UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended:   September 30, 2010

Or

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

For the transition period from ______________ to _______________

Commission File Number:  000-53155

VLOV INC.

  (Exact name of registrant as specified in its charter)

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

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

(86595) 2345999

 (Registrant’s telephone number, including area code)

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

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

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

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each issuer’s classes of common stock, as of the latest practicable date: 18,008,272 shares issued and outstanding as of November 12, 2010. 

TABLE OF CONTENTS

TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2010

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

2

CAUTION REGARDING FORWARD-LOOKING INFORMATION

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

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

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

3

VLOV, INC.

CONSOLIDATED BALANCE SHEETS

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

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

See accompanying notes to consolidated financial statements

4

VLOV, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

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

	Three Months Ended September  30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Net sales	$	13,063		$	13,882		$	49,105		$	45,823
Cost of sales		7,643			8,850			29,918			29,316
Gross profit		5,420			5,032			19,187			16,507
Operating expenses:
Selling expenses		1,399			841			5,442			2,900
General and administrative expenses		702			520			2,602			1,573
		2,101			1,361			8,044			4,473
Income from operations		3,319			3,671			11,143			12,034
Other income (expenses):
Change in fair value of derivative liability		992			-			818			-
Interest income		18			3			61			14
Interest expense		(15	)		(15	)		(52	)		(43	)
		995			(12	)		827			(29	)
Income before provision for income taxes		4,314			3,659			11,970			12,005
Provision for income taxes		884			922			2,992			3,183
Net income		3,430			2,737			8,978			8,822
Other comprehensive income:
Foreign currency translation adjustment		438			7			540			14
Comprehensive income	$	3,871		$	2,744		$	9,518		$	8,836
Allocation of net income for calculating basic earnings per share:
Net income attributable to common shareholders		3,149			2,737			8,127			8,822
Net income attributable to preferred shareholders		281			-			851			-
Net income	$	3,430		$	2,737		$	8,978		$	8,822
Basic earnings per share- common	$	0.18		$	0.17		$	0.47		$	0.56
Diluted earnings per share	$	0.18		$	0.17		$	0.47		$	0.56
Weighted average number of common shares and participating preferred shares outstanding:
Basic		17,874,371			16,000,000			17,199,755			15,773,187
Diluted		19,472,376			16,000,000			19,001,350			15,773,187

See accompanying notes to consolidated financial statements

5

VLOV, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

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

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

See accompanying notes to consolidated financial statements

6

VLOV, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; amounts in thousands)

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

See accompanying notes to consolidated financial statements

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

7

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Description of business and organization

VLOV Inc. (the “Company”) was incorporated in the State of Nevada on October 30, 2006, under the name “Sino Charter, Inc.” The Company changed its name to “VLOV, Inc.” on March 20, 2009. The Company designs, manufactures and sells fashion apparel under the brand name “VLOV”. All current operations of the Company are in the People’s Republic of China (“China” or the “PRC”).

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

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

The Company does not conduct any substantive operations of its own; all of the Company’s operations are conducted by a variable interest entity, Jinjiang Yinglin Jinduren Fashion Limited (“Yinglin Jinduren”), which is controlled by Dong Rong Capital Investment Limited (“HK Dong Rong”). HK Dong Rong is a limited liability company incorporated in Hong Kong on January 5, 2005 originally under the name “Korea Jinduren (International) Dress Limited” (“Korea Jinduren”), and was acquired by PXPF from the majority shareholders of PXPF on September 22, 2008. PXPF is a limited liability company incorporated in the British Virgin Islands (“BVI”) on April 30, 2008.

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

PRC law currently has limits on foreign ownership of domestic PRC companies. To comply with these foreign ownership restrictions, on December 28, 2005, HK Dong Rong (then known as Korea Jinduren) entered into certain exclusive agreements with Yinglin Jinduren and its shareholders. Pursuant to these agreements, HK Dong Rong provides exclusive consulting services to Yinglin Jinduren in return for a consulting services fee which is equal to Yinglin Jinduren’s net profits. Prior to the Share Exchange, however, certain dividends were declared and paid from Yinglin Jinduren’s net income to its equity owners. In addition, Yinglin Jinduren’s equity owners have pledged their equity interests in Yinglin Jinduren to HK Dong Rong, irrevocably granted HK Dong Rong an exclusive option to purchase all or part of the equity interests in Yinglin Jinduren and agreed to entrust all the rights to exercise their voting power to the person(s) appointed by HK Dong Rong.

