UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,D.C.20549
   FORM
10-KSB
  (Mark
One)
 xANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
fiscal year ended December 31, 2007
  OR
   ̈TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the
transition period from 
to
   Commission
File Number 000-30264
    NETWORK CN
      INC.(Name of small
      business issuer in its charter)
   Delaware
            
            11-3177042(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)
   21/F.,ChinachemCenturyTower,178 Gloucester
Road,Wanchai,Hong
Kong
 (Address
of Principal Executive Offices)
 
 (852) 2833-2186
 (Registrant’s
Telephone Number, including Area Code)
 
 Securities
registered pursuant to Section 12(b) of the Exchange Act:
 NONE
 Securities
registered pursuant to Section 12(g) of the Exchange Act:
 Title of
Each Class
 Common
Stock, $0.001 Par Value
  Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.   YES  ̈NO x
   Check
whether the issuer (1) filed all reports to be filed by Section 13 or 15(d) of
the Exchange Act 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 xNO  ̈
  
 
  Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB.  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
issuer's revenues for the fiscal year ended December 31, 2007 were
$27,582,907.
  The
aggregate market value of the registrant’s common stock held by non-affiliates
computed by reference to the closing price of the common stock on March 6,
2008, as reported by OTC Bulletin Board, was approximately
$108,294,000. All executive officers, directors and each person who owns 5%
or more of the outstanding common stock, based on the filings with the
Securities and Exchange Commission, have been excluded since such persons may be
deemed affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
  As of
March 6, 2008, the issuer had 71,546,608 shares of common stock,
$0.001 par value, outstanding.
  Documents
Incorporated by Reference:
 None
  Transitional
Small Business Disclosure Format (Check one): YES  ̈ NO
x
  
 1
 
 NETWORK CN INC.
 ANNUAL
REPORT ON FORM 10-KSB
 FOR
THE YEAR ENDED DECEMBER 31, 2007
  TABLE OF
CONTENTS
   Special
Note Regarding Forward-Looking Statements
  PART
      IItem 1.
            Description of Business
            4Item 2.
            Description of Property
            44Item 3.
            Legal Proceedings
            45Item 4.
            Submission of Matters to a Vote of Security Holders
            45PART
      IIItem 5.
            Market for the Registrant’s Common Equity, Related Stockholder
      Matters and Small Business Issuer Purchases of Equity Securities
            46Item 6.
            Management's Discussion and Analysis or Plan of Operation
            50Item 7.
            Financial Statements and Supplementary Data
            63Item 8.
            Changes In and Disagreements with Accountants on Accounting and
      Financial Disclosure
            63Item 8A.
            Controls and Procedures
            63Item 8B.
            Other Information
            64PART
      IIIItem 9.
            Directors, Executive Officers, Promoters, Control Persons and
      Corporate Governance; Compliance with Section 16(a) of the Exchange Act
            64Item 10.
            Executive Compensation
            70Item 11.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            74Item 12.
            Certain Relationships and Related Transactions, and Director
      Independence
            75Item 13.
            Exhibits
            76Item 14.
            Principal Accountant Fees and Services
            79SIGNATURES
            80
 
 2
 Table of Contents
  SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  This
annual report on Form 10-KSB (“Annual Report”) contains forward-looking
statements about our business, financial condition and prospects based on our
current expectations, assumptions, estimates and projections about us and our
industry. These forward-looking statements are subject to known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance and achievements to be materially
different from or worse than our expectations. These risks, uncertainties
and other factors include those listed under Item 1.“Description of Business–Risks and Uncertainties" and elsewhere in this
Annual Report, and some of which we may not know. Forward-looking statements are
all statements that concern plans, objectives, goals, strategies, future events
or performance and underlying assumptions and other statements that are other
than statements of historical fact, including, but not limited to, those that
are identified by the use of terminology such as "may", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates",
"predicts", "potential", "continue" or the negative of these terms or other
comparable terminology.
  Unless
otherwise required by law, we assume no obligation to update or otherwise revise
the forward-looking statements in this Annual Report, whether as a result of new
information, future events or otherwise. Because of these risks, uncertainties
and assumptions, the forward-looking events and circumstances discussed in this
Annual Report might not occur in the way we expect, or at all. Accordingly, you
should not place undue reliance on any forward-looking information. Also,
forward-looking statements represent our management's beliefs and assumptions
only as of the date of this Annual Report. You should read this Annual Report on
Form 10-KSB and the documents that we have filed as exhibits to this Annual
Report completely and with the understanding that future results could differ
materially from those contemplated by the forward-looking
statements.
     
 3
 Table of Contents
  PART I
  ITEM
1.       DESCRIPTION OF
BUSINESS
  GENERAL
  Network
CN Inc. (“we” or “the Company”), originally incorporated on September 10, 1993,
is a Delaware company with headquarters in the Hong Kong Special Administrative
Region, the People’s Republic of China (“the PRC” or “China”). It was operated
by different management teams in the past, under different operating names,
pursuing a variety of business ventures. The most recent former name was Teda
Travel Group, Inc. On August 1, 2006, the Company changed its name to “Network
CN Inc.” in order to better reflect the Company’s vision under its new and
expanded management team.
  Our
business plan is to build a nationwide information and entertainment network in
the PRC. To achieve this goal, we have established two business divisions: our
Media Business division and our Non-Media Business division. During the latter
half of 2006, we adjusted our primary focus away from our Non-Media Business to
our Media Business and began building a media network with the goal of becoming
a nationwide leader in out-of-home, digital display advertising, roadside LED
digital video panels and mega-size video billboards. We took the first step in
November 2006 by securing a media-related contract for installing and managing
outdoor LED advertising video panels. In 2007, we acquired Shanghai Quo
Advertising Company Limited (“Quo Advertising”), an advertising agency in
Shanghai, China and Xuancaiyi (Beijing) Advertising Company Limited
(“Xuancaiyi”), an advertising agency in Beijing, China. In addition, in 2007 we
secured rights to operate mega-size digital video billboards and roadside LED
panels in prominent cities in the PRC and began generating revenues from our
Media Business. We intend to continue to focus on our Media Business and
actively pursue the acquisition of additional LED operating rights and
advertising contracts with prominent customers. In 2008, we expect to place
additional LED panels into operation, which we expect will further contribute to
our revenues in the second or third quarters. See Item 1. “Description of Business–Media Business” for more
details.
  Our
Non-Media Business is comprised of two sectors: Travel Network and e-Network.
Through our Travel Network we provide agency tour services and hotel management
services. In 2006, we acquired 55% of the equity interest in Guangdong Tianma
International Travel Service Co., Ltd. (“Tianma”), a company organized under the
laws of the PRC and engaged in the provision of tour services to customers both
inside and outside of the PRC. In 2006 and 2007, we earned substantially all of
our revenues from tour services. Our Travel Network also provides day-to-day
management services to hotels and resorts in the PRC. Revenue from hotel
management services declined in 2007 as a result of a decrease in the number of
hotel properties that we manage.
  Through
our e-Network, we plan to establish a fully integrated and comprehensive
business-to-business (B2B) and business-to consumer (B2C) travel network by
providing a broad range of products and services. The development of our
e-Network is still in the planning stage and we do not expect to generate
substantial revenues from our e-Network in the near future. See Item 1. “Description of Business –
Non-Media Business” for more details.
 
