UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




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




For the
fiscal year ended December 31,
2009




or




o
            TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934




For the
transition period from _____________ to ________________




Commission
file number 000-52672




CHINANET ONLINE  HOLDINGS,
INC. (Exact
name of registrant as specified in its charter)





Nevada
            
            20-4672080(State
      or other jurisdiction of
            
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)No.3
      Min Zhuang Road, Building 6,
              Yu
      Quan Hui Gu Tuspark, Haidian District, Beijing, PRC
            
            100195(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code:   +86-10-51600828




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






Title of Each
      Class
            Name of Exchange on which
      Registered$0.0001 Common
      Stock
            NYSE
      Amex




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




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




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




Indicate
by check mark whether the registrant (1) has filed all reports required 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 (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
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




The
aggregate market value of the 2,593,040 shares of voting and non-voting common
equity stock held by non-affiliates of the registrant was approximately
$6,482,600 as of June 30, 2009, the last business day of the registrant’s most
recently completed second fiscal quarter, based on the last sale price of the
registrant’s common stock on such date of $2.50 per share, as reported on the
OTC Bulletin Board.




The
number of shares outstanding of the registrant’s common stock at $.0001 par
value as of March29, 2010
was16,426,320.




DOCUMENTS
INCORPORATED BY REFERENCE




None.









CHINANET
ONLINE HOLDINGS, INC.


TABLE
OF CONTENTS




Annual
Report on Form 10-K for the Year Ended December 31, 2009




PAGEPART
      IItem
      1.
            
            Business
            
            4Item
      1A
            
            Risk
      Factors
            
            24Item
      1B
            
            Unresolved
      Staff Comments
            
            39Item
      2.
            
            Properties
            
            39Item
      3.
            
            Legal
      Proceedings
            
            39Item
      4.
            
            Removed
      and Reserved
            
            39PART
      IIItem
      5.
            
            Market
      for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            
            39Item
      6.
            
            Selected
      Financial Data
            
            40Item
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            41Item
      7A.
            
            Quantitative
      and Qualitative Disclosures about Market RiskItem
      8.
            
            Financial
      Statements and Supplementary Data
            
            62Item
      9.
            
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            
            62Item
      9A.
            
            Controls
      and Procedures
            
            62Item
      9B.
            
            Other
      Information
            
            63PART
      IIIItem
      10.
            
            Directors,
      Executive Officers and Corporate Governance
            
            63Item
      11.
            
            Executive
      Compensation
            
            67Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholders Matters
            
            70Item
      13.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            74Item
      14.
            
            Principal
      Accountant Fees and Services
            
            76PART
      IVItem
      15.
            
            Exhibits
      and Financial Statement Schedules
            
            77SIGNATURES
            
            S-1EXHIBIT
      INDEX
            
            E-1FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
            
            F-1




2




FORWARD
LOOKING STATEMENTS




This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E
of the Securities Exchange Act of 1934. These statements relate to future events
or our future financial performance. We have attempted to identify
forward-looking statements by terminology including “anticipates”, “believes”,
“expects”, “can”, “continue”, “could”, “estimates”, “expects”, “intends”, “may”,
“plans”, “potential”, “predict”, “should” or “will” or the negative of these
terms or other comparable terminology. These statements are only predictions.
Uncertainties and other factors, including the risks outlined under Risk Factors
contained in Item 1A of this Form 10-K, may cause our actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by these forward-looking statements.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our expectations are as of the date this Form 10-K is filed,
and we do not intend to update any of the forward-looking statements after the
filing date to conform these statements to actual results, unless required by
law.




We file
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and proxy and information statements and amendments to reports filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended. You may read and copy these materials at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding us and other companies that file materials with the SEC
electronically. You may also obtain copies of reports filed with the SEC, free
of charge, via a link included on our website at
www.chinanet-online.com.




3





PART
I




ITEM
      1.
            BUSINESS




Business
Overview




The
Company is a holding company that conducts its primary businesses through its
subsidiaries and operating companies, Business Opportunity Online, Beijing CNET
Online, and Shanghai Borongdongsi. We are one of China’s leading full-service
media development and advertising platforms for the small and medium enterprise
(the “SME” )
market.  We are a service-oriented business that leverages proprietary
advertising technology to prepare and publish rich media enabled advertising
campaigns for clients on the Internet and on television. Our goal is to
strengthen our position as the leading diversified media advertising provider in
China.  Our multi-platform advertising network consists of the website
www.28.com (“28.com”), our
Internet advertising portal, ChinaNet TV, our TV production and advertising
unit, and our bank kiosk advertising unit, which is primarily used as an
advertising platform for clients in the financial services
industry.  Using proprietary technology, we provide additional
services as a lead generator.  We also have pursued a strategy as a
re-seller of Internet and television advertising space that we purchase in
bulk.




We have
provided advertising and lead generation services to over 500 clients in a
variety of consumer focused industries.  Our media campaign service
combines both Internet and television advertising, thereby maximizing
advertising exposure for our clients.  Through the high traffic
internet portal 28.com, operated through Business Opportunity Online, companies
and entrepreneurs advertise their products, services and business
opportunities.  28.com offers campaign management tools for our clients
including lead generation and capture, advanced tracking, search engine
optimization, resource scheduling, and content management.  Through
the 28.com site our customers can build sales channels and develop relationships
directly with sales agents, distributors, resellers and/or
franchisees.  It also functions as a one-stop destination for
end-users seeking new business opportunities.  Through our ChinaNet TV
division, operated through Beijing CNET Online, we have in-house television
productions and distribution capabilities.  We create and distribute
television shows that are typically 10 or 20 minutes in length and broadcast on
local television stations.  Airtime is purchased in 40 minute blocks
which air two to four segments each.  The television shows are
comprised of advertisements, similar to infomercials, but include promotions for
several clients during the allotted time.  We have also commenced
production, on a lesser scale, of web video advertisements for clients to be
placed on 28.com.




In May
2008, we launched our bank kiosk division, operated through Shanghai
Borongdongsi, which provides interactive LCD ad displays targeting banking
customers.  In cooperation with the China Construction Bank, we placed
200 interactive kiosks in its branches throughout Henan
Province.  Each kiosk has an LCD advertising display panel, which
provides advertising aimed at bank customers. The kiosk also provides Internet
access on a separate screen so that customers can perform basic non-cash banking
functions such as transferring money, purchasing annuities and/or insurance, and
paying bills.





We
derive our revenue principally by:





·
            charging
      our clients fixed monthly fees to advertise on 28.com;·
            charging
      productions fees for television and web video spots;·
            selling
      advertising time slots on our television shows and bank
      kiosks;·
            reselling
      Internet space and television space at a discount to the direct cost of
      any individual space or time slot, but at a mark-up to our cost due to
      purchase of these items in bulk; and·
            collecting
      fees associated with lead
generation




The five
largest industries in terms of revenue in which our advertising clients operate
are (1) food and beverage, (2) women accessories, (3) footwear, apparel and
garments, (4) home goods and construction materials, and (5) environmental
protection equipment.  Advertisers from these industries together
accounted for approximately87%
of our revenue in 2009.




4


Since we
commenced our current business operations in 2003, we have experienced
significant growth in our network and in our financial results.  We
generated total revenues of $37.7 million in 2009 compared to $21.5 million in
2008 and a net income of $4.0 million in 2009 compared to net income of $2.8
million in 2008.  When our net income of $4.0 million in 2009 is
adjusted to exclude non-cash charges related to our issuance of Series A
preferred stock and warrants in our August 2009 financing, we generated net
income of $8.4 million in 2009.  When our net income is presented as
required by US GAAP to recognize a deemed dividend in 2009 arising from the
intrinsic value of the beneficial conversion feature of our Series A preferred
stock, we experienced a net loss attributable to common shareholders of $2.3
million.




OnDecember
22,
2009, we entered into a co-operation agreement with China’s Social
Welfare & Education Foundation to fund public service programs in support of
the government’s social goal of raising employment rates among college graduates
in China.  According to the agreement, we will donate approximately
$1.5 million per year for the next three years starting in 2010 to China’s
Social Welfare & Education Foundation. These funds will help to support the
Venture Resources Program (“Program”). Through the Program, college graduates
will apply for grants that will help offset the costs associated with starting a
new business. Important information regarding the Program will be accessible
through ChinaNet’s www.28.com portal which will serve as the official website
for the Program. College graduates lacking real world experience will also
benefit from guidance provided by well-known entrepreneurs and venture experts.
These experts will teach business knowledge, help students establish
self-awareness, inspire and support students to develop their own businesses,
and to improve their prospects for employment.




Recent
Development




On March
29, 2010, we entered into an agreement to amend certain provisions of the Series
A-1, Series A-2 and the placement agent Warrants with the holders of those
Warrants originally issued on August 21, 2009.  The amendment to the
Warrants removes certain anti-dilution protection rights that were applicable if
the Company were to issue new shares of common stock or common stock equivalents
at a price per share less than the exercise prices of the Series A-1, Series A-2
and the placement agent Warrants, which are currently $3.00, $3.75 and $2.5 to
$3.75, respectively.  In addition, the amendment to the Warrants added
a provision to grant the holders of the Warrants an approval right until
December 31, 2010, over any new issuance of shares of common stock or common
stock equivalents at a price per share less than the exercise prices of the
Warrants then in effect or without consideration.  The parties agreed
that the amendments to the Warrants would be retroactive from and including,
August 21, 2009.  Except as set forth above, the terms and provisions
of the Warrants shall remain in full force and effect.





Industry
and Market Overview





Overview
of the Advertising Market in China




China has
the largest advertising market in Asia, excluding Japan.  According to
ZenithOptimedia in 2007, China’s advertising market was the fifth largest in the
world by media expenditure, which was approximately $15.4 billion, accounting
for 15.6% of the total advertising spending in the Asia-Pacific
region.  ZenithOptimedia also projected that the advertising market in
China will be one of the fastest growing advertising markets in the world, at a
CAGR of 12.8% from 2007 to 2011. By 2011, China is projected to account for
19.6% of the total advertising spending in the Asia-Pacific region.




The
growth of China’s advertising market is driven by a number of factors, including
the rapid and sustained economic growth and increases in disposable income and
consumption in China. According to ZenithOptimedia, China was the third largest
economy in the world in 2007 in terms of GDP, which amounted to US$3.1 trillion.
According to the National Bureau of Statistics of China, the annual disposable
income per capita in urban households increased from RMB 13,786 in 2007 to RMB
15,781 in 2008 and to 17,175 in 2009, which, representing an increase of 14.5%
and 8.8% respectively.




5




We
believe the advertising market in China has significant potential for future
growth due to relatively low levels of advertising spending per capita and as a
percentage of GDP compared to more developed countries or regions. The following
table sets forth the advertising spending per capita and as a percentage of GDP
in 2007 in China compared to more developed countries or regions:


Advertising
Spending in 2007





Per
      Capita
              (US$)
            
            
            As
      a % of GDPChina
            
            $
            11.62
            
            
            
            0.5
            %Hong
      Kong
            
            
            438.63
            
            
            
            1.5
            %South
      Korea
            
            
            206.71
            
            
            
            1.0
            %Japan
            
            
            320.76
            
            
            
            0.9
            %Asia
      Pacific (weighted average)
            
            
            29.98
            
            
            
            0.8
            %United
      States
            
            
            586.11
            
            
            
            1.3
            %United
      Kingdom
            
            
            419.79
            
            
            
            0.9
            %










According
to ZenithOptimedia’s latest research, China will become the second largest
economy and the fourth largest advertisement market in the world, the percentage
of the expected increase of advertising spending in China for 2010 compares to
2009 will rebound to 10.5%.  The following table sets forth the
percentage of advertising spending increase compares with previous year in China
compared to more developed countries or regions from 2004 through
2010:





Advertising
spending growth rate 2004-2010





Year
              05
      vs.04
            
            
            Year
              06
      vs.05
            
            
            Year
              07
      vs.06
            
            
            Year
              08
      vs.07
            
            
            Year
              09
      vs.08
            
            
            Year
              10
      vs.09%
            
            
            %
            
            
            %
            
            
            %
            
            
            %
            
            
            %China
            
            
            16.5
            
            
            
            20.2
            
            
            
            14.1
            
            
            
            13.5
            
            
            
            7.4
            
            
            
            10.5Global
            
            
            6.1
            
            
            
            6.9
            
            
            
            6.3
            
            
            
            1.0
            
            
            
            -10.2
            
            
            
            3.9United
      States
            
            
            3.1
            
            
            
            4.5
            
            
            
            2.6
            
            
            
            -3.7
            
            
            
            -12.7
            
            
            
            -2.4Europe
            
            
            4.7
            
            
            
            5.8
            
            
            
            4.2
            
            
            
            -1.5
            
            
            
            -11.8
            
            
            
            -0.5Asia
      Pacific
            
            
            9.1
            
            
            
            5.9
            
            
            
            6.3
            
            
            
            2.3
            
            
            
            -3.1
            
            
            
            5.3Japan
            
            
            8.5
            
            
            
            1.1
            
            
            
            0.7
            
            
            
            -3.9
            
            
            
            -8.4
            
            
            
            0.0












Overview
of the Internet Advertising Industry


According
to ZenithOptimedia, the Internet is the only advertising medium that is expected
to experience an increase in expenditures in 2010and will
remain a stabledgrowththereafter.This
growth is expected to stem primarily from the use of search engine, rich media,
video and game embedded advertisements. The growth of Internet advertising is
expected to be 11.3% in 2010 and 15.3% in 2011, and according to the iResearch
China Merchant Website Research Report, is expected to reach $5.8 billion in
2012.




6





The
diagram below depicts annual size, growth, and potential growth of Chinese
Internet advertising market from 2001 to 2012:











High
Demand for the Internet Advertising in China


We
believe that the Internet advertising market in China also has significant
potential for future growth due to high demand from the rapid development of
franchise and chain store business and the SMEs. According to the 2008 China
Franchise Development Report by China Chain Store & Franchise Development
Report, there were approximately 3,000 franchise enterprises and 260,000 chain
stores in China by the end of 2007, and the number of franchise enterprises and
chain stores is expected to increase to 4,000 and 320,000, respectively by
2010.
  The
development of the SME market is still in its early stages and since their sales
channels and distribution networks are still underdeveloped, they are driven to
search for new participants by utilizing Internet advertising.  The
SMEs tend to be smaller, less-developed brands primarily focused on restaurants,
garments, building materials, home appliances, and entertainment with low
start-up costs within a range of $1,000-$15,000. The Chinese government has
promulgated a series of laws and regulations to protect and promote the
development of SMEs which appeals to entrepreneurs looking to benefit from the
central government’s support of increased domestic demand.  SMEs are
now responsible for about 60% of China's industrial output and employment of
about 75% of urban Chinese workforce. SMEs are creating the most new urban jobs,
and they are the main destination for workers laid-off from state-owned
enterprises (SOEs) that re-enter the workforce.





Our
Principal Products and Services





Our
products and services include:




·
            Bundled
      advertising campaign services, comprised of 28.com, our Internet
      advertising portal, and our television and web advertisement
      services;·
            Agency
      services, whereby we re-sell to our customers web advertising space on
      third-party Internet sites and television advertising space;
      and·
            Resale
      of Internet Advertising resources; and·
            In-bank
      advertising services conducted through our network of kiosks located in
      bank branches.




7




Internet
Advertising





We
founded 28.com in 2003. 28.com is a leading Internet site for information about
small business opportunities in China.  It was one of the earliest
entrants in this sector, allowing it to currently hold a 30% market share in
China. Our revenue from 28.com is twice as big as our closest competitor,
u88.cn. We have
provided
services to more than 500 long-term clients advertising business
opportunities on the site.  The platform provides advertisers with the
tools to build sales channels and develop relationships directly with sales
agents, distributors, resellers and/or franchisees. 28.com has the following
features which enable it to be an attractive platform for the
advertisers:





·
            Allows
      entrepreneurs interested in inexpensive franchise and business
      opportunities to find in-depth details about these opportunities in
      various industries;·
            Provides
      one-stop shopping for SMEs and entrepreneurs by providing customized
      services such as design, website setup, and advertisement placement
      through promoting;·
            Bundles
      with 28.com video production, advanced traffic generation techniques and
      search-engine optimization.





28.com
charges its clients fixed monthly fees for ad placements on its homepage at an
average monthly price of $3,000. The site has provided
services to more than 500 long term clients and the total revenue per
month reached approximately $1.5million in 2009.  This segment accounted for 47.0% of our
revenue in 2009 and 53% of our revenue in 2008.





Television
Advertising





As part
of our media campaign services, we produce and distribute television shows that
are comprised of advertisements similar to infomercials, but include promotions
for several clients during the allotted time.  Our clients pay us for
editorial coverage and advertising spots. We are one of the larger producers of
television shows of this nature in China, with a total show time that reached
23,210minutes
in 2009 and an estimated 35,000 minutes in 2010. The shows produced by our TV
unit are distributed during airtime purchased on the biggest national satellite
television stations including Hunan TV, Jiangxi TV, Shandong TV, Guangdong TV,
Fujian TV, Guangxi TV, Mongolia TV, Yunnan TV, Tianjin TV and Heilongjiang TV.
The brand of shows produced by us are entitled “Gold List,” “Online Business
Opportunities,” “The Charm of Wealth,” “ Venture Express,” “Start” and “Run’ s
Road to Wealth.”   This segment accounted for 49% of our revenue in
2009 and 33% of our revenue in 2008.





Resale
of Internet Advertising Resources





We resell
to our clients sponsored search resources from
Baidu. This segment accounted for 3.0% of our revenue in
2009.





Bank
Kiosks





We
operate our bank kiosk advertising network, launched in 2008, through Shanghai
Borongdingsi. We place our kiosk machines, each of which includes a large, LCD
advertising display, in bank branches to target banking patrons. We market our
LCD display network to advertisers in the financial services and insurance
industries. As of December 31, 2009, we had approximately 200flat-panel
displays placed in branches of China Construction Bank in Henan
Province. The kiosks are useful to the banks because, in addition to the
LCD advertising display, they provide bank customers with free Internet access
to on-line banking services, thereby potentially shortening wait times in
branches for teller services.  We believe bank kiosks are a cost
effective solution for advertisers because the interactive client interface
captures information for follow up and also due to the ability to update content
remotely. We originally planned to place 2,000 kiosks by the end of
2009.  However, we noted that our target clients in this segment who
are mostly financial and insurance service institutions had not been fully
recovered from the negative effect of the global financial crisis, and we also
noted that our potential competitors who are also engaged in the outdoor
advertising business encountered a decrease of revenue in the
year.  Therefore, we decided to suspend our further expansion in this
segment in 2009.  Along with the improvement of the global economy and
the recovery of the financial industry, we plan to proceed with our expansion in
this segment by increase approximately 1,300 kiosks and to enhance the
corresponding central control system and the client service system in
2010.




8





Our
target client base for bank kiosk advertising include: large telecommunication
companies, large banks, well-known insurance and financial institutions and auto
companies.  Such as: China Telecom, China Mobile, China Unicom, China
Construction Bank, Ping An of China, China International Fund Management Co.,
Ltd., Toyota, PICC, Guangzhou Honda and Audi. As of December 31, 2009, we
generated US$ 0.15 million revenue from this business segment from Henan
Standard Life.





Internet
Information Management





Internet
information management is a new business segment that we launched in August
2009, which offers our clients an intelligence software product based on our
proprietary search engine optimization technology.  The main objective
of the product is to help our clients gain an early warning of potential
negative exposure on the internet so that when necessary they can formulate an
appropriate response.  We charge a monthly fee to clients using this
service.  For the year ended December 31, 2009, we generated US$ 0.12
million revenue from this new business segment. We plan to build our efforts to
offer this service to our existing clients in the future.




Our
Competitive Strengths




Over our
seven-year history, we believe that we have built a strong track record of
significant competitive strengths such as:




Innovative
Operations





·
            Client-based
      innovation. Our services, which bundle for a set fee Internet ads,
      television shows and other services, including lead generation, simplifies
      the targeting process for our clients by allowing them to use one vendor
      for their Internet and television ad
buys.





·
            Target market innovation and
      expansion of audience base.   We believe that by offering
      multiple advertising media platforms, we enable advertisers to reach a
      wide range of consumers with complementary and mutually reinforcing
      advertising campaigns. We are better able to attract advertisers who want
      to reach targeted consumer groups through a number of different
      advertising media in different venues and at different times of the
      day.




Strong
Technological Advantages




·
            Award winning R&D
      team. We have a R&D team with extensive experience in China’s
      advertising and marketing industry. Bin Zhang, Vice President of China Net
      TV, has been actively engaged in technology research and development in
      this area since 1998. We appointed our Chief Technology Officer Mr. Hongli
      Xu in September 2009.  Mr. Xu has about 20 years experience in
      the internet and software development industry in various sectors, we
      believe Mr. Xu will provide critical leadership in our R&D team, as we
      continue to elevate ChinaNet's position in the Chinese media and
      advertising markets.




·
            Advanced campaign tracking and
      monitoring tools. We have deployed advanced tracking, search engine
      optimization, resource scheduling, content management and ad campaign
      management tools so as to achieve effective and efficient advertising
      effects.




·
            Valuable intellectual
      property. We have three copyright certificates and property rights
      for three software products in connection with the Internet advertising
      business which were developed by our research and development
      team.





·
            Experienced management
      team. We have an experienced management team. In particular,
      Handong Cheng, our founder, chairman and chief executive officer has over
      ten years’ experience in management. He demonstrated his entrepreneurship
      and business leadership by starting up our business and he has
      successfully grown our business to become a pioneer in online media
      marketing and advertising services. He also secured our status as the sole
      strategic alliance partner of China Construction Bank with respect to bank
      kiosk advertising. Zhige Zhang, our chief financial officer has over six
      years’ experience in software development and Internet ad
      technology.




9




First
Mover Advantages




·
            Early Market Entrant as a
      vertically integrated ad portal and Internet agency. We
      have over 5 years of operations as a vertically integrated ad portal and
      ad agency. We have 7 years of experience as an Internet advertising
      agency.  We commenced our Internet advertising services business in
      2003 and was among the first companies in China to create a site and a
      business focused on Internet advertising. We rapidly established a
      sizeable nationwide network, secured a significant market share and
      enhanced awareness of our brand. Our early entry into the market has also
      enabled us to accumulate a significant amount of knowledge and experience
      in this nascent segment of the advertising
  industry.




·
            Early mover advantage in bank
      kiosk. We are one of earlier advertising agents to have
      established an in-bank advertising network. We believe that the
      establishment of our in-bank kiosk segment gives us a competitive edge
      over competing networks as well as over many other forms of traditional
      advertising.




·
            Exclusive
      Strategic Partnership with Top Chinese banks.   In 2008,
      we entered into an eight-year strategic partnership with China
      Construction Bank to be its strategic partner in the establishment of a
      nationwide network of bank kiosks displaying our clients’ advertising on
      large LCD screens and providing bank customers with free internet access
      to on-line banking services. We pay for the kiosks and then provide them
      to China Construction Bank for free in exchange for the exclusive right to
      display advertising on the kiosks. We have already placed 200
      kiosks at branches in Henan Province. We also have been negotiating
      similar potential deals with Bank of Communications and Agricultural Bank
      of China., but, as of December 31, 2009, we have not yet signed any new
      strategic partnership agreement with another bank due to our decision not
      to expand further in this segment in 2009. However, we have been
      maintained active communications with these banks, and we will continue
      our negotiations with them in 2010 as part of our plan to further grow the
      kiosk business in fiscal year 2010. We believe exclusivity with the top
      Chinese banks will create higher barriers to entry for potential
      competitors.




Growth
Strategy





Our
objectives are to strengthen our position as the leading Internet advertising
and marketing services and diversified media advertising network in China and
continue to achieve rapid growth. We intend to achieve these objectives by
implementing the following strategies:





Nationally
Expand Our Bank Kiosk Platform





We intend
to expand our bank kiosk platform in 2010 in order to appeal to our financial
industry advertisers and increase our revenues in this business line. To achieve
this goal, we intend to increase the number of bank kiosks. We intend to enter
into new strategic partnerships with other banks to achieve this
result.





Continue
to Expand Internet Advertising through Adding New Modules into Our 28.com
Network





We intend
to add new modules into the 28.com site, such as customer relationship
management (CRM), supply chain management and enterprise resources planning
(ERP) systems in order to enhance the functionality of our Internet advertising
network. We have launched a new module which was Internet information Management
in August 2009. This product is an artificial intelligence software that is
based on our proprietary search engine optimization technology which helps our
clients gain an early warning in order to identify and respond to potential
negative exposure on the internet.  We charged monthly fee to these
clients.  Although this segment is not consider as our primary source
of revenue, we will continue to promote this service to our clients as a
value-added service to help us achieve more revenue with limited increase of our
cost of revenue.




10





Leverage
our integrated platform to increase operational and cross-selling
synergies


We plan
to maximize opportunities for our business to increase both revenue and cost
synergies. We intend to increase cross-selling by developing additional
flexible, bundled advertising packages that allow advertisers to reach consumers
by complementary and reinforcing media. At the same time, we intend to further
leverage the existing elements of our integrated media platform to enhance the
platform’s attractiveness to advertisers. Advertisers can launch a coordinated
campaign across multiple media while enjoying cost savings from our bundling and
volume discounts.





Promote
Our Brand Name and Augment Our Service Offerings to Attract a Wider Client Base
and Increase Revenues










Our
Advertising Clients; Sales and Marketing





Our
Advertising Clients




The
quality and coverage of our network has attracted a broad base of advertising
clients. As of December 31, 2009, more than 500 long term customers have
purchased advertising time s lots on our 28.com portal, China Net TV and our
bank kiosks. We derive all of our revenues from:


·
            charging
      our clients fixed monthly fees to advertise on 28.com;·
            charging
      production fees for television and web video spots;·
            Selling
      advertising time slots on our television shows and bank
      kiosks;·
            reselling
      Internet space and television space at a discount to the direct cost of
      any individual space or time slot, but at a mark-up to our cost due to
      purchase of these items in bulk; and·
            collecting
      fees associated with lead
generation.





For the year ended
December 31, 2009, we derived 47%of our
revenues from our Internet advertising and49%from our
TV advertising.





The
following table sets forth a breakdown of our revenue from Internet advertising
by industry for the year ended December 31, 2009:








Industry
            
            Percentage of total revenueFood
      and beverage
            
            
            22.0
            %Women
      Accessories
            
            
            11.0
            %Footwear,
      apparel and garments
            
            
            23.0
            %Home
      Goods and Construction Materials
            
            
            13.0
            %Environmental
      Protection Equipment
            
            
            11.0
            %Cosmetic
      and Health Care
            
            
            5.0
            %Education
      Network
            
            
            11.0
            %Others
            
            
            4.0
            %Total
            
            
            100.0
            %




11




Sales
and Marketing





Sales and Marketing.
   We employ an experienced advertising sales force. We provide
in-house education and training to our sales force to ensure they provide our
current and prospective clients with comprehensive information about our
services, the advantages of using our advertising networks as marketing
channels, and relevant information regarding the advertising
industry.  We also market our advertising services from time to time
by placing advertisements on television, and acting as sponsor to third-party
programming as well as to our shows.





Market Research.   
We believe our advertising clients derive substantial value from our ability to
provide advertising services targeted at specific segments of consumer markets.
Market research is an important part of evaluating the effectiveness and value
of our business to advertisers. We conduct market research, consumer surveys,
demographic  analysis and other advertising industry research for internal
use to evaluate new and existing advertising channels. We also purchase or
commission studies containing relevant market study data from reputable
third-party market research firms, iResearch Consulting Co., Ltd. We typically
consult such studies to assist us in evaluating the effectiveness of our network
to our advertisers. A number of these studies contain research on the numbers
and socio-economic and demographic profiles of the people who visit our
network.





Suppliers


The
primary hardware required for the operation of our business consists of servers
and other firmware with which we operate 28.com, video production and editing
equipment for our television programming, and components for our bank kiosks,
including the LCD displays.  We also develop and install software in
our displays to assist us with the configuration, editing and operation of our
advertising content cycles. Maintaining a steady supply of these kiosks and
their proprietary LCD displays is important to our operations and the growth of
our advertising network. We purchase our television displays from third party
manufacturers who build these components according to our specifications. We
select component suppliers based on price and quality. As there are several
other qualified alternative suppliers for our equipment, our obligation to our
current suppliers is not exclusive. We have never experienced any material delay
or interruption in the supply of our digital television displays.
  We deploy
advanced traffic generation techniques, search-engine optimization and other
technologies that assist advertisers, advertising agencies and web publishers in
creating and delivering Internet ads, monitoring and analyzing website traffic,
tracking the performance of advertising campaigns and implementing direct
marketing.





Research
and Development


We intend
to continue to optimize our Standard Operating Environment (the “SOE”)
technology in order to reduce cost and time to deploy, configure, maintain,
support and manage computer servers and system. Whether or not we deploy
newer technology will depend upon cost and network security. We also continue to
develop proprietary software and systems in connection with the operation of and
provision of services through 28.com to enhance ease of use. In addition, we
focus on enhancing related software systems enabling us to track and monitor
advertiser demands.




12


Intellectual Property





We have
three software copyright certificates issued by the State Copyright Office of
the PRC (“SCO”) as
below:




Name of Software
            
            Registration Number基于互联网广告效果投放综合监测及管理平台软件V1.0
              Software
      V1.0 of General Monitoring and Management Platform on Internet Advertising
      Effect
            
            2008SRBJ4073基于效果的搜索引擎服务平台软件V1.0
              Software
      V1.0 of Effect-based Search Engine Service Platform
            
            2008SRBJ4084基于互联网广告留言综合分析及管理平台软件V1.0
              Software
      V1.0 of General Analysis and Management Platform on Internet Based
      Advertising Message
            
            2008SRBJ4084




With this intellectual property, we can facilitate our provision
of services that are in demand by the appropriate customers and can track end
users to help our customers assess and adjust their marketing
strategies.





We
started the upgrade process of our Office Automation (OA) system in 2009, to
enhance the accuracy of our client service and efficiency of our
cross-department communication.  Our OA system upgrade mainly include
the following modules: Advertising contract management, Accounts receivable
collection management, Customer relationship management.





We plan
to increase the investment of R&D expenditures to enhance the safety of our
hardware and server which we dependent upon in supporting our network and
managing and monitoring programs on the network.





Competition





We compete with other advertising
companies in China including companies that operate Internet advertising portals
or television advertising media networks, such as u88.cn 3158.com 08.cn and
78.cn. We compete for advertising clients primarily on the basis of network size
and coverage, location, price, the range of services that we offer and our brand
name. We also compete for overall advertising spending with other alternative
advertising media companies, such as wireless telecommunications, street
furniture, billboard, frame and public transport advertising companies, and with
traditional advertising media, such as newspapers, magazines and
radio.




Legal
Proceedings





We are
currently not a party to any legal or administrative proceedings and are not
aware of any pending or threatened legal or administrative proceedings against
us in all material aspects. We may from time to time become a party to various
legal or administrative proceedings arising in the ordinary course of our
business.





Government
Regulation





The PRC
government imposes extensive controls and regulations over the media industry,
including on television, radio, newspapers, magazines, advertising, media
content production, and the market research industry. This section summarizes
the principal PRC regulations that are relevant to our lines of
business.





Regulations
on the Advertising Industry in China





Foreign
Investments in Advertising





Under the
Administrative Provision on Foreign Investment in the Advertising Industry,
jointly promulgated by the SAIC and MOFCOM on March 2, 2004, or the 2004
Provision, foreign investors can invest in PRC advertising companies either
through wholly owned enterprises or joint ventures with Chinese parties. Since
December 10, 2005, foreign investors have been allowed to own up to 100% equity
interest in PRC advertising companies. However, the foreign investors must have
at least three years of direct operations outside China in the advertising
industry as their core business. This requirement is reduced to two years if
foreign investment in the advertising company is in the form of a joint venture.
Such requirement is also provided similarly in the newly promulgated regulation
that replaced the 2004 Provision as of October 1, 2008, except that according to
the new regulation, the establishment of wholly foreign-owned advertising
companies must be approved by the SAIC or its authorized provincial counterparts
and provincial MOFCOM instead of the SAIC and MOFCOM only. Foreign-invested
advertising companies can engage in advertising design, production, publishing
and agency, provided that certain conditions are met and necessary approvals are
obtained.




13





We have
not engaged in direct operations outside China in the advertising industry as
our core business. Therefore, our subsidiary in China, Rise King WFOE, is
ineligible to apply for the required licenses for providing advertising services
in China. Our advertising business is operated by Business Opportunity Online
and Beijing CNET Online in China.  We have been, and are expected to
continue to be, dependent on these companies to operate our advertising
business. We do not have any equity interest in our PRC Operating Entities, but
Rise King WFOE, receives the economic benefits of the same through the
Contractual Arrangements.





We have
been advised by our PRC counsel, that each of the Contractual Agreements
complies, and immediately after the completion of the transactions contemplated
herein, will comply with all applicable PRC laws and regulations and does not
violate, breach, contravene or otherwise conflict with any applicable PRC laws,
rules or regulations. However, there exist substantial uncertainties regarding
the application, interpretation and enforcement of current and future PRC laws
and regulations and its potential effect on its corporate structure and
contractual arrangements. The interpretation of these laws and regulations are
subject to the discretion of competent PRC authorities. There can be no
assurance that the PRC regulatory authorities will not take a view different
from the opinions of our PRC counsel and determine that its corporate structure
and contractual arrangements violate PRC laws, rules and regulations. In the
event that the PRC regulatory authorities determine in their discretion that our
corporate structure and contractual arrangements violate applicable PRC laws,
rules and regulations, including restrictions on foreign investment in the
advertising industry in the future, We may be subject to severe penalties,
including an order to cease its business operations.





Business
License for Advertising Companies





On
October 27, 1994, the Tenth Session of the Standing Committee of the Eighth
National People’s Congress adopted the Advertising Law which became effective on
February 1, 1995. According to the currently effective Advertising Law and its
various implementing rules, companies engaging in advertising activities must
obtain from the SAIC or its local branches a business license which specifically
includes within its scope the operation of an advertising business. Companies
conducting advertising activities without such a license may be subject to
penalties, including fines, confiscation of advertising income and orders to
cease advertising operations. The business license of an advertising company is
valid for the duration of its existence, unless the license is suspended or
revoked due to a violation of any relevant law or regulation. We have obtained
such a business license from the local branches of the SAIC as required by
existing PRC regulations. We do not expect to encounter any difficulties in
maintaining the business license. However, if we seriously violate the relevant
advertising laws and regulations, the SAIC or its local branches may revoke our
business licenses.





Outdoors





The
Advertising Law in China stipulates that the exhibition and display of outdoor
advertisements must comply with certain requirements. It provides that the
exhibition and display of outdoors advertisements must not:




·
            utilize
      traffic safety facilities and traffic
signs;


·
            impede
      the use of public facilities, traffic safety facilities and traffic
      signs;


·
            obstruct
      commercial and public activities or create an unpleasant sight in urban
      areas;


·
            be
      placed in restrictive areas near government offices, cultural landmarks or
      historical or scenic sites; or


·
            be
      placed in areas prohibited by the local governments from having outdoor
      advertisements.





In
addition to the Advertising Law, the SAIC promulgated the Outdoor Advertising
Registration Administrative Regulations on December 8, 1995, as amended on
December 3, 1998 and May 22, 2006, which also governs the outdoor advertising
industry in China. Under these regulations, outdoor advertisements in China must
be registered with the local SAIC before dissemination. The advertising
distributors are required to submit a registration application form and other
supporting documents for registration. After review and examination, if an
application complies with the requirements, the local SAIC will issue an Outdoor
Advertising Registration Certificate for such advertisement. The content,
quantity, format, specifications, periods, distributors’ name, and locations of
dissemination of the outdoor advertisement must be submitted for registration
with the local SAIC. A change of registration with local SAICs must be effected
in the event of a change in the distributor, the location of dissemination, the
periods, the content, the format, or the specifications of the advertisements.
It is unclear whether the SAIC, or any of its local branches in the
municipalities and provinces covered by our network, will deem our business as
outdoor advertising business, and thus require us to obtain the Outdoor
Advertising Registration Certificate. If the PRC government determines that we
were obligated to complete outdoor advertisement registration as an outdoor
advertising network operator, we may be subject to administrative sanctions,
including discontinuation of its business for failure to complete such
registration.”


14





In
addition, on December 6, 2007, the State Administration of Radio, Film and
Television (“SARFT”) promulgated the December 2007 Notice pursuant to which the
broadcasting of audio and visual programs, including news, drama series, sports,
technology, entertainment and other programs, through radio and television
networks, the Internet and other information systems affixed to vehicles and
buildings and in airports, bus and railway stations, shopping malls, banks,
hospitals and other outdoor public media would be subject to approval by the
SARFT. The December 2007 Notice required the local branches of SARFT to
investigate and record any organization or company engaging in the activities
described in the December 2007 Notice without permission, to send written
notices to such organizations or companies demanding their compliance with the
December 2007 Notice, and to report the results of such investigations to SARFT
by January 15, 2008. We have not yet received any notice from the SARFT or any
of its local branches demanding compliance with the December 2007
Notice.  We may, however, be required to obtain an approval from SARFT
under the December 2007 Notice, or may be required to remove entertainment
programs from its advertising network.





Advertising
Content





PRC
advertising laws, rules and regulations set forth certain content requirements
for advertisements in China including, among other things, prohibitions on false
or misleading content, superlative wording, socially destabilizing content or
content involving obscenities, superstition, violence, discrimination or
infringement of the public interest. Advertisements for anesthetic,
psychotropic, toxic or radioactive drugs are prohibited. There are also specific
restrictions and requirements regarding advertisements that relate to matters
such as patented products or processes, pharmaceutical products, medical
procedures, alcohol, tobacco, and cosmetics. In addition, all advertisements
relating to pharmaceuticals, medical instruments, agrochemicals and veterinary
pharmaceuticals, together with any other advertisements which are subject to
censorship by administrative authorities according to relevant laws or
regulations, must be submitted to relevant authorities for content approval
prior to dissemination.





Advertisers,
advertising operators, including advertising agencies, and advertising
distributors are required by PRC advertising laws and regulations to ensure that
the content of the advertisements they prepare or distribute is true and in full
compliance with applicable laws. In providing advertising services, advertising
operators and advertising distributors must review the supporting documents
provided by advertisers for advertisements and verify that the content of the
advertisements complies with applicable PRC laws, rules and regulations. Prior
to distributing advertisements that are subject to government censorship and
approval, advertising distributors are obligated to verify that such censorship
has been performed and approval has been obtained. Violation of these
regulations may result in penalties, including fines, confiscation of
advertising income, orders to cease dissemination of the advertisements and
orders to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the SAIC or its local branches may
revoke violators’ licenses or permits for their advertising business operations.
Furthermore, advertisers, advertising operators or advertising distributors may
be subject to civil liability if they infringe on the legal rights and interests
of third parties in the course of their advertising business.





We do not
believe that advertisements containing content subject to restriction or
censorship comprise a material portion of the advertisements displayed on our
media network. However, there can be no assurance that each advertisement
displayed on our network complies with relevant PRC advertising laws and
regulations. Failure to comply with PRC laws and regulations relating to
advertisement content restrictions governing the advertising industry in China
may result in severe penalties.




15





Regulation
on Intellectual Property





Regulation
on Trademark





The
Trademark Law of the PRC was adopted at the 24th meeting of the Standing
Committee of the Fifth National People’s Congress on August 23, 1982 and amended
on February 22, 1993 and October 27, 2001. The Trademark Law sets out the
guidelines on administration of trademarks and protection of the exclusive
rights of trademark owners. In order to enjoy an exclusive right to use a
trademark, one must register the trademark with the Trademark Bureau of the SAIC
and obtain a registration certificate.





Regulation
on Patents





The
Patent Law of the PRC was adopted at the 4th Meeting of the Standing Committee
of the Sixth National People’s Congress on March 12, 1984 and subsequently
amended in 1992 and 2000. The Patent Law extends protection to three kinds of
patents: invention patents, utility patents and design patents. According to the
Implementing Regulations of the Patent Law, promulgated by the State Council of
the PRC on December 28, 2002 and effective on February 1, 2003, an invention
patent refers to a new technical solution relating to a product, a process or
improvement. When compared to existing technology, an invention patent has
prominent substantive features and represents notable progress. A utility patent
refers to any new technical solution relating to the shape, the structure, or
their combination, of a product. Utility patents are granted for products only,
not processes. A design patent (or industrial design) refers to any new design
of the shape, pattern or color of a product or any combination thereof that
creates an aesthetic feeling and is suitable for industrial application.
Inventors or designers must register with the State Intellectual Property Office
to obtain patent protection. The term of protection is twenty years for
invention patents and ten years for utility patents and design patents.
Unauthorized use of patent constitutes an infringement and the patent holders
are entitled to claims of damages, including royalties, to the extent
reasonable, and lost profits.





Regulation
on Copyright





The
Copyright Law of the PRC was adopted at the 15th Meeting of the Standing
Committee of the Seventh National People’s Congress on September 7, 1990 and
amended on October 27, 2001. Unlike patent and trademark protection, copyrighted
works do not require registration for protection in China. However, copyright
owners may wish to voluntarily register with China’s National Copyright
Administration to establish evidence of ownership in the event enforcement
actions become necessary. Consent from the copyright owners and payment of
royalties are required for the use of copyrighted works. Copyrights of movies or
other audio or video works usually expire fifty years after their first
publication. We believe that we are in compliance with the PRC regulations on
copyright.