Through these contractual arrangements, HK Dong Rong has the ability to control Yinglin Jinduren’s daily operations and financial affairs, appoint its senior executives and approve all matters requiring shareholder approval. As part of these contractual arrangements, HK Dong Rong and Yinglin Jinduren entered into an operating agreement which, amongst other matters, precludes Yinglin Jinduren from borrowing money, selling or acquiring assets, including intellectual property rights, providing guarantees to third parties or assigning any business agreements, without the prior written consent of HK Dong Rong. HK Dong Rong also agreed that, if any guarantee for Yinglin Jinduren’s performance of any contract or loan was required, HK Dong Rong would provide such guarantee to Yinglin Jinduren.

As a result of these contractual arrangements, HK Dong Rong is entitled to receive the expected residual returns of Yinglin Jinduren. Additionally, although Yinglin Jinduren has been profitable, in the event that Yinglin Jinduren were to incur losses, HK Dong Rong would be obligated to absorb a majority of the risk of loss from Yinglin Jinduren’s activities as a result of its inability to receive payment for its accumulated consulting fees that are equal to Yinglin Jinduren’s net income.

8

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(a) Description of business and organization (continued)

The Company believes that the equity investors in Yinglin Jinduren do not have the characteristics of a controlling financial interest, and that the Company is the primary beneficiary of the operations and residual returns of Yinglin Jinduren and, in the event of losses, would be required to absorb a majority of such losses. Accordingly, the Company consolidates Yinglin Jinduren’s results, assets and liabilities in the accompanying financial statements. Due to the contractual arrangements, the net income and interest allocable to the noncontrolling interest is zero.

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

On November 19, 2009, HK Dong Rong incorporated Dong Rong (China) Co., Ltd. in the PRC as its wholly-owned subsidiary (“China Dong Rong”), with registered capital of $8 million. As of September 30, 2010, $4 million has been contributed to China Dong Rong and the remaining registered capital will be contributed within two years after the date of incorporation. It is the intention of the Company and the equity owners of Yinglin Jinduren to transfer the business operations of Yinglin Jinduren to China Dong Rong; however, such transfer had not yet occurred as of September 30, 2010.

(b) Basis of presentation and consolidation

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. As previously described, the Company, through its wholly-owned subsidiary HK Dong Rong, consolidates Yinglin Jinduren as Yinglin Jinduren is considered to be a variable interest entity (VIE) and the Company is considered to be its primary beneficiary. Because the Company and Yinglin Jinduren are under common control, the initial measurement of the assets and liabilities of Yinglin Jinduren for the purpose of consolidation by the Company was at book value. The Company has had no other business activities except for the exclusive agreements with Yinglin Jinduren and its equity owners. The consolidated financial statements include the financial statements of the Company, its subsidiary and the variable interest entity, Yinglin Jinduren. All significant inter-company transactions and balances between the Company, its subsidiary and the variable interest entity are eliminated upon consolidation.

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

(c) Use of Estimates

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

(d) Accounting Pronouncements

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

9

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(e) Revenue Recognition

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

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

(f) Cash and Cash Equivalents

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

(g) Time Deposits

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

(h) Accounts receivable

Accounts receivable, including associated value added taxes, are unsecured, and are stated at the amount the Company expects to collect. The Company may maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company evaluates the collectability of its accounts receivable based on a combination of factors, including customer credit-worthiness and historical collection experience. Management reviews the receivable aging and adjusts the allowance based on historical experience, financial condition of the customer and other relevant current economic factors. Interest is not normally charged on accounts receivables. As of September 30, 2010, approximately $2.6 million of accounts receivable were aged greater than 90 days. Management has determined no allowance for uncollectible amounts is required.

