.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

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

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

(2) Not applicable.

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

•

China 3C Group 2011 Restricted Stock Plan

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

EXHIBIT INDEX

Exhibit No		Document Description
3.1		Amended and Restated Articles of Incorporation of the Registrant (11)
3.2		By-laws of the Registrant (1 )
4.1		China 3C Group Amended 2005 Equity Incentive Plan. (2 )
4.2		China 3C Group 2011 Restricted Stock Plan
10.1		Stock Purchase Agreement, dated as of October 17, 2005, by and among Sun Oil & Gas, Inc., EH&P Investments, John D. Swain, Fred Holcapek, PH Holding Group, Ma Cheng Ji, Zhou Wei, Zeng Xiu Lan, Gu Xiao Dong, Jacksonville Management Limited, Colin Wilson, Alliance Capital Management, Inc., Hanzhong Fang and China US Bridge Capital, Limited (3)
10.2		Consulting Services Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )
10.3		Operating Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )
10.4		Proxy and Voting Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )
10.5		Option Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )
10.6		Equity Pledge Agreement dated as of November 1, 2005 between Capital Development Limited and Zhejiang Yong Xing Digital Technology Company Limited (4 )
10.7		Subscription Agreement, dated as of December 20, 2005, between the Registrant and Huiqi Xu. (5 )
10.8		Consulting Agreement, dated as of December 20, 2005, among the Registrant, Wen-An Chen and Huoqing Yang. (5 )

10.9		Guarantee Contract between the Registrant and Shenzhen Shiji Ruicheng Guaranty and Investment Company Limited, dated as of December 21, 2005. (6 )
10.10		Agreement and Plan of Merger, dated as of December 21, 2005, among the Registrant, YX Acquisition Corporation, Capital Future Development Limited, Zhenggang Wang, Yimin Zhang, Weiyi Lv, Xiaochun Wang, Zhongsheng Bao, Simple (Hongkong) Investment & Management Company Limited, First Capital Limited, Shenzhen Dingyi Investment & Consulting Limited and China US Bridge Capital Limited. (6 )
10.11		Form of Promissory Note dated December 21, 2005. (6 )

10.12		Share Exchange Agreement, dated as of November 28, 2006, among China 3C Group, Capital Future Development Limited (“CFDL”), Shanghai Joy & Harmony Electronics Company Limited, and the shareholders of CFDL. (7 )

10.13		Form of Securities Purchase Agreement, dated July 13, 2007, by and among the Registrant and certain subscribers (8 )
10.14		Letter of Intent for Strategic Partnership, dated November 22, 2007, between the Registrant’s subsidiary Zhejiang Yongxin Technology Limited and Hangzhou Xituo Network Technology Company (9 )
10.15		Consignment Agreement, dated January 2, 2008, between the Registrant’s subsidiary Hangzhou Shan He Electric Company Limited and Hangzhou Lotour Digital Products Business Company Limited (10 )

16		Consignment Agreement, dated January 3, 2008, between the Registrant’s subsidiary Hangzhou Wang Da Electric Company Limited and Hangzhou Lotour Digital Products Business Company Limited (10 )
10.17		Acquisition Agreement dated December 19, 2008 by and among Zhejiang Yong Xing Digital Technology Company Limited, Yiwu Yong Xin Communication Limited Jinhua Baofa Logistic Limited and the shareholders of Jinhua Baofa Logistic Limited (12)
10.18		Amendment to Acquisition Agreement dated April 4, 2009 by and among Zhejiang Yong Xing Digital Technology Company Limited, Yiwu Yong Xin Communication Limited and the shareholders of Jinhua Baofa Logistic Limited (13)
10.19		Compensation Agreement, dated November 27, 2009, between China 3C Group and Joseph Levinson (14)
10.20		Board of Directors Agreement, dated December 8, 2006, among China 3C Group and Kenneth T. Berents (15)
10.21		China 3C Group 2008 Omnibus Securities and Incentive Plan (16)
10.22		Stock Option Agreement Director Non-Qualified Stock Option, dated December 1, 2008 and effective as of January 15, 2009, between China 3C Group and Kenneth Berents (16)
10.23		Stock Option Agreement Director Non-Qualified Stock Option, dated December 1, 2008 and effective as of January 15, 2009, between China 3C Group and Kenneth Berents (16)
10.24		Stock Option Agreement Director Non-Qualified Stock Option, dated December 1, 2008 and effective as of January 15, 2009, between China 3C Group and Kenneth Berents (16)
10.25		Stock Option Agreement with Todd L. Mavis, dated April 21, 2009, between China 3C Group and Todd L. Mavis (16)
10.26		Agreement dated May 3, 2007 between China 3C Group and Joseph Levinson (16)
10.27		Letter Agreement dated June 16, 2009 between China 3C Group and Jian Zhang (17)