Regulations
on Foreign Currency Exchange





Foreign
Currency Exchange





Pursuant
to the Foreign Currency Administration Rules promulgated on August 25, 2008 and
various regulations issued by SAFE and other relevant PRC government
authorities, the Renminbi is freely convertible only to the extent of current
account items, such as trade-related receipts and payments, interest and
dividends. Capital account items, such as direct equity investments, loans and
repatriation of investment, require the prior approval from SAFE or its local
branch for conversion of the Renminbi into a foreign currency, such as U.S.
dollars, and remittance of the foreign currency outside the PRC. Payments for
transactions that take place within the PRC must be made in Renminbi. Domestic
companies or individuals can repatriate foreign currency payments received from
abroad or deposit these payments abroad subject to applicable regulations that
expressly require repatriation within certain period. Foreign-invested
enterprises may retain foreign exchange in accounts with designated foreign
exchange banks subject to a cap set by SAFE or its local branch. Foreign
currencies received under current account items can be either retained or sold
to financial institutions engaged in the foreign exchange settlement or sales
business without prior approval from SAFE by complying with relevant
regulations. Foreign exchange income under capital account can be retained or
sold to financial institutions engaged in foreign exchange settlement and sales
business, with prior approval from SAFE unless otherwise provided.




16





Our
business operations, which are subject to the foreign currency exchange
regulations, have all been in accordance with these regulations. We will take
steps to ensure that our future operations are in compliance with these
regulations.





Foreign
Exchange Registration of Offshore Investment by PRC Residents





Pursuant
to SAFE’s Notice on Relevant Issues Concerning Foreign Exchange Administration
for PRC Residents to Engage in Financing and Inbound Investment via Overseas
Special Purpose Vehicles, or Circular No. 75, issued on October 21, 2005 and
effective on November 1, 2005, (i) a PRC resident, including a PRC resident
natural person or a PRC company, shall register with the local branch of SAFE
before it establishes or controls an overseas SPV for the purpose of overseas
equity financing (including convertible debt financing); (ii) when a PRC
resident contributes the assets of or its equity interests in a domestic
enterprise to an SPV, or engages in overseas financing after contributing assets
or equity interests to an SPV, such PRC resident shall register his or her
interest in the SPV and the change thereof with the local SAFE branch; and (iii)
when the SPV undergoes a material event outside China, such as a change in share
capital, or merger or acquisition, the PRC resident shall, within 30 days of the
occurrence of such event, register such change with the local branch of SAFE.
PRC residents who are shareholders of SPVs established before November 1, 2005
were required to register with the local SAFE branch before March 31,
2006.  Such deadline has been further extended by the Circular
106.




Under
Circular No. 75, failure to comply with the registration procedures set forth
above may result in penalties, including restrictions on a PRC subsidiary’s
foreign exchange activities in capital accounts and its ability to distribute
dividends to the SPV. On May 29, 2007, SAFE issued Circular 106 as the
implementing rules of Circular 75, which provides more detailed provisions and
requirements for the registration procedures.





On
December 25, 2006, the People’s Bank of China promulgated the “Measures for the
Administration of Individual Foreign Exchange,” and on January 5, 2007, SAFE
promulgated the implementation rules on those measures. These regulations became
effective on February 1, 2007. Pursuant to these regulations, PRC citizens who
are granted shares or share options by an overseas listed company according to
its employee share option or share option plan are required, through a qualified
PRC agent which may be the PRC subsidiary of such overseas listed company, to
register with the SAFE and complete certain other procedures related to the
share option or share option plan. Foreign exchange income received from the
sale of shares or dividends distributed by the overseas listed company must be
remitted into a foreign currency account of such PRC citizen or be exchanged
into Renminbi. In addition, Circular 106 requires a PRC resident to make the SPV
filing together with the employee stock option filing. Moreover, the PRC
resident is required to make an amendment to the previous filings when he or she
exercises his or her employee stock options.





Dividend
Distribution





The
principal laws, rules and regulations governing dividends paid by PRC operating
subsidiaries include the Company Law of the PRC (1993), as amended in 2006, the
Wholly Foreign Owned Enterprise Law (1986), as amended in 2000, and the Wholly
Foreign Owned Enterprise Law Implementation Rules (1990), as amended in 2001.
Under these laws and regulations, PRC subsidiaries, including wholly owned
foreign enterprises, or WFOEs, and domestic companies in China, may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, its PRC
significant subsidiaries, including WFOEs and domestic companies, are required
to set aside at least 10% of their after-tax profit based on PRC accounting
standards each year to their statutory capital reserve fund until the cumulative
amount of such reserve reaches 50% of their respective registered capital. These
reserves are not distributable as cash dividends.





Tax





On March
16, 2007, the Fifth Session of the Tenth National People’s Congress of PRC
passed the Enterprise Income Tax Law of the People’s Republic of China, or EIT
Law, which became effective on January 1, 2008. On November 28, 2007, the State
Council at the 197th Executive Meeting passed the Regulation on the
Implementation of the Income Tax Law of the People’s Republic of China, which
became effective on January 1, 2008.  The EIT Law adopted a uniform
tax rate of 25% for all enterprises (including foreign-invested enterprises) and
revoked the existing tax exemption, reduction and preferential treatments
applicable to foreign-invested enterprises. However, there is a transition
period for enterprises, whether foreign-invested or domestic, that received
preferential tax treatments granted by relevant tax authorities prior to the
effectiveness of the EIT Law. Enterprises that were subject to an enterprise
income tax rate lower than 25% may continue to enjoy the lower rate and
gradually transit to the new tax rate within five years after the effective date
of the EIT Law.




17





Under the
EIT Law, enterprises are classified as either “resident enterprises” or
“non-resident enterprises.” Pursuant to the EIT Law and the Implementation
Rules, enterprises established under PRC laws, or enterprises established
outside China whose “de facto management bodies” are located in China, are
considered “resident enterprises” and subject to the uniform 25% enterprise
income tax rate for their global income. According to the Implementation Rules,
“de facto management body” refers to a managing body that in practice exercises
overall management and control over the production and business, personnel,
accounting and assets of an enterprise. Our management is currently based in
China and is expected to remain in China in the future. In addition, although
the EIT Law provides that “dividends, bonuses and other equity investment
proceeds between qualified resident enterprises” is exempted income, and the
Implementation Rules refer to “dividends, bonuses and other equity investment
proceeds between qualified resident enterprises” as the investment proceeds
obtained by a resident enterprise from its direct investment in another resident
enterprise, however, it is unclear whether our circumstance is eligible for
exemption.





Furthermore,
the EIT Law and Implementation Rules provide that the “non-resident enterprises”
are subject to the enterprise income tax rate of 10% on their income sourced
from China, if such “non-resident enterprises” (i) do not have establishments or
premises of business in China or (ii) have establishments or premises of
business in China, but the relevant income does not have actual connection with
their establishments or premises of business in China. Such income tax may be
exempted or reduced by the State Council of the PRC or pursuant to a tax treaty
between China and the jurisdictions in which its non-PRC shareholders reside.
Under the Double Tax Avoidance Arrangement between Hong Kong and Mainland China,
if the Hong Kong resident enterprise owns more than 25% of the equity interest
in a company in China, the 10% withholding tax on the dividends the Hong Kong
resident enterprise received from such company in China is reduced to 5%. If
China Net HK is considered to be a Hong Kong resident enterprise under the
Double Tax Avoidance Arrangement and is considered to be a “non-resident
enterprise” under the EIT Law, the dividends paid to us by Rise King WFOE may be
subject to the reduced income tax rate of 5% under the Double Tax Avoidance
Arrangement. However, based on the Notice on Certain Issues with Respect to the
Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009
by the State Administration of Taxation, if the relevant PRC tax authorities
determine, in their discretion, that a company benefits from such reduced income
tax rate due to a structure or arrangement that is primarily tax-driven, such
PRC tax authorities may adjust the preferential tax treatment.




We are in
the process of evaluating the impact of the EIT Law on our results of
operations. Any significant income tax expenses may have a material adverse
effect on our net income in 2008 and beyond. Reduction or elimination of the
financial subsidies or preferential tax treatments we currently enjoy or
imposition of additional taxes on us or our subsidiary in China may
significantly increase our income tax expense and materially reduce our net
income.





Provisions
Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors





On August
8, 2006, six PRC regulatory agencies, including CSRC, MOC, SAT, SASAC, SAIC and
SAFE, jointly promulgated the M&A Rules, which became effective on September
8, 2006, to regulate foreign investment in PRC domestic enterprises. The M&A
Rules provide that the MOC must be notified in advance of any change-of-control
transaction in which a foreign investor takes control of a PRC domestic
enterprise and any of the following situations exist: (i) the transaction
involves an important industry in China; (ii) the transaction may affect
national “economic security”; or (iii) the PRC domestic enterprise has a
well-known trademark or historical Chinese trade name in China. The M&A
Rules also contain a provision requiring offshore SPVs formed for the purpose of
the overseas listing of equity interests in PRC companies and controlled
directly or indirectly by PRC companies or individuals, to obtain the approval
of the CSRC prior to publicly listing their securities on an overseas stock
exchange. On September 21, 2006, the CSRC issued a clarification that sets forth
the criteria and procedures for obtaining any required approval from the
CSRC.





To date,
the application of the M&A Rules is unclear. Our PRC counsel, has advised us
that:




·
              the CSRC approval requirement
      applies to SPVs that acquire equity interests in PRC companies through
      share exchanges and cash, and seek overseas listings;
      and
  ·
              based on their understanding of
      the current PRC laws, rules and regulations and the M&A Rules, unless
      there are new PRC laws and regulations or clear requirements from the CSRC
      in any form that require the prior approval of the CSRC for the listing
      and trading of any overseas SPV’s securities on an overseas stock
      exchange, the M&A Rules do not require that we obtain prior CSRC
      approval because:  (i) the Share Exchange is a purely foreign
      related transaction governed by foreign laws, not subject to the
      jurisdiction of PRC laws and regulations; (ii) we are not a special
      purpose vehicle formed or controlled by PRC companies or PRC individuals;
      and (iii) we are owned or substantively controlled by
      foreigners.




However,
the interpretation and application of the M&A Rules remain unclear, and the
PRC government authorities have the sole discretion to determine whether the
transaction is subject to the approval of the CSRC, especially when taking into
consideration of the performance-based incentive option arrangement by way of
the Share Transfer Agreements. If the CSRC or another PRC regulatory agency
subsequently determines that CSRC approval is required for the transaction, we
cannot predict how long it would take to obtain the approval. In addition, we
may need to apply for a remedial approval from the CSRC and may be subject to
certain administrative or other sanctions from these regulatory
agencies.





Further,
new rules and regulations or relevant interpretations may be issued from time to
time that may require us to obtain retroactive approval from the CSRC in
connection with the business combination. If this were to occur, our failure to
obtain or delay in obtaining the CSRC approval for the business combination
would subject us to sanctions imposed by the CSRC and other PRC regulatory
agencies. These sanctions could include fines and penalties on our operations in
China, restrictions or limitations on our ability to pay dividends outside of
China, and other forms of sanctions that may materially and adversely affect our
business, results of operations and financial condition.





If the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
is required for the business combination, we may need to apply for a remedial
approval from the CSRC and may be subject to certain administrative punishments
or other sanctions from these regulatory agencies. New rules and regulations or
relevant interpretations may require that we retroactively obtain approval from
the CSRC in connection with the business combination. If this were to occur, our
failure to obtain or delay in obtaining the CSRC approval for the transaction
would subject us to sanctions imposed by the CSRC and other PRC regulatory
agencies. These sanctions could include fines and penalties on our operations in
China, restrictions or limitations on our ability to pay dividends outside of
China, and other forms of sanctions that may materially and adversely affect our
business, results of operations and financial condition.





The
M&A Rules also established additional procedures and requirements expected
to make merger and acquisition activities in China by foreign investors more
time-consuming and complex, including requirements in some instances that the
MOC be notified in advance of any change-of-control transaction in which a
foreign investor takes control of a PRC domestic enterprise. These rules may
also require the approval from the MOC where overseas companies established or
controlled by PRC enterprises or residents acquire affiliated domestic
companies. Complying with the requirements of the new regulations to complete
such transactions could be time-consuming, and any required approval processes,
including MOC approval, may delay or inhibit our ability to complete such
transactions, which could affect our ability to expand our business.





Our
Corporate History and Background





We were
incorporated in the State of Texas in April 2006 and re-domiciled to become a
Nevada corporation in October 2006. From the date of our incorporation until
June 26, 2009, when we consummated the Share Exchange (as defined below), our
business development activities were primarily concentrated in web server access
and company branding in hosting web based e-games.




18







Our
wholly owned subsidiary, China Net Online Media Limited was incorporated in the
British Virgin Islands on August 13, 2007 (“China Net”).  In April 11,
2008, China Net became the parent holding company of a group of companies
comprised of CNET Online Technology Limited, a Hong Kong company (“China Net
HK”), which established and is the parent company of Rise King Century
Technology Development (Beijing) Co., Ltd., a wholly foreign-owned enterprise
(“WFOE”) established in the People's Republic of China (“Rise King
WFOE”).  We refer to the transactions that resulted in China Net
becoming an indirect parent company of Rise King WFOE as the “Offshore
Restructuring.” We operate our business in China primarily through Business
Opportunity Online (Beijing) Network Technology Co., Ltd. (“Business Opportunity
Online”), Beijing CNET Online Advertising Co., Ltd. (“ Beijing CNET Online
”), and Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai
Borongdingsi”).  Business Opportunity Online, Beijing CNET Online and
Shanghai Borongdingsi, were incorporated on December 8, 2004, January 27, 2003
and August 3, 2005, respectively.  From time to time, we refer to them
collectively as the “ PRC Operating
Entities ”.





Shanghai
Borongdingsi is owned 51% by Beijing CNET Online.  Beijing CNET Online
and Shanghai Borongdingsi entered into a cooperation agreement in June 2008,
followed up with a supplementary agreement in December 2008, to conduct
e-banking advertisement business. The business is based on an e-banking
cooperation agreement between Shanghai Borongdingsi and Henan provincial branch
of China Construction Bank which allows Shanghai Borongdingsi or its designated
party to conduct in-door advertisement business within the business outlets
throughout Henan Province. The e-banking cooperation agreement has a term of
eight years starting August 2008. However, Shanghai Borongdingsi was not able to
conduct the advertisement as a stand-alone business due to the lack of an
advertisement business license and supporting financial resources. Pursuant to
the aforementioned cooperation agreements, Beijing CNET Online committed to
purchase equipment, and to provide working capital, technical and other related
support to Shanghai Borongdingsi.  Beijing CNET Online owns the
equipment used in the kiosk business, is entitled to sign contracts in its name
on behalf of the business, and holds the right to collect the advertisement
revenue generated from the kiosk business exclusively until the recovery of the
cost of purchase of the equipment. Thereafter, Beijing CNET Online has agreed to
distribute 49% of the succeeding net profit generated from the e-banking
advertising business, if any, to the minority shareholders of Shanghai
Borongdingsi.





Restructuring





In
October 2008, a restructuring plan was developed (the
“Restructuring”).  The Restructuring was accomplished in two
steps.  The first step was for Rise King WFOE to acquire control over
Business Opportunity Online and Beijing CNET Online (collectively the “PRC
Operating Subsidiaries”) by entering into a series of contracts (the
“Contractual Agreements”), which enabled Rise King WFOE to operate the business
and manage the affairs of the PRC Operating Subsidiaries. Both of the PRC
Operating Subsidiaries at that time and currently are owned by Messrs. Handong
Cheng, Xuanfu Liu and Ms. Li Sun (the “PRC Shareholders”). Messrs. Cheng and
Liu, are now our Chief Executive Officer and Chief Operating Officer,
respectively.  After the PRC Restructuring was consummated, the second
step was for China Net to enter into and complete a transaction with a U.S.
public reporting company, whereby that company would acquire China Net, China
Net HK and Rise King WFOE, and control the PRC Operating Subsidiaries (the
“China Net Companies”).




19





Legal
Structure of the PRC Restructuring





The
PRC Restructuring was consummated in a manner so as not to violate PRC laws
relating to restrictions on foreign ownership of businesses in certain
industries in the PRC and the PRC M&A regulations.





The
Foreign Investment Industrial Guidance Catalogue jointly issued by the Ministry
of Commerce (“MOFCOM”) and the National Development and Reform Commission in
2007 classified various industries/business into three different categories: (i)
encouraged for foreign investment, (ii) restricted to foreign investment, and
(iii) prohibited from foreign investment.  For any industry/business
not covered by any of these three categories, they will be deemed
industries/business permitted to have foreign investment.  Except for
those expressly provided restrictions, encouraged and permitted
industries/business are usually open to foreign investment and
ownership.  With regard to those industries/business restricted to or
prohibited from foreign investment, there is always a limitation on foreign
investment and ownership.





The
business of the PRC Operating Subsidiaries falls under the class of a business
that provides Internet content or information services, a type of value added
telecommunication services, for which restrictions upon foreign ownership apply,
which means Rise King WFOE is not allowed to do the business the PRC
Operating Subsidiaries companies are currently pursuing.  Advertising
business is open to foreign investment but one of the requirements is that the
foreign investors of a WFOE shall have been carrying out advertising business
for over three years pursuant to the Foreign Investment Advertising Measures as
amended by MOFCOM and the State Administration of Industry and Commerce (“ SAIC ”) on August 22,
2008.  Rise King WFOE is not allowed to engage in the advertising
business because its shareholder, China Net HK, does not meet such
requirements.  In order to control the business and operations of the
PRC Operating Subsidiaries, and consolidate the financial results of the two
companies in a manner that does not violate current PRC laws, Rise King WFOE
executed the Contractual Agreements with the PRC Shareholders and each of the
PRC Operating Subsidiaries. The Contractual Agreements allow us through Rise
King WFOE to, among other things, secure significant rights to influence the two
companies’ business operations, policies and management, approve all matters
requiring shareholder approval, and the right to receive 100% of the income
earned by the PRC Operating Subsidiaries.  In return, Rise King WFOE
provides consulting services to the PRC Operating Subsidiaries.  In
addition, to ensure that the PRC Operating Subsidiaries and the PRC Shareholders
perform their obligations under the Contractual Arrangements, the PRC
Shareholders have pledged to Rise King WFOE all of their equity interests in the
PRC Operating Subsidiaries.  They have also entered into an option
agreement with Rise King WFOE which provides that at such time that current
restrictions under PRC law on foreign ownership of Chinese companies engaging in
the Internet content or information services in China are lifted, Rise King WFOE
may exercise its option to purchase the equity interests in the PRC Operating
Subsidiaries directly.





Each of
the PRC Shareholders entered into a share transfer agreement (the “Share
Transfer Agreement”) with Mr. Yang Li, the sole shareholder of Rise King BVI,
which is a 55% shareholder of China Net. The PRC Shareholders have been granted
the incentive options for the contributions that they have made and will
continue to make to Rise King BVI. Under the Share Transfer Agreements Mr. Li
granted to each of the PRC Shareholders an option to acquire, in the aggregate
10,000 shares of Rise King BVI, representing 100% of the issued and outstanding
shares of Rise King BVI, provided that certain financial performance thresholds
were met by the China Net.  The Share Transfer Agreement was
formalized and entered into on April 28, 2009.  Subject to registering
with the State Administration of Foreign Exchange (“SAFE”) prior to the exercise
and issuance of the Option Shares under the Share Transfer Agreements, which is
an administrative task,  there is no prohibition under PRC laws for
the PRC Shareholders to earn an interest in Rise King BVI after the PRC
Restructuring is consummated in compliance with PRC law.





Pursuant
to the Share Transfer Agreement, the Option Shares vest and become exercisable
in one-third increments upon the China Net Companies attaining consolidated
gross revenue performance targets for fiscal 2009, the six month period ended
June 30, 2010 and the six month period ended December 31, 2010 of RMB 100
million, RMB 60 million and RMB 60 million. If the China Net Companies achieve
the performance targets the exercise price will be $1.00 per
share.  If the targets are not met, the exercise price shall increase
to $2.00 per shares. Therefore, as of February 14, 2011, 100% of the Option
Shares will be exercisable.




20





Accounting
Treatment of the Restructuring





The
Restructuring is accounted for as a transaction between entities under common
control in a manner similar to pooling of interests, with no adjustment to the
historical basis of the assets and liabilities of the PRC Operating
Subsidiaries.  The operations of the Entities are consolidated as if
the current corporate structure had been in existence throughout the period
presented in the audited financial statements. The Restructuring is accounted
for in this manner because pursuant to an Entrustment Agreement dated June
5, 2009 (the “Entrustment Agreement”) between Rise King BVI and the
PRC Shareholders, Rise King BVI granted to the PRC Shareholders, on a
collective basis, managerial control over each of the China Net Companies by
delegating to the PRC Shareholders its shareholder rights, including the right
to vote, and its rights to designate management of the China Net
Company.  The Entrustment Agreement, together with the Contractual
Arrangements, demonstrates the ability of the PRC Shareholders to continue to
control Business Opportunity Online and Beijing CNET Online, which are under our
common control.





Below is
a summary of the material terms of the Contractual Agreements.





Exclusive Business
Cooperation Agreements





Pursuant
to Exclusive Business Cooperation Agreements entered into by and between Rise
King WFOE and each of the PRC Operating Subsidiaries in October 2008, Rise King
WFOE has the exclusive right to provide to the PRC Operating Subsidiaries
complete technical support, business support and related consulting services,
which include, among other things, technical services, business consultations,
equipment or property leasing, marketing consultancy and product research. Each
PRC Operating Subsidiary has agreed to pay an annual service fee to Rise King
WFOE equal to 100% of its audited total amount of operational income each
year.  Each PRC Operating Subsidiary has also agreed to pay a monthly
service fee to Rise King WFOE equal to 100% of the net income generated on a
monthly basis. The payment and terms of payment are fixed to ensure that Rise
King WFOE obtains 100% of the net income for that month, although adjustments
may be made upon approval by Rise King WFOE to provide for operational needs. If
at year end, after an audit of the financial statements of any PRC Operating
Subsidiary, there is determined to be any shortfall in the payment of 100% of
the annual net income, such PRC Operating Subsidiary must pay such shortfall to
Rise King WFOE. Each agreement has a ten-year term, subject to renewal and early
termination in accordance with the terms therein.








Exclusive
Option Agreements





Under
Exclusive Option Agreements entered into by and among Rise King WFOE, each of
the PRC Shareholders, dated as of October 8, 2008, each of the PRC Shareholders
irrevocably granted to Rise King WFOE or its designated person an exclusive
option to purchase, to the extent permitted by PRC law, a portion or all of
their respective equity interest in any PRC Operating Subsidiary for a purchase
price of RMB 10 or a purchase price to be adjusted to be in compliance with
applicable PRC laws and regulations. Rise King WFOE or its designated person has
the sole discretion to decide when to exercise the option, whether in part or in
full. Each of these agreements has a ten-year term, subject to renewal at the
election of Rise King WFOE.





Equity
Pledge Agreements





Under the
Equity Pledge Agreements entered into by and among Rise King WFOE, the PRC
Operating Subsidiaries and each of the PRC Shareholders, dated as of October 8,
2008, the PRC Shareholders pledge, all of their equity interests
in  PRC Operating Subsidiaries to guarantee Beijing CNET Online’s
performance of its obligations under the Exclusive Business Cooperation
Agreement. If Beijing CNET Online or any of the PRC Shareholders breaches
his/her respective contractual obligations under this agreement, or upon the
occurrence of one of the events regarded as an event of default under each such
agreement, Rise King WFOE, as pledgee, will be entitled to certain rights,
including the right to dispose of the pledged equity interests. The PRC
Shareholders of the PRC Operating Subsidiaries agree not to dispose of the
pledged equity interests or take any actions that would prejudice Rise King
WFOE's interest, and to notify Rise King WFOE of any events or upon receipt of
any notices which may affect Rise King WFOE's interest in the pledge. Each of
the equity pledge agreements will be valid until all the payments due under the
Exclusive Business Cooperation Agreement have been fulfilled.




21





Irrevocable
Powers of Attorney





The PRC
Shareholders have each executed an irrevocable power of attorney, dated as of
October 8, 2008, to appoint Rise King WFOE as their exclusive attorneys-in-fact
to vote on their behalf on all PRC Operating Subsidiary matters requiring
shareholder approval.  The term of each power of attorney is valid so
long as such shareholder is a shareholder of the respective PRC Operating
Subsidiary.




Share
Exchange




On June
26, 2009, the Company entered into a Share Exchange Agreement (the “Exchange
Agreement”), with (i) ChinaNet BVI, (ii) ChinaNet BVI’s shareholders, Allglad
Limited, a British Virgin Islands company (“Allglad”), Growgain Limited, a
British Virgin Islands company ("Growgain"), Rise King Investments Limited, a
British Virgin Islands company (“Rise King BVI”), Star (China) Holdings Limited,
a British Virgin Islands company (“Star”), Surplus Elegant Investment Limited, a
British Virgin Islands company (“Surplus”), Clear Jolly Holdings Limited, a
British Virgin Islands company (“ Clear ” and together
with Allglad, Growgain, Rise King BVI, Star and Surplus, the “ChinaNet BVI
Shareholders”), who together own shares constituting 100% of the issued and
outstanding ordinary shares of ChinaNet BVI (the “ChinaNet BVI Shares”), and
(iii) G. Edward Hancock, the former principal stockholder of the Company.
Pursuant to the terms of the Exchange Agreement, the ChinaNet BVI Shareholders
transferred to the Company all of the ChinaNet BVI Shares in exchange for the
issuance of 13,790,800 (the “Exchange Shares” ) shares of Common Stock (the
“Share Exchange”).  As a result of the Share Exchange, ChinaNet BVI
became a wholly owned subsidiary of the Company and the Company is now a holding
company, which through certain contractual arrangements with operating companies
in the PRC, is engaged in providing advertising, marketing and communication
services to small and medium companies in China.




Immediately
prior to the Share Exchange, we cancelled and retired 4,400,000 shares of our
issued and outstanding Common Stock (the “Cancelled Shares”) (reducing our
issued and outstanding shares to 1,383,500), and issued 600,000 shares of our
Common Stock in the aggregate to certain third parties in consideration for
services rendered (resulting in 1,983,500 shares of issued and outstanding
Common Stock immediately prior to the Share Exchange).  A cash amount
of $300,000, previously deposited by us into an escrow account was paid to G.
Edward Hancock, our former majority shareholder and owner of the Cancelled
Shares, as consideration for cancelling the Cancelled Shares in connection with
the Share Exchange.  As a result of the cancellation of the Cancelled
Shares, the share issuance described above, and the Share Exchange, we had
15,774,300 shares issued and outstanding immediately following the Share
Exchange.




In
connection with the Share Exchange, we entered into a Registration Rights
Agreement dated June 26, 2009 with certain of our stockholders signatory
thereto.  Pursuant to the Registration Rights Agreement, we agreed to
provide those stockholders signatory thereto, for a 90-day period from the
date of signing, piggyback registration rights under the Securities Act on a
portion of their shares.  In the event that we do not file such
registration statement within the 90-day period, the stockholders holding a
majority of the securities registrable under the Registration Rights Agreement
will have a demand registration right. There are no other penalties or
liquidated damages (in securities of the Company, cash or otherwise) as a result
of the Company not successfully filing a registration statement within the
90-day period or pursuant to the terms of the demand.  Although we
timely complied with the filing of a registration statement as required, due to
the SEC’s application of Rule 415, we were cutback certain shares on the
registration statement and, as a result, we were unable to register the shares
held by these stockholders.




Name
Change




Prior to
July 14, 2009, our company name was Emazing Interactive, Inc.  On July
14, 2009, the Company caused to be formed a corporation under the laws of the
State of Nevada called ChinaNet Online Holdings, Inc. (the "Merger Sub") and
acquired one hundred shares of its common stock for cash. As such, Merger Sub
was merged with and into the Company.  As a result of the merger, the
separate existence of the Merger Sub ceased.  As a further result of
the merger, our corporate name was changed to “ChinaNet Online Holdings,
Inc.”  We are the surviving corporation in the merger and, except for
the name change provided for in the Agreement and Plan of Merger, there was no
change in our directors, officers, capital structure or business.




22




2009
Financing




On August
21, 2009 (the “Closing Date”), we entered into a securities purchase agreement
(the “Purchase Agreement”), with several investors, including institutional,
accredited and non-US persons and entities (the “ Investors ”),
pursuant to which we sold units, comprised of 10% Series A Convertible Preferred
Stock, par value $.001 per share (the “Series A Preferred Stock”), and two
series of warrants, for a purchase price of $2.50 per unit and gross proceeds of
approximately $10.3 million (the “Financing”).  Net proceeds from the
Financing were approximately $9.5 million.  We sold 4,121,600 units in
the aggregate, which included (i) 4,121,600 shares of our Series A Preferred
Stock, (ii) Series A-1 Warrants to purchase 2,060,800 shares of Common Stock at
an exercise price of $3.00 per share with a three-year term, and (ii) Series A-2
Warrants to purchase 2,060,800 shares of Common Stock at an exercise price of
$3.75 with a five-year term.  In connection with the Financing, we
issued to TriPoint Global Equities, LLC warrants to purchase 329,728 shares of
our Common Stock at an exercise price of $2.50 per share, 164,864 at an
exercise price of $3.00 and 164,864 at an exercise price of $3.75. The warrants
expire on August 20, 2014.




In
connection with the Financing, we entered into a registration rights agreement
(the “Registration Rights Agreement”) with the Investors in which we agreed to
file a registration statement (the “Registration Statement”) with the Securities
and Exchange Commission (the “SEC”) to register the Common Stock underlying the
Series A Preferred Stock, the Series A-1 Warrants and the Series A-2 Warrants
(the “Registrable Securities) , thirty (30) days after the closing of the
Financing.  All of the Registrable Securities were registered on a
Registration Statement of Form S-1 (Reg. No. 333-162038), which went effective
on December 31, 2009.  We are required to keep the Registration
Statement continuously effective under the Securities Act until such date as is
the earlier of the date when all of the securities covered by that registration
statement have been sold or the date on which such securities may be sold
without any restriction pursuant to Rule 144 (the “Financing Effectiveness
Period”).




In
connection with the Financing, we entered into a securities escrow
agreement with the Investors (the “Escrow Agreement”), pursuant to which Rise
King Investment Limited, a British Virgin Islands company (the “Principal
Stockholder”), initially placed 2,558,160 shares of Common Stock (the “Escrow
Shares”) into an escrow account.  Of the Escrow Shares, 1,279,080
shares (equivalent to 50% of the Escrow Shares) are being held as security for
the achievement of audited net income equal to or greater than $7.7 million for
the fiscal year 2009 (the “2009 Performance Threshold”) and the remaining
1,279,080 of the Escrow Shares are being held as security for the achievement of
audited net income equal to or greater than $14 million for the fiscal year 2010
(the “2010 Performance Threshold”).





If we
achieve at least 95% of the applicable Performance Threshold, all of the Escrow
Shares for the corresponding fiscal year shall be returned to the Principal
Stockholder. If we achieve less than 95% of the applicable Performance
Threshold, the Investors shall receive in the aggregate, on a pro rata basis
(based upon the number of shares of Series A Preferred Stock or Conversion
Shares owned by each such Investor as of the date of distribution of the Escrow
Shares), 63,954 shares of the Escrow Shares for each percentage by which the
applicable Performance Threshold was not achieved up to the total number of
Escrow Shares for the applicable fiscal year.  Any Escrow Shares not
delivered to any Investor because such Investor no longer holds shares of Series
A Preferred Stock or Conversion Shares shall be returned to the Principal
Stockholder.





For the
purposes of the Escrow Agreement, net income is defined in accordance with US
GAAP and reported by us in our audited financial statements for each of the
fiscal years ended 2009 and 2010; provided, however, that net income for each of
fiscal years ended 2009 and 2010 shall be increased by any non-cash charges
incurred (i) as a result of the Financing, including without limitation, as a
result of the issuance and/or conversion of the Series A Preferred Stock, and
the issuance and/or exercise of the Warrants, (ii) as a result of the release of
the Escrow Shares to the Principal Stockholder and/or the Investors, as
applicable, pursuant to the terms of the Escrow Agreement, (iii) as a result of
the issuance of ordinary shares of the Principal Stockholder to Messrs. Handong
Cheng and Xuanfu Liu and Ms. Li Sun (the “PRC Shareholders”), upon the exercise
of options granted to the PRC Shareholders by the Principal Stockholder, (iv) as
a result of the issuance of warrants to any placement agent and its designees in
connection with the Financing, (v) the exercise of any warrants to purchase
Common Stock outstanding  and (vi) the issuance under any performance
based equity incentive plan that we adopt.




23





In
addition, we are a party to a Lock-Up Agreement with each of our executive
officers and directors (the “Affiliates”), under which the Affiliates have
agreed with not to offer, sell, contract to sell, assign, transfer, hypothecate
gift, pledge or grant a security interest in, or other wise dispose
of  any shares of our common stock that such Affiliates presently own
or may acquire after the Closing Date during the period commencing on the
Closing Date and expiring on the date that is six months following the
effective date of the Registration Statement  (the “Lock-up
Period”), which is June 30, 2010.  Each Affiliate further agreed that
during the 12-month period following the Lock-up Period, such Affiliate shall
not transfer more than one-twelfth (1/12) of such Affiliate’s holding of Common
Stock during any one calendar month.





Our net
income as adjusted for the purposes of the Escrow Agreement was  $8.4
million and therefore we exceeded the 2009 Performance
Threshold.





Employee





As
of December 31, 2009, we had 224 full-time employees, 91 of which are in
sales and marketing, 53 in operations and support, 23 in management and
administration and 57 in technology and R & D.





We are
compliant with local prevailing wage, contractor licensing and insurance
regulations, and have good relations with our employees.





As
required by PRC regulations, we participate in various employee benefit plans
that are organized by municipal and provincial governments, including pension,
work-related injury benefits, maternity insurance, medical and unemployment
benefit plans. We are required under PRC laws to make contributions to the
employee benefit plans at specified percentages of the salaries, bonuses and
certain allowances of our employees, up to a maximum amount specified by the
local government from time to time. Members of the retirement plan are entitled
to a pension equal to a fixed proportion of the salary prevailing at the member
’ s retirement date.





Generally we enter into a standard
employment contract with our officers and managers for a set period of years and
a standard employment contract with other employees for a set period of
years.  According to these contracts, all of our employees are
prohibited from engaging in any activities that compete with our business during
the period of their employment with us.  Furthermore, the employment
contracts with officers or managers include a covenant that prohibits officers
or managers from engaging in any activities that compete with our business for
two years after the period of employment.





Corporation
Information





Our
principal executive offices are located at No. 3 Min Zhuang Road, Building 6, Yu
Quan Hui Gu Tuspark, Haidian District, Beijing, PRC.  Our telephone
number at this address is (86 10) 51600828 and our fax number is (86 10) 51600
328.  For more information, see
www.chinanet-online.com.




ITEM
1A. RISK FACTORS




In
addition to the other information in this Form 10-K, readers should carefully
consider the following important factors. These factors, among others, in some
cases have affected, and in the future could affect, our financial condition and
results of operations and could cause our future results to differ materially
from those expressed or implied in any forward-looking statements that appear in
this on Form 10-K or that we have made or will make elsewhere.




24




Risks
Related to Our Business




The
recent global economic and financial market crisis has had and may continue to
have a negative effect on the market price of our business, and could have a
material adverse effect on our business, financial condition, results of
operations and cash flow.




The
recent global economic and financial market crisis has caused, among other
things, a general tightening in the credit markets, lower levels of liquidity,
increases in the rates of default and bankruptcy, lower consumer and business
spending, and lower consumer net worth, in the United States, China and other
parts of the world. This global economic and financial market crisis has had,
and may continue to have, a negative effect on the market price of our business,
the volatility of which has increased as a result of the disruptions in the
financial markets. It may also impair our ability to borrow funds or enter into
other financial arrangements if and when additional founds become necessary for
our operations. We believe many of our advertisers have also been affected by
the current economic turmoil. Current or potential advertisers may no longer be
in business, may be unable to fund advertising purchases or determine to reduce
purchases, all of which would lead to reduced demand for our advertising
services, reduced gross margins, and increased delays of payments of accounts
receivable or defaults of payments. We are also limited in our ability to reduce
costs to offset the results of a prolonged or severe economic downturn given our
fixed costs associated with our operations. Therefore, the global economic and
financial market crisis could have a material adverse effect on our business,
financial condition, results of operations and cash flow. In addition, the
timing and nature of any recovery in the credit and financial markets remains
uncertain, and there can be no assurance that market conditions will improve in
the near future or that our results will not continue to be materially and
adversely affected.




We
have a limited operating history, which may make it difficult to evaluate our
business and prospects.




We began
our Internet advertising service via 28.com in 2003, and entered into the TV
production and advertising with China Net TV in May 2008. Both the Internet and
TV advertising platforms are targeting SME customers. The SME market in China is
still in its early stages. In addition, we started our bank kiosk advertising
service through Shanghai Borongdingsi for financial sector customers in 2008.
Accordingly, our limited operating history and the early stage of development of
the markets in which we operate makes it difficult to evaluate the viability and
sustainability of our business and its acceptance by advertisers and consumers.
Although our revenues have grown rapidly, we cannot assure you that we will
maintain our profitability or that we will not incur net losses in the future.
We expect that our operating expenses will increase as we expand. Any
significant failure to realize anticipated revenue growth could result in
operating losses.




We
may be subject to, and may expend significant resources in defending against,
government actions and civil suits based on the content and services we provide
through our Internet, TV and bank kiosk advertising platforms.




PRC
advertising laws and regulations require advertisers, advertising operators and
advertising distributors, including businesses such as ours, to ensure that the
content of the advertisements they prepare or distribute is fair, accurate and
in full compliance with applicable laws, rules and regulations. Although we
comply with the requirements by reviewing the business licenses and the profiles
of our clients, clients may post advertisements about business opportunities
that are not legitimate over which we have no control. Violation of these laws,
rules or regulations may result in penalties, including fines, confiscation of
advertising fees, orders to cease dissemination of the advertisements and orders
to publish an advertisement correcting the misleading information. In
circumstances involving serious violations, the PRC government may revoke a
violator’s license for its advertising business operations.





In April
2009, CCTV reported a story that a franchised store advertised on 28.com turned
out to be a scam, and the fraud victim asserted she joined the store because she
trusted the website.  Pursuant to the PRC advertising law, Business
Opportunity Online as the publisher of advertisement has the obligation to check
relevant documents and verify the content of the advertisement.  For
commercial franchise business in China, a franchiser needs to file an
application with the MOC or its local branches through the website
http://txjy.syggs.mofcom.gov.cn/.  When a franchiser issues an
advertisement through Business Opportunity Online, Business Opportunity Online
checks the business license, the franchiser’s registration form, the trade mark
certificate and other relevant documents to verify the content of the
advertisement.  The Internet information services regulations and the
anti unfair competition regulations have similar requirements for Internet
advertisement publishers.  Based on the laws and regulations above, it
is our view that there is neither any mandatory requirement that Business
Opportunity Online bear any responsibility for the franchiser’s business
activities, nor any valid action or investigation that can be brought by the
consumer or the government against Business Opportunity Online based on the
franchiser’s business activities.  Nevertheless, the possibility
remains that Business Opportunity Online may be required to assume civil and
administrative responsibilities subject to further investigation or enforcement
by competent authorities.




25




If
advertisers or the viewing public do not accept, or lose interest in, our
advertising platforms, our revenues may be negatively affected and our business
may not expand or be successful.




The
Internet and bank kiosk advertising platforms in China are relatively new and
their potential is uncertain. We compete for advertising revenues with many
forms of more established advertising media. Our success depends on the
acceptance of our advertising platforms by advertisers and their continuing
interest in these media as part of their advertising strategies. Our success
also depends on the viewing public’s continued receptiveness towards our
advertising models. Advertisers may elect not to use our services if they
believe that viewers are not receptive to our platforms or that our platforms do
not provide sufficient value as an effective advertising medium. If a
substantial number of advertisers lose interest in advertising on our platforms,
we will be unable to generate sufficient revenues and cash flows to operate our
business, and our financial condition and results of operations would be
materially and adversely affected.




We
operate in the advertising industry, which is particularly sensitive to changes
in economic conditions and advertising trends.




Demand
for advertising resulting advertising spending by our clients, is particularly
sensitive to changes in general economic conditions. For example, advertising
expenditures typically decrease during periods of economic downturn. Advertisers
may reduce the money they spend to advertise on our advertising platforms for a
number of reasons, including:




·
            a
      general decline in economic
conditions;




·
            a
      decline in economic conditions in the particular cities where we conduct
      business;




·
            a
      decision to shift advertising expenditures to other available less
      expensive advertising media; and




·
            a
      decline in advertising spending in
general.




A
decrease in demand for advertising media in general, and for our advertising
services in particular, would materially and adversely affect our ability to
generate revenues, and have a material and adverse effect on our financial
condition and results of operations.




If
the Internet and, in particular, Internet marketing are not broadly adopted in
China, our ability to generate revenue and sustain profitability from the
website 28.com could be materially and adversely affected.




Our
future revenues and profits from our online advertising agency business that we
operate through 28.com are dependent in part upon advertisers in China
increasingly accepting the use of the Internet as a marketing channel, which is
at an early stage in China. Penetration rates for personal computers, the
Internet and broadband in China are all relatively low compared to those in more
developed countries. Furthermore, many Chinese Internet users are not accustomed
to using the Internet for e-commerce or as a medium for other transactions. Many
of our current and potential SME clients have limited experience with the
Internet as a marketing channel, and have not historically devoted a significant
portion of their marketing budgets to the Internet marketing and promotion. As a
result, they may not consider the Internet as effective in promoting their
products and services as traditional print and broadcast media.