 4
 Table of Contents
  MEDIA
AND ADVERTISING MARKET OUTLOOK
  The media
and advertising industry is one of the fastest growing markets in China.
According to Lehman Brothers, China’s advertising market has grown at a compound
annual rate of 15.5% in the last five years, as compared with 9.2% for the rest
of the Asia-Pacific region (excluding Japan), -0.7% for Japan, 4.0% for North
America, and 2.9% for Europe. In addition, data from BOCI indicates that
out-of-home TV advertising, which consists of LED video displays, is the
fastest-growing segment within China's out-of-home sector even though it was
only introduced in 2003. Out-of-home advertising requires minimal content
production, is subject to less regulation, and has low maintenance and
operational requirements. As a result, we believe that the Company is
well-positioned to take advantage of the advertising growth opportunities in
China. We plan to expend substantial resources to build an out-of-home media
network throughout the PRC to capitalize on this market opportunity in the
coming future.
  BUSINESS
OVERVIEW
  1.Media
Business
  Our
mission is to become a leading provider of out-of-home advertising and other
media services in China, primarily serving the needs of branded corporate
customers. We are currently building an out-of-home media network that includes
roadside LED panels and large, strategically-located, high-impact digital video
mega-displays in Beijing, Shanghai and other major cities in China.
  In 2008
we expect to focus most of our activities on acquiring additional rights to
install and operate roadside LED panels and mega-size digital video billboards
in the major cities in China. We expect that in most cases, we will be
responsible for installing the LED panels and billboards, although in some
cases, LED panels and billboards will have already been installed and we will be
responsible for operating and maintaining the panels and billboards. During
fiscal 2007, the Company contracted with a third party, Guiding Media
Advertising Limited (“Guiding Media” or “Bona”), a company organized under
the laws of the PRC, to construct 120 LED panels at various locations on
or before December 31, 2007, at Bona’s cost. Upon completion of the installation
of the LED panels, the Company had an option to acquire the LED panels for their
installation cost plus 15%. On January 1, 2008, we, through our subsidiary Hui
Zhong Lian He Media Technology Co., Ltd (“Lianhe”) entered into a series of
commercial agreements with Bona and the registered shareholders of Bona pursuant
to which we effectively control Bona and receive the net profits of Bona. As a
result of these commercial agreements, we are entitled to consolidate the
financial results of Bona as a variable interest entity pursuant to FASB
Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities
("FIN 46R").  See Item 6. “Management’s Discussion and
Analysis or Plan of Operation – Material Subsequent Events.”
  Once the
LED panels and billboards are put into operation, we sell advertising airtime to
our customers directly. Revenue is recognized in the period when advertisements
are either aired or published.
  a)           120
Roadside LED Project in Changning District, Shanghai
  In
November 2006, our wholly owned subsidiary NCN Media Services Limited (“NCN
Media”), entered into an agreement with Bona to manage and operate approximately
120 LED outdoor advertising video panels in the Changning district of Shanghai,
China (“Changning Project”). Pursuant to the terms of the agreement, the Company
and Bona have the right to operate the network of outdoor video panels for a
20-year period. Initially NCN Media acquired 60% of the Changning Project for $3
million. In December 2006, NCN Media acquired the remaining 40% of the Changning
Project for an additional $3 million.
 5
 Table of Contents
  In
September 2006, Bona obtained the rights to operate the Changning Project from
Yukang Advertising Company Limited (“Yukang”), a state-owned company organized under the laws
of the PRC, pursuant to a cooperation agreement. Pursuant to the
agreement between NCN Media and Bona, Bona agreed to grant NCN Media an
option to enter into a cooperation agreement directly with Yukang on terms
identical to the Bona cooperation agreement.
  Shanghai
is the largest and most populous city in the PRC and is generally regarded as
the financial hub of the country. Shanghai also boasts an increasingly affluent
population. The average household income in the Changning district ranks at the
top of the nineteen districts in Shanghai. The Company expects to market
out-of-home advertising space to high-end brand names in order to reach
Shanghai's growing consumer population.
  b)           Acquisition
of Shanghai Quo Advertising Company Limited
  In
January 2007, the Company, through its subsidiary Crown Winner International
Limited (“Crown Winner”), acquired 100% of Quo Advertising, a growing
China-based advertising agency. Quo Advertising was founded in 1996 in Shanghai,
China and provides advertising design, production, public relations and event
management services for domestic and international clients. Quo Advertising
provided services to approximately 30 domestic and international clients at the
date of acquisition.
  The total
purchase price of the transaction was HK$7.5 million (approximately US$961,500).
The Company paid an aggregate of HK$500,000 (approximately US$64,000) in cash
and issued an aggregate of 300,000 shares of its restricted common stock for the
remaining HK$7 million (equivalent to US$2.99 per share) to the two equity
holders of Quo Advertising in exchange for their equity interests. In order to
comply with certain PRC laws relating to foreign entities’ ownership of
advertising agencies in the PRC, after the acquisition and until December 31,
2007, the former owners of Quo Advertising held 90% and 10% of the equity
interests, respectively, in Quo Advertising in trust for the benefit of Crown
Winner. On January 1, 2008, the Company, through its subsidiary Lianhe, Quo
Advertising and the registered shareholders of Quo Advertising entered into a
series of commercial agreements pursuant to which we effectively control and
manage Quo Advertising and receive the net profits of Quo Advertising. As a
result of these commercial agreements, we are entitled to treat Quo Advertising
as a variable interest entity under FIN 46R and consolidate Quo Advertising’s
financial results. See Item 6.
“Management’s Discussion and Analysis or Plan of Operation – Material Subsequent
Events.”
  Quo
Advertising is an established and profitable business with a client base of
notable consumer brands including Montblanc, Movado, and Chopard. The Company
can provide no assurance that Quo Advertising’s existing or future clients will
seek to advertise
on the Company’s out-of-home LED panels or electronic billboards. However, the
Company believes that the acquisition of Quo Advertising has enhanced the
progress of building our Media Business and has broadened our service offerings
to both new and existing customers. Quo Advertising's experienced media
professionals are able to provide our Media Business with strong sales and
marketing support as well as immediately providing the Company with greater
assistance in developing additional media projects.
  6
 Table of Contents
  c)           200
Roadside LED Project in Huangpu District, Shanghai
  In
February 2006, Quo Advertising entered into a business agreement with Shanghai
Zhong Ying Communication Engineering Company Limited, a company organized under
the laws of the PRC and appointed by the Shanghai City Government to
oversee the installation of 200 LED outdoor advertising video panels in the
Huangpu district of Shanghai (“Huangpu Agreement”). The Huangpu district is
another very sophisticated section of Shanghai, which could be a compelling area
for outdoor advertisers. Under the terms of the Huangpu Agreement, Zhong Ying
will complete the governmental approval process and assist in the selection of
final locations for the LED panels, while Quo Advertising will install and
operate the LED panels. The Huangpu Agreement grants Quo Advertising exclusive
rights to operate the LED panels for a 20-year period.
  d)           100
Roadside LED Project in Nanjing
  In
February 2007, Quo Advertising entered into a business agreement with Nanjing
Yiyi Culture Advertising Company Limited, a company organized under
the laws of the PRC, to manage and operate 100 LED outdoor advertising
video panels in Nanjing, another major city in China (“Nanjing Agreement”).
Located in the Jiangsu province, Nanjing boasts a gross domestic product of $31
billion, a population of approximately 8.2 million and an annual tourism income
of $4 billion. Under the terms of the Nanjing Agreement, Quo Advertising will
own and have the exclusive right to manage all LED panels constructed for a
20-year period.
  e)           120
Roadside LED and 2 Mega-size LED Billboards Project in Wuhan
  In March
2007, Quo Advertising entered into a business agreement with Wuhan Xin An
Technology Development Company Limited, a company organized under
the laws of the PRC, to construct, manage and operate 120 LED outdoor
advertising video panels and 2 mega-size digital video billboards in Wuhan
(“Wuhan Agreement”). Wuhan is a major city in China with a population of 8
million. The addition of this Wuhan Agreement complements the Company’s entrance
into the out-of-home media space in Shanghai and Nanjing. Under the terms of the
Wuhan Agreement, Quo Advertising will own and have the exclusive right to manage
all LED panels constructed for an 8-year period.
  f)           85
Roadside LED Project in Lujiazui Finance and Trade Zone, Shanghai
  In April
2007, Quo Advertising entered into a business agreement with Shanghai Qianming
Advertising Company Ltd, a company organized under
the laws of the PRC. Pursuant to the terms of the agreement, the Company
has the exclusive right to construct, manage and operate up to 85 roadside LED
digital video panels in Shanghai’s Lujiazui Finance & Trade Zone for a term
of 6 years. Lujiazui Financial and Trade Zone is in the center of the Lujiazui
Functional Area, including about 43.4 square kilometers in Pudong, Shanghai.
Hosting fully 31% of the foreign financial institutions in China, Lujiazui is
becoming a leading financial and business center, similar to Manhattan in New
York, the City in London, Shinjuku in Tokyo, and the Central area in the Hong
Kong Special Administrative Region.
 
