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.

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q. 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-Q.

Overview (All dollar amounts in thousands)

China 3C Group (including its subsidiaries unless the context indicates otherwise, "China 3C," the "Company," "we," "us," or "our") was incorporated on August, 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited ("Capital") 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 Capital and Capital 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, Capital 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 Baofa Logistic Limited ("Jinhua"). Jinhua was incorporated under the laws of PRC on December 27, 2001.

On December 21, 2005, Capital 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 Capital pursuant to a Merger Agreement dated at December 21, 2005 by and among China 3C, 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 and, for the Capital shares, China 3C 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 at that time and cash of $500. On August 15, 2007, we executed a series of contractual agreements between CFDL and Zhejiang. The contractual agreements give CFDL 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 CFDL's actual equity ownership of Zhejiang when we execute the contractual agreements. CFDL 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 CFDL 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 August 3, 2006, Capital completed the acquisition of 100% of the equity of Sanhe in exchange for a combination of cash and stock transaction valued at $8,750 in aggregate (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 100% of the equity of Joy & Harmony in exchange for a combination of cash and stock valued at $18,500 in aggregate (consisted of 2,723,110 shares of the Company's common stock and $7,500 in cash).

On July 6, 2009, 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 RMB 120,000,000 (approximately $17,500) in cash.

Yiwu, Wangda, Sanhe and Joy & Harmony are engaged in the 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, 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 the three months ended March 31, 2011 and 2010, 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 March 31, 2011, there are three direct stores and two franchise stores in operation.

Following the acquisition of Jinhua, the Company began providing logistical services 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, radios and audio systems.

Results of Operations for the Three months Ended March 31, 2011 and 2010

Reportable Operating Segments

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

a) Yiwu

b) Wang Da

c) Sanhe

d) Joy & Harmony

e) Jinhua

a) Yiwu

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

                        Three months ended March 31,         Percentage
                          2011                2010             Change
Yiwu                   (restated)          (restated)        (restated)
Revenue               $       4,243       $       6,315            (32.8 )%
Gross Profit                    399                 644            (38.0 )%
Gross Profit Margin             9.4 %              10.2 %           (0.8 )%
Operating Loss                 (345 )              (210 )          (64.3 )%

For the three months ended March 31, 2011, Yiwu generated revenue of $4,243, a decrease of $2,072 or 32.8% compared to $6,315 for the three months ended March 31, 2010. The decrease was a result of lower market demand for office appliances such as fax machines and telephones.

Gross profit decreased $245 or 38.0% from $644 for the three months ended March 31, 2010 to $399 for the three months ended March 31, 2011. Gross profit margin decreased 0.8% from 10.2% in the three months ended March 31, 2010 to 9.4% in the three months ended March 31, 2011. The decrease was a result of increased promotion events in the first quarter of 2011 to maintain market share. Lower gross profit margin was also due to shrinking demand. Since market demand decreased, Yiwu did not have the bargaining power to increase unit sales price as much as the increase in purchase costs of office appliances.

Operating loss was $345 for the three months ended March 31, 2011, an increase of $135 or 64.3% compared to $210 for the three months ended March 31, 2010. Operating loss increased primarily due to decreased gross profit, an increase in labor cost and management fees paid to department stores.

b) 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.

                         Three months ended March 31,          Percentage
                           2011                 2010             Change
Wang Da                 (restated)           (restated)        (restated)
Revenue               $       11,586       $       10,606              9.2 %
Gross Profit                     788                  875             (9.9 )%
Gross Profit Margin              6.9 %               8.25 %           (1.4 )%
Operating Loss                  (745 )               (446 )          (67.0 )%

For the three months ended March 31, 2011, Wang Da generated revenue of $11,586, an increase of $980 or 9.2% compared to $10,606 for the three months ended March 31, 2010. The increase in revenue was primarily due to a higher percentage of sales from international brands such as Nokia and Motorola, which usually have a higher unit price compared to domestic brands.

Gross profit decreased $87 or 9.9% from $875 for the three months ended March 31, 2010 to $788 for the three months ended March 31, 2011. Gross profit margin decreased from 8.3% in the three months ended March 31, 2010 to 6.9% in the three months ended March 31, 2011, a decrease of 1.4%. The decrease in gross profit and gross profit margin was due to the decrease in demand of domestic cell phones, which had a higher gross profit margin than brand name cell phones. Most domestic cell phones do not offer data service compared to brand name cell phones such as Nokia, Motorola and Samsung, which caused the demand for domestic cell phones to decrease.