26




We
face significant competition, and if we do not compete successfully against new
and existing competitors, we may lose our market share, and our profitability
may be adversely affected.




Increased
competition could reduce our profitability and result in a loss of market share.
Some of our existing and potential competitors may have competitive advantages,
such as significantly greater financial, marketing or other resources, and may
successfully mimic and adopt our business models. Moreover, increased
competition will provide advertisers with a wider range of media and advertising
service alternatives, which could lead to lower prices and decreased revenues,
gross margins and profits. We cannot assure you that we will be able to
successfully compete against new or existing competitors.




Failure
to manage our growth could strain our management, operational and other
resources, which could materially and adversely affect our business and
prospects.




We have
been expanding our operations and plan to continue to expand rapidly in China.
To meet the demand of advertisers for a broader coverage, we must continue to
expand our platforms by showing our TV productions and advertisements on more
television stations, and expanding the bank kiosk platforms in terms of numbers
and locations. The continued growth of our business has resulted in, and will
continue to result in, substantial demand on our management, operational and
other resources. In particular, the management of our growth will require, among
other things:




·
            increased
      sales and sales support activities;




·
            improved
      administrative and operational
systems;




·
            enhancements
      to our information technology
system;




·
            stringent
      cost controls and sufficient working
capital;




·
            strengthening
      of financial and management controls;
and




·
            hiring
      and training of new personnel.




As we
continue this effort, we may incur substantial costs and expend substantial
resources. We may not be able to manage our current or future operations
effectively and efficiently or compete effectively in new markets we enter. If
we are not able to manage our growth successfully, our business and prospects
would be materially and adversely affected.




Key
employees are essential to growing our business.




Handong
Cheng, our chief executive officer and president, Zhige Zhang, our chief
financial officer and Xuanfu Liu, our chief operating officer are essential to
our ability to continue to grow our business. They have established
relationships within the industries in which we operate. If they were to leave
us, our growth strategy might be hindered, which could limit our ability to
increase revenue. However, the Company currently has no employment agreements
with key employees.




In
addition, we face competition for attracting skilled personnel. If we fail to
attract and retain qualified personnel to meet current and future needs, this
could slow our ability to grow our business, which could result in a decrease in
market share.




We
may need additional capital and we may not be able to obtain it at acceptable
terms, or at all, which could adversely affect our liquidity and financial
position.




We may
need additional cash resources due to changed business conditions or other
future developments. If these sources are insufficient to satisfy our cash
requirements, we may seek to sell additional equity or debt securities or obtain
a credit facility. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants that
would restrict our operations and liquidity.




27




Our
ability to obtain additional capital on acceptable terms is subject to a variety
of uncertainties, including:




·
            investors’
      perception of, and demand for, securities of alternative advertising media
      companies;




·
            conditions
      of the U.S. and other capital markets in which we may seek to raise
      funds;




·
            our
      future results of operations, financial condition and cash
      flow;




·
            PRC
      governmental regulation of foreign investment in advertising service
      companies in China;




·
            economic,
      political and other conditions in China;
and




·
            PRC
      governmental policies relating to foreign currency
    borrowings.




Our
failure to protect our intellectual property rights could have a negative impact
on our business.




We
believe our brand, trade name, copyrights, domain name and other intellectual
property are critical to our success. The success of our business depends in
part upon our continued ability to use our brand, trade names and copyrights to
further develop and increase brand awareness. The infringement of our trade
names and copyrights could diminish the value of our brand and its market
acceptance, competitive advantages or goodwill. In addition, our information and
operational systems, which have not been patented or otherwise registered as our
property, are a key component of our competitive advantage and our growth
strategy.




Monitoring
and preventing the unauthorized use of our intellectual property is difficult.
The measures we take to protect our brand, trade names, copyrights, domain name
and other intellectual property rights may not be adequate to prevent their
unauthorized use by third parties. Furthermore, application of laws governing
intellectual property rights in China and abroad is uncertain and evolving, and
could involve substantial risks to us. If we are unable to adequately protect
our brand, trade names, copyrights, domain name and other intellectual property
rights, we may lose these rights and our business may suffer materially.
Further, unauthorized use of our brand, domain name or trade names could cause
brand confusion among advertisers and harm our reputation. If our brand
recognition decreases, we may lose advertisers and fail in our expansion
strategies, and our business, results of operations, financial condition and
prospects could be materially and adversely affected.




We
rely on computer software and hardware systems in managing our operations, the
failure of which could adversely affect our business, financial condition and
results of operations.




We are
dependent upon our computer software and hardware systems in supporting our
network and managing and monitoring programs on the network. In addition, we
rely on our computer hardware for the storage, delivery and transmission of the
data on our network. Any system failure that interrupts the input, retrieval and
transmission of data or increases the service time could disrupt our normal
operation. Any failure in our computer software or hardware systems could
decrease our revenues and harm our relationships with advertisers and consumers,
which in turn could have a material adverse effect on our business, financial
condition and results of operations.




We
have limited insurance coverage.




The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited insurance products. We have determined that the
risks of disruption or liability from our business, the loss or damage to our
property, including our facilities, equipment and office furniture, the cost of
insuring for these risks, and the difficulties associated with acquiring such
insurance on commercially reasonable terms make it impractical for us to have
such insurance. As a result, we do not have any business liability, disruption,
litigation or property insurance coverage for our operations in China except for
insurance on some company owned vehicles. Any uninsured occurrence of loss or
damage to property, or litigation or business disruption may result in the
incurrence of substantial costs and the diversion of resources, which could have
an adverse effect on our operating results.




28




If
we are unable to establish appropriate internal financial reporting controls and
procedures, it could cause us to fail to meet our reporting obligations, result
in the restatement of our financial statements, harm our operating results,
subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on
the market price for shares of our Common Stock.




Effective
internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. We maintain a system of internal control over
financial reporting, which is defined as a process designed by, or under the
supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.




As a
public company, we will have significant additional requirements for enhanced
financial reporting and internal controls.  We are required to
document and test our internal control procedures in order to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires
annual management assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent registered public accounting
firm addressing these assessments.  However, recent changes to the
rules of the Securities and Exchange Commission have delayed the requirement for
inclusion of such auditor attestation report in our annual report for the year
ended December 31, 2009 until we file our annual report for the 2010 fiscal
year.  The process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and react to
changes in our business and the economic and regulatory environments and to
expend significant resources to maintain a system of internal controls that is
adequate to satisfy our reporting obligations as a public company.




We cannot
assure you that we will not, in the future, identify areas requiring improvement
in our internal control over financial reporting.  We cannot assure
you that the measures we will take to remediate any areas in need of improvement
will be successful or that we will implement and maintain adequate controls over
our financial processes and reporting in the future as we continue our
growth.  If we are unable to establish appropriate internal financial
reporting controls and procedures, it could cause us to fail to meet our
reporting obligations, result in the restatement of our financial statements,
harm our operating results, subject us to regulatory scrutiny and sanction,
cause investors to lose confidence in our reported financial information and
have a negative effect on the market price for shares of our Common
Stock.




Lack
of experience as officers of publicly traded companies of our management team
may hinder our ability to comply with Sarbanes-Oxley Act.




It may be
time consuming, difficult and costly for us to develop and implement the
internal controls and reporting procedures required by the Sarbanes-Oxley
Act.  We may need to hire additional financial reporting, internal
controls and other finance staff or consultants in order to develop and
implement appropriate internal controls and reporting procedures.  If
we are unable to comply with the Sarbanes-Oxley Act’s internal controls
requirements, we may not be able to obtain the independent auditor
certifications that Sarbanes-Oxley Act requires publicly traded companies to
obtain.




We
will incur increased costs as a result of being a public company.




As a
public company, we incur significant legal, accounting and other expenses that
we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as
well as new rules subsequently implemented by the SEC, has required changes in
corporate governance practices of public companies. We expect these new rules
and regulations to increase our legal, accounting and financial compliance costs
and to make certain corporate activities more time-consuming and costly. In
addition, we will incur additional costs associated with our public company
reporting requirements. We are currently evaluating and monitoring developments
with respect to these new rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.




29




Risks
Relating to Regulation of Our Business and to Our Structure




If
the PRC government finds that the agreements that establish the structure for
operating our China business do not comply with PRC governmental restrictions on
foreign investment in the advertising industry, we could be subject to severe
penalties.




All of
our operations are conducted through the PRC Operating Entities (as defined
below), and through our contractual agreements (as defined below) with each of
our PRC Operating Subsidiaries (as defined below) in China. PRC regulations
require any foreign entities that invest in the advertising services industry to
have at least two years of direct operations in the advertising industry outside
of China. Since December 10, 2005, foreign investors have been allowed to own
directly 100% of PRC companies operating an advertising business if the foreign
entity has at least three years of direct operations in the advertising business
outside of China or less than 100% if the foreign investor has at least two
years of direct operations in the advertising industry outside of China. We do
not currently directly operate an advertising business outside of China and
cannot qualify under PRC regulations any earlier than two or three years after
we commence any such operations outside of China or until we acquire a company
that has directly operated an advertising business outside of China for the
required period of time.  Our PRC Operating Subsidiaries hold the
requisite licenses to provide advertising services in China. Our PRC Operating
Subsidiaries directly operate our advertising network. We have been and are
expected to continue to be dependent on these PRC Operating Subsidiaries to
operate our advertising business for the foreseeable future. We have entered
into Contractual Agreements with the PRC Operating Subsidiaries, pursuant to
which we, through Rise King WFOE, provide technical support and consulting
services to the PRC Operating Subsidiaries. In addition, we have entered into
agreements with our PRC Operating Subsidiaries and each of their shareholders
which provide us with the substantial ability to control these
affiliates.




If we,
our existing or future PRC Operating Subsidiaries or the PRC Operating Entities
are found to be in violation of any existing or future PRC laws or regulations
or fail to obtain or maintain any of the required permits or approvals, the
relevant PRC regulatory authorities, including the State Administration for
Industry and Commerce, or SAIC, which regulates advertising companies, would
have broad discretion in dealing with such violations, including:




·
            revoking
      the business and operating licenses of Rise King WFOE and/or the PRC
      Operating Subsidiaries;




·
            discontinuing
      or restricting the operations of Rise King WFOE and/or the PRC Operating
      Subsidiaries;




·
            imposing
      conditions or requirements with which we, Rise King WFOE and/or our PRC
      Operating Subsidiaries may not be able to
  comply;




·
            requiring
      us or Rise King WFOE and/or PRC Operating Subsidiaries to restructure the
      relevant ownership structure or operations;
or




·
            restricting
      or prohibiting our use of the proceeds of this offering to finance our
      business and operations in China.




The
imposition of any of these penalties would result in a material and adverse
effect on our ability to conduct our business.




We
rely on contractual arrangements with the PRC Operating Subsidiaries and their
shareholders for our China operations, which may not be as effective in
providing operational control as direct ownership.




We rely
on contractual arrangements with our PRC Operating Subsidiaries and their
shareholders to operate our advertising business. These contractual arrangements
may not be as effective in providing us with control over the PRC Operating
Subsidiaries as direct ownership. If we had direct ownership of the PRC
Operating Subsidiaries, we would be able to exercise our rights as a shareholder
to effect changes in the board of directors of those companies, which in turn
could effect changes, subject to any applicable fiduciary obligations, at the
management level. However, under the current contractual arrangements, as a
legal matter, if the PRC Operating Subsidiaries or any of their subsidiaries and
shareholders fail to perform its or their respective obligations under these
contractual arrangements, we may have to incur substantial costs and resources
to enforce such arrangements, and rely on legal remedies under PRC laws,
including seeking specific performance or injunctive relief, and claiming
damages, which we cannot assure you to be effective. Accordingly, it may be
difficult for us to change our corporate structure or to bring claims against
the PRC Operating Subsidiaries if they do not perform their obligations under
its contracts with us or if any of the PRC citizens who hold the equity interest
in the PRC Operating Subsidiaries do not cooperate with any such
actions.




30




Many of
these contractual arrangements are governed by PRC laws and provide for the
resolution of disputes through either arbitration or litigation in the PRC.
Accordingly, these contracts would be interpreted in accordance with PRC laws
and any disputes would be resolved in accordance with PRC legal procedures. The
legal environment in the PRC is not as developed as in other jurisdictions, such
as the United States. As a result, uncertainties in the PRC legal system could
limit our ability to enforce these contractual arrangements. In the event we are
unable to enforce these contractual arrangements, we may not be able to exert
effective control over our operating entities, and our ability to conduct our
business may be negatively affected.




Contractual
arrangements we have entered into among the PRC Operating Subsidiaries may be
subject to scrutiny by the PRC tax authorities and a finding that we owe
additional taxes or are ineligible for our tax exemption, or both, could
substantially increase our taxes owed, and reduce our net income and the value
of your investment.




Under PRC
law, arrangements and transactions among related parties may be subject to audit
or challenge by the PRC tax authorities. If any of the transactions we have
entered into among our subsidiaries and affiliated entities are found not to be
on an arm’s-length basis, or to result in an unreasonable reduction in tax under
PRC law, the PRC tax authorities have the authority to disallow our tax savings,
adjust the profits and losses of our respective PRC entities and assess late
payment interest and penalties.




If any of
our PRC Operating Subsidiaries incurs debt on its own behalf in the future, the
instruments governing the debt may restrict their ability to pay dividends or
make other distributions to us. In addition, the PRC tax authorities may require
us to adjust our taxable income under the contractual arrangements with the PRC
Operating Entities we currently have in place in a manner that would materially
and adversely affect the PRC Operating Entities’ ability to pay dividends and
other distributions to us. Furthermore, relevant PRC laws and regulations permit
payments of dividends by the PRC Operating Entities only out of their retained
earnings, if any, determined in accordance with PRC accounting standards and
regulations. Under PRC laws and regulations, each of the PRC Operating Entities
is also required to set aside a portion of its net income each year to fund
specific reserve funds. These reserves are not distributable as cash dividends.
In addition, subject to certain cumulative limits, the statutory general reserve
fund requires annual appropriations of 10% of after-tax income to be set aside
prior to payment of dividends. As a result of these PRC laws and regulations,
the PRC Operating Entities are restricted in their ability to transfer a portion
of their net assets to us whether in the form of dividends, loans or advances.
Any limitation on the ability of the PRC Operating Entities to pay dividends to
us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our businesses, pay dividends, or
otherwise fund and conduct our business.




31




Risks
Associated With Doing Business In China




There are
substantial risks associated with doing business in China, as set forth in the
following risk factors.




Our
operations and assets in China are subject to significant political and economic
uncertainties.




Changes
in PRC laws and regulations, or their interpretation, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under its current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.




We
derive a substantial portion of ours sales from China.




Substantially
all of our sales are generated from China. We anticipate that sales of our
products in China will continue to represent a substantial proportion of our
total sales in the near future. Any significant decline in the condition of the
PRC economy could adversely affect consumer demand of our products, among other
things, which in turn would have a material adverse effect on our business and
financial condition.




Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.




Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects of exchange
rate fluctuations with respect to any of these currencies. For example, the
value of the Renminbi depends to a large extent on Chinese government policies
and China’s domestic and international economic and political developments, as
well as supply and demand in the local market. Since 1994, the official exchange
rate for the conversion of Renminbi to the U.S. dollar had generally been stable
and the Renminbi had appreciated slightly against the U.S. dollar. However, on
July 21, 2005, the Chinese government changed its policy of pegging the value of
Chinese Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. As a result of this policy change, Chinese Renminbi appreciated
approximately 2.5% against the U.S. dollar in 2005 and 3.3% in 2006. It is
possible that the Chinese government could adopt a more flexible currency
policy, which could result in more significant fluctuation of Chinese Renminbi
against the U.S. dollar. We can offer no assurance that Chinese Renminbi will be
stable against the U.S. dollar or any other foreign currency.




The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the
foreign subsidiaries’ financial statements into U.S. dollars will lead to a
translation gain or loss which is recorded as a component of other comprehensive
income. In addition, we have certain assets and liabilities that are denominated
in currencies other than the relevant entity’s functional currency. Changes in
the functional currency value of these assets and liabilities create
fluctuations that will lead to a transaction gain or loss.  We have
not entered into agreements or purchased instruments to hedge our exchange rate
risks, although we may do so in the future. The availability and effectiveness
of any hedging transaction may be limited and we may not be able to successfully
hedge our exchange rate risks.




32





Although
Chinese governmental policies were introduced in 1996 to allow the
convertibility of Chinese Renminbi into foreign currency for current account
items, conversion of Chinese Renminbi into foreign exchange for capital items,
such as foreign direct investment, loans or securities, requires the approval of
the State Administration of Foreign Exchange, or SAFE, which is under the
authority of the People’s Bank of China. These approvals, however, do not
guarantee the availability of foreign currency conversion. We cannot be sure
that we will be able to obtain all required conversion approvals for our
operations or that Chinese regulatory authorities will not impose greater
restrictions on the convertibility of Chinese Renminbi in the future. Because a
significant amount of our future revenue may be in the form of Chinese Renminbi,
our inability to obtain the requisite approvals or any future restrictions on
currency exchanges could limit our ability to utilize revenue generated in
Chinese Renminbi to fund our business activities outside of China, or to repay
foreign currency obligations, including our debt obligations, which would have a
material adverse effect on our financial condition and results of
operations




We
may have limited legal recourse under PRC laws if disputes arise under our
contracts with third parties.




The
Chinese government has enacted laws and regulations dealing with matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, their experience in implementing, interpreting and enforcing
these laws and regulations is limited, and our ability to enforce commercial
claims or to resolve commercial disputes is unpredictable. If our new business
ventures are unsuccessful, or other adverse circumstances arise from these
transactions, we face the risk that the parties to these ventures may seek ways
to terminate the transactions, or, may hinder or prevent us from accessing
important information regarding the financial and business operations of these
acquired companies. The resolution of these matters may be subject to the
exercise of considerable discretion by agencies of the Chinese government, and
forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely
limited, and without a means of recourse by virtue of the Chinese legal system,
we may be unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations.




We
must comply with the Foreign Corrupt Practices Act.




We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business. Foreign
companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in mainland China. If our
competitors engage in these practices, they may receive preferential treatment
from personnel of some companies, giving our competitors an advantage in
securing business or from government officials who might give them priority in
obtaining new licenses, which would put us at a disadvantage. Although we inform
our personnel that such practices are illegal, we can not assure you that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties.




Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.




The
Renminbi is not a freely convertible currency currently, and the restrictions on
currency exchanges may limit our ability to use revenues generated in Renminbi
to fund our business activities outside the PRC or to make dividends or other
payments in United States dollars. The PRC government strictly regulates
conversion of Renminbi into foreign currencies. Over the years, foreign exchange
regulations in the PRC have significantly reduced the government’s control over
routine foreign exchange transactions under current accounts.  In the
PRC, the State Administration for Foreign Exchange, or the SAFE, regulates the
conversion of the Renminbi into foreign currencies. Pursuant to applicable PRC
laws and regulations, foreign invested enterprises incorporated in the PRC are
required to apply for “Foreign Exchange Registration
Certificates.”  Currently, conversion within the scope of the “current
account” (e.g. remittance of foreign currencies for payment of dividends, etc.)
can be effected without requiring the approval of SAFE.  However,
conversion of currency in the “capital account” (e.g. for capital items such as
direct investments, loans, securities, etc.) still requires the approval of
SAFE.




33




Recent
PRC regulations relating to mergers and acquisitions of domestic enterprises by
foreign investors may increase the administrative burden we face and create
regulatory uncertainties.




On August
8, 2006, the Ministry of Commerce (the “MOC”), joined by the China Securities
Regulatory Commission (the “CSRC”), State-owned Assets Supervision and
Administration Commission of the State Council (the “SASAC”), the State
Administration of Taxation (the “SAT”), the State Administration of Industry and
Commerce (the “SAIC”), and SAFE, jointly promulgated a rule entitled the
Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors (the “M&A Rules”), which took effect as of September 8,
2006.  This new regulation, among other things, has certain provisions
that require SPVs formed for the purpose of acquiring PRC domestic companies and
controlled by PRC individuals, to obtain the approval of the CSRC prior to
publicly listing their securities on an overseas stock market. However, the new
regulation does not expressly provide that approval from the CSRC is required
for the offshore listing of a Special Purpose Vehicle or the SPV which acquires,
directly or indirectly, equity interest or shares of domestic PRC entities held
by domestic companies or individuals by cash payment, nor does it expressly
provide that approval from CSRC is not required for the offshore listing of a
SPV which has fully completed its acquisition of equity interest of domestic PRC
equity prior to September 8, 2006. On September 21, 2006, the CSRC published on
its official website a notice specifying the documents and materials that are
required to be submitted for obtaining CSRC approval.




It is not
clear whether the provisions in the new regulation regarding the offshore
listing and trading of the securities of a SPV applies to an offshore company
such as us which owns controlling contractual interest in the PRC Operating
Entities. We believe that the M&A Rules and the CSRC approval are not
required in the context of the share exchange under our transaction because (i)
such share exchange is a purely foreign related transaction governed by foreign
laws, not subject to the jurisdiction of PRC laws and regulations; (ii) we are
not a SPV formed or controlled by PRC companies or PRC individuals; and (iii) we
are owned or substantively controlled by foreigners.  However, we
cannot be certain that the relevant PRC government agencies, including the CSRC,
would reach the same conclusion, and we still cannot rule out the possibility
that CSRC may deem that the transactions effected by the share exchange
circumvented the new M&A rules, the PRC Securities Law and other rules and
notices.




If the
CSRC or another PRC regulatory agency subsequently determines that the CSRC’s
approval is required for the transaction, we may face sanctions by the CSRC or
another PRC regulatory agency. If this happens, these regulatory agencies may
impose fines and penalties on our operations in the PRC, limit our operating
privileges in the PRC, delay or restrict the repatriation of the proceeds from
this offering into the PRC, restrict or prohibit payment or remittance of
dividends to us or take other actions that could have a material adverse effect
on our business, financial condition, results of operations, reputation and
prospects, as well as the trading price of our shares. The CSRC or other PRC
regulatory agencies may also take actions requiring us, or making it advisable
for us, to delay or cancel the transaction.




The
M&A Rules, along with foreign exchange regulations discussed in the above
subsection, will be interpreted or implemented by the relevant government
authorities in connection with our future offshore financings or acquisitions,
and we cannot predict how they will affect our acquisition strategy. For
example, our operating companies’ ability to remit dividends to us, or to engage
in foreign-currency-denominated borrowings, may be conditioned upon compliance
with the SAFE registration requirements by such Chinese domestic residents, over
whom we may have no control. In addition, such Chinese domestic residents may be
unable to complete the necessary approval and registration procedures required
by the SAFE regulations. Such uncertainties may restrict our ability to
implement our acquisition strategy and adversely affect our business and
prospects.




The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.




China
only recently has permitted provincial and local economic autonomy and private
economic activities, and, as a result, we are dependent on our relationship with
the local government in the province in which we operate our
business.  Chinese government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership.  Our ability to operate in China may
be harmed by changes in its laws and regulations, including those relating to
taxation, environmental regulations, land use rights, property and other
matters.  We believe that our operations in China are in material
compliance with all applicable legal and regulatory
requirements.  However, the central or local governments of these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations.  Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to
return to a more centrally planned economy or regional or local variations in
the implementation of economic policies, could have a significant effect on
economic conditions in China or particular regions thereof, and could require us
to divest ourselves of any interest we then hold in Chinese
properties.




34




Future
inflation in China may inhibit our activity to conduct business in
China.




In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation.  These factors have led to the adoption by Chinese
government, from time to time, of various corrective measures designed to
restrict the availability of credit or regulate growth and contain
inflation.  High inflation may in the future cause Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in China, and thereby harm the market for our
products.




We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.




We may
have difficulty in hiring and retaining a sufficient number of qualified
employees to work in the PRC.  As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards. We may have difficulty establishing adequate management, legal and
financial controls in the PRC.




You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us and our management.




We
conduct substantially all of our operations in China and substantially all of
our assets are located in China. In addition, some of our directors and
executive officers reside within China. As a result, it may not be possible to
effect service of process within the United States or elsewhere outside China
upon some of our directors and senior executive officers, including with respect
to matters arising under U.S. federal securities laws or applicable state
securities laws. It would also be difficult for investors to bring an original
lawsuit against us or our directors or executive officers before a Chinese court
based on U.S. federal securities laws or otherwise. Moreover, China does not
have treaties with the United States or many other countries providing for the
reciprocal recognition and enforcement of judgment of courts.




New
PRC enterprise income tax law could adversely affect our business and our net
income.




On March
16, 2007, the National People’s Congress of the PRC passed the new Enterprise
Income Tax Law (or EIT Law), which took effect on of January 1, 2008. The new
EIT Law imposes a unified income tax rate of 25.0% on all companies established
in China. Under the EIT Law, an enterprise established outside of the PRC with
“de facto management bodies” within the PRC is considered as a resident
enterprise and will normally be subject to the enterprise income tax at the rate
of 25.0% on its global income. The new EIT Law, however, does not define the
term “de facto management bodies.” If the PRC tax authorities subsequently
determine that we should be classified as a resident enterprise, then our global
income will be subject to PRC income tax at a tax rate of 25.0%.




With the
introduction of the EIT Law, China has resumed imposition of a withholding tax
(10.0% in the absence of a bilateral tax treaty or new domestic regulation
reducing such withholding tax rate to a lower rate).  Per the Double
Tax Avoidance Arrangement between Hong Kong and Mainland China, a Hong Kong
company as the investor, which is considered a “non-resident enterprise” under
the EIT Law, may enjoy the reduced withholding tax rate of 5% if it holds more
than 25% equity interest in its PRC subsidiary.  As China Net HK is
the sole shareholder of Rise King WFOE, substantially all of our income will
derive from dividends we receive from Rise King WFOE through China Net
HK.  When we declare dividends from the income in the PRC, we can not
assure whether such dividends may be taxed at a reduced withholding tax rate of
5% per the Double Tax Avoidance Arrangement between Hong Kong and Mainland China
as the PRC tax authorities may regard our China Net HK as a shell company formed
only for tax purposes and still deem Rise King WFOE in the PRC as the subsidiary
directly owned by us. Based on the Notice on Certain Issues with respect to the
Enforcement of Dividend Provisions in Tax Treaties, issued on February 20, 2009
by the State Administration of Taxation, if the relevant PRC tax authorities
determine, in their discretion, that a company benefits from such reduced income
tax rate due to a structure or arrangement that is primarily tax-driven, such
PRC tax authorities may adjust the preferential tax treatment.




35




Investors
should note that the new EIT Law provides only a framework of the enterprise tax
provisions, leaving many details on the definitions of numerous terms as well as
the interpretation and specific applications of various provisions unclear and
unspecified.  Any increase in our tax rate in the future could have a
material adverse effect on our financial conditions and results of
operations.




Under
the new EIT Law, we may be classified as a “resident enterprise” of China. Such
classification will likely result in unfavorable tax consequences to us and
holders of our securities.




Under the
new EIT Law, an enterprise established outside of China with its “de facto
management body” in China is considered a “resident enterprise,” meaning that it
can be treated the same as a Chinese enterprise for enterprise income tax
purposes. The implementing rules of the new EIT Law defines “de facto management
body” as an organization that exercises “substantial and overall management and
control over the production and operations, personnel, accounting, and
properties” of an enterprise. Currently no interpretation or application of the
new EIT Law and its implementing rules is available, therefore it is unclear how
tax authorities will determine tax residency based on the facts of each
case.




If the
PRC tax authorities determine that China Net is a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences
could follow. First, we will be subject to enterprise income tax at a rate of
25% on our worldwide income as well as PRC enterprise income tax reporting
obligations. This would mean that income such as interest on offering proceeds
and other non-China source income would be subject to PRC enterprise income tax
at a rate of 25%. Second, although under the new EIT Law and its implementing
rules dividends paid to us by our PRC subsidiaries would qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to a 10%
withholding tax, as the PRC foreign exchange control authorities, which enforce
the withholding tax, have not yet issued guidance with respect to the processing
of outbound remittances to entities that are treated as resident enterprises for
PRC enterprise income tax purposes. Finally, a 10% withholding tax will be
imposed on dividends we pay to our non-PRC shareholders.




Our
Chinese operating companies are obligated to withhold and pay PRC individual
income tax in respect of the salaries and other income received by their
employees who are subject to PRC individual income tax. If they fail to withhold
or pay such individual income tax in accordance with applicable PRC regulations,
they may be subject to certain sanctions and other penalties, which could have a
material adverse impact on our business.




Under PRC
laws, Rise King WFOE and the PRC Operating Subsidiaries will be obligated to
withhold and pay individual income tax in respect of the salaries and other
income received by their employees who are subject to PRC individual income tax.
Such companies may be subject to certain sanctions and other liabilities under
PRC laws in case of failure to withhold and pay individual income taxes for its
employees in accordance with the applicable laws.




In
addition, the SAT has issued several circulars concerning employee stock
options. Under these circulars, employees working in the PRC (which could
include both PRC employees and expatriate employees subject to PRC individual
income tax) are required to pay PRC individual income tax in respect of their
income derived from exercising or otherwise disposing of their stock options.
Our PRC entities will be obligated to file documents related to employee stock
options with relevant tax authorities and withhold and pay individual income
taxes for those employees who exercise their stock options. While tax
authorities may advise us that our policy is compliant, they may change their
policy, and we could be subject to sanctions.




36




Because
Chinese laws will govern almost all of our business’ material agreements, we may
not be able to enforce our rights within the PRC or elsewhere, which could
result in a significant loss of business, business opportunities or
capital.




The
Chinese legal system is similar to a civil law system based on written statutes.
Unlike common law systems, it is a system in which decided legal cases have
little precedential value. Although legislation in the PRC over the past 25
years has significantly improved the protection afforded to various forms of
foreign investment and contractual arrangements in the PRC, these laws,
regulations and legal requirements are relatively new. Due to the limited volume
of published judicial decisions, their non-binding nature, the short history
since their enactments, the discrete understanding of the judges or government
agencies of the same legal provision, inconsistent professional abilities of the
judicators, and the inclination to protect local interest in the court rooms,
interpretation and enforcement of PRC laws and regulations involve
uncertainties, which could limit the legal protection available to us, and
foreign investors, including you. The inability to enforce or obtain a remedy
under any of our future agreements could result in a significant loss of
business, business opportunities or capital and could have a material adverse
impact on our business, prospects, financial condition, and results of
operations. In addition, the PRC legal system is based in part on government
policies and internal rules (some of which are not published on a timely basis
or at all) that may have a retroactive effect. As a result, we may not be aware
of our violation of these policies and rules until some time after the
violation. In addition, any litigation in the PRC, regardless of outcome, may be
protracted and result in substantial costs and diversion of resources and
management attention.




Risks
Related to our Securities




Insiders
have substantial control over us, and they could delay or prevent a change in
our corporate control even if our other stockholders wanted it to
occur.




Our
executive officers, directors, and principal stockholders hold approximately
80%
of our outstanding Common Stock.  Accordingly, these stockholders are
able to control all matters requiring stockholder approval, including the
election of directors and approval of significant corporate
transactions.  This could delay or prevent an outside party from
acquiring or merging with us even if our other stockholders wanted it to
occur.






There
may not be sufficient liquidity in the market for our securities in order for
investors to sell their securities.




There is
currently only a limited public market for our Common Stock and there can be no
assurance that a trading market will develop further or be maintained in the
future.  As of March 30, 2010, the closing trade price of
our Common Stock was $ 4.84 per share.  As of March 30, 2010, we had
approximately       shareholders of
record of our Common Stock, not including shares held in street
name.  In addition, during the past two years our Common Stock has had
a trading range with a low price of $1.00 per share and a high price of $5.90
per share.





The market price of our Common Stock
may be volatile.




The
market price of our Common Stock has been and will likely continue to be highly
volatile, as is the stock market in general. Some of the factors that may
materially affect the market price of our Common Stock are beyond our control,
such as changes in financial estimates by industry and securities analysts,
conditions or trends in the industry in which we operate or sales of our common
stock. These factors may materially adversely affect the market price of our
Common Stock, regardless of our performance. In addition, the public stock
markets have experienced extreme price and trading volume volatility. This
volatility has significantly affected the market prices of securities of many
companies for reasons frequently unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of our Common Stock.




Because
the Company became public by means of a reverse merger, it may not be able to
attract the attention of major brokerage firms.




Additional
risks may exist since the Company became public through a “reverse
merger.”  Securities analysts of major brokerage firms may not provide
coverage of the Company since there is little incentive to brokerage firms to
recommend the purchase of its Common Stock.  No assurance can be given
that brokerage firms will want to conduct any secondary offerings on behalf of
the Company in the future.




37





The
outstanding warrants may adversely affect us in the future and cause dilution to
existing stockholders.




We
currently have warrants outstanding to purchase up to 4,781,056 shares of our
Common Stock. These warrants have a term ranging from three years to five years
and exercise price ranges from $2.50 to $3.75 per share, subject to adjustment
in certain circumstances. Exercise of the warrants may cause dilution in the
interests of other stockholders as a result of the additional Common Stock that
would be issued upon exercise. In addition, sales of the shares of our Common
Stock issuable upon exercise of the warrants could have a depressive effect on
the price of our stock, particularly if there is not a coinciding increase in
demand by purchasers of our Common Stock. Further, the terms on which we may
obtain additional financing during the period any of the warrants remain
outstanding may be adversely affected by the existence of these warrants as
well.




We
may need additional capital and may sell additional securities or other equity
securities or incur indebtedness, which could result in additional dilution to
our shareholders or increase our debt service obligations.




We may require additional cash
resources due to changed business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. If our cash
resources are insufficient to satisfy our cash requirements, we may seek to sell
additional equity or debt securities or obtain a credit facility. The sale of
additional equity securities or equity-linked debt securities could result in
additional dilution to our shareholders. The incurrence of indebtedness would
result in increased debt service obligations and could result in operating and
financing covenants that would restrict our operations. We cannot assure you
that financing will be available in amounts or on terms acceptable to us, if at
all.





We
have not paid dividends in the past and do not expect to pay dividends in the
future, and any return on investment may be limited to the value of our
stock.




We have
never paid any cash dividends on our Common Stock and do not anticipate paying
any cash dividends on our common stock in the foreseeable future and any return
on investment may be limited to the value of our stock.  We plan to
retain any future earning to finance growth.




The
NYSE Amex may delist our securities from quotation on its exchange which could
limit investors’ ability to make transactions in our securities and subject us
to additional trading restrictions.




Our Common Stock is traded on the NYSE
Amex, a national securities exchange. We cannot assure you that our securities
will meet the continued listing requirements be listed on the NYSE Amex in the
future.




If the
NYSE Amex delists our Common Stock from trading on its exchange, we could face
significant material adverse consequences including:




·
            a
      limited availability of market quotations for our
    securities;




·
            a
      determination that our Common Stock is a “penny stock” which will require
      brokers trading in our Common Stock to adhere to more stringent rules and
      possibly resulting in a reduced level of trading activity in the secondary
      trading market for our Common
Stock;




·
            a
      limited amount of news and analyst coverage for our company;
      and




·
            a
      decreased ability to issue additional securities or obtain additional
      financing in the future.




Our
Common Stock is considered “penny stock.”




The SEC has adopted regulations which
generally define “penny stock” to be an equity security that has a market price
of less than $5.00 per share, subject to specific exemptions.  The
market price of our Common Stock is currently less than $5.00 per share and
therefore may be a “penny stock.”  Brokers and dealers effecting
transactions in “penny stock” must disclose certain information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the
securities.  These rules may restrict the ability of brokers or
dealers to sell the Common Stock and may affect your ability to sell
shares.




38




ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS


None.




ITEM
      2.
            PROPERTIES





The
following table summaries the location of real property we lease.  We
do not own any real property.





Item
            
            Address
            
            Leased/Owned1
            
            No.
      3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian District,
      Beijing, PRC, 1 st
      Floor
            
            Leased2
            
            No.
      3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian District,
      Beijing, PRC, 2 nd
      Floor
            
            Leased3
            
            No.
      3 Min, Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian District,
      Beijing, PRC, Basement
            
            Leased




We
believe that our existing facilities and equipment are well maintained and in
good operating condition, and are sufficient to meet our needs for the
foreseeable future.




ITEM
      3.
            LEGAL
      PROCEEDINGS









ITEM
      4.
            REMOVED
      AND RESERVED




PART
II




ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES


Our
common stock has been listed on the NYSE AMEX under the trading symbol “CNET”
since March 4, 2010.  Prior to that time our common stock was quoted
on the OTC Bulletin Board (“ OTCBB ”) under the
trading symbol “EMZG, ” until August 14, 2009, when our ticker symbol was change
to “CHNT.” The last reported price for our common stock on the NYSE AMEX on
March 30, 2010 was  $4.84 per share.




39




The
following table shows the high and low bid quotations for our common stock
reported by the OTCBB during 2008 and 2009, and the high and low closing sale
prices for our common stock for the first quarter of 2010. The OTCBB quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.





Year
            
            Period
            
            High
            
            
            Low2008
            
            First
      Quarter
            
            $
            1.00
            
            
            $
            1.00Second
      Quarter
            
            $
            1.00
            
            
            $
            1.00Third
      Quarter
            
            $
            1.00
            
            
            $
            1.00Fourth
      Quarter
            
            $
            1.00
            
            
            $
            1.002009
            
            First
      Quarter
            
            $
            0.25
            
            
            $
            0.25Second
      Quarter
            
            $
            2.50
            
            
            $
            1.65Third Quarter
            
            $
            4.50
            
            
            $
            1.75Fourth
      Quarter
            
            $
            5.90
            
            
            $
            3.752010
            
            First
      Quarter (through March 30, 2010)
            
            $
            7.00
            
            
            $
            3.75




Holders




As
of March 29, 2010, there were approximately 468
record holders of our common stock.




Dividends




We have
never paid any dividends and we plan to retain earnings, if any, for use in the
development of the business. Payment of future dividends, if any, will be at the
discretion of the board of directors after taking into account various factors,
including current financial condition, operating results and current and
anticipated cash needs. If we ever determine to pay a dividend, we may
experience difficulties in completing the administrative procedures necessary to
obtain and remit foreign currency from China for the payment of such dividends
from the profits of the PRC Operating Subsidiaries. We have not paid any cash
dividends on shares of our common stock and do not plan to do so in the near
future. We currently plan to retain future earnings to fund the development and
growth of our business. Any future determination related to our dividend policy
will be made at the discretion of our board of directors.




Securities
Authorized for Issuance Under Equity Compensation Plans




See “Item
11. Executive Compensation” for the aggregate information regarding our equity
compensation plans in effect on December 31, 2009.




Equity
Repurchases





During
the fourth quarter of our fiscal year ended December 31, 2009, neither we nor
any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange
Act) purchased any shares of our common stock, the only class of our equity
securities registered pursuant to Section 12 of the Exchange Act.




Recent
Sales of Unregistered Securities




Any
previous sales of unregistered securities by the Company have been previously
disclosed in our reports on Form 10-Q or Form 8-K, as applicable, filed with the
SEC.




ITEM
      6.
            SELECTED
      FINANCIAL DATA




As a
smaller reporting company, we are not required to include disclosure under this
Item.




40




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




Forward-Looking
Statements




You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our audited consolidated financial
statements and the related notes to the consolidated financial statements
included elsewhere in this Form 10-K. Our audited consolidated financial
statements have been prepared in accordance with U.S. GAAP. In addition, our
audited consolidated financial statements and the financial data included in
this Form 10-K reflect our reorganization and have been prepared as if our
current corporate structure had been in place throughout the relevant periods.
The following discussion and analysis contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, without
limitation, statements regarding our expectations, beliefs, intentions or future
strategies that are signified by the words “expect,” “anticipate,” “intend,”
“believe,” or similar language. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Our business
and financial performance are subject to substantial risks and
uncertainties. Actual results could differ materially from those projected
in the forward-looking statements. In evaluating our business, you should
carefully consider the information set forth under the heading “Risk Factors”
and elsewhere in this Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements.




Overview




Our
company (formerly known as Emazing Interactive, Inc.) was incorporated in the
State of Texas in April 2006 and re-domiciled to become a Nevada corporation in
October 2006. From the date of our company’s incorporation until June 26, 2009,
when our company consummated the Share Exchange (as defined below), our
company’s activities were primarily concentrated in web server access and
company branding in hosting web based e-games.




On June
26, 2009, our company entered into a Share Exchange Agreement (the “Exchange
Agreement”), with (i) China Net Online Media Group Limited, a company organized
under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s
shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”),
Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King
Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star
(China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus
Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear
Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together
with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI
Shareholders”), who together owned shares constituting 100% of the issued and
outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and
(iii) G. Edward Hancock, our principal stockholder at such time. Pursuant
to the terms of the Exchange Agreement, the China Net BVI Shareholders
transferred to us  all of the China Net BVI Shares in exchange for the
issuance of 13,790,800 shares (the “Exchange Shares”) of our common stock (the
“Share Exchange”). As a result of the Share Exchange, China Net BVI became our
wholly owned subsidiary and we are now a holding company which, through certain
contractual arrangements with operating companies in the People’s Republic of
China (the “PRC”), is engaged in providing advertising, marketing and
communication services to small and medium companies in China.