 7
 Table of Contents
  g)           2
Mega-Size LED Billboards Project in Nanjing Road Century Plaza,
Shanghai
  In April
2007, Quo Advertising entered into a business agreement with Yukang to act as
Yukang’s exclusive agent to place advertisements on two digital video billboards
located at the Century Plaza on Nanjing Road in Shanghai during a 5-hour time
slot per day for a term of two years (“Nanjing Road Agreement”), while Yukang
remains responsible for all expenses related to the operation of the billboards.
Nanjing Road is one of the most visited tourist attractions in Shanghai with
more than 600 stores, restaurants and art galleries. It is the number one
commercial street in China in terms of total annual revenues.
  h)           28
Roadside LED Panels and 24 Roadside Rolling Light Boxes Project in Nanjing Road
Pedestrian Mall, Shanghai
  In June 2007, Quo
Advertising entered into a business agreement with Shanghai Chuangtian
Advertising Company Limited (“Chuangtian Advertising"), a company organized
under the laws of the PRC pursuant to whichQuo Advertising agreed to
manage and operate 28 roadside LED panels and
24 roadside rolling light boxes located in the pedestrian mall on Nanjing
Road in Shanghai, originally managed and operated by Chuangtian Advertising. Quo
Advertising is obligated to upgrade the panels to either LED advertising video
panels or new rolling advertising light boxes and to lease the sites on which
the advertising video panels are located for an initial period of three
years.
  i)           1
Mega-Size LED Billboard Project in Zhongshan Road Wuhan Gongyi
Tower
  In August
2007, Quo Advertising entered into a business agreement with Wuhan Weiao
Advertising Company Limited, a company organized under the laws of the
PRC. Under the terms of the agreement, Quo Advertising is authorized to
install and operate a 200 square-meter digital video billboard at Wuhan Gongyi
Tower on Zhongshan Road in Wuhan, China for a period of five years. Wuhan, the
capital of Hubei Province, is among the largest cities along the Yangtze River,
with a population of 8 million. It is a hub for economic and cultural activity
in Central China. Wuhan's Gongyi Tower is in the city's central commercial
district which attracts over 450,000 people a day.
  j)           Acquisition
of Xuancaiyi (Beijing) Advertising Company Limited
  On
September 1, 2007, the Company, through Quo Advertising, acquired 51% of the
equity interests of Xuancaiyi (Beijing) Advertising Company Limited
(“Xuancaiyi”), an advertising agency in Beijing, China, for up to RMB 12,245,000
(approximately US$1,666,943) in cash. The purchase consideration is payable as
follows:
  1.
            An
      initial payment of RMB2,500,000 (approximately
  US$330,128);
  2.
            Up
      to RMB 2,454,300 (approximately US$336,680) based on Xuancaiyi’s net
      profit for the four months ended December 31,
  2007;
  3.
            Up
      to RMB 1,834,500 (approximately US$251,656) based on Xuancaiyi’s net
      profit for the first quarter of fiscal year
  2008;
  4.
            Up
      to RMB 1,827,400 (approximately US$250,682) based on Xuancaiyi’s net
      profit for the second quarter of fiscal year
  2008;
  5.
            Up
      to RMB1,819,100 (approximately US$249,543) based on Xuancaiyi’s net profit
      for the third quarter of fiscal year 2008;
and
  6.
            Up
      to RMB1,809,700 (approximately US$248,254) based on Xuancaiyi’s net profit
      for the fourth quarter of fiscal year
2008.
 8
 Table of Contents
  Xuancaiyi
was founded in 2007 and obtained the right to manage and operate a mega-size
high resolution LED advertising billboard in a prominent location in China’s
capital city, Beijing. The billboard, covering more than 758 square meters, is
located on the East Third Ring Road near the exit of the Airport Highway. It is
installed on the wall of Jingxin Tower and measures 17.9 meters wide and over 42
meters high. The Company believes that the investment in Xuancaiyi will
strengthen its Media Business in China. The initial payment of RMB 2,500,000
(approximately US$330,128) was made in September 2007. Based on Xuancaiyi’s net
profits for the four months ended December 31, 2007, we do not expect to make
any payments with respect to the first earn-out.
  k)           1
Mega-Size LED Billboard Project in Workers’ Stadium, Beijing
  In
October 2007, Quo Advertising obtained the exclusive right to operate one
mega-size LED billboard at the Workers’ Stadium in Beijing for a 10-year
period.
  l)           1
Mega-Size LED Billboard Project at Haoyou Emporium, Beijing
  In
October 2007, Quo Advertising obtained the exclusive right to operate one
mega-size LED billboard at Haoyou Emporium in Wangfujing, Beijing for a 6-year
period.
  m)           Terminal
3 Beijing Airport Project
  In
November 2007, Quo Advertising entered into a business agreement with Bona
pursuant to which Bona granted Quo Advertising an exclusive right to operate 98
freestanding multimedia advertisement light boxes to be situated in designated
locations within Beijing International Airport in China for a 3-year period.
Beijing International Airport is the busiest airport in the PRC and in 2006 was
the second busiest airport in Asia and the ninth busiest in the world.
Currently, the airport accommodates approximately 1,100 flights a day, but
is expected to handle 1,500 or more daily flights during the 2008 Olympics.
Terminal 3 is the new international terminal which is slated to open in March
2008.
  n)           Over
950 Advertising Panels Project in Qingdao
  In
November 2007, Quo Advertising acquired the exclusive right to operate and
manage an extensive network of outdoor advertising panels in the city of Qingdao
for a 16-year period. The city of Qingdao will be a principal venue in the 2008
Olympics. Quo Advertising has secured the right to operate a network of panels
comprising two mega-size LED billboards, one mega-size roller-sheet billboard
and 150 roadside LED panels. Quo Advertising has also secured the rights to
operate up to 800 road signage light boxes, subject to further governmental
approval. Qingdao, with a population of over 7 million, is home to dozens of
major financial institutions and features one of China’s busiest seaports, a
naval base and a large industrial center. It is also the headquarters of
Tsingtao Brewery as well as Haier, one of the world’s largest electrical
appliance manufacturers.
  The first
mega-size LED billboard is at the intersection of Fuzhou Road and Donghai Road,
a harbor-side street of shopping malls and financial institutions. This 102
square-meter billboard is located 100 meters from the site for the 2008 Olympic
sailing competitions. The second mega-size LED billboard and the mega-size
roller-sheet billboard, measuring 96 square meters and 100 square meters
respectively, are located at the intersection of Xianggang (Hong Kong) Road, and
Nanjing Road, one of the city’s busiest thoroughfares. This is in Qingdao’s
central business district near shopping malls and financial office complexes.
These mega-size properties have already been installed and are in full
operation. The smaller LED panels and light boxes covered by the agreement will
have to be installed by the Company.
 9
 Table of Contents
  o)           120
Roadside LED Advertising Panels Project in Changsha
  In
December 2007, Quo Advertising acquired the exclusive right to construct,
operate and manage 120 roadside LED advertising panels in Changsha, the capital
of Hunan province for a 5-year period. The Company plans to install 70 of the
panels in 2008 and the remainder in 2009. Changsha, with a population of more
than 6 million, is a transportation hub and one of China's top 20 most
economically advanced cities. Its GDP, which is above the national average, has
grown at an average rate of 14% per year from 2001 to 2005. The city has
attracted a tremendous amount of foreign investment, with nearly $1 billion
worth of foreign direct investment recorded in 2005, mainly in high technology,
manufacturing, food production and services. In recent years, Changsha has also
become an important creative center for the television and entertainment
industry, producing some of the most popular programs in China, including “Super
Girl” , an all-female Chinese version of the UK’s “Pop Idol” or “American Idol”
in the U.S., ranking as the most watched program ever to air on Chinese
TV.
  Summary
of the status of our Advertising Panels
  The
following table summarizes by location the number of roadside advertising panels
that the Company has the right to install and operate and the installation
status:
  Location
            No.
      of Advertising Panels(1)
            Panels
      Installed
              As
      of March 6, 2008(3)
            Duration(2)Changning
      District, Shanghai
            120
            41
            20
      yearsHuangpu
      District, Shanghai
            200
            1
            20
      yearsNanjing
            100
            3
            20
      yearsWuhan
            120
            4
            8
      yearsLujiazui
      Finance and Trade Zone, Shanghai
            85
            85
            6
      yearsNanjing
      Road Pedestrian Mall, Shanghai
            52
            52
            3
      yearsTerminal
      3 Beijing Airport Project
            98
            98
            3
      yearsQingdao
            950
            -
            16
      yearsChangsha
            120
            -
            5
      yearsTotal
      as of March 6, 2008
            1,845
            284
  The
following table summarizes by location the number of mega-size advertising
panels that the Company has the right to install and operate and the
installation status:
 10
 Table of Contents
 Location
            No.
      of Advertising Panels(1)
            Panels
      Installed
              As
      of March 6, 2008(3)
            Duration(2)Wuhan
            3
            1
            5
      to 8 yearsShanghai
            2
            2
            2
      yearsBeijing
            3
            3
            16
      months to 10 yearsQingdao
            3
            3
            16
      yearsTotal
      as of March 6, 2008
            11
            9
 