14.1		Code of Business Conduct and Ethics (11)
21.1		List of Subsidiaries (18)
23.1		Consent of Goldman Parks Kurland Mohidin LLP, an independent registered public accounting firm, filed herewith.
31.1		Certification of Principal Executive Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2		Certification of the Principal Accounting and Financial Officer pursuant to Rule 13A-14(A)/15D-14(A) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.

32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.
32.2		Certification of Principal Accounting and Financial Officer Pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002), filed herewith.

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

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

(7)

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

(8)

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

(9)

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

(10)

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

(11)

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

(12)

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

(13)

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

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

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

(16)

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

(17)

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

(18)

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 23rd day of March 2012.

	CHINA 3C GROUP

		/s/ Zhenggang Wang
		Zhenggang Wang
		Chief Executive Officer and Chairman
		(Principal Executive Officer)

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

Signatures	Title	Date

/s/ Zhenggang Wang		March 23, 2012
Zhenggang Wang	Chief Executive Officer and
	Chairman (Principal Executive
	Officer)

/s/ Xinchuan Kong
Xinchuan Kong	President	March 23, 2012

/s/ Weiping Wang
Weiping Wang	Chief Financial Officer (Principal	March 23, 2012
	Accounting and Financial Officer)

/s/ Chenghua Zhu
Chenghua Zhu	Director	March 23, 2012

/s/ Mingjun Zhu
Mingjun Zhu	Director	March 23, 2012

/s/ Rongjin Weng
Rongjin Weng	Director	March 23, 2012

/s/ Wei Kang Gu
Wei Kang Gu	Director	March 23, 2012

CHINA 3C GROUP AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010

TABLE OF CONTENTS

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3

Consolidated Statements of Operations and Comprehensive Income (Loss)	F-4

Consolidated Statements of Stockholders’ Equity	F-5

Consolidated Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

China 3C Group

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

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

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

/s/ Goldman Kurland and Mohidin, LLP

Encino, California

May 18, 2011

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

F-2

CHINA 3C GROUP

CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31,			December 31,
	2010			2009

ASSETS

Current assets:
Cash and equivalents	$	26,249		$	29,908
Accounts receivable, net		11,026			18,232
Inventories		7,284			6,764
Advances to suppliers		2,201			2,370
Tax receivable		1,200			1,157
Prepaid expenses and other current assets		591			294
Total current assets		48,551			58,725

Property, plant and equipment, net		191			279
Goodwill		11,229			20,820
Intangible asset, net		13,153			14,557
Refundable deposits		7			15
Total assets	$	73,131		$	94,396

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	8,675		$	6,838
Income tax payable		736			938
Total liabilities		9,411			7,776

Stockholders' equity
Common stock, $0.001 par value, 100,000,000 million shares authorized, 54,831,327 issued and outstanding as of December 31, 2010 and 2009, respectively		55			55
Additional paid-in capital		20,252			19,751
Subscription receivable		(50	)		(50	)
Statutory reserve		11,543			11,535
Other comprehensive income		6,706			5,180
Retained earnings		25,214			50,149
Total stockholders' equity		63,720			86,620
Total liabilities and stockholders' equity	$	73,131		$	94,396

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

F-3

CHINA 3C GROUP

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share amounts)

	2010			2009			2008

Net sales	$	158,094		$	218,994		$	323,331
Cost of sales		140,668			187,476			262,003
Gross profit		17,426			31,518			61,328
Selling, general and administrative expenses		42,263			32,126			26,819
Income from operations		(24,837	)		(608	)		34,509
Other (income) expense
Interest income		(102	)		(109	)		(146	)
Other income		(5	)		(163	)		(1,150	)
Other expense		145			163			360
Total other (income) expense		38			(109	)		(936	)