Our
wholly owned subsidiary, China Net BVI, was incorporated in the British Virgin
Islands on August 13, 2007. In April 11, 2008, China Net BVI became the parent
holding company of a group of companies comprised of CNET Online Technology
Limited, a Hong Kong company (“China Net HK”), which established and is the
parent company of Rise King Century Technology Development (Beijing) Co., Ltd.,
a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise King
WFOE”). We refer to the transactions that resulted in China Net BVI becoming an
indirect parent company of Rise King WFOE as the “Offshore Restructuring.”
Through a series of contractual agreements, we operate our business in China
primarily through Business Opportunity Online (Beijing) Network Technology Co.,
Ltd. (“Business Opportunity Online”), Beijing CNET Online Advertising Co., Ltd.
(“Beijing CNET Online”). Beijing CNET Online owns 51% of Shanghai Borongdingsi
Computer Technology Co., Ltd. (“Shanghai Borongdingsi”). Business Opportunity
Online, Beijing CNET Online and Shanghai Borongdingsi, were incorporated on
December 8, 2004, January 27, 2003 and August 3, 2005, respectively. From time
to time, we refer to them collectively as the “PRC Operating
Entities.”




41




Through
our PRC Operating Entities, we are now one of China’s leading full-service media
development and advertising platform for the small and medium enterprise (the
“SME”) market.  We are a service oriented business that leverages
proprietary advertising technology to prepare and publish rich media enabled
advertising campaigns for clients on the internet and on television. Our goal is
to strengthen our position as the leading diversified media advertising provider
in China.  Our multi-platform advertising network consists of
www.28.com, our internet advertising portal; our TV production and advertising
unit, and our newly launched bank kiosk advertising unit, which is primarily
used as an advertising platform for clients in the financial services
industry.  Using proprietary technology, we provide additional
services as a lead generator.  We are also a re-seller of internet and
television advertising space that we purchase in large volumes from other
well-known internet portals. We launched a new service in August 2009, which is
known as “Internet Information Management” service. This product is an
intelligence software that is based on our proprietary search engine
optimization technology which helps our clients gain an early warning in order
to identify and respond to potential negative exposure on the
internet.




Basis
of presentation, critical accounting policies and management
estimates




·
            Change
      of reporting entity and basis of
presentation




As a
result of the Share Exchange on June 26, 2009, the former China Net BVI
shareholders own a majority of our common stock.  The transaction was
regarded as a reverse merger whereby China Net BVI was considered to be the
accounting acquirer as its shareholders retained control of our company after
the Share Exchange, although we are the legal parent company.  The share
exchange was treated as a recapitalization of our company.  As such, China
Net BVI (and its historical financial statements) is the continuing entity for
financial reporting purposes. Pursuant to the terms of the Share Exchange,
Emazing Interactive, Inc. was delivered with zero assets and zero liabilities at
time of closing. Following the Share Exchange, we changed our name from Emazing
Interactive, Inc. to ChinaNet Online Holdings, Inc. Our financial statements
have been prepared as if China Net BVI had always been the reporting company and
then on the share exchange date, had changed its name and reorganized its
capital stock.




·
            Critical
      accounting policies and management
estimates




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and include the accounts of the Company, and its subsidiaries and
Variable Interest Entities (“VIEs”).  We prepare our financial
statements in conformity with US GAAP, which requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenues and expenses during the
financial reporting period. We continually evaluate these estimates and
assumptions based on the most recently available information, our own historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Since the use of estimates is an integral component of
the financial reporting process, actual results could differ from those
estimates. Some of our accounting policies require higher degrees of judgment
than others in their application. We consider the policies discussed below to be
critical to an understanding of our financial statements.




FASB
Establishes Accounting Standards Codification TM




In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.




42




Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.




The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification or ASC is effective for interim and
annual periods ending after September 15, 2009.  The principal impact
on our financial statements for adopting the Codification is limited to
disclosures as all future references to authoritative accounting literature will
be referenced in accordance with the Codification.  In order to ease
the transition to the Codification, we are providing the standards issued and
adopted prior to the adoption of the Codification cross-reference alongside
references to the Codification.





Foreign
currency translation




Our
functional currency is United States dollars (“US$”), and the functional
currency of China Net HK is Hong Kong dollars (“HK$”).  The functional
currency of our PRC operating entities is Renminbi (“RMB’), and PRC is the
primary economic environment in which we operate.




For
financial reporting purposes, the financial statements of our PRC operating
entities, which are prepared using the RMB, are translated into our reporting
currency, the United States Dollar (“U.S. dollar”). Assets and liabilities are
translated using the exchange rate at each balance sheet
date.  Revenue and expenses are translated using average rates
prevailing during each reporting period, and shareholders' equity is translated
at historical exchange rates. Adjustments resulting from the translation are
recorded as a separate component of accumulated other comprehensive income in
shareholders’ equity.




Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions.  The resulting exchange differences are included in the
determination of net income of the consolidated financial statements for the
respective periods.




The
exchange rates used to translate amounts in RMB into US$ for the purposes of
preparing the consolidated financial statements are as follows:





2009
            
            
            2008Balance
      sheet items, except for equity accounts
            
            
            6.8372
            
            
            
            6.8542Items
      in the statements of income and comprehensiveincome,
      and statements cash flows
            
            
            6.8409
            
            
            
            6.9623




(a)
            No representation is made that
      the RMB amounts could have been, or could be converted into US$ at the
      above rates.





Revenue
recognition




Our
revenue recognition policies are in compliance with ASC Topic 605 (Staff
Accounting Bulletin No. 104, “Revenue Recognition”). In accordance with ASC
Topic 605, revenues are recognized when the four of the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) the
service has been rendered, (iii) the fees are fixed or determinable, and
(iv) collectability is reasonably assured.




43




Sales




Sales
include revenues from reselling of advertising time purchased from TV stations
and internet advertising, reselling of internet advertising spaces and other
advertisement related resources. No revenue from advertising-for-advertising
barter transactions was recognized because the transactions did not meet the
criteria for recognition in ASC Topic 605, subtopic 20 (formerly Emerging Issues
Task Force (“EITF”) abstract issue No. 99-17”).  Advertising contracts
establish the fixed price and advertising services to be
provided.  Pursuant to advertising contracts, we provides
advertisement placements in different formats, including but not limited to
banners, links, logos, buttons, rich media and content integration. Revenue is
recognized ratably over the period the advertising is provided and, as such, we
consider the services to have been delivered.  We treat all elements
of advertising contracts as a single unit of accounting for revenue recognition
purposes.  Based upon our credit assessments of its customers prior to
entering into contracts, we determine if collectability is reasonably
assured.  In situations where collectability is not deemed to be
reasonably assured, we recognizes revenue upon receipt of cash from customers,
only after services have been provided and all other criteria for revenue
recognition have been met.





Taxation





1.
            Income
      tax




We adopt
ASC Topic 740 (formerly SFAS No. 109, “Accounting for income taxes”) and uses
liability method to accounts for income taxes.  Under this method,
deferred tax assets and liabilities are determined based on the difference
between of the financial reporting and tax bases of assets and liabilities using
enacted tax rates that will be in effect in the period in which the differences
are expected to reverse. We record a valuation allowance to offset deferred tax
assets if based on the weight of available evidence; it is more-likely-than-not
that some portion, or all, of the deferred tax assets will not be realized. The
effect on deferred taxes of a change in tax rates is recognized in income
statement in the period that includes the enactment date. We had no deferred tax
assets and liabilities recognized for the year ended December 31, 2009 and
2008.




We adopt
ASC Topic 740-10-25-5 through 740-10-25-7 and 740-10-25-13, (formerly
FASB Interpretation No. 48 (“FIN 48”) “Accounting for Uncertainty in
Income Taxes”), which 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. This Interpretation also provides guidance on recognition
of income tax assets and liabilities, classification of current and deferred
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods,
and income tax disclosures.  For the year ended December 31, 2009 and 2008,
we did not have any interest and penalties associated with tax positions and did
not have any significant unrecognized uncertain tax positions.




i). We
are incorporated in the State of Nevada.  Under the current law of
Nevada we are not subject to state corporate income tax.  We became a
holding company and do not conduct any substantial operations of our own after
the Share Exchange. No provision for federal corporate income tax has been made
in our financial statements as no assessable profits for the year ended December
31, 2009 or prior periods.




ii).
China Net BVI was incorporated in the British Virgin Islands
(“BVI”).  Under the current law of the BVI, we are not subject to tax
on income or capital gains.  Additionally, upon payments of dividends
by China Net BVI to us, no BVI withholding tax will be imposed.




iii).
China Net HK was incorporated in Hong Kong and does not conduct any substantial
operations of its own. No provision for Hong Kong profits tax have been made in
our financial statements as no assessable profits for the year ended December
31, 2009. Additionally, upon payments of dividends by China Net HK to its sole
shareholder, China Net BVI, no Hong Kong withholding tax will be
imposed.




44




iv).  Our
PRC operating entities, being incorporated in the PRC, are governed by the
income tax law of the PRC and are subject to PRC enterprise income tax
(“EIT”).  Effective from January 1, 2008, the EIT rate of PRC was
changed from 33% of to 25%, and applies to both domestic and foreign invested
enterprises.




·
            Rise
      King WFOE is a software company qualified by the related PRC governmental
      authorities and was entitled to a two-year EIT exemption from its first
      profitable year and a 50% reduction of its applicable EIT rate, which is
      25% of its taxable income for the exceeding three years.  Rise
      King WFOE had a net loss for the year ended December 31, 2008 and its
      first profitable year is fiscal year 2009 which has been verified by the
      local tax bureau by accepting the application filed by
      us.  Therefore, it was entitled to a two-year EIT exemption for
      fiscal year 2009 through fiscal year 2010 and a 50% reduction of its
      applicable EIT rate which is 25% for fiscal year 2011 through fiscal year
      2013.




·
            Business
      Opportunity Online was qualified as a High and New Technology Enterprise
      in Beijing High-Tech Zone in 2005 and was entitled to a three-year EIT
      exemption for fiscal year 2005 through fiscal year 2007 and a 50%
      reduction of its applicable EIT rate for the exceeding three years for
      fiscal year 2008 through fiscal year 2010.  However, in March
      2007, a new enterprise income tax law (the “New EIT”) in the PRC was
      enacted which was effective on January 1, 2008. Subsequently, on
      April 14, 2008, relevant governmental regulatory authorities released
      new qualification criteria, application procedures and assessment
      processes for “High and New Technology Enterprise” status under the New
      EIT which would entitle the re-qualified and approved entities to a
      favorable statutory tax rate of 15%.  Business Opportunity
      Online did not obtained the approval of its reassessment of the
      qualification as a “High and New Technology Enterprise” under the New EIT
      law as of December 31, 2008, therefore, its income tax was computed using
      the income tax rate of 25% for the year ended December 31,
      2008.




With an
effective date of September 4, 2009, Business Opportunity Online obtained the
approval of its reassessment of the qualification as a “High and New Technology
Enterprise” under the New EIT law and was entitled to a favorable statutory tax
rate of 15%.  Under the previous EIT laws and regulations, High and
New Technology Enterprises enjoyed a favorable tax rate of 15% and were exempted
from income tax for three years beginning with their first year of operations,
and were entitled to a 50% tax reduction to 7.5% for the subsequent three years
and 15% thereafter. The current EIT Law provides grandfathering treatment for
enterprises that were (1) qualified as High and New Technology Enterprises
under the previous EIT laws, and (2) established before March 16,
2007, if they continue to meet the criteria for High and New Technology
Enterprises under the current EIT Law. The grandfathering provision allows
Business Opportunity Online to continue enjoying their unexpired tax holidays
provided by the previous EIT laws and regulations. Therefore, its income tax was
computed using a tax rate of 7.5% for the year ended December 31, 2009 due to
its unexpired tax holidays for fiscal year 2009 through fiscal year
2010.




·
            The
      applicable income tax rate for Beijing CNET Online was 25% for the year
      ended December 31, 2009 and 2008.





·
            The
      New EIT also imposed a 10% withholding income tax for dividends
      distributed by a foreign invested enterprise to its immediate holding
      company outside China, which were exempted under the previous enterprise
      income tax law and rules.  A lower withholding tax rate will be
      applied if there is a tax treaty arrangement between mainland China and
      the jurisdiction of the foreign holding company. Holding companies in Hong
      Kong, for example, will be subject to a 5% rate.  Rise King WFOE
      is owned by an intermediate holding company in Hong Kong and will be
      entitled to the 5% preferential withholding tax rate upon distribution of
      the dividends to this intermediate holding
  company.





2.
            Business
      tax and relevant surcharges




Revenue
of advertisement services are subject to 5.5% business tax and 3% cultural
industry development surcharge of the net service income after deducting amount
paid to ending media promulgators. Revenue of internet technical support
services is subjected to 5.5% business tax.  Business tax charged was
included in cost of sales.





3.
            Value
      added tax




As a
small-scale value added tax payer, revenue from sales of self-development
software of Rise King WFOE is subject to 3% value added tax.


45




Warrant
liabilities




On August
21, 2009 (the “Closing Date”), we entered into a securities purchase agreement
(the “Purchase Agreement”), with several investors, including institutional,
accredited and non-US persons and entities (the “Investors”), pursuant to which
we sold units, comprised of 10% Series A Convertible Preferred Stock, par value
US$0.001 per share (the “Series A preferred stock”), and two series of warrants,
for a purchase price of US$2.50 per unit (the “August 2009
Financing”).  We sold 4,121,600 units in the aggregate, which included
(i) 4,121,600 shares of Series A preferred stock, (ii) Series A-1 Warrants to
purchase 2,060,800 shares of common stock at an exercise price of US$3.00 per
share with a three-year term, and (iii) Series A-2 Warrants to purchase
2,060,800 shares of common stock at an exercise price of US$3.75 with a
five-year term.  Net proceeds were approximately US$9,162,000, net of
issuance costs of approximately US$1,142,000.  TriPoint Global
Equities, LLC acted as placement agent and received (i) a placement fee in the
amount equal to 8% of the gross proceeds and (ii) warrants to purchase up to
329,728 shares of common stock at an exercise price of US$2.50, 164,864 shares
at an exercise price of US$3.00 and 164,864 shares at an exercise price of
US$3.75 respectively, with a five-year term (“Placement Agent Warrants” and
together with the Series A-1 Warrants and Series A-2 Warrants, the
“Warrants”).




The
Warrants have an initial exercise price which is subject to adjustments in
certain circumstances for stock splits, combinations, dividends and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents.  The Warrants may not be exercised if it
would result in the holder beneficially owning more than 9.99% of our
outstanding common shares. That limitation may be waived by the holders of the
warrants by sending a written notice to us not less than 61 days prior to the
date that they would like to waive the limitation.




Accounting for
warrants




We
analyzed the Warrants in accordance to ASC Topic 815 “Derivatives and Hedging”
(formerly SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities”) to determine whether the Warrants meet the definition of a
derivative under ASC Topic 815 and if so, whether the Warrants meet the scope
exception of ASC Topic 815, which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of ASC Topic 815.  We adopted the provisions of ASC Topic 815
subtopic 40 (formerly Emerging Issues Task Force (“EITF”) Issue No. 07-5,
“Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock”), which applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
ASC Topic 815 and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock.  As a result of adopting ASC
Topic 815 subtopic 40, we concluded that the Warrants issued in the August 2009
financing should be treated as a derivative liability, because the Warrants are
entitled to a price adjustment provision to allow the exercise price to be
reduced, in the event we will issue or sell any additional shares of common
stock at a price per share less than the then-applicable exercise price or
without consideration, which is typically referred to as a “Down-round
protection” or “anti-dilution” provision.  According to ASC Topic 815
subtopic 40, the “Down-round protection” provision is not considered to be an
input to the fair value of a fixed-for-fixed option on equity shares which leads
the Warrants fail to be qualified as indexed to our own stock and then to fail
to meet the scope exceptions of ASC Topic 815. Therefore, we accounted for the
Warrants as derivative liabilities under ASC Topic 815.  Pursuant to
ASC Topic 815, derivatives should be measured at fair value and re-measured at
fair value with changes in fair value recorded in earnings at each reporting
period.




Fair value of the
warrants




Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. We estimated the fair value of the Warrants and Series
A preferred stock using various pricing models and available information that we
deems most relevant. Among the factors considered in determining the fair value
of financial instruments are discounted anticipated cash flows, the cost, terms
and liquidity of the instrument, the financial condition, operating results and
credit ratings of the issuer or underlying company, the quoted market price of
similar traded securities, and other factors generally pertinent to the
valuation of financial instruments.




46




Placement agent
warrants




In
accordance with Staff Accounting Bulletin Topic 5.A: “Miscellaneous
Accounting-Expenses of Offering” (“ASC Topic 340 subtopic 10 section
S99-1”),   “specific incremental costs directly attributable to a
proposed or actual offering of securities may properly be deferred and charged
against the gross proceeds of the offering.”  In accordance with the
SEC accounting and reporting manual “cost of issuing equity securities are
charged directly to equity as deduction of the fair value assigned to share
issued.”  Accordingly, we concluded that the warrants issued to the
placement agents are directly attributable to the August 2009
financing.  If we had not issued the warrants to the placement agent,
we would have had to pay the same amount of cash as the fair
value.  Therefore, we deducted the total fair value of the Placement
agent warrants as of the Commitment Date as a deduction of the fair value
assigned to the Series A preferred stock.




Since
they contain the same terms as the Series A-1 and Series A-2 Warrants, the
Placement Agent Warrants are also entitled to the benefit of the “Down-round
protection” provision, which means that the Placement Agent Warrant will also
need to be accounted for as a derivative under SFAS 133 (“ASC Topic 815”) with
changes in fair value recorded in earnings at each reporting
period.





Series
A preferred stock




Key terms
of the Series A preferred stock sold by us in the August 2009 financing are
summarized as follows:




Dividends




Dividends
on the Series A preferred stock shall accrue and be cumulative from and after
the issuance date.  For each outstanding share of Series A preferred
stock, dividends are payable at the per annum rate of 10% of the Liquidation
Preference Amount of the Series A preferred stock.  Dividends are
payable quarterly within thirty (30) days following the last Business Day of
each August, November, February and May of each year (each, a “Dividend Payment
Date”), and continuing until such stock is fully converted. We shall have the
right, at its sole and exclusive option, to pay all or any portion of each and
every quarterly dividend that is payable on each Dividend Payment Date, either
(i) in cash, or (ii) by issuing to the holder of Series A preferred stock such
number of additional Conversion Shares which, when multiplied by US$2.5 would
equal the amount of such quarterly dividend not paid in cash.




Voting
Rights




The
Series A preferred stock holders are entitled to vote separately as a class on
matters affecting the Series A Preferred Stock and with regard to certain
corporate matters set forth in the Series A Certificate of Designation, so long
as any shares of the Series A preferred stock remain outstanding. Holders of the
Series A Preferred Stock are not, however, entitled to vote on general matters
along with holders of common stock.




Liquidation
Preference




In the
event of the liquidation, dissolution or winding up of the affairs of us,
whether voluntary or involuntary (each, a “Liquidation”), the holders of the
Series A preferred stock then outstanding shall be entitled to receive, out of
the assets of us available for distribution to its stockholders, an amount equal
to US$2.5 per share of the Series A preferred stock, plus any accrued but unpaid
dividends thereon, whether or not declared, together with any other dividends
declared but unpaid thereon, as of the date of Liquidation (collectively, the
“Series A Liquidation Preference Amount”) before any payment shall be made or
any assets distributed to the holders of the common stock or any other junior
stock. If upon the occurrence of Liquidation, the assets thus distributed among
the holders of the Series A shares shall be insufficient to permit the payment
to such holders of the full Series A Preference Amount, then the entire assets
of us legally available for distribution shall be distributed ratably among the
holders of the Series A preferred stock.




47




Conversion
Rights




Voluntary
Conversion:




At any
time on or after the date of the initial issuance of the Series A preferred
stock, the holder of any such shares of Series A preferred stock may, at such
holder’s option, subject to the limitations described below in “Conversion Restriction”,
elect to convert all or portion of the shares of Series A preferred stock held
by such person into a number of fully paid and non-assessable shares of common
stock equal to the quotient of Liquidation preference amount of the Series A
preferred stock divided by the initial conversion price of US$2.5. The initial
conversion price may be adjusted for stock splits and combinations, dividend and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents with lower price or without considerations etc, as
stimulated in the Certification of Designation.




Mandatory
Conversion:




All
outstanding shares of the Series A preferred stock shall automatically convert
into shares of Common Stock, subject to the limitations described below in“Conversion Restriction”, at
the earlier to occur of (i) twenty-four month anniversary of the Closing Date,
and (ii) at such time that the Volume Weighted Average Price of our common stock
is no less than US$5.00 for a period of ten (10) consecutive trading days with
the daily volume of the common stock of at least 50,000 shares per
day.




Conversion
Restriction




Holders
of the Series A preferred stock may not convert the preferred stock to shares of
common stock if the conversion would result in the holder beneficially owning
more than 9.99% of our outstanding shares of common stock. That limitation may
be waived by a holder of the Series A preferred stock by sending a written
notice to us on not less than 61 days prior to the date that they would like to
waive the limitation.




Registration Rights
Agreement




In
connection with the Financing, we entered into a registration rights agreement
(the “RRA”) with the Investors in which we agreed to file a registration
statement (the “Registration Statement”) with the Securities and Exchange
Commission (the “SEC”) to register the shares of common stock underlying the
Series A preferred stock (the “Conversion Shares”) and the Warrants (the
“Warrant Shares”), thirty (30) days after the closing of the
Financing.  We have agreed to use its best efforts to have the
Registration Statement declared effective within 150 calendar days after filing,
or 180 calendar days after filing in the event the Registration Statement is
subject to a “full review” by the SEC.




We are
required to keep the Registration Statement continuously effective under the
Securities Act until such date as is the earlier of the date when all of the
securities covered by that registration statement have been sold or the date on
which such securities may be sold without any restriction pursuant to Rule 144
(the “Financing Effectiveness Period”).  We will pay liquidated
damages of 2% of each holder’s initial investment in the Units sold in the
Financing per month, payable in cash, up to a maximum of 10%, if the
Registration Statement is not filed or declared effective within the foregoing
time periods or ceases to be effective prior to the expiration of the Financing
Effectiveness Period.  However, no liquidated damages shall be paid
with respect to any securities being registered that we are not permitted to
include in the Financing Registration Statement due to the SEC’s application of
Rule 415.




Weevaluated the
contingent obligation related to the RRA liquidated damages in accordance to
“ASC Topic 825 “Financial Instruments” subtopic 20” (formerly Financial
Accounting Standards Board Staff Position No. EITF 00-19-2 “Accounting for
Registration Payment Arrangements”), which required the contingent obligation to
make future payments or otherwise transfer consideration under a registration
payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement be separately recognized
and measured in accordance with “ASC Topic 450” “Contingencies” (formerly SFAS
No. 5, “Accounting for Contingencies”). The shares of common stock underlying
the Series A preferred stock (the “Conversion Shares”) and the Warrants (the
“Warrant Shares”) have been successfully registered.  Therefore, we
concluded that such obligation was not probable to incur and no contingent
obligation related to the RRA liquidated damages needs to be recognized for the
year ended December 31, 2009.




48




Security Escrow
Agreement




We
entered into a securities escrow agreement with the Investors (the “Escrow
Agreement”), pursuant to which Rise King Investment Limited, a British Virgin
Islands company (the “Principal Stockholder”), initially placed 2,558,160 shares
of our common stock (the “Escrow Shares”) into an escrow account.  Of
the Escrow Shares, 1,279,080 shares (equivalent to 50% of the Escrow Shares) are
being held as security for the achievement of audited net income equal to or
greater than $7.7 million for the fiscal year 2009 (the “2009 Performance
Threshold”) and the remaining 1,279,080 of the Escrow Shares are being held as
security for the achievement of audited net income equal to or greater than $14
million for the fiscal year 2010 (the “2010 Performance
Threshold”).




If we
achieve at least 95% of the applicable Performance Threshold, all of the Escrow
Shares for the corresponding fiscal year shall be returned to the Principal
Stockholder. If we achieve less than 95% of the applicable Performance
Threshold, the Investors shall receive in the aggregate, on a pro rata basis
(based upon the number of shares of Series A preferred stock or conversion
shares owned by each such Investor as of the date of distribution of the Escrow
Shares), 63,954 shares of the Escrow Shares for each percentage by which the
applicable Performance Threshold was not achieved up to the total number of
Escrow Shares for the applicable fiscal year.  Any Escrow Shares not
delivered to any investor because such investor no longer holds shares of Series
A preferred stock or conversion shares shall be returned to the Principal
Stockholder.




For the
purposes of the Escrow Agreement, net income is defined in accordance with US
GAAP and reported by us in its audited financial statements for each of the
fiscal years ended 2009 and 2010; provided, however, that net income for each of
fiscal years ended 2009 and 2010 shall be increased by any non-cash charges
incurred (i) as a result of the Financing , including without limitation, as a
result of the issuance and/or conversion of the Series A preferred stock, and
the issuance and/or exercise of the Warrants, (ii) as a result of the release of
the Escrow Shares to the Principal Stockholder and/or the investors, as
applicable, pursuant to the terms of the Escrow Agreement, (iii) as a result of
the issuance of ordinary shares of the Principal Stockholder to Messrs. Handong
Cheng and Xuanfu Liu and Ms. Li Sun (the “PRC Shareholders”), upon the exercise
of options granted to the PRC Shareholders by the Principal Stockholder, (iv) as
a result of the issuance of warrants to any placement agent and its designees in
connection with the Financing, (v) the exercise of any warrants to purchase
common stock outstanding  and (vi) the issuance under any performance
based equity incentive plan that we adopts.




In
accordance to ASC Topic 718 and ASU No. 2010-05—Compensation—Stock Compensation:
Escrowed Share Arrangements and the Presumption of Compensation.  We
evaluated the substance of this arrangement and whether the presumption of
compensation has been overcome. According to the Security Escrow Agreement
signed with our investors, the release of these escrow shares to our Principal
Stockholder will not regard to continue employment, and this arrangement is in
substance an inducement made to facilitate the financing transaction, rather
than as compensatory.  Therefore, we concluded that this arrangement
should be recognized and measured according to its nature and reflects as a
deduction of the proceeds allocated to the newly issued securities with no
compensation expenses recorded in earnings.




49




Fair Value of the Series A
preferred stock:




Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. We estimated the fair value of the Warrants and Series
A preferred stock using various pricing models and available information that
management deems most relevant. Among the factors considered in determining the
fair value of financial instruments are discounted anticipated cash flows, the
cost, terms and liquidity of the instrument, the financial condition, operating
results and credit ratings of the issuer or underlying company, the quoted
market price of similar traded securities, and other factors generally pertinent
to the valuation of financial instruments.




Accounting for the Series A
preferred stock




The
Series A preferred stock has been classified as permanent equity as there was no
redemption provision at the option of the holders that is not within the control
of us on or after an agreed upon date. We evaluated the embedded conversion
feature in its Series A preferred stock to determine if there was an embedded
derivative requiring bifurcation.  We concluded that the embedded
conversion feature of the Series A preferred stock does not required to be
bifurcated because the conversion feature is clearly and closely related to the
host instrument.




Allocation of the proceeds
at commitment date and calculation of beneficial conversion
feature





The
following table summarized the allocation of proceeds to the Series A preferred
stock and the Warrants:





Gross
      proceeds
              Allocated
            
            
            Number
      of
              instruments
            
            
            Allocated
      value per instrumentUS$(’000)
            
            
            
            
            
            US$Series
      A-1 Warrant
            
            
            2,236
            
            
            
            2,060,800
            
            
            
            1.08Series
      A-2 Warrant
            
            
            2,170
            
            
            
            2,060,800
            
            
            
            1.05Series
      A preferred stock
            
            
            5,898
            
            
            
            4,121,600
            
            
            
            1.43Total
            
            
            10,304





In
accordance to the schedule above, the unit price is:
1.08*50%+1.05*50%+1.43 = US$2.5 per unit.




We then
evaluated whether a beneficial conversion feature exists by comparing the
operable conversion price of Series A preferred stock with the fair value of the
common stock at the commitment date.  We concluded that the fair value
of common stock was greater than the operable conversion price of Series A
preferred stock at the commitment date and the intrinsic value of the beneficial
conversion feature is greater than the proceeds allocated to the Series A
preferred stock.  In accordance to ASC Topic 470 subtopic 20, if the
intrinsic value of beneficial conversion feature is greater than the proceeds
allocated to the Series A preferred stock, the amount of the discount assigned
to the beneficial conversion feature is limited to the amount of the proceeds
allocated to the Series A preferred stock.  Accordingly, the total
proceeds allocated to Series A preferred stock were allocated to the beneficial
conversion feature with a credit to Additional paid-in capital upon the issuance
of the Series A preferred stock.  Since the Series A preferred stock
may convert to tour  common stock at any time on or after the initial
issue date, all discount was immediately recognized as a deemed dividend and a
reduction to net income attributable to common shareholders.




According
to Staff Accounting Bulletin Topic 5.A: “Miscellaneous Accounting-Expenses of
offering” (“ASC Topic 340 subtopic 10 section S99-1”), “specific incremental
costs directly attributable to a proposed or actual offering of securities may
properly be deferred and charged against the gross proceeds of the
offering”.  And in accordance with the SEC accounting and reporting
manual “cost of issuing equity securities are charged directly to equity as
deduction of the fair value assigned to share issued”.  Accordingly,
we deducted the direct issuing cost paid in cash from the assigned fair value to
the Series A preferred stock.




50





Share-based
Compensation


We
accounted for share-based compensation in accordance with ASC Topic 718,
(formerly SFAS No. 123R “Share-based Payment”) which requires that
share-based payment transactions be measured based on the grant-date fair value
of the equity instrument issued and recognized as compensation expense over the
requisite service period, or vesting period.




Reverse
merger and common stock (reclassification of the stockholders’
equity)




In a
reverse acquisition the historical shareholder’s equity of the accounting
acquirer prior to the merger is retroactively reclassified (a recapitalization)
for the equivalent number of shares received in the merger after giving effect
to any difference in par value of the registrant’s and the accounting acquirer’s
stock by an offset in paid in capital.”




Pursuant
to the terms of Share Exchange Agreement, the China Net BVI shareholders
transferred to us all of the China Net BVI shares in exchange for the issuance
of 13,790,800 shares of our common stock. Accordingly, we reclassified our
common stock and additional paid-in-capital accounts for the year ended December
31, 2008 accordingly.




Recent
Development
 On March
29, 2010, we entered into an agreement to amend certain provisions of the Series
A-1, Series A-2 and the placement agent Warrants with the holders of those
Warrants originally issued on August 21, 2009.  The amendment to the
Warrants removes certain anti-dilution protection rights that were applicable if
the Company were to issue new shares of common stock or common stock equivalents
at a price per share less than the exercise prices of the Series A-1, Series A-2
and the placement agent Warrants, which are currently $3.00, $3.75 and $2.5 to
$3.75, respectively.  In addition, the amendment to the Warrants added
a provision to grant the holders of the Warrants an approval right until
December 31, 2010, over any new issuance of shares of common stock or common
stock equivalents at a price per share less than the exercise prices of the
Warrants then in effect or without consideration.  The parties agreed
that the amendments to the Warrants would be retroactive from and including,
August 21, 2009.  Except as set forth above, the terms and provisions
of the Warrants shall remain in full force and effect.




51





A.
            RESULTS
      OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 AND
  2008





The
following table sets forth a summary, for the periods indicated, of our
consolidated results of operations. Our historical results presented below are
not necessarily indicative of the results that may be expected for any future
period. All amounts, except number of shares and per share data, in thousands of
US dollars.




For
      the year ended December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)SalesFrom
      unrelated parties
            
            $
            35,354
            
            
            $
            20,061From
      related parties
            
            
            2,370
            
            
            
            1,44737,724
            
            
            
            21,508Cost
      of sales
            
            
            21,233
            
            
            
            13,786Gross
      margin
            
            
            16,491
            
            
            
            7,722Operating
      expensesSelling
      expenses
            
            
            4,198
            
            
            
            2,705General
      and administrative expenses
            
            
            2,404
            
            
            
            1,041Research
      and development expenses
            
            
            480
            
            
            
            2027,082
            
            
            
            3,948Income from
      operations
            
            
            9,409
            
            
            
            3,774Other
      income (expenses):Changes
      in fair value of warrants
            
            
            (4,425
            )
            
            
            -Interest
      income
            
            
            14
            
            
            
            8Other
      expenses
            
            
            (99
            )
            
            
            (20
            )(4,510
            )
            
            
            (12
            )Income
      before income tax expense
            
            
            4,899
            
            
            
            3,762Income tax expense
            
            
            880
            
            
            
            962Net
      income
            
            
            4,019
            
            
            
            2,800Other
      comprehensive incomeForeign
      currency translation gain
            
            
            14
            
            
            
            71Comprehensive
      income
            
            $
            4,033
            
            
            $
            2,871Net
      income
            
            $
            4,019
            
            
            $
            2,800Beneficial
      conversion feature of Series A convertible preferred stock
            
            
            (5,898
            )
            
            
            -Dividend
      of Series A convertible preferred stock
            
            
            (373
            )
            
            
            -Net
      income (loss) attributable to common shareholders
            
            $
            (2,252
            )
            
            $
            2,800Earnings
      /(loss) per shareBasic
      and diluted
            
            $
            (0.15
            )
            
            $
            0.20Weighted
      average number of common shares outstanding:Basic
      and diluted
            
            
            14,825,125
            
            
            
            13,790,800




52




NON-GAAP
MEASURES




To
supplement the audited consolidated statement of income and comprehensive income
presented in accordance with Accounting Principles Generally Accepted in the
United States of America ("GAAP"), we also provided non-GAAP measures of income
from operations, income before income tax expenses, net income and basic and
diluted earnings per share for the year ended December 31, 2009 and 2008, which
are adjusted from results based on GAAP to exclude the non-cash charges
recorded, which related to the issuing of Series A preferred stock and warrants
in August 2009 financing.  The non-GAAP financial measures are
provided to enhance the investors' overall understanding of our current
performance in on-going core operations as well as prospects for the future.
These measures should be considered in addition to results prepared and
presented in accordance with GAAP, but should not be considered a substitute for
or superior to GAAP results.  We use both GAAP and non-GAAP information in
evaluating and operating business internally and therefore deems it important to
provide all of this information to investors.





The
following table presented reconciliations of our non-GAAP financial measures to
the audited consolidated statements of income and comprehensive income for the
year ended December 31, 2009 and 2008 (all amounts in thousands of US
dollars):




For
      the year ended December 31,2009
            
            
            2008GAAP
            
            
            NON
      GAAP
            
            
            GAAP
            
            
            NON
      GAAPIncome
      from operations
            
            $
            9,409
            
            
            $
            9,409
            
            
            $
            3,774
            
            
            $
            3,774Other
      income (expenses):Changes
      in fair value of warrants
            
            
            (4,425
            )
            
            
            -
            
            
            
            -
            
            
            
            -Interest
      income
            
            
            14
            
            
            
            14
            
            
            
            8
            
            
            
            8Other
      expenses
            
            
            (99
            )
            
            
            (99
            )
            
            
            (20
            )
            
            
            (20
            )(4,510
            )
            
            
            (85
            )
            
            
            (12
            )
            
            
            (12
            )Income
      before income tax expense
            
            
            4,899
            
            
            
            9,324
            
            
            
            3,762
            
            
            
            3,762Income
      tax expense
            
            
            880
            
            
            
            880
            
            
            
            962
            
            
            
            962Net
      income
            
            
            4,019
            
            
            
            8,444
            
            
            
            2,800
            
            
            
            2,800Other
      comprehensive incomeForeign
      currency translation gain
            
            
            14
            
            
            
            14
            
            
            
            71
            
            
            
            71Comprehensive
      income
            
            $
            4,033
            
            
            $
            8,458
            
            
            $
            2,871
            
            
            $
            2,871Net
      income
            
            $
            4,019
            
            
            $
            8,444
            
            
            $
            2,800
            
            
            $
            2,800Beneficial
      conversion feature of series A convertible preferred stock
            
            
            (5,898
            )
            
            
            -
            
            
            
            -
            
            
            
            -Dividend
      for series A convertible preferred stock
            
            
            (373
            )
            
            
            (373
            )
            
            
            -
            
            
            
            -Net
      income (loss) attributable to common shareholders
            
            $
            (2,252
            )
            
            $
            8,071
            
            
            $
            2,800
            
            
            $
            2,800Earnings
      (loss) per common share-Basic
            
            $
            (0.15
            )
            
            $
            0.54
            
            
            $
            0.20
            
            
            $
            0.20Earnings
      (loss) per common share-Diluted
            
            $
            (0.15
            )
            
            $
            0.50
            
            
            $
            0.20
            
            
            $
            0.20Weighted
      average number of common shares outstanding:Basic
            
            
            14,825,125
            
            
            
            14,825,125
            
            
            
            13,790,800
            
            
            
            13,790,800Diluted
            
            
            14,825,125
            
            
            
            16,725,442
            
            
            
            13,790,800
            
            
            
            13,790,800




53




REVENUE





The
following tables set forth a breakdown of our total revenue, divided into five
segments for the periods indicated, with inter-segment transactions
eliminated:




Revenue
      type
            
            For
      the year ended December 31,2009
            
            2008(Amounts
      expressed in thousands of US dollars, except percentages)Internet
      advertisement
            
            
            17,722
            
            
            
            47.0
            %
            
            
            11,292
            
            
            
            52.5
            %TV
      advertisement
            
            
            18,600
            
            
            
            49.3
            %
            
            
            7,007
            
            
            
            32.6
            %Internet
      Ad. resources resell
            
            
            1,134
            
            
            
            3.0
            %
            
            
            3,081
            
            
            
            14.3
            %Bank
      kiosks
            
            
            152
            
            
            
            0.4
            %
            
            
            128
            
            
            
            0.6
            %Internet
      information management
            
            
            116
            
            
            
            0.3
            %
            
            
            -
            
            
            
            -Total
            
            
            37,724
            
            
            
            100
            %
            
            
            21,508
            
            
            
            100
            %




Revenue
      type
            
            For
      the year ended December 31,2009
            
            2008(Amounts
      expressed in thousands of US dollars, except percentages)Internet
      advertisement
            
            
            17,722
            
            
            
            100
            %
            
            
            11,292
            
            
            
            100
            %--From
      unrelated parties
            
            
            16,332
            
            
            
            92
            %
            
            
            10,740
            
            
            
            95
            %--From
      related parties
            
            
            1,390
            
            
            
            8
            %
            
            
            552
            
            
            
            5
            %TV
      advertisement
            
            
            18,600
            
            
            
            100
            %
            
            
            7,007
            
            
            
            100
            %--From
      unrelated parties
            
            
            17,620
            
            
            
            95
            %
            
            
            6,112
            
            
            
            87
            %--From
      related parties
            
            
            980
            
            
            
            5
            %
            
            
            895
            
            
            
            13
            %Internet
      Ad. resources resell
            
            
            1,134
            
            
            
            100
            %
            
            
            3,081
            
            
            
            100
            %--From
      unrelated parties
            
            
            1,134
            
            
            
            100
            %
            
            
            3,081
            
            
            
            100
            %--From
      related parties
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Bank
      kiosks
            
            
            152
            
            
            
            100
            %
            
            
            128
            
            
            
            100
            %--From
      unrelated parties
            
            
            152
            
            
            
            100
            %
            
            
            128
            
            
            
            100
            %--From
      related parties
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Internet
      information management
            
            
            116
            
            
            
            100
            %
            
            
            -
            
            
            
            ---From
      unrelated parties
            
            
            116
            
            
            
            100
            %
            
            
            -
            
            
            
            ---From
      related parties
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            37,724
            
            
            
            100
            %
            
            
            21,508
            
            
            
            100
            %--From
      unrelated parties
            
            
            35,354
            
            
            
            94
            %
            
            
            20,061
            
            
            
            93
            %--From
      related parties
            
            
            2,370
            
            
            
            6
            %
            
            
            1,447
            
            
            
            7
            %




54




Total
Revenues: Our total revenues increased significantly to US$ 37.7 million
for the year ended December 31, 2009 from US$ 21.5 million for the same
period of 2008.





We
derive the majority of our advertising service revenues from the sale of
advertising space and provision of the related technical support on our portal
website www.28.com; and from
the sale of advertising time purchased from different TV programs to unrelated
third parties and to some of our related parties. We report our advertising
revenue between related and unrelated parties because historically about 5%-10%
of our advertising service revenues came from clients related to some of the
shareholders of our PRC operating entities. Our advertising services to related
parties were provided in the ordinary course of business on the same terms as
those provided to our unrelated advertising clients on an arm’s-length basis. We
expect that our internet advertising service revenue and TV advertising service
revenue will continue to be the primary source and constitute the substantial
majority of our revenues for the foreseeable future.





Our
advertising service revenues are recorded net of any sales discounts. These
discounts include volume discounts and other customary incentives offered to our
advertising clients, including additional advertising time for their
advertisements if we have unused places available in our website and represent
the difference between our official list price and the amount we charge our
advertising clients.





We
typically sign advertising contracts with our advertising clients that require
us to place the advertisements on our portal website for specified places and
specified periods; and/or place the advertisements during our purchased
advisement time in specific TV programs for specified periods. We recognize
revenues as the advertisement airs over the contractual term based on the
schedule agreed upon with our clients.