 1)
            The
      size of the Company’s typical roadside LED video panels ranges from 1.5
      square meters to 4 square meters, while the mega-size LED video billboards
      are typically from 60 square meters to over 700 square
    meters.
 2)
            Although
      the Company has a contractual right to operate the panels for 16 months to
      20 years, governmental authorities in the PRC could limit the period
      during which we can operate the panels if the government interprets the
      current rules and regulations differently or if it were to implement new
      rules and regulations.
 3)
            No.
      of panels installed also includes panels installed by the
      assigning parties.
 4)
            The parties from which the
      Company obtained an exclusive right to operate the advertising panels do
      not guarantee that all relevant governmental approvals have been obtained.
      See Item 1.
      “Description of Business -Risks and
      Uncertainties”.
  LED
technology has evolved to become a new and popular form of advertising in China,
capable of delivering crisp,
 super-bright
images both indoors and outdoors. Additionally, advertisers in China are
increasingly upgrading the quality of their media, and are looking for new,
sophisticated ways to reach consumers. We believe that our out-of-home media
network will allow us to capitalize on this market opportunity. We intend to
continue to expend significant time and resources on our Media Business in 2008
and we anticipate that our Media Business will begin to generate revenues in
2008.
  2.Non-Media
Business
  a)           Travel
Network – Tour Services
  To take
advantage of China’s booming travel market, in June 2006, the Company, through
its subsidiary NCN Management Services Limited (“NCN Management Services”),
acquired 55% of the equity interests of Tianma, a travel agency headquartered in
Guangdong Province in the PRC. In order to comply with certain PRC laws relating
to foreign entities’ ownership of travel agencies in the PRC, the former owner
of Tianma holds 55% of the equity interests in Tianma in trust for the
benefit of NCN Management Services. The laws of the PRC govern the agreements by
which the Company acquired Tianma and by which the former owner of Tianma holds
such equity interest in trust. See Item 1. “Description of Business -
Regulations Affecting Our Hotel Business and - Risks and
Uncertainties."
  Tianma is
an authorized inbound and outbound travel operator and provides travel agency
services to customers for both inbound and outbound travel. With the exponential
growth in outbound travelers, the Company’s goal is to build a nationwide travel
network and to enter into alliances with overseas travel agents for both inbound
and outbound travel.
  Tianma
organizes independent inbound and outbound tour and travel packages for a
variety of destinations within China and internationally. Tour packages may
include air and land transportation, hotels, restaurants and tickets to tourist
destinations and other excursions. Tianma books all elements of such packages
with third-party service providers, such as airlines, car rental companies and
hotels, or through other tour package providers and then resells such packages
to its clients. Revenues generated by Tianma accounted for a substantial portion
of the Company’s total revenue in 2006 and 2007. A typical sale of tour services
is as follows:
 11
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  i)
            Tianma,
      in consultation with sub-agents, organizes a tour or travel package,
      including making reservations for blocks of tickets, rooms, etc. with
      third-party service providers. Tianma may be required to make deposits,
      pay all or part of the ultimate fees charged by such service providers or
      make legally binding commitments to pay such fees. For air-tickets, Tianma
      normally books a block of air tickets with airlines in advance and pays
      the full amount of the tickets to reserve seats before any tours are
      formed. The air tickets are usually valid for a certain period of time. If
      the pre-packaged tours do not materialize and are eventually not formed,
      Tianma will resell the air tickets to other travel agents or customers.
      For hotels, meals and transportation, Tianma usually pays an upfront
      deposit of 50-60% of the total cost. The remaining balance is then settled
      after completion of the tours.
  ii)
            Tianma,
      through its sub-agents, advertises tour and travel packages at prices set
      by Tianma and sub-agents.
  iii)
            Customers
      approach Tianma or its appointed sub-agents to book an advertised packaged
      tour.
  iv)
            The
      customers pay a deposit to Tianma directly or through its appointed
      sub-agents.
  v)
            When
      the minimum required number of customers (which number is different for
      each tour based on the elements and costs of the tour) for a particular
      tour is reached, Tianma will contact the customers for tour confirmation
      and request full payment. All payments received by the appointed
      sub-agents are paid to Tianma prior to the commencement of the
      tours.
  vi)
            Tianma
      will then make or finalize corresponding bookings with outside service
      providers such as airlines, bus operators, hotels, restaurants, etc. and
      pay any unpaid fees or deposits to such
  providers.
  Tianma is
the principal in such transactions and the primary obligor to the third-party
providers, regardless of whether it has received full payment from its
customers. In addition, Tianma is also liable to the customers for any claims
relating to the tours, such as accidents or tour services. Tianma has adequate
insurance coverage for accidental loss arising during the tours. The
Company utilizes a network of sub-agents who operate strictly in Tianma’s name
and can only advertise and promote the business of Tianma with the prior
approval of Tianma.
  Fuel
prices surged by 48% in 2007 and as of February 2008, crude oil prices rose to
US$100 per barrel. Since fuel is a major cost component for airlines and other
travel providers, rising fuel prices have increased our operating expenses and
had an adverse impact on the profitability of our travel business. In addition,
an economic downturn in the U.S. and other global economies in 2008 could have
an adverse effect on China's economic growth, which would have a negative impact
on the China travel market and our travel business.
  12
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  b)   Travel
Network – Hotel Management Services
  Before
the change of company name and business direction in the latter half of 2006,
the Company was predominantly a traditional hotel management company. In fiscal
2007, revenues from hotel management services dropped in comparison to previous
years as a result of a decline in the number of hotel properties that we
managed.
  c)   e-Network
Services
  The
Company has been considering establishing a fully integrated and comprehensive
business-to-business (B2B) and business-to-consumer (B2C) travel network by
providing a broad range of products and services underpinned by our Media
Network and Travel Network. Our e-Network business is still at early planning
stage, and we anticipate no substantial revenue in 2008. The Company is
currently re-assessing its Non-Media Business strategy.
  COMPETITION
  1.Media
Business
  We
compete with other advertising companies in China, including companies that
operate out-of-home advertising media networks, such as Focus Media, JCDecaux
and Clear Media. The Company competes with these companies for advertising
clients on the basis of the size of our advertising network, advertising
coverage, panel locations, pricing, and range of advertising services that we
offer. The Company also competes with these companies for rights to locate LED
panels and/or billboards in desirable locations in Chinese cities. In addition,
commercial buildings, hotels, restaurants and other commercial locations may
decide to install and operate their own billboards or LED panels. The Company
also competes for overall advertising spending with other more traditional media
such as newspapers, TV, magazines and radio, and more advanced media like
Internet advertising, frame and public transport.
  The
Company may also face competition from new entrants into the out-of-home LED
advertising sector. Our sector is characterized by low initial fixed costs for
entrance in term of LED panel requirements and it is uncommon for advertising
clients to enter into exclusive arrangements. In addition, as of
December 10, 2005, wholly foreign-owned advertising companies are allowed
to operate in China, which may expose us to increasing competition from
international advertising media companies attracted by the opportunities in
China.
  Increased
competition could reduce our operating margins, profitability and result in a
loss of market share. Some of our existing and potential competitors may have
competitive advantages, such as more advertising locations and broader coverage
and exclusive arrangements in desirable locations. These competitors could
provide advertising clients with a wider range of media and advertising
services, which could cause us to lose advertising clients or to reduce prices
in order to compete, which could decrease our revenues, gross margins and
profits. We cannot guarantee that we will be able to compete against these
existing and new competitors.
  In order
to enhance our competitive power and to obtain more advertising locations
throughout China, the Company is continuing to search for prime advertising
locations in major cities like Beijing, Shanghai, Nanjing, Wuhan, Qingdao and
Changsha. Concurrently, we also plan to expand our network coverage to other
cities like Guangzhou, Shenzhen and Chengdu. We believe that increasing our
network, advertising coverage and locations for LED video panels and mega-size
digital video billboards, we will be able to offer more competitive pricing to
our advertising clients thereby increasing our profitability.
 13
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  2.Non-Media
Business
  The
travel service industry in China is large and is continuing to grow at an
accelerated rate primarily as a result of strong economic growth in China. We
believe that strong economic growth in China will continue in 2008 and consumer
spending in the travel service industry will continue to be strong.
  In
addition, several large-scale events will occur in the next few years which we
believe will support the growth of the travel industry in China. The 2008
Olympics will be held in Beijing followed by the Shanghai World Expo and the
Asian Games in Guangzhou in 2010. These events are expected to attract
significant domestic and international travelers.
  However,
the travel industry is also highly fragmented and intensely competitive as more
and more travel agencies obtain an International Travel Agency Business License
from the China National Tourism Administration. There are now more than 180 such
travel agencies in Guangdong Province alone and more than 1,500 agencies
nationwide. All these travel agencies, particularly those operating in
Guangdong, compete directly with Tianma.
  We
compete on the basis of brand recognition, tour selection, pricing,
accessibility of travel information, range of travel services offered,
convenience, and customer satisfaction. Since our travel subsidiary, Tianma, is
located in Guangzhou, we compete for customers primarily in the southern areas
of China which are relatively affluent.
  We also
expect to face increasing competition from hotels and airlines as they increase
their direct selling efforts or engage in alliances with other travel service
providers. It may further reduce our profit margin in travel services sector.
Moreover, as part of the conditions for the entry into the World Trade
Organization in 2001, China committed to opening up segments of its travel
industry to foreign participation. This deregulation would benefit the travel
industry in terms of improving industry practices and introducing new
technologies. However, it will also increase competition from foreign
participatants. The Company expects that it will need to invest considerable
resources in the future in order to remain competitive in this
market.
  GOVERNMENT
REGULATION
  1.Regulations Affecting Our
Media Business
  The
Company’s near-term focus is on further developing its Media Network to
capitalize on China’s fast growing out-of-home advertising market. A key
objective for the Media Network is to provide medium to mega-size LED billboards
in prominent cities in China.
  Limitations
on Foreign Ownership in the Advertising Industry
  The
principal regulations governing foreign ownership in the advertising industry in
China include:
 14
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 lThe
      Catalogue for Guiding Foreign Investment in Industry (2007);
              