(i) Depreciation and Amortization

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

Buildings	30 years
Furniture, fixtures and equipment	5 years
Motor vehicles	5 years
Office equipment	5 years
Plant and machinery	5 to 15 years

(j) Inventories

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

(k) Foreign Currency Translation

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

10

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(k) Foreign Currency Translation (continued)

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People's Bank of China (the "PBOC") or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC, which are determined largely by supply and demand. The rates of exchange quoted by the People's Bank of China on September 30, 2010 and December 31, 2009 were US$1.00 to RMB 6.68 and RMB 6.83, respectively. The average translation rates of US$1.00 to RMB 6.76 and US$1.00 to RMB 6.80 was applied to the income statement accounts for the three and nine months ended September 30, 2010, respectively. The average translation rate of US$1.00 to RMB 6.84 was applied to the income statement accounts for the three and nine months ended September 30, 2009.

Translation adjustments are recorded as other comprehensive income (loss) in the consolidated statements of stockholders’ equity and comprehensive income and as a separate component of stockholders equity.

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

(l) Land use rights

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

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

Intangible assets of the Company are reviewed annually to determine whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of September 30, 2010, the Company expects these assets to be fully recoverable.

(m) Long-Lived Assets

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

(n) Comprehensive Income

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

(o) Income Taxes

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

11

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(o) Income Taxes (continued)

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

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

(p) Advertising Costs

Advertising costs are expensed and reflected in selling expenses on the consolidated statements of income and comprehensive income in the period in which the advertisements are first run. Advertising expense for the three months ended September 30, 2010 and 2009 were approximately US$1.37 million and US$0.75 million, respectively, and approximately US$4.11 million and US$2.19 million for the nine months ended September 30, 2010 and 2009, respectively. Advertising costs include advertising subsidy expense which is accrued based on the terms in effect with distributors and paid when all attaching conditions have been completed.

(q) Shipping and Handling Costs

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

(r) Research and Development Costs

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

(s) Derivative Financial Instruments

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

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

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

(t) Fair Value of Financial Instruments

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

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

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

12

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(u) Earnings Per Share

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

(v) New Accounting Pronouncements

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

Pronouncement	Issued	Title
ASU No. 2009-15	October 2009	Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing
ASU No. 2009-16	December 2009	Transfers and Servicing (Topic 860): Accounting for Transfers and Financial Assets.
ASU No. 2009-17	December 2009	Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities
ASU No. 2010-01	January 2010	Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force
ASU No. 2010-02	January 2010	Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification
ASU No. 2010-05	January 2010	Compensation - Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation

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

Pronouncement	Issued	Title
ASU No. 2009-13	October 2009	Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task Force
ASU No. 2010-06	January 2010	Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
ASU No. 2010-09	February 2010	Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements
ASU No. 2010-11	March 2010	Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives

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

13

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(2) TIME DEPOSITS

Time deposits (in thousands):

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

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

(3) INVENTORIES

Inventories consist of the following (in thousands):

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

(4) PROPERTY, PLANT AND EQUIPMENT

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

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

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

14

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(5) LAND USE RIGHTS

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

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

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

(6) ACCRUED EXPENSES AND OTHER PAYABLES

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

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

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

15

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(7) RELATED PARTY TRANSACTIONS

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

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

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

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

(8) DERIVATIVE FINANCIAL INSTRUMENTS

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

The Company uses a binomial option pricing model to value these Warrants. In valuing the Warrants at the time they were issued and at September 30, 2010, the Company used the market price of its common stock on the date of valuation, an expected dividend yield of 0% and the remaining period to the expiration date of the Warrants. All Warrants can be exercised by the holder at any time.

Because of the limited historical trading period of the Company’s common stock, the expected volatility of its common stock over the remaining life of the Warrants, which has been estimated at 85%, is based on a review of the volatility of entities considered by management as comparable. The risk-free rates of return used ranged from 0.44% to 0.46%, based on constant maturity rates published by the U.S. Federal Reserve, applicable to the remaining life of the Warrants.