Income (loss) before income taxes		(24,875	)		(499	)		35,445
Provision for income taxes		52			714			8,611
Net income (loss)	$	(24,927	)	$	(1,213	)	$	26,834
Foreign currency translation adjustments		1,526			(92	)		3,400
Comprehensive income (loss)	$	(23,401	)	$	(1,305	)	$	30,234

Net income (loss) available to common shareholders per share:
Basic and Diluted	$	(0.45	)	$	(0.02	)	$	0.51

Weighted average shares outstanding:
Basic and Diluted		54,831,327			53,867,890			52,673,938

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

F-4

CHINA 3C GROUP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2010, 2009 and 2008

(in thousands)

					Additional							Other						Total
	Common Stock				Paid-In		Subscription			Statutory		Comprehensive			Retained			Stockholders'
	Shares		Amount		Capital		Receivable			Reserve		Income			Earnings			Equity
Balance at December 31, 2007		52,674	$	53	$	19,466	$	(50	)	$	7,234	$	1,872		$	28,829		$	57,404

Foreign currency translation adjustments		-		-		-		-			-		3,400			-			3,400
Transfer to statutory reserve		-		-		-		-			3,875		-			(3,875	)		-
Net income		-		-		-		-			-		-			26,834			26,834

Balance at December 31, 2008		52,674		53		19,466		(50	)		11,109		5,272			51,788			87,638

Foreign currency translation adjustments		-		-		-		-			-		(92	)		-			(92	)
Issuance of common stock for compensation		1,997		2		285		-			-		-			-			287
Issuance of common stock in consideration of the cancelled stock options		160		-		-		-			-		-			-			-
Transfer to statutory reserve		-		-		-		-			426		-			(426	)		-
Net income		-		-		-		-			-		-			(1,213	)		(1,213	)

Balance at December 31, 2009		54,831		55		19,751		(50	)		11,535		5,180			50,149			86,620

Foreign currency translation adjustments		-		-		-		-			-		1,526			-			1,526
Issuance of common stock for compensation		-		-		501		-			-		-			-			501
Transfer to statutory reserve		-		-		-		-			8		-			(8	)		-
Net loss		-		-		-		-			-		-			(24,927	)		(24,927	)
Balance at December 31, 2010		54,831	$	55	$	20,252	$	(50	)	$	11,543	$	6,706		$	25,214		$	63,720

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

F-5

CHINA 3C GROUP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	2010			2009			2008

Operating activities:
Net income (loss)	$	(24,927	)	$	(1,213	)	$	26,834
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		11			614			36
Amortization of intangible assets		1,405			698			-
Goodwill impairment		9,591			-			-
Stock based compensation		501			287			337
Gain on asset disposition		-			-			(2	)
Provision for bad debts		-			-			262
(Increase)/decrease in assets
Accounts receivable		7,688			5,472			(14,630	)
Tax receivable		-			(1,157	)		-
Other receivable		(138	)		(64	)		-
Inventories		(261	)		2,199			(1,732	)
Prepaid expenses and other current assets		(142	)		(142	)		(4	)
Advance to suppliers		251			119			247
Refundable deposits		9			17			11
(Increase) / decrease in current liabilities
Accounts payable and accrued expenses		1,545			1,482			1,867
Income tax payable		(231	)		(1,200	)		(536	)
Net cash provided (used) by operating activities		(4,698	)		7,112			12,690

CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of property and equipment		-			(806	)		(11	)
Proceeds from asset sales		(22	)		-			2
Payments for acquisition of subsidiary		-			(7,784	)		(7,318	)
Net cash (used in) investing activities		(22	)		(8,590	)		(7,327	)

Effect of exchange rate changes on cash and cash equivalents		1,061			(772	)		1,842

Net increase (decrease) in cash		(3,659	)		(2,250	)		7,205
Cash, beginning of year		29,908			32,158			24,953
Cash, end of year	$	26,249		$	29,908		$	32,158