              lAdvertising Law (1994);lRegulations on Control of Advertisement (1987);lImplementation Rules for Regulations on Control of Advertisement
      (2004); andlThe Administrative Regulations on Foreign-invested Advertising
      Enterprises (2004).
  Since
December 2005, the PRC government has allowed foreign investors to directly own
100% of an advertising business if the foreign investor has at least three years
of direct operations in the advertising business outside of China or to set up
an advertising joint venture if the foreign investor has at least two years of
direct operations in the advertising industry outside of China.
  As we do
not have the necessary advertising business outside of China, we are not
entitled to own directly 100% of an advertising business in China. Our
advertising business was provided through our contractual arrangements with our
PRC operating subsidiary Quo Advertising in the year 2007. Quo Advertising was
owned by two PRC citizens, who are designated by us and hold 100% of the equity
interests in Quo Advertising in trust for the benefit of us, and operates our
advertising network projects. In January 2008, we restructured our advertising
business after acquiring the media subsidiaries namely Lianhe and Bona. We,
through our newly acquired subsidiary, Lianhe, entered into an exclusive
management consulting services agreement and an exclusive technology consulting
services agreement with each of Quo Advertising, Bona and Hui Zhi Bo Tong Media
Advertising Beijing Co., Ltd (“Botong”). In addition, Lianhe entered into an
equity pledge agreement and an option agreement with each of the registered PRC
shareholders of Quo Advertising, Bona and Botong and pursuant to which these
shareholders had pledged 100% of their shares to Lianhe and granted Lianhe the
option to acquire their shares at a mutually agreed purchase price which shall
first be used to repay any loans payable to Lianhe or any affiliate of Lianhe by
the registered PRC shareholders. These commercial arrangements enable us to
exert effective control on these entities, and transfer their economic benefits
to us for financial results consolidation. For details, please refer to Item 6. “Management’s Discussion and
Analysis or Plan of Operation – Material Subsequent Events” for
details.
  There are
risks in our structural arrangement with these advertising entities. Our PRC
legal counsel has critically analyzed and reviewed these commercial agreements
based on the present laws, advertising rules and regulations, and
standardization documents in China. Based on the advice given by the local legal
counsel, the Company makes amendments in our agreements and, if necessary,
prepare additional legal document in order to improve our position for the case
of any legal proceeding. After such critical analysis and followed by the
amendment of contracts, we are confident that the Company is in compliance with
existing laws, advertising rules and regulations, and standardization documents.
However, we are advised by our PRC legal counsel that State Administration for
Industry and Commerce (“SAIC”) and other PRC Regulatory Authorities may have
different interpretations and applications of current and future PRC laws, rules
and regulations. There would be no assurance that these SAIC and PRC regulatory
authorities may take a different view that is contrary to the opinion of our PRC
legal counsel in the future. We could be subject to severe penalties in case
these SAIC and PRC regulatory authorities determine that we are not in
compliance with the laws, advertising rules and regulations, and standardization
documents. Although the risk cannot be avoided totally, we believe that we
performed our reasonable effort to reduce the risk arising from our commercial
agreements arrangement.
 15
 Table of Contents
  We have
been and will continue to be dependent on such commercial agreements arrangement
to operate our media business in the near future. If it is found to be in
violation of PRC Advertising Laws or regulations and fail to obtain any of the
required permits or approvals under any relevant PRC regulations, we could be
penalized. It would have an effect on our ability to conduct business in these
aspects. See Item 1.“Description of Business–Risks and Uncertainties" for details.
  Regulation of Advertising
Services
  Business License
for Advertising Companies
  The
principal regulations governing advertising businesses in China
include:
  l
            The
      Advertising Law (1994)
  l
            Regulations
      on Control of Advertisement (1987);
and
  l
            The
      Implementing Rules for the Advertising Administrative Regulations
      (2004).
  These
regulations stipulate that companies that engage in advertising activities must
obtain from the SAIC or its local branches a business license which specifically
includes operating an advertising business within its business scope. 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 do not
expect to encounter any difficulties in maintaining our business licenses. Quo
Advertising holds a business license from the local branches of the SAIC as
required by the existing PRC regulations.
  Advertising
Content
  PRC
advertising laws and regulations set forth certain content requirements for
advertisements in China, which include prohibitions on, among other things,
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. It is prohibited to
disseminate tobacco advertisements via broadcast or print media. It is also
prohibited to display tobacco advertisements in any waiting lounge, theater,
cinema, conference hall, stadium or other public area. There are also specific
restrictions and requirements regarding advertisements that relate to matters
such as patented products or processes, pharmaceuticals, medical instruments,
veterinary pharmaceuticals, agrochemicals, foodstuff, alcohol and cosmetics. In
addition, all advertisements relating to pharmaceuticals, medical instruments,
agrochemicals and veterinary pharmaceuticals advertised through radio, film,
television, newspaper, magazine and other forms of media, together with any
other advertisements which are subject to censorship by administrative
authorities according to relevant laws and administrative regulations, must be
submitted to the relevant administrative authorities for content approval prior
to dissemination.
 16
 Table of Contents
  Advertisers,
advertising operators and advertising distributors are required by PRC
advertising laws and regulations to ensure that the content of the
advertisements they prepare or distribute are true and in full compliance with
applicable laws. In providing advertising services, advertising operators and
advertising distributors must review the prescribed supporting documents
provided by advertisers for advertisements and verify that the content of the
advertisements comply with applicable PRC laws and regulations. In addition,
prior to distributing advertisements for certain commodities, which are subject
to government censorship and approval, advertising distributors and advertisers
are obligated to ensure 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 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 will employ qualified advertising inspectors who are
trained to review advertising content for compliance with relevant laws and
regulations.
  Outdoor
Advertising
  The
Advertising Law stipulates that the exhibition and display of outdoor
advertisements must not:
  lutilize traffic safety facilities and traffic signs;limpede the use of public facilities, traffic safety facilities and
      traffic signs;lobstruct commercial and public activities or create an eyesore in
      urban areas;lbe placed in restrictive areas near government offices, cultural
      landmarks or historical or scenic sites; andlbe placed in areas prohibited by the local governments from having
      outdoor advertisements.
  In
additional 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 governs the outdoor advertising
industry in China.
  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. Many municipal cities of China have respectively promulgated
their own local regulations on the administration of outdoor advertisements.
Those municipal regulations set forth specific requirements on the outdoor
advertisements, such as the allowed places of dissemination and size
requirements of the outdoor advertisement facilities.  17
 Table of Contents
  In
addition to the regulations on outdoor advertisements, the placement and
installation of LED billboards are also subject to municipal local zoning
requirements and relevant governmental approvals of the city where the LED
billboards located. In Shanghai, the placement and installation of LED
billboards are required to obtain application for an outdoor advertising
registration certificate for each LED billboard subject to a term of use
approved by local government agency for each LED billboard. If the existing LED
billboards placed by our LED location provider or us are required to be removed,
the attractiveness of this portion of our advertising network will be
diminished.
  2.Regulations Affecting Our
Non-Media Business
  a)           Travel
Network
  Travel
Agency. The travel industry is subject to the supervision of the China
National Tourism Administration and local tourism administrations. The principal
regulations governing travel agencies in China include:
  lRegulations of Administration of Travel Agencies (1996), as amended
      on December 11, 2001; andlThe Implementing Rules of Regulations of Administration of Travel
      Agencies (2001).
  Under
these regulations, a travel agency must obtain a license from the China National
Tourism Administration to conduct cross-border travel business, and a license
from the provincial-level tourism administration to conduct domestic travel
agency business.
  Air-ticketing.
The air-ticketing business is subject to the supervision of China National
Aviation Transportation Association (“CNATA”), and its regional branches. Prior
to March 31, 2006, the principal regulation governing air-ticketing in China is
the Administration on Civil Aviation Transporting Marketing Agency Business
Regulations (1993). Currently the principal regulation governing air-ticketing
in China is the Rules on Cognizance of Qualification for Civil Aviation
Transporting Marketing Agencies (2006) which has taken effect since March 31,
2006.
  Under
these regulations, prior to March 31, 2006, an air-ticketing agency must obtain
a permit from General Administration of Civil Aviation of China (“CAAC”) or its
regional branch in every city in which the agency propose to conduct its air-ticketing
business. On and after March 31, 2006, any entity that wishes to conduct the
air-ticketing business in China must apply for an air-ticketing permit from
CNATA. The regulations provide for a transitional grace period for air-ticketing
agencies that have obtained a valid license from CAAC or its regional branch
prior to the promulgation of the new rules. These agencies are permitted to use
their original licenses until such licenses expire.  Restrictions
on Foreign Ownership
  Current
PRC laws and regulations impose substantial restrictions on foreign ownership of
travel agency and the air ticketing businesses in China.
 
