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

Overview

China 3C Group ("China 3C") was incorporated on August, 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited ("CFDL") was incorporated on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital Technology Company Limited ("Zhejiang"), Yiwu Yong Xin Communication Limited ("YYX"), Hangzhou Wandga Electronics Company Limited ("HWD"), Hangzhou Sanhe Electronic Technology, Limited ("Sanhe"), and Shanghai Joy & Harmony Electronic Development Company Limited ("SJ&H") were incorporated under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and CFDL own 100% of the capital stock of SJ&H and HSE. Until August 14, 2007, when it made the change to its ownership structure described in the next paragraph in order to comply with certain requirements of PRC law, CFDL owned 100% of the capital stock of Zhenjiang. Zhejiang owns 90% and YYX owns 10% of HWD. Zhejiang owns 90% and HWD owns 10% of YYX. On December 19, 2008, ZYX entered into an agreement to acquire 90% and YYX to acquire 10% of the entire equity interests in Jinhua Baofa Logistic Limited ("Jinhua"), a company organized under the laws of the People's Republic of China. As of December 31, 2008, we have made a $7.3 million purchase deposit to Jinhua.

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

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

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

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

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

The Company is engaged in the business of resale and distribution of third party products and generate approximately 100% of its revenue from resale of items such as mobile phone, facsimile machines, DVD players, stereo's, speakers, MP3 and MP4 players, iPod, electronic dictionaries, CD players, radios, Walkmans, and audio systems. We sell and distribute products through retail stores and secondary distributors.

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

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

We operate substantially all of our retail operations through our "store in store" model. Under this model, the Company leases space in major department stores and retailers. Leasing costs can vary based on a percentage of sales, or can be fixed. For the year ended 2008, 17 store in stores' leases were fixed rents, the remaining 997 store in stores' leases were variable based on sales.

Results of Operations

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

Reportable Operating Segments

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

a) Yiwu Yong Xin Telecommunication Company, Limited or "YYX"

b) Hangzhou Wang Da Electronics Company, Limited or "HWD"

c) Hangzhou Sanhe Electronic Technology Limited or "HSE"

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

a) Yiwu Yong Xin Telecommunication Company, Limited or "YYX"

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

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

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

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

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

b) Hangzhou Wang Da Electronics Company, Limited or "HWD"

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

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

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

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

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

c) Hangzhou Sanhe Electronic Technology Limited or "HSE"

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

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

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

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

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

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

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

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

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

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

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

Net sales

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

Percentage of sales

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

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

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

Cost of Sales

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

Top Ten Suppliers of Each of Our Subsidiaries in 2008

            YYX                 HWD                  HSE                 SH&J
1    Fengda Technology   Shanghai             Zhejiang            Shanghai Ganshun
     Company Limited     Post&Telecom         Shaixinke Company   Trade Company
                         Appliances Co -      Limited             Limited
                         Hangzhou

2    Hangzhou            Shenzhen Tianyin     Zhongshan Longde    Huaqi Information
     Shenruida Trade     Telecommunication    Home Electronics    Digital Technology
     Company Limited     Company Limited      Company Limited     Company Limited
                                                                  (aigo) - Shanghai

3    Shanghai            Hangzhou Tianchen    Zhejiang            SONY-Shanghai
     Zhongfang           Digital              Zhuocheng Digital   Company Limited
     Electronics         Telecommunication    Electronics
     Company Limited     Company Limited      Company Limited

4    Wenzhou Jingwei     Hangzhou Qiuxin      Shenzhen            Shanghai Jingming
     Company             Internet Equipment   Chuangwei-RGB       Technology Company
                         Company Limited      Electronics         Limited
                                              Company Limited

5    Ninbo Zhongxun      Hangzhou Weihua      Shenzhen Aosike     Shanghai China-tex
     Electronics         Telecommunication    Electronics         Electronic System
     Company Limited     Company Limited      Company Limited     Company Limited

6    Shanghai Hongyi     Hangzhou Chaoyue     Shanghai Haier      Shanghai Caitong
     Office Supplies     Telecommunication    Industrial and      Digital Technology
     Company Limited     Company Limited      Trade Company       Company Limited

7    Shanghai            Shenzhen Liansheng   TCL Electronics     Beijing Broadcom
     Guangdian           Technology Company   Company Limited     Information
     Equipment Company   Limited                                  Technology Company
     Limited                                                      Limited

8    Yiwu Wantong        Hangzhou Huayu       Shenzhen Deheyuan   Chongqing Zhaohua
     Telecom Equipment   Telecommunication    Electronics         Digital Technology
     Company Limited     Appliances Company   Company             Company Limited
                         Limited

9    Shanghai Rongduo    Shenzhen Jinfeng     Shenzhen Angel      Shanghai Jinling
     Business Company    Datong Technology    Drinking Water      Network Equipment
     Limited             Company Limited      Industrial Group    Company Limited

10   Shanghai Huoke      Shenzhen Jiepulin    Guangzhou           Shenzhen Dejing
     Electronics         Company Limited      Shengshida          Electronics
     Company Limited                          Electronics         Company Limited
                                              Company Limited

Gross Profit Margin

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

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

General and Administrative Expenses

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

Income from Operations

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

Provision for income taxes

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

Net Income

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

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

Reportable Operating Segments

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

a) Yiwu Yong Xin Telecommunication Company, Limited or "YYX"

b) Hangzhou Wang Da Electronics Company, Limited or "HWD"

c) Hangzhou Sanhe Electronic Technology Limited or "HSE"

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

a) Yiwu Yong Xin Telecommunication Company, Limited or "YYX"

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

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

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

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

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

b) Hangzhou Wang Da Electronics Company, Limited or "HWD"

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

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

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

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

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

c) Hangzhou Sanhe Electronic Technology Limited or "HSE"

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

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

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

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

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

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

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

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

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

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

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

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

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

. . .