Supplemental disclosure of cash flow information:
Income taxes paid	$	254		$	3,073		$	9,155
Interest paid	$	-		$	-		$	-

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

F-6

CHINA 3C GROUP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010 AND 2009

Note 1 - ORGANIZATION

China 3C Group (the “Company” or “China 3C”) was incorporated on August 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited - BVI (“Capital”) was incorporated on July 22, 2004 under the laws of the British Virgin Islands (“BVI”). Zhejiang Yong Xin Digital Technology Company Limited (“Zhejiang”), Yiwu Yong Xin Communication Limited (“Yiwu”), Hangzhou Wang Da Electronics Company Limited (“Wang Da”), Hangzhou Sanhe Electronic Technology Limited (“Sanhe”), and Shanghai Joy & Harmony Electronics Company Limited (“Joy & Harmony”), Jinhua Baofa Logistic Ltd (“Jinhua”) were incorporated under the laws of Peoples Republic of China (“PRC”) on July 11, 2005, July 18, 1997, March, 30, 1998, April 12, 2004, August 20, 2003 and December 27, 2001, respectively. All dollar amounts are in thousands, unless otherwise indicated.

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

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

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

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

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

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

F-7

Cash paid for acquisition of Jinhua	$	17,508

Assets acquired :
Cash	$	2,406
Accounts receivable, net		715
Other receivables, net		60
Prepaid expenses		133
Property, plant and equipment		216
Intangible asset - transportation network		15,182
Goodwill		472
Assets acquired		19,184

Liabilities assumed:
Accounts payable		315
Accrued expenses and other payables		547
Due to shareholders		814
Liabilities assumed		1,676

Net assets acquired	$	17,508

F-8

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

F-9

Principles of Consolidation

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

Currency Translation

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

Use of Estimates

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

Risks and Uncertainties

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

Contingencies

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

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

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

F-10

Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis. Allowances for doubtful debts were $441 and $404 as of December 31, 2010 and 2009, respectively.

			Additions
Description	Balance at January 1,		(1) Charged to expenses		(2) Charged to other comprehensive loss		Deductions			Balance at December 31,
Allowance for doubtful receivables 2010	$	404	$	37	$	-		-		$	441
Allowance for doubtful receivables 2009	$	365	$	37	$	84		(82	)	$	404

Inventories

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

Property, Plant & Equipment

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

Automotive	5 years
Office Equipment	5 years

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

	2010			2009
Automotive	$	738		$	877
Office equipment		195			132
Leasehold improvement		65			67
Plant and Equipment		3			3
Sub Total		1,001			1,079
Less: accumulated depreciation		(810	)		(800	)
Total	$	191		$	279

F-11

Long-Lived Assets

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

Fair Value of Financial Instruments

ASC 825 “Financial Instruments” requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.

Impairment of Goodwill

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

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

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

Revenue Recognition

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

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

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

F-12

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

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

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

Sales revenue is therefore recognized on the following basis:

Store in store model:

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

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

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

Wholesales:

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

F-13

Return policies

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

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

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

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

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

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

F-14

Cost of Sales

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

General and Administrative Expenses

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

Shipping and handling fees

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

Vendor Discounts

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

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

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

Share Based Payment

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

Advertising

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

Other Income

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

	2010		2009		2008
Advertising service income	$	-	$	103	$	649
Repair service income		-		30		29
Commission income from China Unicom		-		30		470
Gain on disposal of PPE		5		-		2
Total other income	$	5	$	163	$	1,150

F-15

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

Income Taxes

The Company utilizes ASC 740 “Income Taxes”. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Basic and Diluted Earnings per Share

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

Statement of Cash Flows

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

Concentration of Credit Risk

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

Segment Reporting

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

F-16

Recent Accounting Pronouncements

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

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

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

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

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

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

F-17

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

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

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

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

Note 3 – ADVANCES TO SUPPLIERS

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

Note 4 - COMMON STOCK

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

F-18

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

Note 5 - STOCK WARRANTS, OPTIONS, AND COMPENSATION

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

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

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

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

Options Outstanding								Options Exercisable
Exercise Price		Number of Shares		Weighted Average Remaining Life (Years)		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
$	4.16		50,000		7.0	$	4.16		50,000	$	4.16