 18
 Table of Contents
  Travel
Agency. The principal regulation governing foreign ownership of travel
agencies in China is the Establishment of Foreign-controlled and Wholly
Foreign-owned Travel Agencies Tentative Provisions (2003), as amended in
February 2005. Currently, qualified foreign investors are permitted to establish
or own a travel agency upon the approval of the PRC government, subject to
considerable restrictions as to its scope of business. For instance, foreign
travel agencies cannot arrange for the travel of persons from mainland China to
Hong Kong, Macau, Taiwan or any other country. In addition, foreign travel
agencies cannot establish branches.
  The PRC
Government currently only allows foreign investors to run traveling business in
China if the foreign investors’ annual revenue from travel services is above USD
40 million for a Sino-foreign joint venture with local partner or above USD 500
million for a wholly owned travel services agency. The minimum capital
investment is RMB 2.5 million for a traveling business where foreign investors
take majority or higher interest, and the foreign investor must be a member of
the industry association of tourism of its home country.
  Air
ticketing. Currently, China’s laws and regulations are not very clear on
the foreign investment in air-ticketing industry. According to the Regulations
on Foreign Investment in Civil Aviation Industry (2002) and relevant foreign
investment regulations regarding civil aviation business, a foreign investor
(other than those qualified Hong Kong or Macau service providers which were
permitted to own up to 100% of an advertising agency in China) cannot own 100%
of an air ticketing agency in China. The foreign investors' equity holding
ratios are subject to the approval of relevant government authorities. In
addition, foreign-invested air-ticketing agencies are not permitted to sell
passenger tickets for domestic flights in China.
  As a
result of the rules and regulations described above, we conduct our travel
businesses in China through Tianma and Youwei Zheng, who holds the equity
interests of Tianma in trust for the Company, as well as certain independent
air-ticketing agencies and travel agencies. We have entered into contractual
arrangements with Tianma and Youwei Zheng pursuant to which we believe, based on
the advice of PRC legal counsel, that:
  •
            