·
            We
      achieved a significant increase (about 57%) in internet advertising
      revenues to US$ 17.7 million for the year ended December 31, 2009 from US$
      11.3 million for the same period of 2008.  This is primarily as
      a result of (1) the successful brand building effort for www.28.com we
      made in 2007 and 2008 both on TV and in other well-known portal websites
      in China; (2) more mature client service technologies; and (3) a more
      experienced sales team.





·
            We
      also achieved a significant revenue increase (about 165%) in TV
      advertising, a business that we started in May 2008, to US$ 18.6 million
      for the year ended December 31, 2009 from US$ 7.0 million for the same
      period in 2008.  We generated this US$ 18.6 million of TV
      advertising revenue by selling about 23,210 minutes of advertising time
      that we purchased from about ten provincial TV
  stations.





·
            Our
      resale of internet advertising resources is also a segment that we
      launched in May 2008. This business is mainly comprised of our resale of a
      portion of the internet resources that we purchase from other portal
      websites to our existing internet advertising clients, in order to promote
      our existing clients’ businesses through sponsored search, search engine
      traffic generation techniques and portal resources of other well-known
      portal websites.  We achieved US$ 1.1 million of this revenue
      for the year ended December 31, 2009 and US$ 3.1 million for the same
      period of 2008. We do not consider this segment to be a core business and
      revenue source, because it does not promote the www.28.com
      brand and generates low to even negative margin due to the high purchase
      cost of internet resources from other well-known portal websites. Because
      of these reasons relating to the segment, we allocated less of our revenue
      generating capacity to this segment in 2009 to optimize our strategic
      focus and to better control our cost of
revenue.




55




·
            As
      of December 31, 2009 the bank kiosks advertising business is still in the
      test-run stage.  We will spend more resources to expand this
      business in the future through further clients and central control system
      development.





·
            Internet
      information management is a new business segment that we launched in
      August 2009, which offers our clients an artificial intelligence software
      product based on our proprietary search engine optimization
      technology.  The main objective of the product is to help our
      clients gain an early warning of potential negative exposure on the
      internet so that when necessary they can formulate an appropriate
      response.  We charge a monthly fee to clients using this
      service.  For the year ended December 31, 2009, we generated US$
      0.12 million revenue from this new business segment. We plan to build our
      efforts to offer this service to our existing clients in the
      future.





Cost
of revenues





Our
cost of revenues consists of costs directly related to the offering of our
advertising services.  The following table sets forth our cost of
revenues, divided into five segments, by amount and gross profit ratio for the
periods indicated, with inter-segment transactions eliminated:





For
      the year ended December 31,2009
            
            
            2008(Amounts
      expressed in thousands of US dollars, except percentages)Revenue
            
            
            Cost
            
            
            GPratio
            
            
            Revenue
            
            
            Cost
            
            
            GPratioInternet
      advertisement
            
            
            17,722
            
            
            
            4,456
            
            
            
            75
            %
            
            
            11,292
            
            
            
            4,671
            
            
            
            59
            %TV
      advertisement
            
            
            18,600
            
            
            
            15,637
            
            
            
            16
            %
            
            
            7,007
            
            
            
            5,939
            
            
            
            15
            %Internet
      Ad. resources resell
            
            
            1,134
            
            
            
            1,085
            
            
            
            4
            %
            
            
            3,081
            
            
            
            3,154
            
            
            
            (2
            %)Bank
      kiosk
            
            
            152
            
            
            
            13
            
            
            
            91
            %
            
            
            128
            
            
            
            22
            
            
            
            83
            %Internet
      information management
            
            
            116
            
            
            
            7
            
            
            
            94
            %
            
            
            -
            
            
            
            -
            
            
            
            -Others
            
            
            -
            
            
            
            35
            
            
            
            N/A
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            37,724
            
            
            
            21,233
            
            
            
            44
            %
            
            
            21,508
            
            
            
            13,786
            
            
            
            36
            %




Cost of revenues:Our total cost of revenues increased significantly to US$ 21.2 million
for the year ended December 31, 2009 from US$ 13.8 million for the same period
of 2008.  These increases in costs were in line with the significant
increase of our total revenues for the above periods.





Our cost
of revenues related to the offering of our advertising services mainly consists
of internet resources purchased from other portal websites, technical services
related to lead generation, sponsored search resources purchased, TV
advertisement time costs purchased from TV stations, and business taxes and
surcharges.





·
            Internet
      resources cost is the largest component of our cost of revenue for
      internet advertisement revenue. We purchased these resources from other
      well-known portal websites in China, such as: Baidu, Tengxun (QQ), Google,
      and sogou, to help our internet advertisement clients to get better
      exposure and to generate more visits from their advertisements placed on
      our portal website.  We accomplish these objectives though
      sponsored search, advanced tracking, advanced traffic generation
      technologies, and search engine optimization technologies in
      connection with the well-known portal websites indicated above. Our
      internet resources cost for internet advertising revenue was US$ 4.5
      million and US$ 4.7 million for the year ended 2009 and 2008,
      respectively. Our average gross profit ratio for internet advertising
      services is about 70%-80%.  We had a relatively lower gross
      profit ratio, which is 59% for the year ended December 31, 2008, mainly as
      a result of the fact that we had not yet generated a stable client base in
      the first half of fiscal year 2008.  With relatively limited
      revenue generated, the cost spent in the first half of fiscal year 2008
      was not yet offset by an internet advertising business that had achieved
      the economy of scale that we had in the fiscal year 2009. However, this
      situation has been improved significantly since the third quarter of 2008,
      the gross profit ratio for the six months ended December 31, 2008
      increased to 64%, which led an increase of gross profit ratio for the year
      ended December 31, 2008 to 59% from 50% for the six months ended June 30,
      2008.  For the year ended December 31, 2009, the gross profit
      ratio for this segment improved to
75%.




56




·
            TV
      advertisement time cost is the largest component of our cost of revenue
      for TV advertisement revenue. We purchase TV advertisement time from about
      ten different provincial TV stations and resell it to our TV advertisement
      clients through infomercials produced by us. Our TV advertisement time
      cost was US$ 15.6 million and US$ 6.0 million for the year ended 2009 and
      2008, respectively, which were in line with the increase of our TV
      advertising revenue for the above mentioned periods. Our average gross
      profit ratio for TV advertising business is about
  15%.





·
            Our
      resale of internet advertising resources is also a segment that we
      launched in May 2008.   We purchase advertising resources
      from Baiduin large volumes, allowing us to enjoy a more favorable discount on
      rates. We normally purchase these internet resources for providing
      value-added services to our internet advertising clients on our own portal
      website www.28.com.
      However, besides placing advertisements on www.28.com, some of our
      advertising clients also want to use other direct channels for their
      promotions, so they purchase internet resources from us because, through
      us, they have access to lower rates as compared to the market price. The
      gross profit ratio for this business is relatively low (about 3%-5%)
      compared with our other segments.  In 2008, with less experience
      in running an internet advertising business on www.28.com, we
      over purchased internet resources and could not use the resources to
      generate sufficient revenue to cover our costs due to our lack of a stable
      client base at that time. That is the main reason for the negative gross
      margin we had in this business sector for the year ended December 31,
      2008.  However, this situation improved significantly in the
      second half year of 2008, because we successfully increased our client
      base in the second half of 2008, and brought more revenue into this
      business sector accordingly.  For the year ended December 31,
      2009, the gross profit ratio for this segment improved to
    4%.




Gross
Profit


As a
result of the foregoing, our gross profit was US$ 16.5 million for the year
ended December 31, 2009 compared to US$ 7.7 million for the same period of
2008.  According to our past experience, the comprehensive gross
margin of our business is about 35%-45%.  We achieved a much higher
comprehensive gross margin for the year ended December 31, 2009 mainly due to
the following reasons: (1) we have achieved a relatively stable client base in
fiscal year 2009 which brought us more internet advertising revenue in fiscal
year 2009 compared with that in fiscal year 2008, (2) the higher recognition of
our website www.28.com by our
current and potential customers allowed us to scale back on the use of traffic
generation technologies with respect to 28.com and their associated costs and
(3) our enhancements to our production services for our TV infomercials allowed
us to provide, and generate fees for, higher margin services in our TV
advertisement segment.




Operating
Expenses and Net Income


Our
operating expenses consist of selling expenses, general and administrative
expenses and research and development expenses.  The following tables
set forth our operating expenses, divided into their major categories by amount
and as a percentage of our total revenues for the periods
indicated.




For
      the year ended December 31,2009
            
            
            2008(Amounts
      expressed in thousands of US dollars, except
  percentages)Amount
            
            
            %
      of total revenue
            Amount
            
            
            %
      of total revenueTotal
      Revenue
            
            
            37,724
            
            
            
            100
            %
            
            
            21,508
            
            
            
            100
            %Gross
      Profit
            
            
            16,491
            
            
            
            44
            %
            
            
            7,722
            
            
            
            36
            %Selling
      expenses
            
            
            4,198
            
            
            
            11
            %
            
            
            2,705
            
            
            
            13
            %General
      and administrative expenses
            
            
            2,404
            
            
            
            7
            %
            
            
            1,041
            
            
            
            5
            %Research
      and development expenses
            
            
            480
            
            
            
            1
            %
            
            
            202
            
            
            
            1
            %Total
      operating expenses
            
            
            7,082
            
            
            
            19
            %
            
            
            3,948
            
            
            
            19
            %




57





Operating
Expenses:Our operating expenses increased significantly to
US$ 7.1 million for the year ended December 31, 2009 from US$ 3.9 million
for the same period of 2008.





·
            Selling
      expenses: Selling expenses increased to US$ 4.2 million for the year ended
      December 31, 2009 from US$ 2.7 million for the same period of 2008. The
      increase in our selling expenses was mainly due to (1) increase in brand
      development expenses for www.28.com; (2) increase in staff performance
      bonuses due to increase of our revenue; (3) increase in traveling expenses
      and other marketing expenses due to the expansion of our revenue; and (4)
      increase in staff salary and benefits due to expansion of our sales
      force.





Our
selling expenses primarily consist of brand development advertising expenses we
pay to TV stations for the television promotion of www.28.com, other
advertising and promotional expenses, staff salaries, benefit and performance
bonuses, website server hosting and broadband leasing expenses, and travel and
communication expenses.  Among the selling expenses, our website brand
development expenses on television accounted for approximately 70% of the total
selling expenses for the year ended December 31, 2009 and 2008,
respectively.  As we continue to expand our client base, we will
increase our sales force accordingly, which will result in an increase in
selling expenses. In general, we expect selling expenses to remain relatively
stable as a percentage of total revenues.





·





Our
general and administrative expenses primarily consist of salaries and benefits
for management, accounting and administrative personnel, office rentals,
depreciation of office equipment, professional service fees, maintenance,
utilities and other office expenses. We expect that our general and
administrative expenses will increase in future periods as we hire additional
personnel and incur additional costs in connection with the expansion of our
business and incur increased professional services costs in connection with
disclosure requirements under applicable securities laws, and our efforts to
continuing to improve our internal control systems in-line with the expansion of
our business.





·
            Research and development
      expenses:Research and development expenses increased to US$ 0.5
      million for the year ended December 31, 2009 from US$ 0.2 million for the
      same period of 2008. These changes are mainly due to the increase of
      development cost to our client services based internet technology in
      2009.





Our
research and development expenses primarily consist of salaries and benefits for
the research and development staff, equipment depreciation expenses, and office
utilities and supplies allocated to our research and development department. We
expect that our research and development expenses will increase in future
periods as we will expand and optimizeour portal website and
upgrade our advertising management software. In general, we expect research and
development expenses to remain relatively stable as a percentage of total
revenues.





Operating Profit:As a result of the foregoing, our operating profit increased
significantly to US$ 9.4 million for the year ended December 31, 2009 from
US$ 3.8 million for the same period of 2008.





Changes in Fair
Value of Warrants:We accounted our warrants issued to investors and
placement agent in August 2009 financing as derivative liabilities under ASC
Topic 815 “Derivatives and Hedging” (formerly SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”). Pursuant to ASC Topic 815, a
derivative liability should be measured at fair value at the commitment date,
and re-measured at fair value with changes in fair value recorded in earnings at
each reporting period. With the assistance of an independent appraisal firm, we
gauged the total fair value of the warrants we issued in August 2009 financing
to be approximately US$ 5.1 million as of August 21, 2009 (the Commitment Date)
and re-measured to be approximately US$ 9.6 million as of December 31, 2009.
Therefore, approximately US$ 4.5 million was recorded as changes in fair value
of warrants as a deduction of the operating profit for the year ended December
31, 2009.





58




Interest Income:Our interest income increased to US$ 0.014 million for the year ended
December 31, 2009 from US$ 0.008 million for the same period of 2008,
primarily as a result of higher cash and cash equivalent balances generated from
our operating and financing activities.





Other Income and
Other Expenses:Other income and other expenses represent miscellaneous
non-operating related income and expenses occurred. The increase of the other
expenses for the year ended December 31, 2009 was due to our donation of about
US$ 0.08 million to China Communist Youth League Qinghai Committee to support
young people starting their own business with the help of infomercials provided
by www.28.com.





Income Tax:We recognized an income tax expense of US$ 0.88 million for the year
ended December 31, 2009 and US$ 0.96 million for the same period of
2008.





With an
effective date of September 4, 2009, one of our PRC operating entities, Business
Opportunity Online obtained the approval of its reassessment of the
qualification as a “High and New Technology Enterprise” under the New EIT law
and was entitled to a favorable statutory tax rate of 15%.  Under the
previous EIT laws and regulations, High and New Technology Enterprises enjoyed a
favorable tax rate of 15% and were exempted from income tax for three years
beginning with their first year of operations, and were entitled to a 50% tax
reduction to 7.5% for the subsequent three years and 15% thereafter. The current
EIT Law provides grandfathering treatment for enterprises that were
(1) qualified as High and New Technology Enterprises under the previous EIT
laws, and (2) established before March 16, 2007, if they continue to
meet the criteria for High and New Technology Enterprises under the current EIT
Law. The grandfathering provision allows Business Opportunity Online to continue
enjoying their unexpired tax holidays provided by the previous EIT laws and
regulations. Business Opportunity Online was eligible to enjoy the
grandfathering treatment, because it was established before March 16, 2007 and
was qualified as a “High and New Technology Enterprise” under the previous EIT
laws, which was granted with a three-year EIT exemption from fiscal year 2005
through 2007 and an 50% EIT deduction to 7.5% from fiscal year 2008 through
fiscal year 2010. Therefore, its income tax was computed using a tax rate of
7.5% for the year ended December 31, 2009 due to its unexpired tax holidays for
fiscal year 2009 through fiscal year 2010. However, for fiscal year 2008, its
income tax was computed using an effective tax rate of 25% due to not obtaining
the reassessment of the qualification as a “High and New Technology Enterprise”
under the New EIT law as of December 31, 2008.




The
applicable income tax rate for Beijing CNET Online was 25% for the year ended
December 31, 2009 and 2008. Rise King WFOE as a software company had a net loss
for the year ended December 31, 2008 and was granted a two-year EIT exemption
for fiscal year 2009 (its first profitable year) through fiscal year 2010 and a
50% reduction of its applicable EIT rate which is 25% for fiscal year 2011
through fiscal year 2013. Therefore, no income tax expense was accrued for Rise
King WFOE for the year ended December 31, 2009 and 2008.




Net Income:As a result of the foregoing, our net income amounted to US$ 4.0 million
for the year ended December 31, 2009 as compared to US$ 2.8 million for the
same period of 2008. Excluding the non-cash charges recorded as changes in fair
value of warrants for the year ended December 31, 2009, which was approximately
US$ 4.4 million, we achieved net income amounted to US$ 8.4 million and US$ 2.8
million for the year ended December 31, 2009 and 2008,
respectively.





Beneficial
conversion feature of Series A convertible preferred stock: We evaluated
whether a beneficial conversion feature exists by comparing the operable
conversion price of Series A preferred stock with the fair value of the common
stock at the commitment date.  We concluded that the fair value of
common stock was greater than the operable conversion price of Series A
preferred stock at the commitment date and the intrinsic value of the beneficial
conversion feature is greater than the proceeds allocated to the Series A
preferred stock.  In accordance to ASC Topic 470 subtopic 20, if the
intrinsic value of beneficial conversion feature is greater than the proceeds
allocated to the Series A preferred stock, the amount of the discount assigned
to the beneficial conversion feature is limited to the amount of the proceeds
allocated to the Series A preferred stock, which is approximately US$5.9
million.  Accordingly, the total proceeds allocated to Series A
preferred stock were allocated to the beneficial conversion feature with a
credit to Additional paid-in capital upon the issuance of the Series A preferred
stock.  Since the Series A preferred stock may convert to our common
stock at any time on or after the initial issuing date, all discount was
immediately recognized as a deemed dividend and a reduction to net income
attributable to common shareholders.




59




Dividend forSeries A
convertible preferred stock:Dividend to Series A convertible stock
holders was calculated at the per annum rate of 10% of the liquidation
preference amount of the Series A preferred stock which was US$10,304,000 for
the year ended December 31, 2009 commencing from the dividend commencement date
which is August 21, 2009.




B.
            LIQUIDITY
      AND CAPITAL RESOURCES




Cash and
cash equivalents represent cash on hand and deposits held at call with banks. We
consider all highly liquid investments with original maturities of three months
or less at the time of purchase to be cash equivalents.   As
of December 31, 2009, we had cash and cash equivalents of US$ 13.9 million.





Our
liquidity needs include (i) net cash used in operating activities that
consists of (a) cash required to fund the initial build-out and continued
expansion of our network and (b) our working capital needs, which include
advanced payment for advertising time purchased from TV stations and for
internet resources providers, payment of our operating expenses and financing of
our accounts receivable; and (ii) net cash used in investing activities
that consists of the investments in computers and other office equipment. To
date, we have financed our liquidity need primarily through proceeds from our
operating activities.





The
following table provides detailed information about our net cash flow for the
periods indicated





For
      the year ended December 31,2009
            
            2008Amounts
      in thousands of US dollarsNet
      cash provided by operating activities
            
            
            4,617
            
            
            
            821Net
      cash used in investing activities
            
            
            (930
            )
            
            
            (497
            )Net
      cash provided by financing actives
            
            
            7,544
            
            
            
            1,981Effect
      of foreign currency exchange rate changes on cash
            
            
            7
            
            
            
            57Net
      increase in cash and cash equivalents
            
            
            11,238
            
            
            
            2,362




Net cash provided by operating
activates:Our net cash provided by operating activities increased to US$
4.6 million for the year ended December 31, 2009 from US$ 0.8 million for the
same period of 2008. This is mainly resulting from the increase in our net
profit.





Net cash used in investing
activities:Our net cash used in investing activities increased to US$
0.9 million for the year ended December 31, 2009 from US$ 0.5 million for the
same period of 2008. This is because, during 2009, our company purchased more
vehicle, computers and office equipment as a result of the expansion of our
business and increase in our staff.





Net cash provided by financing
activities:Our net cash provided by financing activities increased to
US$ 7.5 million for the year ended December 31, 2009 from US$ 2.0 million for
the same period of 2008.  This is mainly because we completed our
August 2009 financing and received net proceeds of US$ 9.2 million from this
financing. We also used approximately US$ 1.3 million to pay off the third party
loans during fiscal year 2009 and US$ 0.3 million to cancel and retire 4,400,000
shares of our common stock immediately prior to the reverse merger transaction.
Net cash provided by financing activities for the year ended December 31, 2008
was mainly sourced from short-term loans we borrowed from third parties and our
directors in that period.




60





Our
accounts receivable balance as of December 31, 2009 increased to approximately
US$3.2 million as compared to US$1.0 million as of December 31,
2008.   This increase resulted from our adoption of a more
aggressive policy of extending credit to our customers in 2009 , allowing our
customers to pay their fees after we provided advertising services to
them.  In connection with these extensions of credit, we in turn
granted credit discounts to our customers as incentives for them to pay in
advance.  Our main goal in adopting this strategy was to increase
market share and revenue.  In contract, in 2008, we normally required
all customers to pay for the advertising services that we provide in
advance.  Approximately US$2.2 million in receivables accrued in 2009
have been collected after year end. We will continue to strengthen our efforts
to manage proactively the collections of our accounts receivable, and to
restrict our credit policy accordingly if we determine that there is any
significant risk of a material increase in bad debts.





Our other
receivables balance as of December 31, 2009 increased to approximately US$ 2.6
million, including approximately US$2.3 million that we remitted to third party
as an advanced deposit to participate in a bidding process for 2010 TV
advertisement time on several TV stations.  In January 2010, we have
collected approximately US$1.6 million of our other receivables accrued in 2009.
The remaining balance of our other receivables is comprised of staff advances
paid for normal business purposes.  We believe the likelihood of our
collection of the remaining balance is high due to the nature of these
receivables.





Our
ability to pay dividends is primarily dependent on receiving distributions of
funds from our PRC operating entities. Relevant PRC statutory laws and
regulations permit payments of dividends by our PRC operating entities only out
of their retained earnings, if any, as determined in accordance with PRC
accounting standards and regulations. The results of operations reflected in the
financial statements prepared in accordance with U.S. GAAP differ from
those reflected in the statutory financial statements of our PRC operating
entities.





In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
the PRC is required to provide certain statutory reserves, namely general
reserve fund, the enterprise expansion fund and staff welfare and bonus fund
which are appropriated from net profit as reported in the enterprise’s PRC
statutory accounts. A wholly-owned foreign invested enterprise is required to
allocate at least 10% of its annual after-tax profit to the general reserve
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Rising King WFOE was established as a wholly-owned foreign
invested enterprise and therefore is subject to the above mandated restrictions
on distributable profits.





Additionally,
in accordance with the Company Law of the PRC, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required
to provide for discretionary surplus reserve, at the discretion of the board of
directors, from the profits determined in accordance with the enterprise’s PRC
statutory accounts. The aforementioned reserves can only be used for specific
purposes and are not distributable as cash dividends. China Net Beijing and
Business Opportunity Online were established as a domestic invested enterprise
and therefore are subject to the above mandated restrictions on distributable
profits.





As a
result of these PRC laws and regulations that require annual appropriations of
10% of after-tax income to be set aside prior to payment of dividends as general
reserve fund, our PRC operating entities  are restricted in their
ability to transfer a portion of their net assets to us.  Amounts
restricted include paid-in capital and statutory reserve funds of our PRC
operating entities as determined pursuant to PRC generally accepted accounting
principles, totaling approximately US$1.1 million as of December 31,
2009.




61





In
addition, we entered contractual arrangements with our PRC Operating Entities
including engaging Rise King WOFE as the exclusive services provider to provide
comprehensive technical support, business support and related consulting
services to our PRC Operating entities which allow Rise King WFOE to receive
service fee accordingly. Under PRC law, arrangements and transactions among
related parties may be subject to audit or challenge by the PRC tax authorities.
If any of the transactions we have entered into among our subsidiaries and
affiliated entities are found not to be on an arm’s-length basis, or to result
in an unreasonable reduction in tax under PRC law, the PRC tax authorities have
the authority to disallow our tax savings, adjust the profits and losses of our
respective PRC entities and assess late payment interest and
penalties.  The PRC tax authorities may require us to adjust our
taxable income under the contractual arrangements with the PRC Operating
Entities we currently have in place in a manner that would materially and
adversely affect the PRC Operating Entities’ ability to pay dividends and other
distributions to us.





C.
            Off-Balance
      Sheet Arrangements





None.




D.
            Tabular
      Disclosure of Contractual
Obligations




The
following table sets forth our company’s contractual obligations as of December
31, 2009:




Rental
      payments
              
              
              Server
      hosting and board-band lease payments
              
              
              TV
      advertisement
                purchase
      payments
              
              
              TotalUS$(’000)
              
              
              US$(’000)
              
              
              US$(’000)
              
              
              US$(’000)Year
      ended December 31,-2010
              
              
              261
              
              
              
              84
              
              
              
              31,752
              
              
              
              32,097-2011
              
              
              261
              
              
              
              -
              
              
              
              -
              
              
              
              261-Thereafter
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              
              522
              
              
              
              84
              
              
              
              31,752
              
              
              
              32,358




ITEM
      7B.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




As a
smaller reporting company, we are not required to include disclosure under this
Item.




ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY
DATA




Our
consolidated financial statements and the notes thereto begin on page F-1 of
this Annual Report.




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




None




ITEM
      9A.
              CONTROLS
      AND PROCEDURES




(a)           Evaluation
of Disclosure Controls and Procedures.




62




Disclosure
Controls




Under the
supervision and with the participation of management, including our chief
executive officer and the chief financial officer, we conducted an evaluation 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 Exchange Act,
as of the end of December 31, 2009. Based on this evaluation, our chief
executive officer and chief financial officer concluded as of December 31, 2009
that our disclosure controls and procedures were effective such that the
material information required to be included in our SEC reports is recorded,
processed, summarized and reported within the time periods specified in SEC
rules and forms relating to our company, including our consolidating
subsidiaries, and was made known to them by others within those entities,
particularly during the period when this report was being prepared.




Management’s
Report on Internal Control Over Financial Reporting




This
annual report does not include a report of management's assessment regarding
internal control over financial reporting or an attestation report of the
company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies




(b)           Changes
in Internal Controls.




In
addition, no change in our internal control over financial reporting (as defined
in Rules 13a-15 or 15d-15 under the 1934 Act) occurred during the fourth quarter
of the year ended December 31, 2009, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.




ITEM
      9B.
            OTHER
      INFORMATION




None.




PART
III




ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




Executive
Officers and Directors





The following discussion sets forth
information regarding the executive officers and directors of the Company as of
March 30, 2010.   The board of directors is comprised of only one
class. All of the directors will serve until the next annual meeting of
shareholders and until their successors are elected and qualified, or until
their earlier death, retirement, resignation or removal. To date we have not had
an annual meeting.  Provided below is a brief description of our
executive officers’ and directors’ business experience during the past five
years.





Name
            
            Age
            
            PositionHandong
      Cheng
            
            38
            
            Chairman
      of the Board, Chief Executive Officer and PresidentZhige
      Zhang
            
            35
            
            Chief
      Financial Officer, Treasurer and DirectorXuanfu
      Liu
            
            43
            
            Chief
      Operating Officer and SecretaryHai
      Cui
            
            39
            
            Vice
      President, Head of Bank Kiosk UnitWen
      Hu
            
            40
            
            Vice
      President, Head of Television OperationsLi
      Wang
            
            45
            
            Vice
      President, Head of Human ResourcesBing
      Zhang
            
            39
            
            Vice
      President, Head of Business Development and
  AdministrationMin
      Wu
            
            36
            
            Finance
      DirectorXinwei
      Liu
            
            33
            
            Vice
      General Manager, Head of 28.comHongli
      Xu
            
            40
            
            Chief
      Technology OfficerZhiqing
      Chen
            
            36
            
            DirectorMototaka 
      Watanabe
            
            67
            
            DirectorDouglas
      MacLellan
            
            54
            
            Director




63




Handong
Cheng, Chief Executive Office, President and Director





Mr. Cheng
has served as Chief Executive Officer of China Net since September
2007.  Prior to that role, from October 2003 to September 2007, Mr.
Cheng acted as President of China Net Online Advertising Limited.  Mr.
Cheng holds and EMBA from Guanghua School of Management in Beijing, and a degree
in economic law from the College of Law of Wuhan
University.   Mr. Cheng appropriately serves on the Board of
Directors as Chairman, Chief Executive Officer and President because he has
acted as the instrumental visionary for our company since 2003, forging our key
business strategies that have led to our current
success.





Zhige
Zhang, Chief Financial Officer, Treasurer and Director





Mr.
Zhang has served as Chief Financial Officer of China Net since January
2009.  Prior to that role, from January 2008 to January 2009, Mr.
Zhang served as Executive Director of China Net.  From January 2007 to
December 2007, Mr. Zhang was Director and Vice President of Fu Jian Rong Ji
Software Limited.  From August 2002 to December 2006, Mr. Zhang acted
as Chief Operating Officer of Beijing HSHZ Information System Engineering
Company.  Mr. Zhang holds a degree in industry design from Guilin
University of Electronic Technology.




Xuanfu
Liu, Chief Operating Officer and Secretary





Mr.
Liu joined Business Opportunity Online as a Vice President in January 2004, and
has served as Chief Operating Officer of China Net since September
2007.  Prior to joining Business Opportunity Online, Mr. Liu acted as
a human resources officer at Chang Jiang Wired Electricity Factory in Wuhan,
China.  Mr. Liu is the brother of Xinwei Liu.





Hai
Cui, Vice President





Mr.
Cui, has served as a Vice President and Head of the Bank Kiosk Unit since
2008.  Prior to serving in that role, from 2005 to 2007, Mr. Cui
served as a director and General Manager of Shanghai Borongdingsi. From 2001 to
2005, Mr. Cui was General Manager of Guang Zhou Hui Gang Technology Co.,
Limited.  Mr. Cui holds a M.S. in Computer Engineering from the
College of Information Engineering, University of Zhengzhou.





Wen
Hu, Vice President





Mr.
Hu has served as a Vice President and Head of Television Operations since
October 2007.  Prior to serving as a Vice President of China Net, from
October 2005 to September 2007, Mr. Hu acted as Vice General Manager of China
Net.  Prior to joining China Net, from March 1999 to February 2004,
Mr. Hu was Vice General Manager of Beijing Te Li Jie Tidy Technology
Limited.  Mr. Hu graduated in 1991 from Hu Bei Xiao Gan City Radio and
Television University.





Li
Wang, Vice President





Ms.
Wang has served as a Vice President and Head of Human Resources since September
2007.  Prior to serving in that role, from August 2005 to August 2007,
Ms. Wang acted as Senior Financial Director of China Net Online Advertising
Limited.  From November 2001 to July 2005, Ms. Wang acted as Financial
Director for Tidynet Cleaning Technology Limited, Beijing.  Ms. Wang
holds a degree in accounting from Hu Bei Xiao Gan District Business School (now
Xiao Gan Professional Technology College).





Bing
Zhang, Vice President





Mr.
Zhang, has served as a Vice President and Head of Business Development and
Administration since 2008.  Prior to serving in that role, from 2004
to 2007, Mr. Zhang acted as a Senior Consultant to China Net Online Advertising
Limited. From 2001 to 2003, Mr. Zhang acted as General Manager for Shanghai
JOINNS Company.  Mr. Zhang holds a M.S. in Chemical Engineering
Technology from School of Chemical Engineering, University of
Zhengzhou.




64





Min
Wu, Finance Director and Principal Accounting Officer





Ms.
Wu has served as Finance Director and principal accounting officer of China Net
since February 2009.  Prior to serving in that role, from May 2005 to
December 2007, Ms. Wu acted as Financial Manager of Neotel Telecom Engineering
Co., Limited.  From February 2001 to May 2003, Ms. Wu was an
accountant with Shenzhen Branch of Shanghai Pudong Development
Bank.  Ms. Wu holds a degree in business management from South Central
University of Finance and Law, and a MBA from University of Science and
Technology, Beijing.




Hongli
Xu, Chief Technology Officer




Mr.
Xu served as Project Manager at ThinkingPower Technology Co., Ltd., from 2004 to
2006, an e-government software company focused on the broadcasting and
television industry, where Mr. Xu oversaw the development and management of a
full suite of software products designed to improve government interactions with
citizens and businesses. From 2001 to 2004, Mr. Xu was Product Manager at Acer
Digital Services (China) Company, the world's third largest PC manufacturer,
where he was in charge of internet product development for several of the
Company's subsidiaries. From 1998 to 2000, Mr. Xu served as Project Manager at
Colored Ribbons Information System Co., Ltd, a software development company
focused on the electron industry, where he was directly responsible for
analyzing, designing, and testing business application solutions and software
products. Mr. Xu created the first B2B website in China, "CCEC.com." Mr. Xu
holds a Bachelor Degree in Software from Dalian University of
Technology.




Xinwei
Liu, Vice General Manager





Mr.
Liu has served as Vice General Manager and Head of 28.com since 2005. 
Prior to becoming Vice General Manager of China Net, from 2003 to 2005, Mr. Liu
acted as Managing Director of the China Net Advertising Department. Mr. Liu is
the brother of Mr. Xuanfu Liu.




Zhiqing
Chen, Director





Mr. Chen
is a partner of Jin Mao P.R.C. Lawyers in Shanghai, specializing in corporate
law, including foreign investments and mergers and acquisitions. Mr. Chen’s
clients include local PRC enterprises as well as international corporations.
Prior to joining the Company, Mr. Chen served as a non-management director for
Shanghai Fumai Investment Management Co., Ltd., Shanghai Zhijinwu Investment
Management Co., Ltd, and Shanghai Merciful Groups Co., Ltd.  Mr. Chen
received a law degree in international economics from East China University, a
master’s degree in economic philosophy from Fudan University, and an EMBA degree
from Beijing University.





Mototaka
Watanabe, Director





Mr.
Watanabe serves as a corporate advisor to SJI, Inc. (Jasdaq Market), a provider
of computer and computer peripheral equipment and software merchant wholesaler,
and has served in several capacities there since 2005, including operating
officer, manager of the president’s office and corporate auditor. From 2000 to
2005, Mr. Watanabe served as the executive director for TCC Inc., a power
conversion company specializing in high quality connectors and adapters for the
RF connector industry. Mr. Watanabe graduated in 1966 from Chuo University
Faculty of Commerce in Japan.





Douglas
MacLellan, Director





Mr.
MacLellan currently serves as chairman and chief executive officer at Radient
Pharmaceuticals, Inc. (AMEX: RPC), a vertically integrated specialty
pharmaceutical company, and also serves as chairman and chief executive officer
for the MacLellan Group, an international financial advisory firm established in
1992, where he advises clients on strategic planning, operational activities,
corporate finance, economic policy, asset allocation and mergers &
acquisitions. From 2005 to 2009, Mr. MacLellan was co-founder and vice chairman
at Ocean Smart, Inc. (OTCBB: OCSM), a Canadian based aquaculture company. From
2002 to 2006, Mr. MacLellan served as chairman and co-founder at Broadband
Access MarketSpace, Ltd., a China based IT advisory firm, and was also
co-founder at Datalex Corp., a software and IT company specializing in mainframe
applications, from 1997 to 2002. MacLellan was educated at the University of
Southern California, where he received advanced training in classical economic
theory and international relations.




65





Family
Relationships





There are
no family relationships between any of our directors or executive officers
except that Mr. Xinwei Liu is the brother of Mr. Xuanfu Liu.




Corporation
Governance





Our board
of directors has an audit committee, a nominating and corporate governance
committee and a compensation committee, each of which was formed on November 30,
2009.





Audit
Committee




Our board
of directors has a separately-designated standing audit committee established in
accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as
amended.  Zhiqing Chen, Mototaka Watanabe and Douglas MacLellan serve
on the audit committee.  Our board of directors has determined that
each of our Audit Committee members is “independent” as defined by Section
803A of the NYSE Amex Company Guide.




Our board of directors has determined
that we have at least one “audit committee financial expert,” as defined by the
rules and regulations of the SEC, serving on our audit committee, and that
Douglas MacLellan is the “audit committee financial expert.”  For
information about Mr. MacLellan’s relevant experience which qualifies him as an
“audit committee financial expert,” please see a description of his business
experience under the section entitled, “Executive Officers and
Directors.”





Nominating
and Corporate Governance Committee





The
purpose of the nominating and corporate governance committee is to assist our
board of directors in identifying qualified individuals to become board members,
in determining the composition of the board of directors and in monitoring the
process to assess board effectiveness. Each of Messrs. Chen, Watanabe and
MacLellan are members of the nominating and corporate governance committee. The
nominating and corporate governance committee operates under a written charter.
Mr. Chen is the chairman of nominating and corporate governance
committee.





Compensation
Committee





The
compensation committee is responsible for (a) reviewing and providing
recommendations to the board of directors on matters relating to employee
compensation and benefit plans, and (b) assisting the board in determining the
compensation of the chief executive officer and making recommendations to the
board with respect to the compensation of the chief financial officer, other
executive officers of the Company and independent directors. Each of
Messrs.  Chen, Watanabe and MacLellan are members of the compensation
committee. The compensation committee operates under a written charter. Mr.
MacLellan is the chairman of compensation committee.





Code
of Ethics


We
adopted a Corporate Code of Ethics and Conduct on December 21, 2009. The Code of
Ethics is designed to deter wrongdoing and to promote ethical conduct and full,
fair, accurate, timely and understandable reports that the Company files or
submits to the Securities and Exchange Commission and others. A copy of the Code
of Ethics is included as Exhibit 14.1 to this Annual Report on Form
10.  A copy of the Code of Ethics is available on our website at www.chinanet-online.com.  A
printed copy of the Code of Ethics may be obtained free of charge by writing to
us at our headquarters located at No. 3 Min Zhuang Road, Building 6, Yu Quan Hui
Gu Tuspark, Haidian District, Beijing, PRC 100195.




66




Mr.
Handong Cheng holds the positions of principal executive officer and chairman of
the Board of Company.  The board has not designated a lead
director.  Given the limited number of directors comprising the board,
the independent directors call and plan their executive sessions collaboratively
and, between board meetings, communicate with management and one another
directly.  In the circumstances, the directors believe that
formalizing in a lead director functions in which they all participate might
detract from rather than enhance performance of their responsibilities as
directors.





The Board
of Directors receives regular reports from the Chief Executive Officer and
members of senior management on operational, financial, legal and regulatory
issues and risks. The Audit Committee of the Board additionally is charged under
its Charter with oversight of financial risk, including the Company’s internal
controls, and it receives regular reports from management, the Company’s
internal auditors and the Company’s independent auditors. When-ever a Committee
of the Board receives a report involving risk identification, risk management or
risk mitigation, the Chairman of the Committee reports on that discussion, as
appropriate, to the full Board during the next Board meeting.





Security
Holder Recommendation of Board Nominees




There have been no material changes to
the procedures by which security holders may recommend nominees to our Board of
Directors




Section 16(a)
Beneficial Ownership Reporting Compliance




Section 16(a) of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, requires our executive
officers, directors and persons who beneficially own more than 10% of a
registered class of our equity securities to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. These executive
officers, directors, and greater than 10% beneficial owners are required by SEC
regulation to furnish us with copies of all Section 16(a) forms filed by
such reporting persons.




Based solely on our review of such
forms furnished to us and written representations from certain reporting
persons, we believe that all other filing requirements applicable to our
executive officers, directors and greater than 10% beneficial owners were
complied with during 2009.




ITEM
11. EXECUTIVE
COMPENSATION





Background
and Compensation Philosophy




Our Board
of Directors has not adopted or established a formal policy or procedure for
determining the amount of compensation paid to our executive officers. No
pre-established, objective performance goals or metrics have been used by the
Board of Directors in determining the compensation of our executive
officers.




Elements
of Compensation




Some of
our executive officers receive a base salary to compensate them for services
rendered during the year. Our policy of compensating our certain executives with
a cash salary has served the Company well. Because of our history of attracting
and retaining executive talent, we do not believe it is necessary at this time
to provide our executives equity incentives, or other benefits for the Company
to continue to be successful.




Base Salary and Bonus. The
value of base salary and bonus for each our executive reflects his skill set and
the market value of that skill set in the sole discretion of the Board of
Director.




67


Equity
Incentives.  We have not granted stock based awards as a
component of compensation to our executive officers. In the future, we may make
awards under our equity incentive plan which awards may be granted if our
Compensation Committee determines that it is in our best interest and the best
interest of our stockholders to do so.





Retirement Benefits. Our
executive officers are not presently entitled to company-sponsored retirement
benefits.




Perquisites. We have not
provided our executive officers with any material perquisites and other personal
benefits and, therefore, we do not view perquisites as a significant or
necessary element of our executive’s compensation.




Deferred Compensation. We do
not provide our executives the opportunity to defer receipt of annual
compensation.




Summary
Compensation Table




The
following table sets forth all cash compensation paid by the Company, as well as
certain other compensation paid or accrued, for each of the last three fiscal
years of our company to each named executive officer.




Summary
Compensation of Named Executive Officers





Name and Principal Position
            
            Fiscal
              Year
            
            
            Salary
              ($)
            
            
            All Other
              Compensation
              ($)
            
            
            Total ($)G.
      Edward Hancock*
              Former
      President
            
            
            2009
              2008
            
            
            
            1,250
              6,300
            
            
            
            -
              -
            
            
            
            1,250
              6,300Handong
      Cheng,
              Chairman
      of the Board,
              President
      and Chief Executive Officer
            
            
            2009
              2008
            
            
            
            26,577
              12,009
            
            
            
            -
              -
            
            
            
            26,577
              12,009Zhige
      Zhang,
              Chief
      Financial Officer, Treasurer and Secretary
            
            
            2009
              2008
            
            
            
            19,142
              -
            
            
            
            -
              -
            
            
            
            19,142
              -Xuanfu
      Liu
              Chief
      Operating Officer
            
            
            2009
              2008
            
            
            
            19,108
              -
            
            
            
            -
              -
            
            
            
            19,108
              -Hai
      Cui
              Vice
      President, Head of Bank Kiosk Unit
            
            
            2009
              2008
            
            
            
            8,951
              -
            
            
            
            365
              -
            
            
            
            9,316
              -Wen
      Hu
              Vice
      President, Head of Television Operations
            
            
            2009
              2008
            
            
            
            18,632
              7,531
            
            
            
            365
              -
            
            
            
            18,997
              7,531Li
      Wang
              Vice
      President, Head of Human Resources
            
            
            2009
              2008
            
            
            
            17,658
              8,999
            
            
            
            365
              -
            
            
            
            18,023
              8,999Bing
      Zhang
              Vice
      President, Head of Business Development and Administration
            
            
            2009
              2008
            
            
            
            17,892
              -
            
            
            
            365
              -
            
            
            
            18,257
              -Xinwei
      Liu
              Vice
      General Manager, 28.com
            
            
            2009
              2008
            
            
            
            19,523
              9,729
            
            
            
            365
              -
            
            
            
            19,888
              9,729Hongli
      Xu
              Chief
      Technology Officer
            
            
            2009
              2008
            
            
            
            5,967
              -
            
            
            
            -
              -
            
            
            
            5,967
              -Min
      Wu
              Finance
      Director
            
            
            2009
              2008
            
            
            
            15,131
              -
            
            
            
            365
              -
            
            
            
            15,496
              -


*
Mr .Hancock resigned as President on June 26, 2009, in connection with the Share
Exchange.