Operating loss was $745 for the three months ended March 31, 2011, a decrease of $299 or 67.0% compared to $446 for the three months ended March 31, 2010. Operating income decreased primarily due to decreased gross profit and increased operating expenses including an increase in base salary for all staff and an increase in management fees paid to the department stores.

c) Sanhe

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

                         Three months ended March 31,          Percentage
                           2011                 2010             Change
Sanhe                   (restated)           (restated)        (restated)
Revenue               $       10,848       $       11,367             (4.6 )%
Gross Profit                     864                1,290            (33.0 )%
Gross Profit Margin              8.0 %               11.4 %           (3.4 )%
Operating Loss                  (969 )               (516 )          (87.8 )%

For the three months ended March 31, 2011, Sanhe generated revenue of $10,848, a decrease of $519 or 4.1% compared to $11,367 for the three months ended March 31, 2010. The decrease was a result of decline in market demand of DVD players and speakers.

Gross profit decreased $426 or 30.0% from $1,290 for the three months ended March 31, 2010 to $864 for the three months ended March 31, 2011. Gross profit margin decreased from 11.4% in 2010 to 8.0% in 2011, a decrease of 3.4%. The decrease was a result of higher sales volume of televisions in the first quarter of 2011 compared to higher sales in DVD players and speakers in the first quarter of 2010, which have higher gross profit margin compared to other home electronics products.

Operating loss was $969 for the three months ended March 31, 2011, an increase of $453 or 87.8% compared to $516 for the three months ended March 31, 2010. Operating loss increased primarily due to decreased gross profit and increased operating expenses including an increase in base salary for all staff and an increase in management fees paid to the department stores.

d) Joy & Harmony

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

                         Three months ended March 31,          Percentage
                           2011                 2010             Change
Joy & Harmony           (restated)           (restated)        (restated)
Revenue               $       10,011       $       10,895             (8.1 )%
Gross Profit                   1,049                1,199            (12.5 )%
Gross Profit Margin             10.5 %               11.0 %           (0.5 )%
Operating Loss                  (772 )               (508 )          (52.0 )%

For the three months ended March 31, 2011, Joy & Harmony generated revenue of $10,011, a decrease of $884 or 8.1% compared to $10,895 for the three months ended March 31, 2010. Gross profit decreased $150 or 12.5% from $1,199 for the three months ended March 31, 2010 to $1,049 for the three months ended March 31, 2011. Gross profit margin decreased from 11.0% in 2010 to 10.5% in 2011, a decrease of 0.5%. The decrease in revenue was due to a lower demand for small digital products such as MP3 and MP4. The decrease in gross profit margin was primarily due to a higher percentage of sales from international brands, which usually have lower profit margin than domestic brands.

Operating loss was $772 for the three months ended March 31, 2011, an increase of $264 or 52.0% compared to $508 for the three months ended March 31, 2010. Operating loss increased primarily due to decreased gross profit and increased operating expenses including an increase in base salary for all staff and management fees paid to the department stores.

e) 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.

                             Three months ended March 31,          Percentage
Jinhua                        2011                  2010             Change
Revenue                   $       2,202         $       2,641            (16.6 )%
Gross Profit                        (92 )                 596           (115.4 )%
Gross Profit Margin                (4.2 )%               22.6 %          (26.7 )%
Operating (Loss)/Income            (441 )                 250           (276.4 )%

Revenue decreased from $2,641 for the three months ended March 31, 2010 to $2,202 for the three months ended March 31, 2011. Gross profit margin decreased 26.7% from 22.6% for the three months ended March 31, 2010 to (4.2)% for the three months ended March 31, 2011. The logistics industry is experiencing a downturn. While the fuel cost and labor cost continue to rise, and toll rates remain high, the price for transportation did not increase accordingly. Therefore, revenue and gross profit margin decreased. Operating income decreased primarily due to decreased gross profit margin. Higher operating expenses, labor cost in particular, also caused operating income to decrease.

Net Sales

Net sales for the three months ended March 31, 2011 decreased by 7.0%, to $39,093 (restated) compared to $42,058 (restated) for the three months ended March 31, 2010. Management believes the sales decrease was a result of various factors including a slowdown in the retail markets in general, weaker demand for consumer and business electronics as well as the pressure of increased competitions from supermarkets, internet commerce as well as increased TV shopping networks.

Cost of Sales

Cost of sales for the three months ended March 31, 2011 was $36,063 compared to $37,433 for the three months ended March 31, 2010, a decrease of 3.7%. The decreased cost of sales for the three months was a result of the decrease in sales from the comparable period. In addition, higher fuel cost and higher cost of consumer electronics also contributed to the increased cost of sales.