            we
      are able to exert effective control over Tianma;•
            
            substantially
      all of the economic benefits of Tianma will be transferred to us;
      and•
            
            our
      subsidiary, NCN Management Services has an exclusive option to purchase
      all or part of 55% of the equity interests in Tianma to the extent
      permitted by PRC laws.
  The
Company further believes, based on the advice of PRC legal counsel,
that:
  •
            
            the
      ownership structure of Tianma is in compliance with existing PRC laws and
      regulations;•
            
            the
      contractual arrangements among NCN Management Services, Tianma and Youwei
      Zheng are valid, binding and enforceable, and will not result in any
      violation of PRC laws or regulations currently in effect;
    and•
            
            the
      PRC business operations of NCN Management Services and Tianma, as
      described in this Annual Report, are in compliance with existing PRC laws
      and regulations in all material
respects.
  We have
been further advised, however, that there are substantial uncertainties
regarding the interpretation and application of current and future PRC laws and
regulations. Accordingly, there can be no assurance that the PRC regulatory
authorities will not in the future take a view that is contrary to the above
opinion of our PRC legal counsel. We have been further advised by our PRC
counsel that if the PRC government finds that the agreements that establish the
structure for operating our PRC travel business do not comply with PRC
government restrictions on foreign investment in travel business, we could be
subject to severe penalties. See Item 1.“Description of Business–Risks and Uncertainties"for details.
 19
 Table of Contents
  b)           e-Network
  The
Company targets for developing a comprehensive and fully integrated Internet
travel services platform focusing on providing a broad range of consumer
services. This includes, but is not limited to (i) accommodation booking and
sales; (ii) travel agencies services for air-ticket sales and, tour packages;
(iii) e-ticketing for concerts, sports events, exhibitions, etc; (iv) sales and
delivery of gifts and souvenirs; (v) e-payment function that directly links to
payment-clearing systems of national banks, financial institutions and mobile
phone operators. These services will be offered at individual service outlets
located in hotel chains, other potential locations and on a comprehensive online
website. We plan to develop this component as a complete travel and leisure
network and substantial revenue driver.
  PRC
Government Regulations
  Internet Content
Provisions. The principal regulations governing foreign ownership of the
Internet content provision business in China include:
 
 lRegulation on Internet Information Service (2000);
              lThe Telecommunications Regulations (2000);
              lThe Administrative Measures for Telecommunications Business
      Operating License (2002);
              lAdministrative Rules for Foreign Investments in Telecommunications
      Enterprises (2002);andlForeign Investment Industrial Guidance Catalogue
      (2007).
  Under
these regulations, a foreign entity is prohibited from owning more than 50% of a
PRC entity that provides value-added telecommunications services, which includes
Internet content provision services. Foreign investors are not allowed to invest
in news websites, web streaming audio-visual services, etc.
  Online
Advertising. The principal regulations governing foreign ownership of
advertising agencies in China are the Foreign Investment Industrial Guidance
Catalogue (2007) and the Administrative Regulations Concerning Foreign Invested
Advertising Enterprises (2004). Under these regulations, prior to December 2005,
foreign investors (other than those qualified Hong Kong or Macau service
providers which were permitted to own up to 100% of an advertising agency in
China) were only allowed to own majority interest in an advertising agency in
China. Beginning on December 2005, foreign investors are allowed to own 100% of
an advertising agency in China subject to certain qualification requirements.
However, for those advertising agencies that provide online advertising service,
foreign ownership restrictions on the Internet content provision business are
still applicable.
 
 20
 Table of Contents
  3.Regulations Affecting All of
Our Businesses
  Regulation
of Foreign Currency Exchange
  The
principal regulation governing foreign currency exchange in China is the Rules
on Foreign Exchange Control (1996), as amended. Under the Rules, Renminbi is
freely convertible for trade and service-related foreign exchange transactions,
but not for direct investment, loan or investment outside China unless the prior
approval of the State Administration for Foreign Exchange of the PRC or other
relevant authorities is obtained.
  Pursuant
to the Rules on Foreign Exchange Control, foreign investment enterprises in
China may purchase foreign currency without the approval of the State
Administration for Foreign Exchange of the PRC for trade and service-related
foreign exchange transactions by providing commercial documents evidencing these
transactions. They may also retain foreign exchange (subject to a cap approved
by the State Administration for Foreign Exchange of the PRC) to satisfy foreign
exchange liabilities or to pay dividends. However, the relevant PRC government
authorities may limit or eliminate the ability of foreign investment enterprises
to purchase and retain foreign currencies in the future. In addition, foreign
exchange transactions for direct investment, loan and investment outside China
are still subject to limitations and require approvals from the State
Administration for Foreign Exchange of the PRC.
  Regulation
of Dividend Distribution
  The
principal regulations governing distribution of dividends of wholly
foreign-owned companies include:
 
 lThe Foreign Investment Enterprise Law (1986), as amended;
      andlAdministrative Rules under the Foreign Investment Enterprise Law
      (2001).
  Under
these regulations, foreign investment enterprises in China may pay dividends
only out of their accumulated profits, if any, determined in accordance with PRC
accounting standards and regulations. In addition, wholly foreign-owned
enterprises in China are required to set aside at least 10% of their after-tax
profits each year, if any, to fund certain reserve funds, unless such reserve
funds as accumulated have reached 50% of their respective registered capital.
These reserves are not distributable as cash dividends.
  Regulation of Enterprise Income
Law
  The
Enterprise Income Law (“EIT Law’) was promulgated by the National People’s
Congress on March 16, 2007 to introduce a new uniform taxation regime in the
PRC. Both resident and non-resident enterprises deriving income from the PRC
will be subject to this EIT Law from January 1, 2008. It replaces the previous
two different tax rates applied to foreign-invested enterprises and domestic
enterprises by only one single income tax rate applied for all enterprises in
the PRC. Under this EIT Law, except for some hi-tech enterprises which are
subject to EIT rates of 15% and other very limited situation that allows EIT
rates at 20%, the general applicable EIT rate in the PRC is 25%. We may not
enjoy tax incentives for our further established companies in the PRC and
therefore our tax advantages over domestic enterprises may be
diminished.
 
 21
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  RISKS
AND UNCERTAINTIES
  We are
subject to various risks that could have a negative effect on the Company and
its financial condition. You should understand that these risks could cause
results to differ materially from those expressed in forward looking
statements contained in this report and in other Company communications. Because
there is no way to determine in advance whether, or to what extent, any present
uncertainty will ultimately influence our business, you should give equal weight
to each of the following:
  1.Risks Related to Operating
Our Business in China
  All of
our assets and revenues are derived from our operations located in China.
Accordingly, our business, financial condition, results of operations and
prospects are subject, to a significant extent, to economic, political and legal
developments in China.
  The
PRC’s economic, political and social conditions, as well as governmental
policies, could affect the financial markets in China, our liquidity and our
ability to access to capital and to operate our business.
  The PRC
economy differs from the economies of most developed countries in many respects,
including the extent of government involvement, level of development, growth
rate, and control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth over the past several years, growth
has been irregular, both geographically and among various sectors of the
economy. The PRC government has implemented various measures to encourage
economic growth and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on the
Company. The PRC economy has been transitioning from a planned economy to a more
market-oriented economy. Although the PRC government has implemented measures
since the late 1970’s emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of improved corporate governance in business enterprises, a
substantial portion of productive assets in China are still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry development by imposing industrial policies. The PRC
government also exercises significant control over China’s economic growth
through allocating resources, controlling payment of foreign
currency-denominated obligations, establishing monetary policy and providing
preferential treatment to particular industries or companies. Since late 2003,
the PRC government
has implemented a number of measures, such as raising bank reserves against
deposit rates to place additional limitations on the ability of commercial banks
to make loans and raise interest rates, in order to slow down specific segments
of China’s economy, which is believed to be overheating. These actions, as well
as future actions and policies of the PRC government, could materially affect
our liquidity and our ability to access to capital and to operate our
business.  China's
central bank announces in 16 January 2008 that it will raise the required
reserve ratio for commercial banks by half a percentage point as of 25 January
2008. As such, the ratio would be raised to 15 %, the highest since
1984. The intention of this action, together with other stringent monetary
policies, is to reduce their lending power in an effort to cool down the
economic overheating. Together with this action, the central bank totally raised
the reserve ratio 11 times and benchmark interest rates six times from last
year. Since from last few years, excess liquidity is a major challenge for
the China government as it results in bubbles and economic overheating. China's
stock market benchmark Shanghai Composite Index almost doubled last year and the
economy expanded 11.5 % in the first three quarters of 2007.
 