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

				Numbers of warrants				Value
Issue date	Expiration date	Exercise price per share		September 30, 2010		December 31, 2009		September 30, 2010		December 31, 2009
October 27, 2009	October 27, 2012	$	3.43		723,052		723,052	$	1,193,676	$	1,538,959
November 17, 2009	November 17, 2012	$	3.43		667,059		675,308		1,107,084		1,440,952
December 1, 2009	December 1, 2012	$	3.43		326,767		326,767		544,177		704,510
					1,716,878		1,725,127	$	2,844,937	$	3,684,421

16

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(8) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)

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

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

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value using Level 3 inputs during the nine months ended September 30, 2010:

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

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

(9) SHORT-TERM BORROWINGS

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

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

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

(10) COMMON STOCK

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

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

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

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

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

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

				Weighted-Average
				Grant Date
Non-vested Shares	Shares			Fair Value
Non-vested at January 1, 2010		-			-
Granted		30,000		$	5.33
Vested		(13,063	)	$	5.33
Forfeited		-			-
Non-vested at September 30, 2010		16,397		$	5.33

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

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

17

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(11) PREFERRED STOCK

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

On October 27 and November 17, 2009, the Company sold 1,446,105 and 1,350,616 Preferred Shares, respectively, to certain accredited investors. Each Preferred Share is convertible into one share of common stock, at a conversion price of $2.86 per share (subject to certain adjustments) at any time at the holder’s option, and will automatically convert if the common stock is qualified for listing on either the NASDAQ Capital Market or the NYSE Amex Equities. The designation, rights, preferences and other terms and provisions of the Preferred Shares are set forth in the Certificate of Designation filed with the Nevada Secretary of State on October 23, 2009. Each Preferred Share is entitled to participate in any dividends declared and paid on the common stock on an as-converted basis. Holders of the Preferred Shares are also entitled to notice of any stockholders’ meeting and vote together with common stock holders on an as-converted basis. Each Preferred Share has a liquidation preference of $2.86 per share, plus any accrued but unpaid dividends. During the nine months ended September 30, 2010, 1,307,065 Preferred Shares were converted, and at September 30, 2010, 1,489,656 Preferred Shares were outstanding, with an aggregate liquidation preference of $4,260,416.

(12) EARNINGS PER SHARE

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

(a) Basic

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

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

(b) Diluted

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

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

18

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(13) INCOME TAXES

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

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

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

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

The following table reconciles the US statutory rates to the Company's effective tax rate for the three and nine months ended September 30, 2010 and 2009:

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

19

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(13) INCOME TAXES (CONTINUED)

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

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

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

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

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

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

(14) STATUTORY RESERVES

Under PRC regulations, Yinglin Jinduren may pay dividends only out of its accumulated profits, if any, determined in accordance with PRC GAAP. In addition, it is required to set aside at least 10% of its after-tax net profits each year, if any, to fund statutory reserves until the balance of the reserves reaches 50% of its registered capital.  The statutory reserves are not distributable in the form of cash dividends to the Company but can be used to make up prior year cumulative losses. As of September 30, 2010, the registered capital of Yinglin Jinduren was RMB 10,000,000 and the statutory reserves have been fully funded.

(15) LEASE COMMITMENTS

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

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

	Future minimum payments
Three months Ending December 31:
2010	$	18
Year Ending December 31:
2011		70
2012		54
	$	142

20

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(16) BUSINESS AND CREDIT CONCENTRATIONS

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

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

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

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

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

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

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

21

VLOV, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(16) BUSINESS AND CREDIT CONCENTRATIONS (CONTINUED)

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

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

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

* The concentration is less then 10%

(17) BENEFIT PLAN

Pursuant to the relevant regulations of the PRC government, Yinglin Jinduren participates in a local municipal government retirement benefits scheme (the “Scheme”), whereby Yinglin Jinduren is required to contribute a certain percentage of the basic salaries of its employees to the Scheme to fund their retirement benefits. Contributions under the Scheme are charged to the income statement as incurred. Contributions to the Scheme were US$12,000 and US$44,000 for the three months ended September 30, 2010 and 2009, respectively, and US$78,000 and US$133,000 for the nine months ended September 30, 2010 and 2009, respectively.