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

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

F-19

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

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

Note 6 - COMPENSATED ABSENCES

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

Note 7 - INCOME TAXES

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

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

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

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

F-20

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

	2010			2009			2008
Deferred tax assets:
U.S. net operating losses	$	172		$	349		$	226
PRC net operating losses		5,990			240			-
Total deferred tax assets		6,162			589			226
Less valuation allowance		(6,162	)		(589	)		(226	)
	$	-		$	-		$	-

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

	2010			2009			2008
(Credit) tax at US Statutory Rate		(34.0	)%		(34.0	)%		34.0	%
Tax rate difference		8.6	%		9.0	%		(9.0	)%
Non deductible expense-impairment loss		9.6			-			-
Other		0.1			-			-
Valuation allowance		15.5	%		(118.1	)%		(1.0	)%
Effective rate		(0.2	)%		(143.1	)%		24.0	%

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

Note 8 - COMMITMENTS

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

2011	$	176
2012		53
2013		12

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

Note 9 - STATUTORY RESERVE

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

F-21

Statutory reserve funds are restricted for set off against losses, expansion of production and operation or increase in register capital of the respective company. Statutory public welfare fund is restricted to the capital expenditures for the collective welfare of employees. These reserves are not transferable to the Company in the form of cash dividends, loans or advances. These reserves are therefore not available for distribution except in liquidation. As of December 31, 2010, 2009 and 2008, the Company had allocated $11,543, $11,535 and $11,109 to these non-distributable reserve funds.

Note 10 - OTHER COMPREHENSIVE INCOME

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

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

Note 11- CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS

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

Note 12 - MAJOR CUSTOMERS AND CREDIT RISK

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

Note 13 - SEGMENT INFORMATION

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

F-22

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

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

	Year Ended December 31, 2010
	Mobile			Home			Communication			Consumer
	Phones			Electronics			Products			Electronics			Logistics			Other			Total
Sales, net	$	43,801		$	42,427		$	20,251		$	40,247		$	10,691		$	677		$	158,094
Cost of sales		40,073			38,001			17,923			34,787			9,289			595			140,668
Gross profit		3,728			4,426			2,328			5,460			1,402			82			17,426
Loss from operations		(3,156	)		(5,469	)		(2,456	)		(11,395	)		(1,448	)		(913	)		(24,837	)
Total assets		10,993			14,988			9,967			18,536			15,837			2,810			73,131

	Year Ended December 31, 2009
	Mobile			Home			Communication			Consumer
	Phones			Electronics			Products			Electronics		Logistics		Other			Total
Sales, net	$	58,744		$	53,385		$	44,375		$	56,660	$	5,573	$	257		$	218,994
Cost of sales		52,144			44,758			39,246			47,239		3,860		229			187,476
Gross profit		6,600			8,627			5,129			9,421		1,713		28			31,518
Income (loss) from operations		(262	)		(741	)		(612	)		1,012		408		(413	)		(608	)
Total assets		13,761			17,379			12,353			30,271		19,268		1,364			94,396

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

Mobile phones was $43,801.

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

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

F-23

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

Logistics was $10, 691.

Other was $677.

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

Mobile phones was $58,744.

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

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

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

Logistics was $5,573.

Other was $257.

Note 14 - SUBSEQUENT EVENTS

On January 17, 2011, China 3C Group entered into a Registered Trademark Transfer Agreement to purchase a registered trademark, “Lotour.” The registered term of the trademark expires on July 6, 2020. The total consideration for the purchase of the trademark was RMB 2,280,000 (or approximately $345,600), which was paid in the form of 1.08 million shares of the Company’s common stock, using a price of $0.32 per share.

On January 20, 2011, Zhejiang entered into a Design and Development Engagement Agreement to design and develop an electronic book product under the brand name “Lotour.” The total consideration for the design and development of the electronic book product is RMB 3,160,000 (or approximately $480,000), which was paid in the form of 1.6 million shares of the Company’s common stock, using a price of $0.30 per share. The term of the Development Agreement is from January 20, 2011 to July 19, 2011.

F-24

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