68


Other
compensation represents the aggregate grant date fair value of the restricted
shares granted to each named executive officer for financial reporting purpose
pursuant to FASB ASC Topic 718 during fiscal year 2009.





Employment
Agreements





We
entered into a standard employment contract with our executive officers from
fiscal year 2009 for a set period of years. According to these contracts, these
executive officers will devote substantially all of his time to the service of
the Company and may not compete directly or indirectly with
us.  Before that, we didn’t have any employment agreements with any of
our executive officers.





We
entered into a standard employment contract with other employees for a set
period of years.  According to these contracts, all of our employees
are prohibited from engaging in any activities that compete with our business
during the period of their employment with us.




The
Company does not have change-in-control agreements with any of its directors or
executive officers, and the Company is not obligated to pay severance or other
enhanced benefits to executive officers upon termination of their
employment.




Outstanding
Equity Awards at Fiscal Year-End





Option
      AwardsName
            
            Grant
      Date
            
            Number
      of securities underlying Unexercised Options (#)
    Exercisable
            
            
            Number
      of securities underlying Unexercised Options (#)
    Unexercisable
            
            
            Option
      Exercise Price ($)
            
            Option
      Expiration Date
            
            Market
      Value of Unexercised Options ($)Douglas
      MacLelllan
            
            11/30/2009
            
            
            -
            
            
            
            44,000
            
            
            
            5
            
            11/29/2014
            
            
            -Zhiqing
      Chen
            
            11/30/2009
            
            
            -
            
            
            
            5,000
            
            
            
            5
            
            11/29/2014
            
            
            -Mototaka
      Watanabe
            
            11/30/2009
            
            
            -
            
            
            
            5,000
            
            
            
            5
            
            11/29/2014
            
            
            -





69


Vesting
Schedule for unexercisable options





Vesting
      ScheduleName
            
            Grant
      Date
            
            2010
            
            
            2011Douglas
      MacLelllan
            
            11/30/2009
            
            
            22,000
            
            
            
            22,000Zhiqing
      Chen
            
            11/30/2009
            
            
            2,500
            
            
            
            2,500Mototaka
      Watanabe
            
            11/30/2009
            
            
            2,500
            
            
            
            2,500Total
            
            
            
            
            27,000
            
            
            
            27,000






Director
Compensation for the fiscal year 2009





Name
            
            Fees
      Earned or Paid in Cash
            
            
            Stock
      Awards
            
            
            Option
      Awards
            
            
            Non-equity
      incentive plan compensation
            
            
            Non-qualified
      deferred compensation earnings
            
            
            All
      Other Compensation
            
            
            TotalDouglas
      MacLellan
            
            $
            5,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            5,000Zhiqing
      Chen
            
            $
            500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            500Mototaka
      Watanabe
            
            $
            500
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            $
            500




Pursuant to one year agreements with
the Company each of Messrs. Chen and Watanabe will receive a fee of $300 per
month for the term of the agreement, as well $200 per month as long as each
serves on the Audit Committee, while Mr. MacLellan will receive a monthly fee of
$3,000 for the term of the agreement, as well as $2,000 a month so long as he
serves as the Audit Committee Chairman. Upon execution of their agreements,
Messrs. Chen and Watanabe were each awarded a 5-year option to purchase up to
5,000 shares of common stock of the Company at $5.00 per share, such options
vesting in quarterly installments annually over 24 months, so long as each is,
respectively, a member of the board of directors. Upon execution of his
agreement, Mr. MacLellan was awarded (i) one 5-year option to purchase up to
24,000 shares of common stock of the Company at $5.00 per share, such options
vesting in quarterly installments annually over 24 months, so long as he is a
member of the board of directors and (ii) one 5-year option to purchase up to
20,000 shares of common stock of the Company at $5.00 per share, such options
vesting in quarterly installments over 24 months, so long as he is Chairman of
the Audit Committee. The Company will also reimburse each Independent Director
for expenses related to his or her attending meetings of the board, meetings of
committees of the board, executive sessions and shareholder
meetings.




ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      SHAREHOLDER MATTERS





The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of March  , 2010 by (i) each person (or group
of affiliated persons) who is known by us to own more than five percent of the
outstanding shares of our common stock, (ii) each director and executive
officer, and (iii) all of our directors and executive officers and director
nominees as a group. As of March
29, 2010,
we had16,426,320shares of Common Stock issued and outstanding.





70


Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise noted,
the principal address of each of the stockholders, directors and officers listed
below is No. 3 Min Zhuang Road, Building 6, Yu Quan Hui Gu Tuspark, Haidian
District, Beijing, PRC 100195.





All
share ownership figures include shares of our Common Stock issuable upon
securities convertible or exchangeable into shares of our Common Stock within
sixty (60) days of March
29,
2010, which are deemed outstanding and beneficially owned by such person for
purposes of computing his or her percentage ownership, but not for purposes of
computing the percentage ownership of any other person.




Name and Address of Beneficial Owner
            
            Amount
              and
              Nature of
              Beneficial
              Ownership
            
            
            Percentage
              of
              Outstanding
              Shares of
              Common
              StockRise
      King Investments Limited (1) (6)
            
            
            7,434,940
            
            
            
            45.26
            %Star
      (China) Holdings Limited (2)
            
            
            1,279,080
            
            
            
            7.79
            %Surplus
      Elegant Investment Limited (3)
            
            
            1,879,080
            
            
            
            11.44
            %Allglad
      Limited (4)
            
            
            1,279,080
            
            
            
            7.79
            %Clear
      Jolly Holdings Limited (5)
            
            
            1,279,080
            
            
            
            7.79
            %Li
      Sun (6)
            
            
            7,434,940
            
            
            
            45.26
            %Handong
      Cheng (6)
            
            
            7,434,940
            
            
            
            45.26
            %Xuanfu
      Liu (6)
            
            
            7,434,940
            
            
            
            45.26
            %Sansar
      Capital Management (7)
            
            
            1,640,989
            
            
            
            9.99
            %Taylor
      International Fund, Ltd. (8)
            
            
            1,100,000
            
            
            
            6.70
            %Zhige
      Zhang
            
            
            -
            
            
            
            *Hai
      Cui
            
            
            150
            
            
            
            *Wen
      Hu
            
            
            150
            
            
            
            *Li
      Wang
            
            
            150
            
            
            
            *Bing
      Zhang
            
            
            150
            
            
            
            *Min
      Wu
            
            
            150
            
            
            
            *Xinwei
      Liu
            
            
            150
            
            
            
            *Hongli
      Xu
            
            
            -
            
            
            
            *Douglas
      McLellan
            
            
            -
            
            
            
            *Mototaka
      Watanabe
            
            
            -
            
            
            
            *Zhiqing
      Chen
            
            
            -
            
            
            
            *All
      Directors and Executive Officers, as a group (11)
            
            
            7,435,840
            
            
            
            45.27
            %


*
Less than one percent




71


(1)
            The
      business address of Rise King Investments Limited is P.O. Box 957,
      Offshore Incorporations Center, Road Town, Tortola, British Virgin
      Islands.





(2)
            The
      business address of Star (China) Holdings Limited is P.O. Box 957,
      Offshore Incorporations, Center, Road Town, Tortola, British Virgin
      Islands.(3)
            The
      business address of Surplus Elegant Investments Limited is Portcullis
      Trustnet Chambers, Road Town, Tortola, British Virgin
    Islands.(4)
            The
      Business address of Allglad Limited is P.O. Box 957, Offshore
      Incorporations Center, Road Town, Tortola, British Virgin
      Islands.(5)
            The
      business address of Clear Jolly Holdings Limited is P.O. Box 957, Offshore
      Incorporations Center, Road Town, Tortola, British Virgin
      Islands.(6)
            In
      accordance with an Entrustment Agreement, dated June 5, 2009, by and
      between Rise King Investments Limited (“Rise King”) and Handong Cheng,
      Xuanfu Liu and Li Sun (collectively, the “Grantees”), Rise King
      collectively delegated to the Grantees its direct or indirect rights as a
      stockholder of China Net Online Media Group Limited, CNET Online
      Technology Limited, Rise King Century Technology Development (Beijing)
      Co., Ltd., or any subsidiaries of such companies (collectively, the
      “Covered Companies”), including the direct or indirect right to vote any
      equity interest in the Covered Companies, or to designate the management
      of such companies. As a result of the delegation of authority under the
      Entrustment Agreement, Mr. Cheng, Mr. Liu and Ms. Sun may be deemed to be
      beneficial owners of the shares of our common stock held by Rise King.
      Each of Mr. Cheng, Mr. Liu and Ms. Sun disclaim such beneficial ownership,
      and this prospectus shall not be deemed to be an admission that Mr. Cheng,
      Mr. Liu or Ms. Sun is the beneficial owner of any such shares for any
      purpose.(7)
            Consists
      of 1,000,000 shares underlying Series APreferred
      Stock and Series A-1 and Series A-2 Warrants to purchase up to 1,000,000
      shares of our Common Stock, subject to a 9.99% limitation on beneficial
      ownership of our Common Stock as more fully described in note 3 to
      the Selling Stockholder table below.  Mr.
      Sanjay Motwani, portfolio manager has voting and dispositive power over
      the shares held by Sansar Capital Management.  Mr. Motwani
      may be deemed to beneficially own the shares of Common Stock held by
      Sansar Capital Management. Mr. Motwani disclaims
      beneficial ownership of such shares. The address  for 
      Sansar Capital Management is 135 E 57th Street 23rd Floor, New York, NY
      10022, U. S. A.





(8)
            Consists
      of 100,000 shares of Common Stock, 500,000 shares underlying Series A
      Preferred Stock and Series A-1 and Series A-2 Warrants to purchase up to
      500,000 shares of our Common Stock, subject to a 9.99% limitation on
      beneficial ownership of our Common Stock as more fully described in
      note 3 to the Selling Stockholder table below.  Stephen S.
      Taylor, portfolio manager  has voting and dispositive power over
      the shares held by Taylor International Fund Ltd.  Mr. Taylor
      may be deemed to beneficially own the shares of Common Stock held by
      Taylor International Fund, Ltd. Mr. Taylor disclaims beneficial ownership
      of such shares. The address  for  Taylor International
      Fund, Ltd. is 714 South Dearborn Street,2nd floor, Chicago, IL
      60605.




Equity
Compensation Plan Information at December 31, 2009





The
following tabular disclosure provides information as of December 31, 2009
regarding the Company’s common stock authorized for issuance under equity
compensation plans.





Plan
      Category
            
            Number of Securities to be
              Issued
      upon Exercise of Outstanding
              Options
            
            
            Weighted
              Average
              Exercise Price
              Of
              Outstanding
      Options and Rights
            
            
            Number of Securities
              Remaining Available for
              Future Issuance Under Equity
              Compensation
      PlansEquity
      compensation plans approved by security holders
            
            
            54,000
            
            
            $
            5.00
            
            
            
            4,891,980Equity
      compensation plans not approved by security holders
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            54,000
            
            
            
            
            
            
            
            4,891,980





72


Our 2009 Omnibus Securities and
Incentive Plan (the “Plan”) provides for the granting of distribution equivalent
rights, incentive stock options, non-qualified stock options, performance share
awards, performance unit awards, restricted stock awards, restricted stock unit
awards, stock appreciation rights, tandem stock appreciation rights,
unrestricted stock awards or any combination of the foregoing, as may be best
suited to the circumstances of the particular employee, director or consultant
as provided herein (the “Awards”). Certain Awards are intended to qualify as
“incentive stock options” within the meaning of our Internal Revenue Code (the
“Code”). The Plan was approved by our Board on October 30, 2009, but has not yet
been approved by our stockholders.





The total
number of shares of our common stock that may be issued under the Plan may not
exceed 5,000,000. In connection with the Financing, we agreed that during a
period ending on August 20, 2012, such issuances shall not exceed ten percent
(10%) of the issued and outstanding shares of Common Stock of the Company in the
aggregate.





73





Changes
in Control




There are
no arrangements known to us, including any pledge by any person of our
securities, the operation of which may at a subsequent date result in a change
in control of the Company.




ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE




Certain
Relationships and Related Transactions




PRC law
currently limits foreign equity ownership of companies that provide value-added
telecommunication services and advertisement services (in case the parent
company is not qualified).  To comply with these foreign ownership
restrictions, we operate our business in China through a series of contractual
arrangements with the PRC Operating Subsidiaries and its
shareholders.  Some of the shareholders of the PRC Operating
Subsidiaries are also our directors and executive officers. These agreements
are summarized as follows:





Exclusive
Business Cooperation Agreements





Pursuant
to Exclusive Business Cooperation Agreements entered into by and between Rise
King WFOE and each of the PRC Operating Subsidiaries in October 2008, Rise King
WFOE has the exclusive right to provide to the PRC Operating Subsidiaries
complete technical support, business support and related consulting services,
which include, among other things, technical services, business consultations,
equipment or property leasing, marketing consultancy and product research. Each
PRC Operating Subsidiary has agreed to pay an annual service fee to Rise King
WFOE equal to 100% of its audited total amount of operational income each
year.  Each PRC Operating Subsidiary has also agreed to pay a monthly
service fee to Rise King WFOE equal to 100% of the net income generated on a
monthly basis. The payment and terms of payment are fixed to ensure that Rise
King WFOE obtains 100% of the net income for that month, although adjustments
may be made upon approval by Rise King WFOE to provide for operational needs. If
at year end, after an audit of the financial statements of any PRC Operating
Subsidiary, there is determined to be any shortfall in the payment of 100% of
the annual net income, such PRC Operating Subsidiary must pay such shortfall to
Rise King WFOE. Each agreement has a ten-year term, subject to renewal and early
termination in accordance with the terms therein.





Exclusive
Option Agreements





Under
Exclusive Option Agreements entered into by and among Rise King WFOE, each of
the PRC Shareholders, dated as of October 8, 2008, each of the PRC Shareholders
irrevocably granted to Rise King WFOE or its designated person an exclusive
option to purchase, to the extent permitted by PRC law, a portion or all of
their respective equity interest in any PRC Operating Subsidiary for a purchase
price of RMB 10 or a purchase price to be adjusted to be in compliance with
applicable PRC laws and regulations. Rise King WFOE or its designated person has
the sole discretion to decide when to exercise the option, whether in part or in
full. Each of these agreements has a ten-year term, subject to renewal at the
election of Rise King WFOE.





Equity
Pledge Agreements





Under the
Equity Pledge Agreements entered into by and among Rise King WFOE, the PRC
Operating Subsidiaries and each of the PRC Shareholders, dated as of October 8,
2008, the PRC Shareholders pledge, all of their equity interests in PRC
Operating Subsidiaries to guarantee Beijing CNET Online’s performance of its
obligations under the Exclusive Business Cooperation Agreement. If Beijing CNET
Online or any of the PRC Shareholders breaches his/her respective contractual
obligations under this agreement, or upon the occurrence of one of the events
regarded as an event of default under each such agreement, Rise King WFOE, as
pledgee, will be entitled to certain rights, including the right to dispose of
the pledged equity interests. The PRC Shareholders of the PRC Operating
Subsidiaries agree not to dispose of the pledged equity interests or take any
actions that would prejudice Rise King WFOE's interest, and to notify Rise King
WFOE of any events or upon receipt of any notices which may affect Rise King
WFOE's interest in the pledge. Each of the equity pledge agreements will be
valid until all the payments due under the Exclusive Business Cooperation
Agreement have been fulfilled.





74


Irrevocable
Powers of Attorney





The PRC
Shareholders have each executed an irrevocable powers of attorney, dated as of
October 8, 2008, to appoint Rise King WFOE as their exclusive attorneys-in-fact
to vote on their behalf on all PRC Operating Subsidiary matters requiring
shareholder approval.  The term of each power of attorney is valid so
long as such shareholder is a shareholder of the respective PRC Operating
Subsidiary.





Entrustment
Agreement





In
accordance with an Entrustment Agreement, dated June 5, 2009, by and between
Rise King Investments Limited (“Rise King”) and Handong Cheng, Xuanfu Liu, and
Li Sun (collectively, the “Grantees”), Rise King collectively delegated to the
Grantees its direct or indirect rights as a stockholder of China Net Online
Media Group Limited, CNET Online Technology Limited, Rise King Century
Technology Development (Beijing) Co., Ltd., or any subsidiaries of such
companies (collectively, the “Covered Companies”), including the direct or
indirect right to vote any equity interest in the Covered Companies, or to
designate the management of such companies. As a result of the delegation of
authority under the Entrustment Agreement, Mr. Cheng, Mr. Liu and Ms. Sun may be
deemed to be beneficial owners of the shares of our common stock held by Rise
King. Each of Mr. Cheng, Mr. Liu and Ms. Sun disclaim such beneficial ownership,
and this Current Report shall not be deemed to be an admission that Mr. Cheng,
Mr. Liu, or Ms. Sun is the beneficial owner of any such shares for any
purpose.





Share
Transfer Agreement





Each of
the PRC Shareholders entered into a share transfer agreement (the “Share
Transfer Agreements”) with Mr. Yang Li, the sole shareholder of Rise King BVI,
which is a 55% shareholder of China Net for purpose of granting incentive
options to the PRC Shareholders for the contributions that they have made and
will continue to make to Rise King BVI. Under the Share Transfer Agreements, Mr.
Li granted to each of the PRC Shareholders an option to acquire, in the
aggregate 10,000 shares of Rise King BVI (4,600 by Mr. Handong Cheng, 3,600 by
Mr. Xuanfu Liu and 1,800 by Ms. Li Sun), representing 100% of the issued and
outstanding shares of Rise King BVI, at a purchase price of $1 per share (the
par value of Rise King BVI’s common stock), provided that certain financial
performance thresholds are met by the China Net Companies.





Under the
terms of each Share Transfer Agreement, the PRC Shareholders will have the right
to purchase the aggregate 10,000 shares of Rise King BVI as follows: (1)
one-third of the shares at $1 per share if the China Net Companies generate at
least RMB 100,000,000 of gross revenue for the twelve-month period from January
1, 2009 to December 31, 2009; (2) one-third of the shares at $1 per share when
the China Net Companies generate at least RMB 60,000,000 of gross revenue for
the six-month period from January 1, 2010 to June 30, 2010; and (3) one-third of
the shares at $1 per share when the China Net Companies generate at least RMB
60,000,000 of gross revenue for the six-month period from July 1, 2010 to
December 31, 2010.  In the event that the China Net Companies do not
achieve any of the performance targets specified above, the PRC Shareholders may
exercise the applicable option at the alternative exercise price of $2 per
share. If the PRC Shareholders purchase all shares eligible for purchase under
the Share Transfer Agreement, the PRC Shareholders will become China Net’s
controlling shareholders through their beneficial ownership of Rise King
BVI.





The Share
Transfer Agreements were entered into on April 28, 2009. Subject to registering
with the State Administration of Foreign Exchange (SAFE) prior to the exercise
and issuance of the option shares under the Share Transfer Agreements, which is
an administrative task, there is no prohibition under PRC laws for the PRC
Shareholders to earn an interest in Rise King BVI after the PRC Restructuring is
consummated in compliance with PRC law.




Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons




It
is our policy that we will not enter into transactions required to be disclosed
under Item 404 of Regulation S-K unless the audit committee or another
independent body of our Board of Directors first reviews and approves the
transactions.





75


Director
Independence





Our Board
of Directors has determined that each of Messrs. Zhiqing Chen, Mototaka Watanabe
and Douglas MacLellan are independent, as that term is defined by Section 803A
of the NYSE Amex Company Guide.




ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES







On July
30, 2009, the Company engaged Bernstein & Pinchuk LLP (“BP”) to serve as its
independent auditor.  Prior to that time, The Hall Group, CPAs was our
independent auditor.




Aggregate
fees billed to us by The Hall Group, CPA during the fiscal years ended December
31, 2009 and 2008 were:






2009
              
              
              2008Audit
      Fees
              
              $
              4,650
              
              
              $
              14,000Audit
      Related Fees
              
              $
              -
              
              
              $
              -Tax
      Fees
              
              $
              -
              
              
              $
              -All
      Other Fees
              
              $
              -
              
              
              $
              -Total
              
              $
              4,650
              
              
              $
              14,000




Aggregate
fees billed to us by BP during the fiscal year ended December 31, 2009 and 2008
was




2009
            
            
            2008Audit
      Fees
            
            $
            122,510
            
            
            $
            -Audit
      Related Fees
            
            $
            128,950
            
            
            $
            48,000Tax
      Fees
            
            $
            -
            
            
            
            -All
      Other Fees
            
            $
            -
            
            
            
            -Total
            
            $
            251,460
            
            
            $
            48,000




Audit
Fees




This
category includes aggregate fees billed by our independent auditors for the
audit of our annual financial statements, review of financial statements
included in our quarterly reports on Form 10-Q and services that are normally
provided by the auditor in connection with statutory and regulatory filings for
those fiscal years.




Audit-Related
Fees




This
category consists of services by our independent auditors that, including
accounting consultations on transaction related matters, are reasonably related
to the performance of the audit or review of our financial statements and are
not reported above under Audit Fees.




76




Tax
Fees




This
category consists of professional services rendered for tax compliance and
preparation of our corporate tax returns and other tax advice.




All
Other Fees




This
category consists of professional services rendered for products and services
provided, other than the services reported above under Audit Fees, Audit-Related
Fees and Tax Fees.




Pre-Approval
Policies and Procedures by the Audit Committee




The
committee must pre-approve all audit, review, attest and permissible non-audit
services (including any permissible internal control-related services) to be
provided to the company or its subsidiaries by the independent auditors. The
committee may establish pre-approval policies and procedures in compliance with
applicable SEC rules.




PART
IV




ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




(a)           The
following are filed with this report:




(1)
            The
      financial statements listed on the Financial Statement’s Table of
      Contents




(2)
            Not
      applicable




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




Exhibit No.
            
            Description2.1
            
            Share
      Exchange Agreement, dated as of June 26, 2009, by and among Emazing
      Interactive, Inc., G. Edward Hancock, China Net Online Media Group
      Limited, and the shareholders of China Net Online Media Group
      Limited.(1)2.2
            
            Escrow
      Agreement, dated as of June 8, 2009, by and between Emazing Interactive,
      Inc., China Net Online Media Group Limited, Edward Hancock and Leser,
      Hunter, Taubman & Taubman. (1)2.3
            
            Agreement
      and Plan of Merger (2)3.1
            
            Articles
      of Incorporation of Emazing Interactive, Inc., as amended
    (1)3.2
            
            Articles
      of Merger. (2)3.3
            
            Certificate
      of Designation. (3)3.4
            
            By-laws.
      (4)4.1
            
            Registration
      Rights Agreement, dated as of June 26, 2009, by and among Emazing
      Interactive, Inc. and certain stockholders listed therein.
    (1)4.2
            
            Form
      of Series A-1 Warrant. (3)4.3
            
            Form
      of Series A-2 Warrant. (3)4.4
            
            Registration
      Rights Agreement, dated as of August 21, 2009.
  (3)




77




Exhibit No.
            
            Description4.5*
            
            2009
      Omnibus Securities and Incentive Plan10.1
            
            Exclusive
      Business Cooperation Agreement, dated October 8, 2008, by and between Rise
      King Century Technology Development (Beijing) Co., Ltd. and Beijing CNET
      Online Advertising Co., Ltd. (1)10.2
            
            Exclusive
      Option Agreement, dated as of October 8, 2008, by and among Rise King
      Century Technology Development (Beijing) Co., Ltd., Beijing CNET Online
      Advertising Co., Ltd. and Handong Cheng with respect to Mr. Cheng’s equity
      interest in Beijing CNET Online Advertising Co., Ltd.
  (1)10.3
            
            Exclusive
      Option Agreement, dated as of October 8, 2008, by and among Rise King
      Century Technology Development (Beijing) Co., Ltd., Beijing CNET Online
      Advertising Co., Ltd. and Xuanfu Liu with respect to Mr. Liu’s equity
      interest in Beijing CNET Online Advertising Co., Ltd.
  (1)10.4
            
            Exclusive
      Option Agreement, dated as of October 8, 2008, by and among Rise King
      Century Technology Development (Beijing) Co., Ltd., Beijing CNET Online
      Advertising Co., Ltd. and Li Sun with respect to Ms. Sun’s equity interest
      in Beijing CNET Online Advertising Co., Ltd.10.5
            
            Equity
      Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
      King Century Technology Development (Beijing) Co., Ltd., Beijing CNET
      Online Advertising Co., Ltd. and Handong Cheng with respect to Mr. Cheng’s
      equity interest in Beijing CNET Online Advertising Co., Ltd.
      (1)10.6
            
            Equity
      Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
      King Century Technology Development (Beijing) Co., Ltd., Beijing CNET
      Online Advertising Co., Ltd. and Xuanfu Liu with respect to Mr. Liu’s
      equity interest in Beijing CNET Online Advertising Co., Ltd.
      (1)10.7
            
            Equity
      Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
      King Century Technology Development (Beijing) Co., Ltd., Beijing CNET
      Online Advertising Co., Ltd. and Li Sun with respect to Ms. Sun’s equity
      interest in Beijing CNET Online Advertising Co., Ltd.
  (1)10.8
            
            Power
      of Attorney of Handong Cheng, dated as of October 8, 2008, appointing Rise
      King Century Technology Development (Beijing) Co., Ltd. as his agent and
      attorney in connection with his equity interest in Beijing CNET Online
      Advertising Co., Ltd. (1)10.9
            
            Power
      of Attorney of Xuanfu Liu, dated as of October 8, 2008, appointing Rise
      King Century Technology Development (Beijing) Co., Ltd. as his agent and
      attorney in connection with his equity interest in Beijing CNET Online
      Advertising Co., Ltd. (1)10.10
            
            Power
      of Attorney of Li Sun, dated as of October 8, 2008, appointing Rise King
      Century Technology Development (Beijing) Co., Ltd. as her agent and
      attorney in connection with her equity interest in Beijing CNET Online
      Advertising Co., Ltd. (1)10.11
            
            Exclusive
      Business Cooperation Agreement, dated October 8, 2008, by and between Rise
      King Century Technology Development (Beijing) Co., Ltd. and Business
      Opportunity Online (Beijing) Network Technology Co., Ltd.
    (1)10.12
            
            Exclusive
      Option Agreement, dated as of October 8, 2008, by and among Rise King
      Century Technology Development (Beijing) Co., Ltd., Business Opportunity
      Online (Beijing) Network Technology Co., Ltd. and Handong Cheng with
      respect to Mr. Cheng’s equity interest in Business Opportunity Online
      (Beijing) Network Technology Co., Ltd. (1)10.13
            
            Exclusive
      Option Agreement, dated as of October 8, 2008, by and among Rise King
      Century Technology Development (Beijing) Co., Ltd., Business Opportunity
      Online (Beijing) Network Technology Co., Ltd. and Xuanfu Liu with respect
      to Mr. Liu’s equity interest in Business Opportunity Online (Beijing)
      Network Technology Co., Ltd. (1)10.14
            
            Exclusive
      Option Agreement, dated as of October 8, 2008, by and among Rise King
      Century Technology Development (Beijing) Co., Ltd., Business Opportunity
      Online (Beijing) Network Technology Co., Ltd. and Li Sun with respect to
      Ms. Sun’s equity interest in Business Opportunity Online (Beijing) Network
      Technology Co., Ltd. (1)10.15
            
            Equity
      Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
      King Century Technology Development (Beijing) Co., Ltd., Business
      Opportunity Online (Beijing) Network Technology Co., Ltd. and Handong
      Cheng with respect to Mr. Cheng’s equity interest in Business Opportunity
      Online (Beijing) Network Technology Co., Ltd.
  (1)




78




Exhibit No.
            
            Description10.16
            
            Equity
      Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
      King Century Technology Development (Beijing) Co., Ltd., Business
      Opportunity Online (Beijing) Network Technology Co., Ltd. and Xuanfu Liu
      with respect to Mr. Liu’s equity interest in Business Opportunity Online
      (Beijing) Network Technology Co., Ltd. (1)10.17
            
            Equity
      Interest Pledge Agreement, dated as of October 8, 2008, by and among Rise
      King Century Technology Development (Beijing) Co., Ltd., Business
      Opportunity Online (Beijing) Network Technology Co., Ltd. and Li Sun with
      respect to Ms. Sun’s equity interest in Business Opportunity Online
      (Beijing) Network Technology Co., Ltd. (1)10.18
            
            Power
      of Attorney of Handong Cheng, dated as of October 8, 2008, appointing Rise
      King Century Technology Development (Beijing) Co., Ltd. as his agent and
      attorney in connection with his equity interest in Business Opportunity
      Online (Beijing) Network Technology Co., Ltd. (1)10.19
            
            Power
      of Attorney of Xuanfu Liu, dated as of October 8, 2008, appointing Rise
      King Century Technology Development (Beijing) Co., Ltd. as his agent and
      attorney in connection with his equity interest in Business Opportunity
      Online (Beijing) Network Technology Co., Ltd. (1)10.20
            
            Power
      of Attorney of Li Sun, dated as of October 8, 2008, appointing Rise King
      Century Technology Development (Beijing) Co., Ltd. as her agent and
      attorney in connection with her equity interest in Business Opportunity
      Online (Beijing) Network Technology Co., Ltd. (1)10.21
            
            Entrustment
      Agreement, dated June 5, 2009, by and between Rise King Investments
      Limited and Handong Cheng, Xuanfu Liu and Li Sun. (1)10.22
            
            Share
      Transfer Agreement, dated April 28, 2009, by and between Yang Li and
      Handong Cheng (1)10.23
            
            Share
      Transfer Agreement, dated April 28, 2009, by and between Yang Li and
      Xuanfu Liu (1)10.24
            
            Share
      Transfer Agreement, dated April 28, 2009, by and between Yang Li and Li
      Sun (1)10.25
            
            Internet
      Banking Experiencing All-in-One Engine Strategic Cooperation Agreement,
      dated August 7, 2008, by and between Henan Branch of China Construction
      Bank and Shanghai Borongdingsi Computer Technology Co., Ltd.
      (1)10.26
            
            Cooperation
      Agreement, dated July 8, 2008, by and between Beijing CNET Online
      Advertising Co., Ltd. and Shanghai Borongdingsi Computer Technology Co.,
      Ltd. (1)10.27
            
            Supplemental
      Agreement to the Cooperation Agreement, dated December 10, 2008, by and
      between Beijing CNET Online Advertising Co., Ltd. and Shanghai
      Borongdingsi Computer Technology Co., Ltd. (1)10.28
            
            Office
      Lease Agreement, dated January 1, 2009, by and between Beijing
      YuQuanHuiGu  Realty Management Ltd. Co. and Business Opportunity
      Online (Beijing) Network Technology Ltd. Co. (1)10.29
            
            Office
      Lease Agreement, dated January 1, 2009, by and between Beijing
      YuQuanHuiGu  Realty Management Ltd. Co. and Beijing CNET Online
      Advertising Co., Ltd. (1)10.30
            
            Office
      Lease Agreement, dated January 1, 2009, by and between Beijing
      YuQuanHuiGu  Realty Management Ltd. Co. and Rise King Century
      Technology Development (Beijing) Co., Ltd. (1)10.31
            
            Securities
      Purchase Agreement, dated as of August 21, 2009. (3)10.32
            
            Securities
      Escrow Agreement, dated as of August 21, 2009. (3)10.33
            
            Form
      of Lock-up Agreement. (3)10.34*
            
            Independent
      Director Agreement effective as of November 30, 2009 by and between the
      Company and Douglas MacLellan. (5)




79




Exhibit No.
            
            Description10.35*
            
            Independent
      Director Agreement effective as of November 30, 2009 by and between the
      Company and Mototaka Watanabe. (5)10.36*
            
            Independent
      Director Agreement effective as of November 30, 2009 by and between the
      Company and Zhiqing Chen. (5)10.37
            
            Warrant
      Amendment Agreement +14
            
            Code
      of Ethics (6)21.1
            
            Subsidiaries
      of the Registrant (7)31.1
            
            Certification
      pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002. +31.2
            
            Certification
      pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section
      302 of the Sarbanes-Oxley Act of 2002. +32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002. +


+          
   Filed herewith




*           Denotes
managerial contracts or compensatory plans or arrangements:




(1)           Incorporated
by reference herein to the Report on Form 8-K filed on July 2,
2009.




(2)           Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 24, 2009.




(3)           Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 27, 2009.




(4)           Incorporated
by reference herein to the Company’s  Registration Statement  on Form
SB-1 filed with the Securities and Exchange Commission on October 20,
2006.




(5)           Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 2, 2009.





(6)           Incorporated
by reference herein to the Company’s Current Report on Form 8-K filed on
December 21, 2009





(7)           Incorporated
by reference herein to the Company’s Registration Statement on Form S-1 filed on
September 22, 2009.




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




(c)           Not
applicable.





80




SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




ChinaNet
      Online Holdings, Inc.Dated:
      March 31, 2010
              By:
              /s/Handong
      ChengName:
              Handong
      ChengTitle:
              Chairman
      and Chief Executive Officer


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


Dated:
      March 31, 2010
                  By:
                  /s/Handong
      ChengName:
                  Handong
      ChengTitle:
                  Chairman
      and Chief Executive Officer (Principal Executive
      Officer)
 Dated:
      March 31, 2010
                      By:
                      /s/Zhige
      ZhangName:
                      Zhige
      ZhangTitle:
                      Chief
      Financial Officer (Principal Financial Officer) and
      Director


Dated:
      March 31, 2010
                    By:
                    /s/Min
      WuName:
                    Min
      WuTitle:
                    Principal
      Accounting Officer


Dated:
      March 31, 2010
                      By:
                      /s/Zhiqing
      ChenName:
                      Zhiqing
      ChenTitle:
                      Director
 Dated:
      March 31, 2010
                        By:
                        /s/Mototaka
      WatanabeName:
                        Mototaka
      WatanabeTitle:
                        Director
 Dated:
      March 31, 2010
                          By:
                          /s/Douglas
      MacLellanName:
                          Douglas
      MacLellanTitle:
                          Director
  S-1




CHINANET
ONLINE HOLDINGS, INC. AND SUBSIDIARIES




INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008





PageReport
      of Independent Registered Public Accounting Firm
            
            F-1Consolidated
      Balance Sheets
            
            F-2
      - F-3Consolidated
      Statements of Income and Comprehensive Income
            
            F-4
      - F-5Consolidated
      Statements of Stockholders’ Equity
            
            F-8
      - F-9Consolidated
      Statements of Cash Flows
            
            F-6
      - F-7Notes
      to Consolidated Financial Statements
            
            F-10
      - F-39









CHINANET
ONLINE HOLDINGS, INC.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS


PagesReport
      of Independent Registered Public Accounting Firm
              
              
              F-1Consolidated
      Balance Sheets
              
              
              F-2Consolidated
      Statements of Income and Comprehensive Income
              
              
              F-4Consolidated
      statements of cash flows
              
              
              F-6Consolidated
      Statements of Changes in Stockholders’ Equity
              
              
              F-8Notes
      to Consolidated Financial Statements
              
              
              F-10
   
  REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 
 To the
Board of Directors and Stockholders of
 ChinaNet
Online Holdings, Inc.
 
 We have
audited the accompanying consolidated balance sheets of ChinaNet Online
Holdings, Inc. (“the Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of income and comprehensive income, stockholders’ equity
and cash flows for each of the years in the two-year period then ended. The
Company’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008, and the results of its operations and its cash flows for each of the
years in the two-year period then ended in conformity with accounting principles
generally accepted in the United States of America.
 