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

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

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

Overview

We design, develop, manufacture, distribute and sell casual apparel and clothing products in the PRC targeted toward middle-class Chinese men under the brand name “V·LOV”.  We sell our products to our independent distributors, each of whom is granted rights to market and sell our products in a defined market or territory.  As of September 30, 2010, we had agreements with 12 distributors throughout northern, central and southern China.  After distributors place purchase orders for our products, such products are manufactured by us and our outsourced manufacturers and delivered to our distributors.  As of November 3, 2010, our distributors owned and operated 526 points of sales, or POS, across the PRC, including counters, concessions, free standing stores and store-in-stores.  We maintain and exercise control over advertising and marketing activities from our headquarters in Fujian, China, where we set the tone for integrity, consistency and direction of the V·LOV brand image throughout China.

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

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

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

Critical Accounting Policies

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

23

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

Basis of presentation and consolidation

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

Revenue Recognition

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

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

Accounts receivable

Accounts receivable, which are unsecured, are stated at the amount we expect to collect. We continuously monitor collections and payments from our customers (our distributors) and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Historically, our credit losses have not been significant and within our expectations; however, we cannot guarantee that we will continue to experience the same credit loss rates that have been experienced in the past.

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

From Date of Invoice to Customer:	September 30, 2010		December 31, 2009
0-30 days	$	8,853	$	6,914
31-60 days		2,308		2,190
61-90 days		4,178		-
91-120 days		2,600		-
121 days and above		-		-
Allowance for bad debts		-		-
Total Accounts Receivable	$	17,939	$	9,104

24

On average, we collect our receivables within 90 days. Our ability to collect is attributed to the steps that we take prior to extending credit to our distributors as discussed above. If we are having difficulty collecting from a distributor, we take the following steps: cease existing shipments to the distributor, visit the distributor to request payment on past due invoice, and if necessary, take legal recourse. If all of these steps are unsuccessful, management would then determine whether or not the receivable should be written off.

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

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

Income Taxes

We are subject to income taxes, primarily in the PRC. We believe we have adequately provided for all taxes due but amounts asserted by tax authorities could be greater or less than the amounts we have accrued. We have concluded all PRC corporate income tax matters through September 30, 2010 and do not anticipate adjustments as a result of any tax audits within the next twelve months.

Derivative instruments

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

The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. At September 30, 2010, the warrants that we issued in 2009 in connection with sales of our series A convertible preferred stock and our common stock are accounted for as derivative instrument liabilities, We determine the fair value of these instruments using a binomial option pricing model. That model requires the use of a number of assumptions, including our expected dividend yield and the expected volatility of our common stock price over the life of the instruments. Because of the limited trading history for our common stock, we have estimated the future volatility of our common stock price based on the historical experience of other entities considered comparable to us. The identification of, and accounting for, derivative instruments and the assumptions used to value them can significantly affect our financial statements.

Results of Operations

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

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

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Net Sales

Net sales for the three months ended September 30, 2010 were $13,063,000, a decrease of 5.9% from $13,882,000 for the same period in 2009, while net sales for the nine months ended September 30, 2010 were $49,105,000, an increase of 7.2% from $45,823,000 for the same period of 2009.  We generate revenue primarily from the sales of our apparel products to our distributors, who sell them at retail locations throughout northern, central and southern China.  These retail locations, also known as points of sales (“POS”), include counters, concessions, free standing stores and store-in-stores. We do not own or operate any V·LOV retail locations ourselves; the POS are established and owned by our distributors, each of whom operates its network of POS directly or through third-party retail operators. We design and create samples, which are presented to our distributors at our semi-annual previews for their selection and purchase based on what they believe will sell most effectively at their POS. Additionally, we set guidelines for our distributors as to how our products are to be advertised and displayed. We believe that our sales are driven by marketing and advertising as well as by creating fashionable designs. The decrease in our sales for the three months ended September 30, 2010 was primarily attributable to decreases in sales to distributors in Jiangxi, Zhejiang and Yunnan provinces due to their closing of counters and concessions. The increase in sales for the nine months ended September 30, 2010 was a result of our stronger sales results during the second quarter of 2010.