Gross Profit Margin

Gross profit margin for the three months ended March 31, 2011 was 7.8% (restated) compared to 11.0% (restated) for the three months ended March 31, 2010. The lower gross profit margin was primarily due to the decreased unit sales prices of consumer and business electronics in the competitive market in China. In addition, international brand name electronics represented a higher percentage of sales in the first three months of 2011 compared to 2010. The increased sales of brand name electronics led to lower gross profit margin since brand name electronics have lower gross profit margins compared to domestic products.. For the logistics segment, the decrease in gross profit margin was primarily due to increased fuel cost.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2011 were $7,271 (restated) or 18.6% of net sales, compared to $6,474 (restated) or 15.4% of net sales for the three months ended March 31, 2010, an increase of 3.2% of sales. The increase in general and administrative expenses for the first quarter was primarily due to an increase in labor cost.

Loss from Operations

Operating loss for the three months ended March 31, 2011 was $4,241 or 10.8% of net sales compared to $1,849 or 4.4% of net sales for the three months ended March 31, 2010, an increase of 129.3%. Lower sales, lower gross profit margin as well as increased operating expenses were the key factors for the increase in loss from operations during the three months ended March 31, 2011 compared to 2010.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2011 was $90 compared to $107 for the three months ended March 31, 2010. Income tax expense was not significant due to Yiwu, Wang Da, Joy & Harmony and Sanhe having losses in the three months of 2011 and 2010. Zhejiang was the only subsidiary having operating income and the amount was not significant in the three months of 2011 and 2010. In addition, although Jinhua had operating lossess, Jinhua still incurred nominal income tax expenses because Jinhua uses simplified tax system.

Net Loss

Net loss was $4,459 or 11.4% of net sales for the three months ended March 31, 2011 compared to $1,927 or 4.6% of net sales for the three months ended March 31, 2010, an increase of 131.4%. Decreased sales revenue, lower gross profit margin and higher operating expenses were the critical factors which contributed to the decrease in net income.

Liquidity and Capital Resources

Operations and liquidity needs are funded primarily through cash flows from operations. Cash and equivalents were $18,381 at March 31, 2011, compared to $27,256 at March 31, 2010, and compared to $26,249 at December 31, 2010.

We believe the funds available to us are adequate to meet our operating needs for the remainder of 2011.

Our cash flows for the three month periods are summarized as follows:

                                                           Three months ended
                                                                March 31,
                                                            2011          2010
Net cash (used in) operating activities                  $   (8,248 )   $ (2,605 )
Effect of exchange rate change on cash and equivalents          380          (47 )
Net decrease in cash and equivalents                         (7,868 )     (2,652 )
Cash and equivalents at beginning of period                  26,249       29,908
Cash and equivalents at end period                       $   18,381     $ 27,256

Operating Activities

Net cash used in operating activities was $8,248 for the three months ended March 31, 2011 compared to $2,605 for the three months ended March 31, 2010, a 216.7% increase. The increase was mainly attributable to several factors, including (i) net loss of $4,459; (ii) increase in accounts receivable of $1,997, (iii) decrease in accounts payable and accrued expenses of $2,891,offset by the decrease in prepaid expenses and other current asset of $194 in the three months ended March 31, 2011, and add back stock compensation of $609.

                             Three months ended March 31,
                                                     Percentage
                         2011            2010          Change

Sales, Net            $   39,093       $ 42,058             (7.0 )%

Accounts receivable   $   13,100       $ 17,981            (27.1 )%

Accounts receivable decreased 27.1% in the first quarter of 2011 while sales decreased 7.0%. Management monitors and periodically assesses the collectability of accounts receivable to ensure the allowance for bad debt account is reasonably estimated. Collection of debt is based on the terms of legal binding documents. Our account receivable department has periodically reviewed the allowance for doubtful accounts. The bad debt allowance is based on the aging of receivables, credit history and credit quality of the customers, the term of the contracts as well as the balance outstanding. If an account receivable item is considered probable to be uncollectible, it will be charged to bad debts immediately.

We did not have any capital expenditure for the first three months of 2011 and 2010.

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 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 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; and (3) whether all elements of the contract have been fulfilled and delivered. In addition, our revenue recognition policy requires an assessment as to whether collection is reasonably assured, which inherently requires us to evaluate the creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing or amount of revenue recognition.

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

Inflation

Neither inflation nor changing prices has had a material impact on the Company's net sales, revenues or continuing operations during the past three fiscal years.

After Sales Service

The after-sales services 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 March 31, 2011:



                                                             Payment Due by Period
                                               Less than 1                                            More than
Contractual Obligations          Total            year           1-3 years         3-5 years           5 years
Operating lease obligations   $       278     $         190     $         87     $            1     $            -