 
 
 /s/
Bernstein & Pinchuk LLP
 March 31,
2010
 New York,
NY
  F-1


CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEETS
 (In
thousands)


As
      of December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            13,917
            
            
            $
            2,679Accounts
      receivable, net
            
            
            3,173
            
            
            
            978Other
      receivables
            
            
            2,636
            
            
            
            -Prepayments
      and deposit to suppliers
            
            
            4,111
            
            
            
            4,072Due
      from related parties
            
            
            492
            
            
            
            109Due
      from Control Group (see
      note 8)
            
            
            -
            
            
            
            243Inventories
            
            
            2
            
            
            
            1Other
      current assets
            
            
            30
            
            
            
            46Total
      current assets
            
            
            24,361
            
            
            
            8,128Property
      and equipment, net
            
            
            1,355
            
            
            
            678Other
      long-term assets
            
            
            48
            
            
            
            7$
            25,764
            
            
            $
            8,813Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
            
            $
            290
            
            
            $
            37Advances
      from customers
            
            
            914
            
            
            
            608Other
      payables
            
            
            27
            
            
            
            1,333Accrued
      payroll and other accruals
            
            
            191
            
            
            
            66Due
      to related parties
            
            
            24
            
            
            
            346Due
      to Control Group
            
            
            1,142
            
            
            
            1,149Due
      to director
            
            
            -
            
            
            
            10Taxes
      payable
            
            
            1,978
            
            
            
            1,746Dividend
      payable
            
            
            373
            
            
            
            -Total
      current liabilities
            
            
            4,939
            
            
            
            5,295Long-term
      liabilities:Long-term
      borrowing from director
            
            
            128
            
            
            
            128Warrant
      liabilities (see note
      16)
            
            
            9,564
            
            
            
            -Commitments andcontingencies(see note 22)
            
            
            -
            
            
            
            -




F-2


CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
BALANCE SHEETS (CONTINUED)
 (In
thousands, except for number of shares and per share data)


As
      of December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)Stockholders’
      equity:Series
      A convertible preferred stock,  US$0.001 par value;
      authorized-8,000,000 shares;  issued and outstanding-4,121,600
      and nil shares at December 31, 2009 and 2008
      respectively (Liquidation preference $10,304)
            
            
            4
            
            
            
            -Common
      stock (US$0.001 par value;
              authorized-50,000,000 shares;
      issued and outstanding 15,828,320 shares and 13,790,800 shares at
      December 31, 2009 and 2008 respectively)
            
            
            16
            
            
            
            14Additional
      paid-in capital
            
            
            10,574
            
            
            
            599Statutory
      reserves
            
            
            372
            
            
            
            304Retained
      earnings
            
            
            50
            
            
            
            2,370Accumulated
      other comprehensive income
            
            
            117
            
            
            
            103Total
      stockholders’ equity
            
            
            11,133
            
            
            
            3,390$
            25,764
            
            
            $
            8,813




See notes
to the consolidated financial statements




F-3


CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (In
thousands)


Year
      ended December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)SalesFrom
      unrelated parties
            
            $
            35,354
            
            
            $
            20,061From
      related parties
            
            
            2,370
            
            
            
            1,44737,724
            
            
            
            21,508Cost
      of sales
            
            
            21,233
            
            
            
            13,786Gross
      margin
            
            
            16,491
            
            
            
            7,722Operating
      expensesSelling
      expenses
            
            
            4,198
            
            
            
            2,705General and administrative expenses
            
            
            2,404
            
            
            
            1,041Research
      and development expenses
            
            
            480
            
            
            
            2027,082
            
            
            
            3,948Income from
      operations
            
            
            9,409
            
            
            
            3,774Other
      income (expenses):Changes
      in fair value of warrants  (see note
    16)
            
            
            (4,425
            )
            
            
            -Interest
      income
            
            
            14
            
            
            
            8Other
      expenses
            
            
            (99
            )
            
            
            (20
            )(4,510
            )
            
            
            (12
            )Income
      before income tax expense
            
            
            4,899
            
            
            
            3,762Income
      tax expense
            
            
            880
            
            
            
            962Net
      income
            
            
            4,019
            
            
            
            2,800Other
      comprehensive incomeForeign
      currency translation gain
            
            
            14
            
            
            
            71Comprehensive
      income
            
            $
            4,033
            
            
            $
            2,871




F-4




CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF INCOME AND
 COMPREHENSIVE
INCOME (CONTINUED)
 (In
thousands, except for number of shares and per share data)




Year
      ended December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)Net
      income
            
            $
            4,019
            
            
            $
            2,800Beneficial
      conversion feature of Series A convertible preferred stock (see note
    17)
            
            
            (5,898
            )
            
            
            -Dividend
      of Series A convertible preferred stock
            
            
            (373
            )
            
            
            -Net
      income (loss) attributable to common shareholders
            
            $
            (2,252
            )
            
            $
            2,800Earnings
      /(loss) per shareEarnings
      (loss) per common shareBasic
      and diluted
            
            $
            (0.15
            )
            
            $
            0.20Weighted
      average number of common shares outstanding:Basic
      and diluted
            
            
            14,825,125
            
            
            
            13,790,800


See notes
to the consolidated financial statements




F-5


CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (In
thousands)




Year
      ended December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)Cash
      flows from operating activitiesNet income
            
            $
            4,019
            
            
            $
            2,800Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
      and Amortization
            
            
            207
            
            
            
            77Other
            
            
            8
            
            
            
            6Share-based
      compensation expenses (see
      note 25)
            
            
            360
            
            
            
            -Changes
      in fair value of warrants (see note 16)
            
            
            4,425
            
            
            
            -Allowances for
      doubtful debts
            
            
            71
            
            
            
            -Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            (2,262
            )
            
            
            (741
            )Other
      receivables
            
            
            (2,634
            )
            
            
            200Prepayment
      and deposit to suppliers
            
            
            (29
            )
            
            
            (3,570
            )Due
      from related parties
            
            
            (382
            )
            
            
            (107
            )Due
      from/to Control Group
            
            
            235
            
            
            
            749Other
      current assets
            
            
            14
            
            
            
            (33
            )Accounts
      payable
            
            
            253
            
            
            
            (281
            )Advances
      from customers
            
            
            303
            
            
            
            471Accrued
      payroll and other accruals
            
            
            124
            
            
            
            21Due
      to related parties
            
            
            (322
            )
            
            
            317Taxes
      payable
            
            
            227
            
            
            
            912Net
      cash provided by operating activities
            
            
            4,617
            
            
            
            821Cash
      flows from investing activitiesPurchases
      of vehicles and office equipment
            
            
            (890
            )
            
            
            (490
            )Purchases
      of other long-term assets
            
            
            (40
            )
            
            
            (7
            )Net
      cash used in investing activities
            
            
            (930
            )
            
            
            (497
            )




F-6


CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
 (In
thousands)


Year
      ended December 31,2009
            
            
            2008(US
      $)
            
            
            (US
      $)Cash
      flows from financing activitiesIncrease of long-term borrowing from director
            
            
            -
            
            
            
            126Increase/(decrease) of due to director
            
            
            (10
            )
            
            
            548Increase/(decrease)
      of other payables
            
            
            (1,308
            )
            
            
            1,307Cancellation
      and retirement of common stock (seenote 18)
            
            
            (300
            )
            
            
            -Proceeds
      from issuance of Series A convertible preferred stock and warrants (net of
      issuance cost of US$ 1,142)
            
            
            9,162
            
            
            
            -Net
      cash provided by financing activities
            
            
            7,544
            
            
            
            1,981Effect
      of exchange rate fluctuation on cash and cash equivalents
            
            
            7
            
            
            
            57Net
      increase in cash and cash equivalents
            
            
            11,238
            
            
            
            2,362Cash
      and cash equivalents at beginning of year
            
            
            2,679
            
            
            
            317Cash
      and cash equivalents at end of year
            
            $
            13,917
            
            
            $
            2,679Supplemental
      disclosure of cash flow informationInterest
      paid
            
            $
            -
            
            
            $
            -Income
      taxes paid
            
            $
            1,129
            
            
            $
            673




See notes
to the consolidated financial statements




F-7




CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
 (In
thousands, except for number of shares)




Series
      A convertible preferred stock
            
            
            Common
      Stock
            
            
            Additional
            
            
            
            
            
            
            
            
            Accumulated
      otherNumber
      of shares
            
            
            Amount
            
            
            Number
      of shares
            
            
            Amount
            
            
            paid-in
              capital
            
            
            Statutoryreserves
            
            
            Retained
      earnings
            
            
            comprehensive
      income
            
            
            Total(US
      $)
            
            
            
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)Balance,
      January 1, 2008
            
            
            -
            
            
            
            -
            
            
            
            13,790,800
            
            
            
            14
            
            
            
            511
            
            
            
            67
            
            
            
            (193
            )
            
            
            32
            
            
            
            431Assets
      donated by Control Group
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            88
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            88Net
      income for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,800
            
            
            
            -
            
            
            
            2,800Appropriation
      of statutory reserves
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            237
            
            
            
            (237
            )
            
            
            -
            
            
            
            -Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            71
            
            
            
            71Balance,
      December 31, 2008
            
            
            -
            
            
            
            -
            
            
            
            13,790,800
            
            
            
            14
            
            
            
            599
            
            
            
            304
            
            
            
            2,370
            
            
            
            103
            
            
            
            3,390Effect
      of reverse acquisition
            
            
            -
            
            
            
            -
            
            
            
            1,383,500
            
            
            
            1
            
            
            
            (301
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (300
            )Issuance
      of Series A convertible preferred shares
            
            
            4,121,600
            
            
            
            4
            
            
            
            -
            
            
            
            -
            
            
            
            5,894
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,898Recognition
      of beneficial conversion feature upon issuance of Series A
      convertible preferred shares as deemed dividend
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,898
            
            
            
            -
            
            
            
            (5,898
            )
            
            
            -
            
            
            
            -Deduction
      of issuing cost
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,142
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,142
            )




F-8


CHINANET
ONLINE HOLDINGS, INC.
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
 (In
thousands, except for number of shares)




Series
      A convertible
              preferred
      stock
            
            
            Common
      Stock
            
            
            Additional
            
            
            
            
            
            
            
            
            Accumulated
      otherNumber
      of shares
            
            
            Amount
            
            
            Number
      of shares
            
            
            Amount
            
            
            paid-in
              capital
            
            
            Statutory
      reserves
            
            
            Retained
      earnings
            
            
            comprehensive
      income
            
            
            Total(US
      $)
            
            
            
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)
            
            
            (US
      $)Deduction
      of grant date fair value of placement agent warrants as issuing
      cost
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (733
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (733
            )Series
      A convertible preferred stock dividend
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (373
            )
            
            
            -
            
            
            
            (373
            )Shares
      issued for services
            
            
            -
            
            
            
            -
            
            
            
            600,000
            
            
            
            1
            
            
            
            149
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            150Share
      based compensation related to service
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            79
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            79Issuance
      of restricted shares
            
            
            -
            
            
            
            -
            
            
            
            54,020
            
            
            
            -
            
            
            
            131
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            131Net
      income for the year
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,019
            
            
            
            -
            
            
            
            4,019Appropriation
      of statutory reserves
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            68
            
            
            
            (68
            )
            
            
            -
            
            
            
            -Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14
            
            
            
            14Balance,
      December 31, 2009
            
            
            4,121,600
            
            
            
            4
            
            
            
            15,828,320
            
            
            
            16
            
            
            
            10,574
            
            
            
            372
            
            
            
            50
            
            
            
            117
            
            
            
            11,133




See
      notes to the consolidated financial
statements





F-9


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




1.
            Organization
      and nature of operations





ChinaNet
Online Holdings, Inc. (formerly known as Emazing Interactive, Inc.), (the
“Company”), was incorporated in the State of Texas in April 2006 and
re-domiciled to become a Nevada corporation in October 2006. From the date of
the Company’s incorporation until June 26, 2009, when the Company consummated
the Share Exchange, the Company’s activities were primarily concentrated in web
server access and company branding in hosting web based e-games.





On June
26, 2009, the Company entered into a Share Exchange Agreement (the “Exchange
Agreement”), with (i) China Net Online Media Group Limited, a company organized
under the laws of British Virgin Islands (“China Net BVI”), (ii) China Net BVI’s
shareholders, Allglad Limited, a British Virgin Islands company (“Allglad”),
Growgain Limited, a British Virgin Islands company ("Growgain"), Rise King
Investments Limited, a British Virgin Islands company (“Rise King BVI”), Star
(China) Holdings Limited, a British Virgin Islands company (“Star”), Surplus
Elegant Investment Limited, a British Virgin Islands company (“Surplus”), Clear
Jolly Holdings Limited, a British Virgin Islands company (“Clear” and together
with Allglad, Growgain, Rise King BVI, Star and Surplus, the “China Net BVI
Shareholders”), who together owned shares constituting 100% of the issued and
outstanding ordinary shares of China Net BVI (the “China Net BVI Shares”) and
(iii) G. Edward Hancock, the principal stockholder of the Company at that time.
Pursuant to the terms of the Exchange Agreement, the China Net BVI Shareholders
transferred to the Company all of the China Net BVI Shares in exchange for the
issuance of 13,790,800  shares (the “Exchange Shares”) of the
Company’s common stock (the “Share Exchange”). As a result of the Share
Exchange, China Net BVI became a wholly owned subsidiary of the Company and the
Company is now a holding company, which through certain contractual arrangements
with operating companies in the People’s Republic of China (the “PRC”), which
engages in providing advertising, marketing and communication services to small
and medium companies in China through www.28.com (the
portal website of the Company’s PRC Variable Interest Entity), TV media and bank
kiosks.





The
Company’s wholly owned subsidiary, China Net BVI was incorporated in the British
Virgin Islands on August 13, 2007. In April 11, 2008, China Net BVI became the
parent holding company of a group of companies comprised of CNET Online
Technology Limited, a Hong Kong company (“China Net HK”), which established and
is the parent company of Rise King Century Technology Development (Beijing) Co.,
Ltd., a wholly foreign-owned enterprise (“WFOE”) established in the PRC (“Rise
King WFOE”). The Company refers to the transactions that resulted in China Net
BVI becoming an indirect parent company of Rise King WFOE as the “Offshore
Restructuring.” Through a series of contractual agreements, the Company operates
its business in China primarily through Business Opportunity Online (Beijing)
Network Technology Co., Ltd. (“Business Opportunity Online”), Beijing CNET
Online Advertising Co., Ltd. (“Beijing CNET Online”). Beijing CNET Online owns
51% of Shanghai Borongdingsi Computer Technology Co., Ltd. (“Shanghai
Borongdingsi”). Business Opportunity Online, Beijing CNET Online and Shanghai
Borongdingsi, were incorporated on December 8, 2004, January 27, 2003 and August
3, 2005, respectively. From time to time, we refer to them collectively as the
“PRC Operating Entities.”





Shanghai
Borongdingsi is owned 51% by Beijing CNET Online. Beijing CNET Online and
Shanghai Borongdingsi entered into a cooperation agreement in June 2008,
followed up with a supplementary agreement in December 2008, to conduct bank
kiosk advertisement business. The business is based on a bank kiosk cooperation
agreement between Shanghai Borongdingsi and Henan provincial branch of China
Construction Bank which allows Shanghai Borongdingsi or its designated party to
conduct in-door advertisement business within the business outlets throughout
Henan Province. The bank kiosk cooperation agreement has a term of eight years
starting August 2008. However, Shanghai Borongdingsi was not able to conduct the
advertisement as a stand-alone business due to the lack of an advertisement
business license and supporting financial resources. Pursuant to the
aforementioned cooperation agreements, Beijing CNET Online committed to purchase
equipment, and to provide working capital, technical and other related support
to Shanghai Borongdingsi. Beijing CNET Online owns the equipment used in the
kiosk business, is entitled to sign contracts in its name on behalf of the
business, and holds the right to collect the advertisement revenue generated
from the bank kiosk business exclusively until the recovery of the cost of
purchase of the equipment. Thereafter, Beijing CNET Online has agreed to
distribute 49% of the succeeding net profit generated from the bank kiosk
advertising business, if any, to the minority shareholders of Shanghai
Borongdingsi.




F-10





CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




2.
            Summary
      of significant accounting policies




a)
            Change
      of reporting entity and basis of
presentation





As a
result of the Share Exchange on June 26, 2009, the former China Net BVI
shareholders owned a majority of the common stock of the Company.  The
transaction was regarded as a reverse acquisition whereby China Net BVI was
considered to be the accounting acquirer as its shareholders retained control of
the Company after the Share Exchange, although the Company is the legal parent
company.  The share exchange was treated as a recapitalization of the
Company.  As such, China Net BVI (and its historical financial statements)
is the continuing entity for financial reporting purposes. Pursuant to the terms
of the Share Exchange, Emazing Interactive, Inc. was delivered with zero assets
and zero liabilities at time of closing. Following the Share Exchange, the
company changed its name from Emazing Interactive, Inc. to ChinaNet Online
Holdings, Inc. The financial statements have been prepared as if China Net BVI
had always been the reporting company and then on the share exchange date, had
changed its name and reorganized its capital stock.




The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) and include the accounts of the Company, its subsidiaries and
Variable Interest Entities (“VIEs”), China Net BVI, China Net HK, Rise King
WFOE, Beijing CNET Online and Business Opportunity Online.  According
to the agreements between Beijing CNET Online and Shanghai Borongdingsi,
although Beijing CNET Online legally owns 51% of Shanghai Borongdingsi’s
interests, Beijing CNET Online only controls the assets and liabilities related
to the bank kiosk business, which has been all included in the financial
statements of Beijing CNET Online, but does not controls other asset of Shanghai
Borongdingsi, thus, Shanghai Borongdingsi’s financial statements were not
consolidated by the Company.




b)
            FASB
      Establishes Accounting Standards Codification
TM




In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification.




Following
the Codification, the Financial Accounting Standards Board will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASU”) which will serve to update the Codification, provide background
information about the guidance and provide the basis for conclusions on the
changes to the Codification.




The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented. The Codification or ASC is effective for interim and
annual periods ending after September 15, 2009.  The principal impact
on the Company’s financial statements for adopting the Codification is limited
to disclosures as all future references to authoritative accounting literature
will be referenced in accordance with the Codification.  In order to
ease the transition to the Codification, the Company is providing the standards
issued and adopted prior to the adoption of the Codification cross-reference
alongside references to the Codification.




F-11




CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




c)
            Principles
      of Consolidation




The
consolidated financial statements include the financial statements of all the
subsidiaries and VIEs of the Company. All transactions and balances between the
Company and its subsidiaries and VIEs have been eliminated upon
consolidation.




d)
            Use
      of estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the related disclosure of contingent assets and liabilities at
the date of these consolidated financial statements, and the reported amounts of
revenue and expenses during the reporting period. Management bases these
estimates on historical experiences and the best information available at the
time the estimates are made; however actual results could differ from those
estimates. US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
contingencies and results of operations. While management has based their
assumptions and estimates on the facts and circumstances existing as of December
31, 2009, final amounts may differ from these estimates.




e)
            Foreign
      currency translation and
transactions




The
functional currency of the Company is United States dollars (“US$”), and the
functional currency of China Net HK is Hong Kong dollars (“HK$”).  The
functional currency of the Company’s PRC operating entities is Renminbi (“RMB’),
and PRC is the primary economic environment in which the Company
operates.




For
financial reporting purposes, the financial statements of the Company’s PRC
operating entities, which are prepared using the RMB, are translated into the
Company’s reporting currency, the United States Dollar (“U.S. dollar”). Assets
and liabilities are translated using the exchange rate at each balance sheet
date.  Revenue and expenses are translated using average rates
prevailing during each reporting period, and stockholders’ equity is translated
at historical exchange rates. Adjustments resulting from the translation are
recorded as a separate component of accumulated other comprehensive income in
stockholders’ equity.




Transactions
denominated in currencies other than the functional currency are translated into
the functional currency at the exchange rates prevailing at the dates of the
transactions.  The resulting exchange differences are included in the
determination of net income of the consolidated financial statements for the
respective periods.




The
exchange rates used to translate amounts in RMB into US$ for the purposes of
preparing the consolidated financial statements are as follows:





2009
            
            
            2008Balance
      sheet items, except for equity accounts
            
            
            6.8372
            
            
            
            6.8542Items
      in the statements of income and comprehensiveincome,
      and statements cash flows
            
            
            6.8409
            
            
            
            6.9623




F-12




CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


No
representation is made that the RMB amounts could have been, or could be
converted into US$ at the above rates.




f)
            Cash
      and cash equivalents




Cash and
cash equivalents consist of cash on hand and bank deposits, which are
unrestricted as to withdrawal and use.  The Company considers all
highly liquid investments with original maturities of three months or less at
the time of purchase to be cash equivalents.




g)
            Accounts
      receivable, net




Accounts
receivable are recorded at net realizable value consisting of the carrying
amount less an allowance for uncollectible accounts as needed. The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in the Company’s existing accounts receivable. The Company
determines the allowance based on aging data, historical collection experience,
customer specific facts and economic conditions. Account balances are charged
off against the allowance after all means of collection have been exhausted and
the potential for recovery is considered remote.  The Company did not
have any off-balance-sheet credit exposure relating to its customers, suppliers
or others. As of December 31, 2009 and 2008, the Company has determined that
approximately US$71,000 and US$ nil allowance for doubtful debts is
required.




h)
            Inventories




Inventories,
consisting mainly of low value consumable articles are stated at the lower of
cost or market value. Inventories are charged to expense when being
withdrawn.




i)
            Property
      and equipment, net




Property
and equipment are recorded at cost less accumulated depreciation. Depreciation
is calculated on the straight-line method after taking into account their
respective estimated residual values over the following estimated useful
lives:





Vehicles
            
            5
      yearsOffice
      equipment
            
            3-5
      yearsElectronic
      devices
            
            5
      years




Depreciation
expenses are included in selling expenses, general and administrative expenses
and research and development expenses.




When
property and equipment are retired or otherwise disposed of, resulting gain or
loss is included in net income or loss in the year of disposition for the
difference between the net book value and proceeds received
thereon.  Maintenance and repairs which do not improve or extend the
expected useful lives of the assets are charged to expenses as
incurred.




j)
            Impairment
      of long-lived assets




Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable.  Recoverability of long-lived assets to be held and used
is measured by a comparison of the carrying amount of the asset to the estimated
undiscounted future cash flows expected to be generated by the
asset.  If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment loss is recognized for the
difference between the carrying amount of the asset and its fair value. There
were no impairment losses incurred for the years ended December 31, 2009 and
2008.




F-13




CHINANET
ONLINE HOLDINGS, INC.


NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




k)
            Fair
      Value





Accounting
Standard Codification TM (“ASC”) Topic 820 (formerly Statement of
Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurement and
Disclosures”, defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. This topic also establishes
a fair value hierarchy which requires classification based on observable and
unobservable inputs when measuring fair value. There are three levels of inputs
that may be used to measure fair value:





Level 1
- Quoted
prices in active markets for identical assets or liabilities.





Level 2
- Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.





Level 3
- Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.





Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter.





The
carrying values of cash and cash equivalents, trade and other receivables,
prepayments, payables and other liabilities approximate fair values due to their
short maturities.





Assets
and liabilities measured at fair value on a recurring basis are summarized
as follows:








Fair
      value measurement
              using
      inputs
            
            
            Carrying
      amount as of December 31,Financial
      instruments
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            2009
            
            
            2008US$(’000)
            
            
            US$(’000)
            
            
            US$(’000)
            
            
            US$(’000)
            
            
            US$(’000)Warrant
      liabilities
            
            
            -
            
            
            
            9,564
            
            
            
            -
            
            
            
            9,564
            
            
            
            -





Due to
lack of the liquidity of the Company’s underlying stock and other factors, such
as registration status, the Company estimated the fair value of the warrant
liabilities based upon observable inputs such as quoted prices for similar
securities, quoted price in markets that are not active or other inputs that are
observable to determine the fair value of the warrant liabilities.





There was
no asset or liability measured at fair value on a non-recurring basis as of
December 31, 2009 and 2008, except warrant liabilities as of December 31,
2009.




l)
            Revenue
      recognition




The
Company's revenue recognition policies are in compliance with ASC Topic 605
(Staff Accounting Bulletin No. 104, “Revenue Recognition”). In accordance with
ASC Topic 605, revenues are recognized when the four of the following criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) the
service has been rendered, (iii) the fees are fixed or determinable, and
(iv) collectability is reasonably assured.




F-14


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Sales




Sales
include revenues from reselling of advertising time purchased from TV stations
and internet advertising, reselling of internet advertising spaces and other
advertisement related resources. No revenue from advertising-for-advertising
barter transactions was recognized because the transactions did not meet the
criteria for recognition in ASC Topic 605, subtopic 20 (formerly Emerging Issues
Task Force (“EITF”) abstract issue No. 99-17”).  Advertising contracts
establish the fixed price and advertising services to be
provided.  Pursuant to advertising contracts, the Company provides
advertisement placements in different formats, including but not limited to
banners, links, logos, buttons, rich media and content integration. Revenue is
recognized ratably over the period the advertising is provided and, as such, the
Company considers the services to have been delivered. The Company treats all
elements of advertising contracts as a single unit of accounting for revenue
recognition purposes.  Based upon the Company’s credit assessments of
its customers prior to entering into contracts, the Company determines if
collectability is reasonably assured.  In situations where
collectability is not deemed to be reasonably assured, the Company recognizes
revenue upon receipt of cash from customers, only after services have been
provided and all other criteria for revenue recognition have been
met.




m)
            Cost
      of sales




Cost of
sales primarily includes the cost of media advertising time, internet
advertisement related resources and other technical services purchased from
third parties, labor cost and benefits and PRC business tax.




n)
            Advertising
      costs




Advertising
costs for the Company’s own brand building are not includable in cost of sales,
they are expensed when incurred and are included in “selling expenses” in the
statement of income and comprehensive income. For the year ended December 31,
2009 and 2008, advertising expenses for the Company’s own brand building were
approximately US$3,063,000 and US$1,937,000, respectively.




o)
            Research
      and development expenses




Research
and development costs are charged to expense when incurred. Expenses for
research and development for the years ended December 31, 2009 and 2008 were
approximately US$ 480,000 and US$202,000 respectively.




p)
            Income
      taxes




The
Company adopts ASC Topic 740 (formerly SFAS No. 109, “Accounting for income
taxes”) and uses liability method to accounts for income taxes.  Under
this method, deferred tax assets and liabilities are determined based on the
difference between of the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the period in
which the differences are expected to reverse. The Company records a valuation
allowance to offset deferred tax assets if based on the weight of available
evidence, it is more-likely-than-not that some portion, or all, of the deferred
tax assets will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income statement in the period that includes the
enactment date. The Company had no deferred tax assets and liabilities
recognized for the year ended December 31, 2009 and 2008.




q)
            Uncertain
      tax positions




The
Company adopts ASC Topic 740-10-25-5 through 740-10-25-7 and
740-10-25-13, (formerly FASB Interpretation No. 48 (“FIN 48”)
“Accounting for Uncertainty in Income Taxes”), which 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. This Interpretation also
provides guidance on recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods, and income tax disclosures.  For the
year ended December 31, 2009 and 2008, the Company did not have any interest and
penalties associated with tax positions and did not have any significant
unrecognized uncertain tax positions.




F-15


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


r)
            Share-based
      Compensation




The
Company accounted for share-based compensation in accordance with ASC Topic 718,
(formerly SFAS No. 123R “Share-based Payment”) which requires that
share-based payment transactions be measured based on the grant-date fair value
of the equity instrument issued and recognized as compensation expense over the
requisite service period, or vesting period.




s)
            Comprehensive
      income





The
Company accounts for comprehensive income in accordance with ASC Topic 220,
Comprehensive Income (formerly SFAS 130 “Reporting Comprehensive Income”), which
establishes standards for reporting and displaying comprehensive income and its
components in the consolidated financial statements. Comprehensive income is
defined as the change in equity of a company during a period from transactions
and other events and circumstances excluding transactions resulting from
investments from owners and distributions to owners. Accumulated other
comprehensive income, as presented on the accompanying consolidated balance
sheets are the cumulative foreign currency translation adjustments.




t)
            Earnings
      / (loss) per share




Earnings
/ (loss) per share are calculated in accordance with ASC Topic 260,
“Earnings Per Share” (formerly SFAS No. 128 “Earning Per Share”). Basic
earnings per share is computed by dividing income attributable to common
stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share reflect the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. Common shares issuable upon the
conversion of the convertible preferred shares are included in the computation
of diluted earnings per share on an “if-converted” basis when the impact is
dilutive. The dilutive effect of outstanding common stock warrants is reflected
in the diluted earnings per share by application of the treasury stock method
when the impact is dilutive.




u)
            Commitments
      and contingencies




The
Company has adopted ASC 450 subtopic 20, Loss Contingencies (formerly
SFAS 5 “Accounting for Contingencies”) in determining its accruals and
disclosures with respect to loss contingencies. Accordingly, estimated losses
from loss contingencies are accrued by a charge to income when information
available prior to issuance of the financial statements indicates that it is
probable that a liability have been incurred and the amount of the loss can be
reasonably estimated. Legal expenses associated with the contingency are
expensed as incurred. If a loss contingency is not probable or reasonably
estimable, disclosure of the loss contingency is made in the financial
statements when it is at least reasonably possible that a material loss could be
incurred.




v)
            Recent
      accounting pronouncements




Upon
initial adoption of SFAS 157 on April 1, 2008, the Company adopted FASB ASC
820-10 (formerly FSP FAS 157-2, “Effective Date of FASB Statement
157”), which deferred the provisions of previously issued fair value guidance
for nonfinancial assets and liabilities to the first fiscal period
beginning after November 15, 2008. Deferred nonfinancial assets and liabilities
include items such as goodwill and other non-amortizable intangibles. Effective
January 1, 2009, the Company adopted the fair value guidance for nonfinancial
assets and liabilities. The adoption of this ASC did not have a material impact
on the Company’s Consolidated Financial Statements.




F-16


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Effective
January 1, 2009, the Company adopted FASB ASC 805-10, (formerly SFAS No.
141R, “Business Combinations”), which establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in an acquiree and the goodwill acquired.  In addition, the
provisions in this ASC require that any additional reversal of deferred tax
asset valuation allowance established in connection with fresh start
reporting on January 7, 1998 be recorded as a component of income tax
expense rather than as a reduction to the goodwill established in
connection with the fresh start reporting. The Company will apply ASC
805-10 to any business combinations subsequent to adoption.




Effective
January 1, 2009, the Company adopted FASB ASC 805-20 (formerly FSP FAS
141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies”), which amends ASC 805-10 to require
that an acquirer recognize at fair value, at the acquisition date, an asset
acquired or a liability assumed in a business combination that arises from a
contingency if the acquisition-date fair value of that asset or liability can be
determined during the measurement period. If the acquisition-date fair value of
such an asset acquired or liability assumed cannot be determined, the acquirer
should apply the provisions of ASC Topic 450, Contingences, to determine whether
the contingency should be recognized at the acquisition date or after such date.
The adoption of ASC 805-20 did not
have a material impact on the Company’s Consolidated Financial
Statements.




Effective
January 1, 2009, the Company adopted FASB ASC 810-10-65 (formerly SFAS No. 160,
Non-controlling Interests in Consolidated Financial Statements — an amendment of
ARB No. 51), which amends previously issued guidance to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling interest in
a subsidiary, which is sometimes referred to as minority interest, is an
ownership interest in the consolidated entity that should be reported as equity.
Among other requirements, this Statement requires that the consolidated net
income attributable to the parent and the non-controlling interest be clearly
identified and presented on the face of the consolidated income
statement.  The adoption of the provisions in this ASC did not have a
material impact on the Company’s Consolidated Financial Statements.




Effective
January 1, 2009, the Company adopted FASB ASC 815-10-65 (formerly SFAS No.
161, “Disclosures about Derivative Instruments and Hedging Activities”), which
amends and expands previously existing guidance on derivative instruments to
require tabular disclosure of the fair value of derivative instruments and their
gains and losses. This ASC also requires disclosure regarding the credit-risk
related contingent features in derivative agreements, counterparty credit risk,
and strategies and objectives for using derivative instruments. The adoption of
this ASC did not have a material impact on the Company’s Consolidated Financial
Statements.




Effective
January 1, 2009, the Company adopted FASB ASC 350-30 and ASC 275-10-50 (formerly
FSP FAS 142-3, “Determination of the Useful Life of Intangible Assets:), which
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company will
apply ASC 350-30 and ASC 275-10-50 prospectively to intangible assets acquired
subsequent to the adoption date. The adoption of these revised provisions did
not have a material impact on the Company’s Consolidated Financial
Statements.




Effective
July 1, 2009, the Company adopted FASB ASC 825-10-65 (formerly FSP FAS 107-1 and
Accounting Principles Board 28-1, Interim Disclosures about Fair Value of
Financial Instruments), which amends previous guidance to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. The
adoption of FASB ASC 825-10-65 did not have a material impact on the Company’s
Consolidated Financial Statements.




F-17


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Effective
July 1, 2009, the Company adopted FASB ASC 320-10-65 (formerly FSP FAS 115-2 and
FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments).
Under ASC 320-10-65, an other-than-temporary impairment must be recognized
if the Company has the intent to sell the debt security or the Company is more
likely than not will be required to sell the debt security before its
anticipated recovery. In addition, ASC 320-10-65 requires impairments related to
credit loss, which is the difference between the present value of the cash flows
expected to be collected and the amortized cost basis for each security, to be
recognized in earnings while impairments related to all other factors to be
recognized in other comprehensive income. The adoption of ASC 320-10-65 did not
have a material impact on the Company’s Consolidated Financial
Statements.




Effective
July 1, 2009, the Company adopted FASB ASC 820-10-65 (formerly FSP FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly), which provides guidance on how to determine the fair
value of assets and liabilities when the volume and level of activity for the
asset or liability has significantly decreased when compared with normal market
activity for the asset or liability as well as guidance on identifying
circumstances that indicate a transaction is not orderly. The adoption of ASC
820-10-65 did not have a material impact on the Company’s Consolidated Financial
Statements.




Effective
July 1, 2009, the Company adopted FASB ASC 855-10 (formerly SFAS No. 165,
“Subsequent Events”), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued. Adoption of ASC
855-10 did not have a material impact on the Company’s Consolidated Financial
Statements.




In
December 2008, the FASB issued ASC 715, Compensation – Retirement Benefits
(formerly FASB FSP FAS 132(R)-1, “Employers’ Disclosures about Postretirement
Benefit Plan Assets”), which expands the disclosure requirements about plan
assets for defined benefit pension plans and postretirement plans. The adoption
of these disclosure requirements did not have any material effect on the
Company’s Consolidated Financial Statements.




In
August, 2009, the FASB issued ASC Update No. 2009-05 to provide guidance on
measuring the fair value of liabilities under FASB ASC 820 (formerly SFAS No.
157, “Fair Value Measurements”).  The adoption of this Update did not
have any material effect on the Company’s Consolidated Financial
Statements.




w)
            New
      accounting pronouncement to be
adopted




In June
2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140, (codified by ASU No.
2009-16 issued in December 2009). SFAS No. 166 limits the circumstances in
which a financial asset should be derecognized when the
transferor has not transferred the entire financial asset by taking into
consideration the transferor’s continuing involvement. The standard requires
that a transferor recognize and initially measure at fair value all assets
obtained (including a transferor’s beneficial interest) and liabilities incurred
as a result of a transfer of financial assets accounted for as a sale. The
concept of a qualifying special-purpose entity is removed from SFAS
No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” along with the exception from applying FIN
46(R), Consolidation of Variable Interest Entities. The standard is effective
for the first annual reporting period that begins after November 15, 2009
(i.e. the Company’s fiscal ending December 31, 2010). Earlier application is
prohibited. It is expected the adoption of this Statement will have no material
effect on the Company’s Consolidated Financial Statements.




F-18


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
No. 46(R), (codified by ASU No. 2009-17 issued in December 2009). The
standard amends FIN No. 46(R) to require a company to analyze whether its
interest in a variable interest entity (“VIE”) gives it a controlling financial
interest. A company must assess whether it has an implicit financial
responsibility to ensure that the VIE operates as designed when determining
whether it has the power to direct the activities of the VIE that significantly
impact its economic performance. Ongoing reassessments of whether a company is
the primary beneficiary are also required by the standard. SFAS No. 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE. The standard also eliminates certain
exceptions that were available under FIN No. 46(R). This Statement will be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009 (i.e. the Company’s fiscal
ending December 31, 2010). Earlier application is prohibited. Comparative
disclosures will be required for periods after the effective date. It is
expected the adoption of this Statement will have no material effect on the
Company’s Consolidated Financial Statements.




In
October 2009, the FASB concurrently issued the following ASC Updates
(ASU):




ASU No.
2009-13—Revenue Recognition (ASC Topic 605): Multiple-Deliverable Revenue
Arrangements (formerly EITF Issue No. 08-1).  ASU No. 2009-13 modifies
the revenue recognition guidance for arrangements that involve the delivery of
multiple elements, such as product, software, services or support, to a customer
at different times as part of a single revenue generating
transaction.  This standard provides principles and application
guidance to determine whether multiple deliverables exist, how the individual
deliverables should be separated and how to allocate the revenue in the
arrangement among those separate deliverables. The standard also expands the
disclosure requirements for multiple deliverable revenue
arrangements.




ASU No.
2009-14—Software (ASC Topic 985): Certain Revenue Arrangements That Include
Software Elements (formerly EITF Issue No. 09-3). ASU No. 2009-14 removes
tangible products from the scope of software revenue recognition guidance and
also provides guidance on determining whether software deliverables in an
arrangement that includes a tangible product, such as embedded software, are
within the scope of the software revenue guidance.




ASU No.
2009-13 and ASU No. 2009-14 should be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. Alternatively, an
entity can elect to adopt these standards on a retrospective basis, but both
these standards must be adopted in the same period using the same transition
method. The Company expects to apply these ASU Updates on a prospective basis
for revenue arrangements entered into or materially modified beginning January
1, 2011.  The Company is currently evaluating the potential impact
these ASC Updates may have on its financial position and results of
operations.




In
October 2009, the FASB also issued ASU No. 2009-15—Accounting for Own-Share
Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing. ASU 2009-15 amends ASC 470-20, Debt with Conversion and Other
Options, to provide accounting and reporting guidance for own-share lending
arrangements issued in contemplation of convertible debt issuance. ASU 2009-15
is effective for fiscal years beginning on or after December 15, 2009 with
retrospective application required.




In
January 2010, the FASB issued the following ASC Updates:




ASU No.
2010-01—Equity (Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash. This Update clarifies that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in EPS prospectively and is not a stock dividend for purposes of
applying Topics 505 and 260 (Equity and Earnings Per Share). The amendments in
this Update are effective for interim and annual periods ending on or after
December 15, 2009 with retrospective application.




F-19


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


ASU No.
2010-02—Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary. This Update amends ASC 810 subtopic 10 and related
guidance to clarify that the scope of the decrease in ownership provisions of
the Subtopic and related guidance applies to (i) a subsidiary or group of assets
that is a business or nonprofit activity; (ii) a subsidiary that is a business
or nonprofit activity that is transferred to an equity method investee or joint
venture; and (iii) an exchange of a group of assets that constitutes a business
or nonprofit activity for a non-controlling interest in an entity, but does not
apply to: (i) sales of in substance real estate; and (ii) conveyances of
petroleum and gas mineral rights. The amendments in this Update are effective
beginning in the period that an entity adopts FAS 160 (now included in ASC 810
subtopic 10).




ASU No.
2010-05—Compensation—Stock Compensation (Topic 718): Escrowed Share Arrangements
and the Presumption of Compensation. This Update simply codifies EITF Topic
D-110, “Escrowed Share Arrangements and the Presumption of Compensation and does
not change any existing accounting standards.




ASU No.
2010-06—Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements.  This Update amends ASC 820
subtopic 10 that requires new disclosures about transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. This Update also amends
ASC 820 subtopic 10 to clarify certain existing disclosures. The new disclosures
and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements, which are effective for fiscal
years beginning after December 15, 2010.




The
Company expects that the adoption of the above Updates issued in January 2010
will not have any significant impact on its financial position and results of
operations.




Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s Consolidated Financial
Statements upon adoption.




3.
            Cash
      and cash equivalents


As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Cash
            
            
            616
            
            
            
            131Deposits
      with short-term maturities
            
            
            13,301
            
            
            
            2,54813,917
            
            
            
            2,679




The
Company received a net proceeds of approximately US$9,162,000 in its August 2009
financing for continuing business expansion and development in PRC. The
Company’s operations in PRC use RMB as its functional currency. The company is
subject to the effects of exchange rate fluctuation with respect to any of these
currencies.  Among approximately US$25,764,000 total assets of the
Company, cash and cash equivalents increased to approximately US$13,917,000 as
of December 31, 2009.




F-20





CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


4.
            Accounts
      receivable




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Accounts
      receivable
            
            
            3,244
            
            
            
            978Less:
      Allowance for doubtful debts
            
            
            71
            
            
            
            -Accounts
      receivable,net
            
            
            3,173
            
            
            
            978




All of
the accounts receivable are non-interest bearing.







5.
            Other
      receivables




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Advance
      deposits for TV advertisement bidding
            
            
            2, 261
            
            
            
            -Staff
      advances for normal business purpose
            
            
            375
            
            
            
            -2,636
            
            
            
            -





Advance
deposits for TV advertisement bidding were deposits made by the Company to
participate in the biddings for TV advertisement time of 2010 in several TV
stations, and approximately US$1,550,000 has been collected in January 2010.
Management believes no allowance for doubtful accounts is required for these
other receivables for the year ended December 31, 2009.




6.
            Prepayments
      and deposit to suppliers




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Contract
      execution guarantees to TV advertisement  and internet resources
      providers
            
            
            3,086
            
            
            
            2,268Prepayments
      to TV advertisement and internet resources providers
            
            
            991
            
            
            
            1,784Other
      deposits and prepayments
            
            
            34
            
            
            
            204,111
            
            
            
            4,072




F-21


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Contract
execution guarantee to TV advertisement and internet resources providers are
paid as a contractual deposit to the Company’s service
providers.  These amounts will be used to offset the service fee needs
to be paid to the service providers in the last month of each contract
period.




According
to the contracts signed between the Company and its suppliers, the Company is
normally required to pay the contract amount in advance.  These
prepayments will be transferred to cost of sales when the related services are
provided.




Management
believes that there will not be any collectability issue about these deposits
and prepayments, and no allowance for doubtful accounts is required for the year
ended December 31, 2009 and 2008.




7.
            Due
      from related parties


As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Beijing
      Hongfujiali Information Technology Co., Ltd.
            
            
            439
            
            
            
            -Beijing
      Saimeiwei Food Equipment Technology Co., Ltd.
            
            
            53
            
            
            
            49Beijing
      Zujianwu Technology Co., Ltd.
            
            
            -
            
            
            
            15Beijing
      Xiyue Technology Co., Ltd.
            
            
            -
            
            
            
            7Beijing
      Fengshangyinli Technology Co., Ltd
            
            
            -
            
            
            
            15Soyilianmei
      Advertising Co., Ltd.
            
            
            -
            
            
            
            23492
            
            
            
            109




These
related parties are directly or indirectly owned by the Control Group (see note
8) or the management of the Company.  Amount due from Beijing
Hongfujiali Information Technology Co., Ltd. which amounting approximately
US$439,000 was advanced deposit for participating in year 2010 advertising
resources bidding which has been collected in January 2010.  The rest
of the related party balances were outstanding payments for advertising services
the Company provided to these related parties.




8.
            Due
      from Control Group


As
      of December 31,2009
            
            2008US$(’000)
            
            US$(’000)Due
      from Control Group
            -
            
            243




F-22


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Mr.
Handong CHENG, Mr. Xuanfu, LIU and Ms. Li SUN, the owners of the Company’s PRC
VIEs, Business Opportunities Online, and Beijing CNET Online before the Offshore
Restructuring, are collectively referred to as the “Control Group”.




Due from
Control Group were short-term, non-interest bearing loans borrowed by the
Control Group individuals.




9.
            Property
      and equipment




Property
and equipment consist of the following:




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Vehicles
            
            
            423
            
            
            
            90Office
      equipment
            
            
            816
            
            
            
            286Electronic
      devices
            
            
            438
            
            
            
            437Total
      property and equipment
            
            
            1,677
            
            
            
            813Less:
      accumulated depreciation
            
            
            322
            
            
            
            1351,355
            
            
            
            678




Depreciation
expenses in aggregate for the years ended December 31, 2009 and 2008 were
approximately US$207,000 and $77,000 respectively.




10.
            Other
      payables


As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Due
      to third parties
            
            
            -
            
            
            
            1,255Others
            
            
            27
            
            
            
            7827
            
            
            
            1,333





Due to
third parties as of December 31, 2008 represents non-interest bearing, working
capital loans borrowed by the Company from third parties, which have been paid
off as of December 31, 2009.




F-23





CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




11.
            Due
      to related parties




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Beijing
      Rongde Information Technology Co., Ltd.
            
            
            -
            
            
            
            292Beijing
      Saimeiwei Food Equipments Technology Co., Ltd
            
            
            14
            
            
            
            54Beijing
      Telijie Century Environmental Technology Co., Ltd.
            
            
            10
            
            
            
            -24
            
            
            
            346





The
related parties listed above are directly or indirectly owned by the Control
Group, the Company provided advertising services to them. The advance payments
listed above are received from these parties for advertising services will be
provided in the future periods.




12.
            Due
      to Control Group




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Due
      to Control Group
            
            
            1,142
            
            
            
            1,149





Due to
Control Group were amounts paid by Control Group individuals on behalf of the
Company which mainly included staff salary, performance bonus, cost of resources
purchased and other administrative expenses.




13.
            Taxation




1)Income
tax




i). The
Company is incorporated in the state of Nevada.  Under the current law
of Nevada, the company is not subject to state corporate income
tax.  The Company become a holding company and does not conduct any
substantial operations of its own after the Share Exchange. No provision for
federal corporate income tax have been made in the financial statements as the
Company has no assessable profits for the year ended December 31, 2009 or prior
periods.




ii).
China Net BVI was incorporated in the British Virgin Islands
(“BVI”).  Under the current law of the BVI, the Company is not subject
to tax on income or capital gains.  Additionally, upon payments of
dividends by China Net to its shareholders, no BVI withholding tax will be
imposed.