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

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

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

26

Cost of Sales and Gross Profit Margin

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

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

We presently outsource 100% of our manufacturing to third parties, based on orders for our products that we receive from our distributors based on the clothing samples we design and create. Historically, we have outsourced to two types of manufacturers: (1) sub-contractors, which require us to provide them with the raw materials for our products, and (2) O.E.M. manufacturers, that supply their own raw materials. Beginning in 2009, we have shifted our outsourcing to O.E.M. manufacturers. Our plan is continue outsourcing our manufacturing needs. O.E.M. finished goods cost, representing our purchase of finished products from the O.E.M. manufacturers, accounted for 52.4% and 57.5% of our sales for the three months and nine months periods ended September 30, 2010, respectively, compared to 58.5%  and 58.5% for the same periods in 2009, respectively.

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

27

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

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

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

Selling, General and Administrative Expenses

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

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

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

Change in Fair Value of Derivative Liability

We issued common stock purchase warrants to the investors in our financings completed in October, November and December 2009. These warrants are accounted for at fair value as derivative instruments and are marked-to-market each period, with changes in the fair value charged or credited to income each period and do not impact cash flow as these are non-cash charges. During the three and nine months ended September 30, 2010, we recorded a gains of $992,000 and $817,000, respectively. In future periods, we may experience significant gains or losses, as the value of these warrants fluctuates in response to changes in our stock price.

Income Tax Expenses

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

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

Reconciliation of effective tax expense (in thousands):

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

Net Income

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

Liquidity and Capital Resources

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

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

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

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As of September 30, 2010, we had cash and cash equivalents of $7,149,000, total current assets of $35,593,000 and current liabilities of $5,140,000, which is net of the $2,848,000 derivative liability.  The $2,848,000 derivative liability relating to our warrants will be allocated to equity when the warrants are exercised and eliminated when the warrants expire. The $2,848,000 derivative liability does not require a cash settlement. We presently finance our operations primarily from the cash flow from our operations, and we anticipate that this will continue to be our primary source of funds to finance our short-term cash needs. Our cash balance as of November 12, 2010 was $7,229,000.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

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

The following tables summarize our contractual obligations as of September 30, 2010, and the effect that these obligations are expected to have on our liquidity and cash flows in future periods.

	Payments Due by Period
	Total		Less than 1 year		1 Year +
	(in thousands of dollars)
Contractual Obligations  :
Total Indebtedness	$	599	$	599	$	-
Operating Leases		142		18		124
Total Contractual Obligations:	$	741	$	617	$	124

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

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

Off-Balance Sheet Arrangements

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

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level.

Our current accounting staff continues to remain relatively inexperienced with respect to U.S. GAAP-based reporting and SEC rules and regulations, and will require additional training to be able to timely and properly account for complex transactions such as our sales of preferred stock, common stock and warrants in October, November and December 2009. As a result, the ability of our financial control environment to mitigate material misstatement from being prevented or detected remained lacking as of the evaluation date. In April 2010, the Company retained a CFO on a part-time basis to assist with the preparation of the Company’s financial statements in accordance with U.S. GAAP. Additionally, the Company engaged an outside consultant to assist with the valuation of the securities issued in connection with its fourth quarter 2009 financings. The Company looks to take such other steps as necessary to address the weakness in its accounting staff, the effectiveness of which will not be known until the Company performs a test in connection with management’s tests of internal control over financial reporting to be undertaken as of December 31, 2010.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

As of and for the nine months ended September 30, 2010, there were no material changes in our risk factors from those disclosed in Part I, Item 1A, of our annual report on Form 10-K as of and for the year ended December 31, 2009.

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

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

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

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

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Item 3. Defaults upon Senior Securities.

None

Item 4. Reserved.

Item 5. Other Information.

None

Item 6. Exhibits.

EXHIBIT INDEX

Exhibit Number	Description
2.1	Share Exchange Agreement (1)
3.1	Articles of Incorporation (2)
3.2	Amendment to Articles of Incorporation (for 1-for-100 reverse stock split), filed with the Nevada Secretary of State on January 12, 2009 (10)
3.3	Articles of Merger filed on March 4, 2009 and effective March 20, 2009 (3)
3.4	Certificate of Correction filed on March 6, 2009 (3)
3.5	Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock, filed with the Nevada Secretary of State on October 23, 2009 (4)
3.6	Bylaws (2)
3.7	Amendment to the Bylaws (1)
4.1	Specimen Common Stock Certificate (2)
4.2	Specimen Series A Convertible Preferred Stock Certificate (4)
4.3	Form of Common Stock Purchase Warrant for the Preferred Shares Financing (4)
4.4	Form of Common Stock Purchase Warrant for the Common Shares Financing (6)
4.5	Form of Common Stock Purchase Warrant issued to American Capital Ventures, Inc. (14)
10.1	Consulting Services Agreement (1)
10.2	Operating Agreement (1)
10.3	Equity Pledge Agreement (1)
10.4	Option Agreement (1)
10.5	Voting Rights Proxy Agreement (1)
10.6	Share Purchase Binding Letter of Intent with ARC China, Inc. dated September 29, 2009 (5)

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10.7	Form of Securities Purchase Agreement for the Preferred Shares Financing (4)
10.8	Form of Escrow Agreement for the Preferred Shares Financing (4)
10.9	Form of Securities Purchase Agreement for the Common Shares Financing (6)
10.10	Supplemental Agreement dated February 18, 2009 (8)
10.11	Form of Director Offer Letter entered into with Ying Zhang and Jianwei Shen (11)
10.12	Bridge Loan and Financing Agreement dated June 11, 2008 (12)
10.13	Trademark License Contract for serial number 3871951 dated February 12, 2009  (12)
10.14	Trademark License Contract for serial number 3884844 dated February 12, 2009  (12)
10.15	Trademark License Contract for serial number 3884845 dated February 12, 2009  (12)
10.16	Trademark License Contract for serial number 4247545 dated February 12, 2009  (12)
10.17	Form of Securities Purchase Agreement dated February 13, 2009 (12)
10.18	Form of Securities Purchase Agreement dated February 12, 2009 (12)
10.19	Loanout Agreement with Worldwide Officers, Inc. dated April 27, 2010 (13)
10.20	Director Offer Letter with Jianhui Wang dated June 1, 2010 (15)
10.21	Regional Distributorship Agreement between Yinglin Jinduren and C-002 of Mingzhu 100 Market dated May 25, 2009 (14)
10.22	Regional Distributorship Agreement between Yinglin Jinduren and Jinyang Commerce Co., Ltd. dated dated May 25, 2009 (14)
10.23	Regional Distributorship Agreement between Yinglin Jinduren and Jinduren Store, Tianqiao District, Jinan dated May 25, 2009 (14)
10.24	Regional Distributorship Agreement between Yinglin Jinduren and Clothwork Apparel, Wanma Plaza dated May 25, 2009 (14)
31.1	Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended *
31.2	Certifications pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended *
32.1	Certifications pursuant to 18 U.S.C. Section 1350 *
32.2	Certifications pursuant to 18 U.S.C. Section 1350 *
99.1	Legal Opinion of Allbright Law Offices (13)

  * Filed herewith.

(1) Filed on February 13, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(2) Filed on February 9, 2007 as an exhibit to our Registration Statement on Form SB-2, and incorporated herein by reference.

(3) Filed on March 20, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(4) Filed on October 30, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

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(5) Filed on October 5, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(6) Filed on December 2, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(7) Filed on March 7, 2008 as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.

(8) Filed on February 20, 2009 as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(9) Filed on April 15, 2009, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(10) Filed on December 17, 2009, as an exhibit to our Registration Statement on Form S-1, and incorporated herein by reference.

(11) Filed on March 16, 2010, as an exhibit to our Current Report on Form 8-K, and incorporated herein by reference.

(12) Filed on April 15, 2010, as an exhibit to our Annual Report on Form 10-K, and incorporated herein by reference.

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

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

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

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SIGNATURES

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

	VLOV INC. (Registrant)
Date: November 15, 2010	By:	/s/ Qingqing Wu
		Qingqing Wu
		Chief Executive Officer

Date: November 15, 2010	By:	/s/ Bennet P. Tchaikovsky
		Bennet P. Tchaikovsky
		Chief Financial Officer

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