F-24


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




iii).
China Net HK was incorporated in Hong Kong and does not conduct any substantial
operations of its own. No provision for Hong Kong profits tax have been made in
the financial statements as China Net HK has no assessable profits for the year
ended December 31, 2009 or prior periods. Additionally, upon payments of
dividends by China Net HK to its shareholders, no Hong Kong withholding tax will
be imposed.




iv).  The
Company’s PRC operating entities, being incorporated in the PRC, are governed by
the income tax law of the PRC and is subject to PRC enterprise income tax
(“EIT”).  Effective from January 1, 2008, the EIT rate of PRC was
changed from 33% of to 25%, and applies to both domestic and foreign invested
enterprises.




l
            Rise
      King WFOE is a software company qualified by the related PRC governmental
      authorities and was entitled to a two-year EIT exemption from its first
      profitable year and a 50% reduction of its applicable EIT rate, which is
      25% of its taxable income for the exceeding three years.  Rise
      King WFOE had a net loss for the year ended December 31, 2008 and its
      first profitable year is fiscal year 2009 which has been verified by the
      local tax bureau by accepting the application filed by the
      Company.  Therefore, it was entitled to a two-year EIT exemption
      for fiscal year 2009 through fiscal year 2010 and a 50% reduction of its
      applicable EIT rate which is 25% for fiscal year 2011 through fiscal year
      2013.




l
            Business
      Opportunity Online was qualified as a High and New Technology Enterprise
      in Beijing High-Tech Zone in 2005 and was entitled to a three-year EIT
      exemption for fiscal year 2005 through fiscal year 2007 and a 50%
      reduction of its applicable EIT rate for the exceeding three years for
      fiscal year 2008 through fiscal year 2010.  However, in March
      2007, a new enterprise income tax law (the “New EIT”) in the PRC was
      enacted which was effective on January 1, 2008. Subsequently, on
      April 14, 2008, relevant governmental regulatory authorities released
      new qualification criteria, application procedures and assessment
      processes for “High and New Technology Enterprise” status under the New
      EIT which would entitle the re-qualified and approved entities to a
      favorable statutory tax rate of 15%.  Business Opportunity
      Online did not obtain the approval of its reassessment of the
      qualification as a “High and New Technology Enterprise” under the New EIT
      law as of December 31, 2008, therefore, its income tax was computed using
      the income tax rate of 25% for the year ended December 31,
      2008.




With an
effective date of September 4, 2009, Business Opportunity Online obtained the
approval of its reassessment of the qualification as a “High and New Technology
Enterprise” under the New EIT law and was entitled to a favorable statutory tax
rate of 15%.  Under the previous EIT laws and regulations, High and
New Technology Enterprises enjoyed a favorable tax rate of 15% and were exempted
from income tax for three years beginning with their first year of operations,
and were entitled to a 50% tax reduction to 7.5% for the subsequent three years
and 15% thereafter. The current EIT Law provides grandfathering treatment for
enterprises that were (1) qualified as High and New Technology Enterprises
under the previous EIT laws, and (2) established before March 16,
2007, if they continue to meet the criteria for High and New Technology
Enterprises under the current EIT Law. The grandfathering provision allows
Business Opportunity Online to continue enjoying their unexpired tax holidays
provided by the previous EIT laws and regulations. Therefore, its income tax was
computed using a tax rate of 7.5% for the year ended December 31, 2009 due to
its unexpired tax holidays for fiscal year 2009 through fiscal year
2010.




l
            The
      applicable income tax rate for Beijing CNET Online was 25% for the year
      ended December 31, 2009 and 2008.




l
            The
      New EIT also imposed a 10% withholding income tax for dividends
      distributed by a foreign invested enterprise to its immediate holding
      company outside China, which were exempted under the previous enterprise
      income tax law and rules.  A lower withholding tax rate will be
      applied if there is a tax treaty arrangement between mainland China and
      the jurisdiction of the foreign holding company. Holding companies in Hong
      Kong, for example, will be subject to a 5% rate.  Rise King WFOE
      is invested by immediate holding company in Hong Kong and will be entitled
      to the 5% preferential withholding tax rate upon distribution of the
      dividends to its immediate holding
company.




F-25


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




2)
Business tax and relevant surcharges




Revenue
of advertisement services are subject to 5.5% business tax and 3% cultural
industry development surcharge of the net service income after deducting amount
paid to ending media promulgators. Revenue of internet technical support
services is subjected to 5.5% business tax.  Business tax charged was
included in cost of sales.




3)
Value added tax




As a
small-scale value added tax payer, revenue from sales of self-developmented
software of Rise King WFOE is subjected to 3% value added tax.







As of
December 31, 2009 and 2008, taxes payable consist of:




As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Business
      tax payable
            
            
            1,003
            
            
            
            556Culture
      industry development surcharge payable
            
            
            27
            
            
            
            4Value
      added tax payable
            
            
            8
            
            
            
            -Enterprise
      income tax payable
            
            
            886
            
            
            
            1,132Individual
      income tax payable
            
            
            54
            
            
            
            541,978
            
            
            
            1,746




A
reconciliation of the provision for income taxes determined at the US federal
corporate income tax rate to the Company’s effective income tax rate is as
follows:





Year
      ended December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Pre-tax
      income
            
            
            4,899
            
            
            
            3,762US
      federal rate
            
            
            35
            %
            
            
            35
            %Income
      tax expense computed at U.S. federal rate
            
            
            1,715
            
            
            
            1,317Reconciling
      items:Rate
      differential for domestic earnings
            
            
            (1,912
            )
            
            
            (376
            )Tax
      holiday effects
            
            
            (692
            )
            
            
            -Non-deductible
      expenses
            
            
            1,769
            
            
            
            21Effective
      tax expense
            
            
            880
            
            
            
            962




F-26


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  As of
December 31, 2009 and 2008, the Company did not have any significant temporary
differences and carryforwards that may result in deferred
tax.










14.
            Dividend
      payable





As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Dividend
      payable to Series A convertible stock holders
            
            
            373
            
            
            
            -




Dividend
to Series A convertible stock holders was calculated at the per annum rate of
10% of the liquidation preference amount of the Series A preferred stock which
was US$10,304,000 for the year ended December 31, 2009 commencing from the
dividend commencement date which is August 21, 2009.




15.
            Long-term
      borrowing from director





As
      of December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Long-term
      borrowing from director
            
            
            128
            
            
            
            128




Long-term
borrowing from director was a non-interest bearing loan from a director of the
Company relating to the long-term investment in the Company’s wholly-owned
subsidiary Rise King WFOE.




16.
            Warrant
      liabilities




On August
21, 2009 (the “Closing Date”), the Company entered into a securities purchase
agreement (the “Purchase Agreement”), with several investors, including
institutional, accredited and non-US persons and entities (the “Investors”),
pursuant to which the Company sold units, comprised of 10% Series A Convertible
Preferred Stock, par value US$0.001 per share (the “Series A preferred stock”),
and two series of warrants, for a purchase price of US$2.50 per unit (the
“August 2009 Financing”).  The Company sold 4,121,600 units in the
aggregate, which included (i) 4,121,600 shares of Series A preferred stock, (ii)
Series A-1 Warrant to purchase 2,060,800 shares of common stock at an exercise
price of US$3.00 per share with a three-year term, and (iii) Series A-2 Warrants
to purchase 2,060,800 shares of common stock at an exercise price of US$3.75
with a five-year term.  Net proceeds were approximately US$9,162,000,
net of issuance costs of approximately US$1,142,000.  TriPoint Global
Equities, LLC acted as placement agent and received (i) a placement fee in the
amount equal to 8% of the gross proceeds and (ii) warrants to purchase up to
329,728 shares of common stock at an exercise price of US$2.50, 164,864 shares
at an exercise price of US$3.00 and 164,864 shares at an exercise price of
US$3.75 respectively, with a five-year term (“Placement agent warrants” and
together with the Series A-1 Warrant and Series A-2 Warrant, the
“Warrants”).




F-27




CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




The
Warrants have an initial exercise price which is subject to adjustments in
certain circumstances for stock splits, combinations, dividends and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents.  The Warrants may not be exercised if it
would result in the holder beneficially owning more than 9.99% of the Company’s
outstanding common shares. That limitation may be waived by the holders of the
warrants by sending a written notice to the Company not less than 61 days prior
to the date that they would like to waive the limitation.




Accounting for
warrants





The
Company analyzed the Warrants in accordance to ASC Topic 815 “Derivatives and
Hedging” (formerly SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities”) to determine whether the Warrants meet the definition of a
derivative under ASC Topic 815 and if so, whether the Warrants meet the scope
exception of ASC Topic 815, which is that contracts issued or held by the
reporting entity that are both (1) indexed to its own stock and (2) classified
in stockholders’ equity shall not be considered to be derivative instruments for
purposes of ASC Topic 815.  The Company adopted the provisions of ASC
Topic 815 subtopic 40 (formerly Emerging Issues Task Force (“EITF”) Issue No.
07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock”), which applies to any freestanding financial instruments or
embedded features that have the characteristics of a derivative, as defined by
ASC Topic 815 and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock.  As a result of adopting ASC
Topic 815 subtopic 40, the Company concluded that the Warrants issued in the
August 2009 financing should be treated as a derivative liability, because the
Warrants are entitled to a price adjustment provision to allow the exercise
price to be reduced, in the event the Company issues or sells any additional
shares of common stock at a price per share less than the then-applicable
exercise price or without consideration, which is typically referred to as a
“Down-round protection” or “anti-dilution” provision.  According to
ASC Topic 815 subtopic 40, the “Down-round protection” provision is not
considered to be an input to the fair value of a fixed-for-fixed option on
equity shares which leads the Warrants fail to be qualified as indexed to the
Company’s own stock and then to fail to meet the scope exceptions of ASC Topic
815. Therefore, the Company accounted for the Warrants as derivative liabilities
under ASC Topic 815.  Pursuant to ASC Topic 815, derivatives should be
measured at fair value and re-measured at fair value with changes in fair value
recorded in earnings at each reporting period.




Fair value of the
warrants





Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments.




Allocation of the proceeds
at commitment date and re-measurement as of December 31,
2009





As
described in Note 17 below, the total proceeds allocated to the Series A-1
warrants and Series A-2 warrants were approximately US$4,406,000 as of August
21, 2009, and the re-measured fair value of the warrants as of December 31, 2009
was approximately US$8,532,000. The changes in fair value of the Series A-1
warrant and Series A-2 warrant which are approximately US$4,126,000 were
recorded in earnings for the year ended December 31, 2009.




F-28


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Placementagentwarrants




In
accordance with ASC Topic 340 subtopic 10 section S99-1 (formerly Staff
Accounting Bulletin Topic 5.A: “Miscellaneous Accounting-Expenses of
Offering”),   “specific incremental costs directly attributable
to a proposed or actual offering of securities may properly be deferred and
charged against the gross proceeds of the offering.”  In accordance
with the SEC accounting and reporting manual “cost of issuing equity securities
are charged directly to equity as deduction of the fair value assigned to share
issued.”  Accordingly, the Company concluded that the warrants issued
to the placement agents are directly attributable to the August 2009
financing.  If the Company had not issued the warrants to the
placement agent, the Company would have had to pay the same amount of cash as
the fair value.  Therefore, the Company deducted the total fair value
of the Placement agent warrants as of the Commitment Date which was
approximately US$733,000 as a deduction of the fair value assigned to the Series
A preferred stock.




Since
they contain the same terms as the Series A-1 and Series A-2 Warrants, the
Placement Agent Warrants are also entitled to the benefits of the “Down-round
protection” provision, which means that the Placement Agent Warrants will also
need to be accounted for as a derivative under ASC Topic 815 with changes in
fair value recorded in earnings at each reporting period. As of December 31,
2009, the total fair value of the Placement agent warrants were approximately
US$1,032,000, therefore, the changes of the total fair value of the Placement
agent warrants which were approximately US$299,000 were recorded in earnings for
the year ended December 31, 2009.




The
following table summarized the above transactions:





As
      of
              December
      31, 2009
            
            
            As
      of
              August
      21,
              2009
            
            
            Changes
      in
              Fair
      ValueUS$’000
            
            
            US$’000
            
            
            US$’000Fair
      value of the Warrants:Series
      A-1 warrant
            
            
            4,513
            
            
            
            2,236
            
            
            
            2,277Series
      A-2 warrant
            
            
            4,019
            
            
            
            2,170
            
            
            
            1,849Placement
      agent warrants
            
            
            1,032
            
            
            
            733
            
            
            
            2999,564
            
            
            
            5,139
            
            
            
            4,425




17.
            Series
      A convertible preferred shares




Key terms
of the Series A preferred stock sold by the Company in the August 2009 financing
are summarized as follows:




Dividends




Dividends
on the Series A preferred stock shall accrue and be cumulative from and after
the issuance date.  For each outstanding share of Series A preferred
stock, dividends are payable at the per annum rate of 10% of the Liquidation
Preference Amount of the Series A preferred stock.  Dividends are
payable quarterly within thirty (30) days following the last Business Day of
each August, November, February and May of each year (each, a “Dividend Payment
Date”), and continuing until such stock is fully converted. The Company shall
have the right, at its sole and exclusive option, to pay all or any portion of
each and every quarterly dividend that is payable on each Dividend Payment Date,
either (i) in cash, or (ii) by issuing to the holder of Series A preferred stock
such number of additional Conversion Shares which, when multiplied by US$2.5
would equal the amount of such quarterly dividend not paid in cash.




F-29


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Voting
Rights




The
Series A preferred stock holders are entitled to vote separately as a class on
matters affecting the Series A Preferred Stock and with regard to certain
corporate matters set forth in the Series A Certificate of Designation, so long
as any shares of the Series A preferred stock remain outstanding. Holders of the
Series A Preferred Stock are not, however, entitled to vote on general matters
along with holders of common stock.




Liquidation
Preference




In the
event of the liquidation, dissolution or winding up of the affairs of the
Company, whether voluntary or involuntary (each, a “Liquidation”), the holders
of the Series A preferred stock then outstanding shall be entitled to receive,
out of the assets of the Company available for distribution to its stockholders,
an amount equal to US$2.5 per share of the Series A preferred stock, plus any
accrued but unpaid dividends thereon, whether or not declared, together with any
other dividends declared but unpaid thereon, as of the date of Liquidation
(collectively, the “Series A Liquidation Preference Amount”) before any payment
shall be made or any assets distributed to the holders of the common stock or
any other junior stock. If upon the occurrence of Liquidation, the assets thus
distributed among the holders of the Series A shares shall be insufficient to
permit the payment to such holders of the full Series A Preference Amount, then
the entire assets of the Company legally available for distribution shall be
distributed ratably among the holders of the Series A preferred
stock.




Conversion
Rights




Voluntary
Conversion:




At any
time on or after the date of the initial issuance of the Series A preferred
stock, the holder of any such shares of Series A preferred stock may, at such
holder’s option, subject to the limitations described below in “Conversion Restriction”,
elect to convert all or portion of the shares of Series A preferred stock held
by such person into a number of fully paid and non-assessable shares of common
stock equal to the quotient of Liquidation preference amount of the Series A
preferred stock divided by the initial conversion price of US$2.5. The initial
conversion price may be adjusted for stock splits and combinations, dividend and
distributions, reclassification, exchange or substitution, reorganization,
merger, consolidation or sales of assets, issuance of additional shares of
common stock or equivalents with lower price or without considerations etc, as
stimulated in the Certification of Designation.




Mandatory
Conversion:




All
outstanding shares of the Series A preferred stock shall automatically convert
into shares of Common Stock, subject to the limitations described below in“Conversion Restriction”, at
the earlier to occur of (i) twenty-four month anniversary of the Closing Date,
and (ii) at such time that the Volume Weighted Average Price of the Company’s
common stock is no less than US$5.00 for a period of ten (10) consecutive
trading days with the daily volume of the common stock of at least 50,000 shares
per day.




Conversion
Restriction




Holders
of the Series A preferred stock may not convert the preferred stock to shares of
common stock if the conversion would result in the holder beneficially owning
more than 9.99% of the Company’s outstanding shares of common stock. That
limitation may be waived by a holder of the Series A preferred stock by sending
a written notice to the Company on not less than 61 days prior to the date that
they would like to waive the limitation.




F-30


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Registration Rights
Agreement




In
connection with the Financing, the Company entered into a registration rights
agreement (the “RRA”) with the Investors in which the Company agreed to file a
registration statement (the “Registration Statement”) with the Securities and
Exchange Commission to register the shares of common stock underlying the Series
A preferred stock (the “Conversion Shares”) and the Warrants (the “Warrant
Shares”), thirty (30) days after the closing of the Financing.  The
Company has agreed to use its best efforts to have the Registration Statement
declared effective within 150 calendar days after filing, or 180 calendar days
after filing in the event the Registration Statement is subject to a “full
review” by the SEC.




The
Company is required to keep the Registration Statement continuously effective
under the Securities Act until such date as is the earlier of the date when all
of the securities covered by that registration statement have been sold or the
date on which such securities may be sold without any restriction pursuant to
Rule 144 (the “Financing Effectiveness Period”).  The Company will pay
liquidated damages of 2% of each holder’s initial investment in the Units sold
in the Financing per month, payable in cash, up to a maximum of 10%, if the
Registration Statement is not filed or declared effective within the foregoing
time periods or ceases to be effective prior to the expiration of the Financing
Effectiveness Period.  However, no liquidated damages shall be paid
with respect to any securities being registered that the Company are not
permitted to include in the Financing Registration Statement due to the SEC’s
application of Rule 415.




The
Company evaluated the contingent obligation related to the RRA liquidated
damages in accordance to “ASC Topic 825 “Financial Instruments” subtopic 20”
(formerly Financial Accounting Standards Board Staff Position No. EITF 00-19-2
“Accounting for Registration Payment Arrangements”), which required the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement be separately recognized and measured in accordance with “ASC Topic
450” “Contingencies” (formerly SFAS No. 5, “Accounting for Contingencies”). The
shares of common stock underlying the Series A preferred stock (the “Conversion
Shares”) and the Warrants (the “Warrant Shares”) have been successfully
registered by the Company.  Therefore, the Company concluded that such
obligation was not probable to incur and no contingent obligation related to the
RRA liquidated damages needs to be recognized for the year ended December 31,
2009.




Security Escrow
Agreement




The
Company entered into a securities escrow agreement with the Investors (the
“Escrow Agreement”), pursuant to which Rise King Investment Limited, a British
Virgin Islands company (the “Principal Stockholder”), initially placed 2,558,160
shares of Common Stock (the “Escrow Shares”) into an escrow
account.  Of the Escrow Shares, 1,279,080 shares (equivalent to 50% of
the Escrow Shares) are being held as security for the achievement of audited net
income equal to or greater than $7.7 million for the fiscal year 2009 (the “2009
Performance Threshold”) and the remaining 1,279,080 of the Escrow Shares are
being held as security for the achievement of audited net income equal to or
greater than $14 million for the fiscal year 2010 (the “2010 Performance
Threshold”).




If the
Company achieves at least 95% of the applicable Performance Threshold, all of
the Escrow Shares for the corresponding fiscal year shall be returned to the
Principal Stockholder. If the Company achieves less than 95% of the applicable
Performance Threshold, the Investors shall receive in the aggregate, on a pro
rata basis (based upon the number of shares of Series A preferred stock or
conversion shares owned by each such Investor as of the date of distribution of
the Escrow Shares), 63,954 shares of the Escrow Shares for each percentage by
which the applicable Performance Threshold was not achieved up to the total
number of Escrow Shares for the applicable fiscal year.  Any Escrow
Shares not delivered to any investor because such investor no longer holds
shares of Series A preferred stock or conversion shares shall be returned to the
Principal Stockholder.




F-31


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




For the
purposes of the Escrow Agreement, net income is defined in accordance with US
GAAP and reported by the Company in its audited financial statements for each of
the fiscal years ended 2009 and 2010; provided, however, that net income for
each of fiscal years ended 2009 and 2010 shall be increased by any non-cash
charges incurred (i) as a result of the Financing , including without
limitation, as a result of the issuance and/or conversion of the Series A
Preferred Stock, and the issuance and/or exercise of the Warrants, (ii) as a
result of the release of the Escrow Shares to the Principal Stockholder and/or
the investors, as applicable, pursuant to the terms of the Escrow Agreement,
(iii) as a result of the issuance of ordinary shares of the Principal
Stockholder to Messrs. Handong Cheng and Xuanfu Liu and Ms. Li Sun (the “PRC
Shareholders”), upon the exercise of options granted to the PRC Shareholders by
the Principal Stockholder, (iv) as a result of the issuance of warrants to any
placement agent and its designees in connection with the Financing, (v) the
exercise of any warrants to purchase common stock outstanding  and
(vi) the issuance under any performance based equity incentive plan that the
Company adopts.




In
accordance to ASC Topic 718 and ASU No. 2010-05—Compensation—Stock Compensation:
Escrowed Share Arrangements and the Presumption of Compensation.  The
Company evaluated the substance of this arrangement and whether the presumption
of compensation has been overcome. According to the Security Escrow Agreement
signed between the Company and its investors, the release of these escrow shares
to the Principal Stockholder will not regard to continue employment, and this
arrangement is in substance an inducement made to facilitate the financing
transaction on behalf of the Company, rather than as
compensatory.  Therefore, the Company concluded that this arrangement
should be recognized and measured according to its nature and reflects as a
deduction of the proceeds allocated to the newly issued securities with no
compensation expenses recorded in earnings.




Fair Value of the Series A
preferred stock:





Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and Series A preferred stock using various pricing models and available
information that management deems most relevant. Among the factors considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer or underlying
company, the quoted market price of similar traded securities, and other factors
generally pertinent to the valuation of financial instruments.




Accounting for the Series A
preferred stock





The
Series A preferred stock has been classified as permanent equity as there was no
redemption provision at the option of the holders that is not within the control
the Company on or after an agreed upon date. The Company evaluated the embedded
conversion feature in its Series A preferred stock to determine if there was an
embedded derivative requiring bifurcation.  The Company concluded that
the embedded conversion feature of the Series A preferred stock does not
required to be bifurcated because the conversion feature is clearly and closely
related to the host instrument.




Allocation of the proceeds
at commitment date and calculation of beneficial conversion
feature





The
following table summarized the allocation of proceeds to the Series A preferred
stock and the Warrants:




F-32


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS


Gross
      proceeds
              Allocated
            
            
            Number
      of
              Instruments
            
            
            Allocated
      value per instrumentUS$ (’000)
            
            
            
            
            
            US$Series
      A-1 Warrant
            
            
            2,236
            
            
            
            2,060,800
            
            
            
            1.08Series
      A-2 Warrant
            
            
            2,170
            
            
            
            2,060,800
            
            
            
            1.05Series
      A preferred stock
            
            
            5,898
            
            
            
            4,121,600
            
            
            
            1.43Total
            
            
            10,304





In
accordance to the schedule above, the unit price is: [1.08*50%+1.05*50%+1.43] =
US$2.5 per unit.





The
Company then evaluated whether a beneficial conversion feature exists by
comparing the operable conversion price of Series A preferred stock with the
fair value of the common stock at the commitment date.  The Company
concluded that the fair value of common stock was greater than the operable
conversion price of Series A preferred stock at the commitment date and the
intrinsic value of the beneficial conversion feature is greater than the
proceeds allocated to the Series A preferred stock.  In accordance to
ASC Topic 470 subtopic 20, if the intrinsic value of beneficial conversion
feature is greater than the proceeds allocated to the Series A preferred stock,
the amount of the discount assigned to the beneficial conversion feature is
limited to the amount of the proceeds allocated to the Series A preferred
stock.  Accordingly, the total proceeds allocated to Series A
preferred stock were allocated to the beneficial conversion feature with a
credit to Additional paid-in capital upon the issuance of the Series A preferred
stock.  Since the Series A preferred stock may convert to the
Company’s common stock at any time on or after the initial issue date, all
discount was immediately recognized as a deemed dividend and a reduction to
net income attributable to common shareholders.





According
to ASC Topic 340 subtopic 10 section S99-1 (formerly Staff Accounting Bulletin
Topic 5.A: “Miscellaneous Accounting-Expenses of
offering”),   “specific incremental costs directly attributable
to a proposed or actual offering of securities may properly be deferred and
charged against the gross proceeds of the offering”.  And in
accordance with the SEC accounting and reporting manual “cost of issuing equity
securities are charged directly to equity as deduction of the fair value
assigned to share issued”.  Accordingly, the Company deducted the
direct issuing cost paid in cash which were approximately US$1,142,000 from the
assigned fair value to the Series A preferred stock.




18.
            Reverse
      acquisition and common stock (reclassification of the
      stockholders’ equity)





In a
reverse acquisition the historical shareholder’s equity of the accounting
acquirer prior to the merger is retroactively reclassified (a recapitalization)
for the equivalent number of shares received in the merger after giving effect
to any difference in par value of the registrant’s and the accounting acquirer’s
stock by an offset in paid in capital.”





Pursuant
to the terms of Share Exchange Agreement, the China Net BVI shareholders
transferred to the Company all of the China Net BVI shares in exchange for the
issuance of 13,790,800 shares of the Company’s common stock. Therefore, the
Company reclassified its common stock and additional paid-in-capital accounts
for the year ended December 31, 2008 accordingly.





Immediately
prior to the Share Exchange, 4,400,000 shares of the Company’s outstanding
common stock were cancelled and retired.  China Net BVI also deposited
$300,000 into an escrow account, which amount was paid to Emazing principal
stockholder, who owned the 4,400,000 shares, as a result of the Share Exchange
have been consummated.





F-33





CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




19.
            Related
      party transactions




Year
      ended December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)Advertising
      revenue from related parties:-Beijing
      Saimeiwei Food Equipment Technology Co., Ltd,
            
            1,548
            
            
            
            423-Beijing
      Zujianwu Technology Co., Ltd.
            
            -
            
            
            
            34-Beijing
      Fengshangyinli Technology Co., Ltd.
            
            79
            
            
            
            159-Soyilianmei
      Advertising Co., Ltd.
            
            539
            
            
            
            449-Beijing
      Telijie Cleaning Technology Co., Ltd.
            
            -
            
            
            
            53-Beijing
      Telijie Century Environmental Technology Co., Ltd.
            
            204
            
            
            
            53-Beijing
      Rongde Information Technology Co., Ltd.
            
            -
            
            
            
            2762,370
            
            
            
            1,447




20.
            Employee
      defined contribution plan




Full time
employees of the Company in the PRC participate in a government mandated defined
contribution plan, pursuant to which certain pension benefits, medical care,
employee housing fund and other welfare benefits are provided to employees.
Chinese labor regulations require that the PRC subsidiaries of the Company make
contributions to the government for these benefits based on certain percentages
of the employees’ salaries. The Company has no legal obligation for the benefits
beyond the contributions made. The total amounts for such employee benefits,
which were expensed as incurred, were approximately US$148,000 and US$ 106,000
for the year ended December 31, 2009 and 2008, respectively.




21.
            Concentration
      of risk




Credit
risk




Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, accounts
receivable, and prepayments and other current assets. As of December 31, 2009
and 2008 substantially all of the Company’s cash and cash equivalents were held
by major financial institutions located in the PRC and Hong Kong, which
management believes are of high credit quality.




Risk arising from operations
in foreign countries




All of
the Company’s operations are conducted within the PRC. The Company’s operations
in the PRC are subject to various political, economic, and other risks and
uncertainties inherent in the PRC. Among other risks, the Company’s operations
in the PRC are subject to the risks of restrictions on transfer of funds,
changing taxation policies, foreign exchange restrictions; and political
conditions and governmental regulations.




F-34


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Currency convertibility
risk




Significant
part of the Company’s businesses is transacted in RMB, which is not freely
convertible into foreign currencies. All foreign exchange transactions take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rates quoted by the People’s Bank of
China. Approval of foreign currency payments by the People’s Bank of China or
other regulatory institutions requires submitting a payment application form
together with suppliers’ invoices and signed contracts. These exchange
control measures imposed by the PRC government authorities may restrict the
ability of the Company’s PRC subsidiary to transfer its net assets, which to the
Company through loans, advances or cash dividends.




22.
            Commitments




The
following table sets forth the Company’s contractual obligations as of December
31, 2009:




Rental
              payments
            
            
            Server
      hosting and board-band lease payments
            
            
            TV
      advertisement purchase payments
            
            
            TotalUS$(’000)
            
            
            US$(’000)
            
            
            US$(’000)
            
            
            US$(’000)Year
      ended December 31,-2010
            
            
            
            261
            
            
            
            84
            
            
            
            31,752
            
            
            
            32,097-2011
            
            
            
            261
            
            
            
            -
            
            
            
            -
            
            
            
            261-Thereafter
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            
            522
            
            
            
            84
            
            
            
            31,752
            
            
            
            32,358




23.
            Segment
      reporting




Based on
the criteria established by ASC Topic 280 “Segment report” (formerly
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information”), as of December 31, 2009, the Company mainly operated in five
principal segments: TV advertising, internet advertising, bank kiosk
advertising, internet advertising resources resell and internet information
management. Internet information management is a new product and business
segment of the Company, which was officially launched in August 2009. It is an
intelligence software that is based on our proprietary search engine
optimization technology which helps our clients gain an early warning in order
to identify and respond to potential negative exposure on the
internet.  The following tables present summarized information by
segments.




F-35


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





Year
      ended December 31, 2009Internet
              Ad.
            
            
            TV
              Ad.
            
            
            Bank
              kiosk
            
            
            Internet
              Ad.
              resources
              resell
            
            
            IIM
            
            
            Others
            
            
            Inter-
      segment and reconciling item
            
            
            TotalUS$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)Revenue
            
            
            17,722
            
            
            
            19,298
            
            
            
            152
            
            
            
            1,178
            
            
            
            116
            
            
            
            966
            
            
            
            (1,708
            )
            
            
            37,724Cost
      of sales
            
            
            4,456
            
            
            
            16,335
            
            
            
            13
            
            
            
            1,086
            
            
            
            6
            
            
            
            35
            
            
            
            (698
            )
            
            
            21,233Total
      operating expenses
            
            
            5,794
            
            
            
            688
            
            
            
            120
            
            
            
            -
            
            
            
            -
            
            
            
            1,490
            *
            
            
            (1,010
            )
            
            
            7,082Including:
      Depreciation and amortization expense
            
            
            53
            
            
            
            58
            
            
            
            83
            
            
            
            -
            
            
            
            -
            
            
            
            13
            
            
            
            -
            
            
            
            207Operating
      income(loss)
            
            
            7,472
            
            
            
            2,275
            
            
            
            19
            
            
            
            92
            
            
            
            110
            
            
            
            (559
            )
            
            
            -
            
            
            
            9,409Changes
      in fair value of warrants (See note 16)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,425
            
            
            
            -
            
            
            
            4,425Expenditure
      for long-term assets
            
            
            432
            
            
            
            221
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            277
            
            
            
            -
            
            
            
            930Net
      income (loss)
            
            
            6,705
            
            
            
            2,079
            
            
            
            19
            
            
            
            92
            
            
            
            110
            
            
            
            (4,986
            )
            
            
            -
            
            
            
            4,019Total
      assets
            
            
            12,249
            
            
            
            7,703
            
            
            
            438
            
            
            
            -
            
            
            
            -
            
            
            
            9,484
            
            
            
            (4,110
            )
            
            
            25,764





*Including
US$360,000 share-based compensation expenses (See note 25).





Year
      ended December 31, 2008Internet
              Ad.
            
            
            TV
              Ad.
            
            
            Bank
              kiosk
            
            
            Internet
              Ad.
              resources
              resell
            
            
            IIM
            
            
            Others
            
            
            Inter-
      segment and reconciling item
            
            
            TotalUS$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)
            
            
            US$
              (‘000)Revenue
            
            
            11,292
            
            
            
            7,007
            
            
            
            128
            
            
            
            3,081
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            21,508Cost
      of sales
            
            
            4,671
            
            
            
            5,939
            
            
            
            22
            
            
            
            3,154
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,786Total
      operating expenses
            
            
            2,923
            
            
            
            1,006
            
            
            
            9
            
            
            
            -
            
            
            
            -
            
            
            
            10
            
            
            
            -
            
            
            
            3,948Including:
      Depreciation and amortization expense
            
            
            21
            
            
            
            34
            
            
            
            22
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            77Operating
      income(loss)
            
            
            3,698
            
            
            
            62
            
            
            
            97
            
            
            
            (73
            )
            
            
            -
            
            
            
            (10
            )
            
            
            -
            
            
            
            3,774Expenditure
      for long-term assets
            
            
            41
            
            
            
            23
            
            
            
            431
            
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            -
            
            
            
            497Net
      income (loss)
            
            
            2,068
            
            
            
            669
            
            
            
            73
            
            
            
            -
            
            
            
            -
            
            
            
            (10
            )
            
            
            -
            
            
            
            2,800Total
      assets
            
            
            6,794
            
            
            
            5,037
            
            
            
            414
            
            
            
            -
            
            
            
            -
            
            
            
            128
            
            
            
            (3,560
            )
            
            
            8,813





24.
            Earnings
      (Loss) per share




Basic and
diluted earnings (loss) per share for each of the periods presented are
calculated as follows:





Year
      ended December 31,2009
            
            
            2008US$(’000)
            
            
            US$(’000)(Amount
      in thousands except for
              the
      number of shares and per share data)Numerator:Net
      income (loss) attributable to common shareholders-basic and
      diluted
            
            $
            (2,252
            )
            
            $
            2,800Denominator:Weighted
      average number of common shares outstanding-basic and
    diluted
            
            
            14,825,125
            
            
            
            13,790,800Basic
      and diluted earnings (loss) per share
            
            $
            (0.15
            )
            
            $
            0.20




F-36


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




All share
and per share data have been retroactively adjusted to reflect the reverse
acquisition on June 26, 2009 whereby the 13,790,800 shares of common stock
issued by the Company (nominal acquirer) to the shareholders of China Net BVI
(nominal acquiree) are deemed to be the number of shares outstanding for the
period prior to the reverse acquisition.  For the period after the
reverse acquisition, the number of shares considered to be outstanding is the
actual number of shares outstanding during that period.





As of
December 31, 2009, a total of 4,121,600 convertible preferred shares and a total
of 4,781,056 outstanding warrants have not been included in the calculation of
diluted earnings (loss) per share in order to avoid any anti-dilutive
effect.




25.
            Share-based
      compensation expenses





On June
26, 2009, the Company issued 300,000 shares of common stock to TriPoint Capital
Advisors, LLC and 300,000 shares of common stock to Richever Limited,
respectively, that the Company’s board of directors previously approved for the
financial consulting and corporate development services that they
provided.  The shares were issued in accordance with the exemption
from the registration provisions of the Securities Act of 1933, as amended,
provided by Section 4(2) of such Act for issuances not involving any public
offering.  The 600,000 shares issued were valued at $0.25 per share,
the closing bid of the Company’s common stock on the date of
issue.  Therefore, total aggregate value of the transaction that we
recognized was US$150,000, which was recorded in general and administrative
expenses as share-based compensation expenses.





On June
17, 2009, the Company engaged J and M Group, LLC (“J&M”) to provide investor
relations services. The initial term of the agreement is for one
year.  As additional compensation, the Company agreed to issue J&M
120,000 shares of the Company’s common stock that vest 10,000 shares every 30
days. The shares were issued in accordance with the exemption from the
registration provisions of the Securities Act of 1933, as amended, provided by
Section 4(2) of such Act for issuances not involving any public
offering.  The 120,000 shares issued on June 17, 2009 were valued at
$0.15 per share, the closing bid of the Company’s common stock on the date of
issue. Therefore, total aggregate number of shares granted to J&M
vested as of December 31, 2009 was 60,000 shares.  Total aggregate
value of the transaction that the Company recognized in the year ended
December 31, 2009 were US$9,000, which were recorded in general and
administrative expenses as share-based compensation expenses. Going forward the
cost of these shares will be expensed as they vest.





On July
1, 2009, the Company engaged Hayden Communications International, Inc. (“HC”) to
provide investor relations services. The initial term of the agreement is for
one year.  As additional compensation, the Company agreed to issue HC
80,000 shares of the Company’s common stock that vest on a straight line basis
over the contract period. The shares were issued in accordance with the
exemption from the registration provisions of the Securities Act of 1933, as
amended, provided by Section 4(2) of such Act for issuances not involving any
public offering.  The 80,000 shares issued on July 1, 2009 were valued
at $1.75 per share, the closing bid of the Company’s common stock on the date of
issue. Therefore, total aggregated number of shares granted to HC vested as
of December 31, 2009 was 40,000 shares.  Total aggregate value of the
transaction that the Company recognized in the year ended December 31, 2009
were US$70,000, which were recorded in general and administrative expenses as
share-based compensation expenses. Going forward the cost of these shares will
be expensed as they vest.




F-37


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS





On
November 13, 2009, the Company issued 54,020 restricted shares to its employees
and consultants which were fully vested upon issuance. These shares were valued
at US$2.43 per share which represents the grant date fair value of these
shares.  Total aggregate value of the transaction that the Company
recognized in the year ended December 31, 2009 were approximately US$131,000
which were recorded in general and administrative expenses as share-based
compensation expenses.





On
November 30, 2009, the Company granted one 5-year options to each of its three
independent directors, Mr. Douglas MacLellan, Mr.Mototaka Watanabe andMr.Zhiqing Chen, to purchase in the
aggregate 54,000 shares of the Company’s common stock at an exercise price
of US$5.00 per share, in consideration of their services to the Company. These
options vest quarterly at the end of each 3-month period, in equal installments
over the 24-month period from the date of grant.  However, upon a
change of control, the option shall automatically become fully vested and
exercisable as of the date of such changes of control.  These options
were valued at US$2.64 per share which represents the grant datefair value
of these options.  The related compensation expenses will be
recognized over its vesting period.  The Company didn’t recognize the
compensation expenses for these options for the year ended December 31, 2009,
due to the amount is immaterial.





The
Company estimates the fair value of these options using the Black-Scholes option
pricing model based on the following assumptions:





Underlying
      stock price
            
            $
            3.43Expected
      term
            
            
            3Risk-free
      interest rate
            
            
            1.10
            %Dividend
      yield
            
            
            -Expected
      Volatility
            
            
            150
            %Exercise
      price of the option
            
            $
            5





Underlying
stock price is a discounted stock price based upon the regression on actual
discount obtained from an appropriate index due to lack of liquidity of the
Company’s underlying stock and other factors.  As the three
individuals receiving options are non-employee executive directors, the Company
believes that forfeitures are highly unlikely, and termination is not
applicable. As such, the Company developed a weighted-average expected
term at 3 years based on analysis of the vesting schedule and exercise
assumptions. The risk-free interest rate is based on the 3 year U.S.
Treasury rate. The dividend yield is calculated based on management’s estimate
of dividends to be paid on the underlying stock. The expected volatility is
calculated using historical data obtained from an appropriate index due to lack
of liquidity of the Company’s underlying stock.  Exercise price of the
option is the contractual exercise price of the option.





Options
issued and outstanding at December 31, 2009 and their movements during the
period are as follows:




F-38


CHINANET
ONLINE HOLDINGS, INC.
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS




Option
      Outstanding
            
            
            Option
      ExercisableNumber
      of underlying shares
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Number
      of underlying shares
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            Weighted
              Average
              Exercise
              PriceBalance,
      January 1, 2009
            
            
            -
            
            
            
            
            
            
            
            
            
            -Granted/Vested
            
            
            54,000
            
            
            
            5
            
            
            $
            5.00
            
            
            
            -Forfeited
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -Exercised
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            -Balance,
      December 31, 2009
            
            
            54,000
            
            
            
            4.92
            
            
            $
            5.00
            
            
            
            -




26.
            Subsequent
      events




The
company has evaluated events subsequent to the balance sheet date through March
31, 2010, which represents the date these financial statements were available to
be issued.





In
January and March 2010, there were 500,000 and 98,000 shares of Series A
convertible preferred stock which were converted into the Company’s common
stock, respectively.





In
February 2010, the Company paid approximately US$285,000 in cash to the Series A
convertible preferred stock holders which represent the dividend from August 21,
2009 (“the Dividend Commence Date”) to November 30, 2009 (“the Dividend Payment
Date).





On March
4, 2010 the Company’s common stock was listed on the American Stock Exchange
under the under the symbol “CNET”, before this the Company’s common stock was
trade on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “CHNT.”




The
investor and placement agent warrants that were issued as a result of our August
2009 Financing contained a Down-round protection provision” whereby for a period
of twelve (12) months following December 31, 2009 (the effective date of the
Registration Statement) in the event the Company issued any additional shares of
Common Stock or securities exercisable, convertible or exchangeable for Common
Stock at a price per share less than the exercise price then in effect or
without consideration.  As described in Note 16 and according to ASC
Topic 815 subtopic 40, the “Down-round protection” provision is not considered
to be an input to the fair value of a fixed-for-fixed option on equity shares
which lead to the Warrants to fail to be qualified as indexed to the Company’s
own stock and then fail to meet the scope exceptions of ASC Topic 815.
Therefore, the Company accounted for the Warrants as derivative liabilities
under ASC Topic 815.  Pursuant to ASC Topic 815, derivative should be
measured at fair value and re-measured at fair value with changes in fair value
recorded in earnings at each reporting period.
 
 On March
29, 2010, the Company and the holders of the Warrants entered into agreements to
amend certain provisions of the Warrants. The amendment, which is retroactive
from and including, August 21, 2009, to the investor and placement agent
warrants removes the “Down-round protection” rights that were applicable if the
Company were to issue new shares of common stock or common stock equivalents at
a price per share less than the exercise price of the Warrants.  In
addition, the amendment to the warrants added a provision to grant the holders
of a majority of the warrants an approval right until December 31, 2010, over
any new issuance of shares of common stock or common stock equivalents at a
price per share less than the exercise price of the warrants. An estimate of the
financial effect cannot be made at this time.


F-39