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  Such move
is due to the fact that the PRC government has prime concern about Renminbi
appreciation and accelerating inflation pressure. In January 2008, it is
reported that China's macro data showed a slightly decrease in both the trade
surplus and money supply from November. China’s December trade surplus is
US$22.7 billion and it shows a jump of 48 % from a year earlier. Due to the
export surplus, M2, the broadest measure of money supply, rises 16.7 % to
US$5.55 trillion from a year earlier. Along with the trade surplus growth, it
helps push up foreign reserves to a total US$1.53 trillion by the end of 2007.
At the same time, economic growth is likely to continue accelerating. Inflation
in China surges to 6.9 % in November 2007, the fastest since 1996.
  It is
expected that the PRC government will continue to institute further tightening
measures to cool down the risk of the liquidity-fueled A-share bubble and hot
property market. The interest rate and the reserve requirement ratio would
likely go higher in this year. These actions, together with other actions and
policies of the government, could materially affect our liquidity and operation
in business.
  Our
operations in China may be adversely affected by changes in the policies of the
PRC government.
  The
political environment in the PRC may adversely affect the Company’s business
operations. PRC has been operating as a socialist state since 1949 and is
controlled by the Communist Party of China. In recent years, however, the
government has introduced reforms aimed at creating a “socialist market economy”
and policies have been implemented to allow business enterprises greater
autonomy in their operations. Changes in the political leadership of the PRC may
have a significant effect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, foreign investment and so on. Since most of our operating assets and
revenues are derived from our operations located in China, our business and
financial condition, results of operations and prospects are closely subject to
economic, political and legal developments in China. Moreover, economic reforms
and growth in the PRC have been more successful in certain provinces than in
others, and the continuation or increases of such disparities could affect the
political or social stability of the PRC.
  Our
business development in China may be affected by the introduction of Enterprise
Income Tax Law (the EIT Law) effective from January 1, 2008.
  The EIT
Law was promulgated by the National People’s Congress on March 16, 2007 to
introduce a new uniform taxation regime in the PRC. Both resident and
non-resident enterprises deriving income from the PRC will be subject to this
EIT Law from January 1, 2008. It replaces the previous two different tax rates
applied to foreign-invested enterprises and domestic enterprises by only one
single income tax rate applied for all enterprises in the PRC. Under this EIT
Law, except for some hi-tech enterprises which are subject to EIT rates of 15%,
the general applicable EIT rate in the PRC is 25%. We may not enjoy tax
incentives for our further established companies in the PRC and therefore our
tax advantages over domestic enterprises may be diminished. As a result, our
business development in China may be adversely affected.
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  The
PRC government exerts substantial influence over the manner in which the Company
must conduct its business activities.
  Only
recently has the PRC government permitted greater provincial and local economic
autonomy and private economic activities. The PRC government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Accordingly, any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy, regional or local variations in the
implementation of economic policies could have a significant effect on economic
conditions in the PRC or particular regions. The Company may be requested to
divest the interests it then holds in Chinese properties or joint ventures. Any
such developments could have a material affect on the business, operations,
financial condition and prospects of the Company.
  Future
inflation in China may inhibit economic activity and therefore affect our
operations.
  Recently,
the Chinese economy has experienced periods of rapid expansion. During this
period, there have been high rates of inflation. As a result, the PRC government
adopted various corrective and cool-down measures designed to restrict the
availability of credit or regulate growth and contain inflation. While inflation
has moderated since 1995, high inflation would cause the PRC government to
impose controls on credit and/or prices, which could inhibit economic activity
in China, and thereby affecting the Company’s business operations and prospects
in the PRC.
  We
may be restricted from exchanging RMB to other currencies in a timely
manner.
  At the
present time, Renminbi (“RMB”) is not an exchangeable currency. The Company
receives nearly all of its revenue in RMB, which may need to be exchanged to
other currencies, primarily U.S. dollars, and remitted outside of the PRC.
Effective from July 1, 1996, foreign currency “current account” transactions by
foreign investment enterprises, including Sino-foreign joint ventures, are no
longer subject to the approval of State Administration of Foreign Exchange
(“SAFE”, formerly, “State Administration of Exchange Control”), but need only a
ministerial review, according to the Administration of the Settlement, Sale and
Payment of Foreign Exchange Provisions promulgated in 1996 (the “FX
regulations”). “Current account” items include international commercial
transactions, which occur on a regular basis, such as those relating to trade
and provision of services. Distributions to joint venture parties also are
considered a “current account transaction”. Other non-current account items,
known as “capital account” items, remain subject to SAFE approval. Under current
regulations, the Company can obtain foreign currency in exchange for RMB from
swap centers authorized by the government. The Company does not anticipate
problems in obtaining foreign currency to satisfy its requirements; however,
there is no assurance that foreign currency shortages or changes in currency
exchange laws and regulations by the PRC government will not restrict the
Company from exchanging RMB in a timely manner. If such shortages or changes in
laws and regulations occur, the Company may accept RMB, which can be held or
reinvested in other projects.
  We
may suffer from exchange rate risks that could result in foreign currency
exchange loss.
  Because
our business transactions are denominated in RMB and our funding will be
denominated in USD, fluctuations in exchange rates between USD and RMB will
affect our balance sheet and financial results. Since July 2005, RMB has
been no longer solely pegged with USD but is pegged against a basket of
currencies as a whole in order to keep a more stable exchange rate for
international trading. With the very strong economic growth in China in the last
few years, RMB is facing a very high pressure to appreciate against USD. Such
pressure would result in more fluctuations in exchange rates and in turn our
business would suffer from higher foreign currency exchange rate
risk.
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  There are
very limited hedging tools available in China to hedge our exposure in exchange
rate fluctuations. They are also ineffective in the sense that these hedges
cannot be performed in the PRC financial market, and more important, the
frequent changes in PRC exchange control regulations would limit our hedging
ability for RMB.
  Risks
from the outbreak of severe acute respiratory syndrome (SARS) and avian flu in
various parts of China, Hong Kong and elsewhere.
  Since
early 2003, mainland China, Hong Kong and certain other countries, largely in
Asia, have been experiencing an outbreak of a new and highly contagious form of
atypical pneumonia, now known as severe acute respiratory syndromes, or SARS.
This outbreak has resulted in significant disruption to the lifestyles of the
business and economic activity in the effected areas. Areas in Mainland China
that have been affected include areas where the Company has business and
management operations. Although the outbreak is now generally under control in
China, the Company cannot predict at this time whether the situation may again
deteriorate or the extent of its effect on the Company’s business and
operations. Moreover, there are many Asian countries including China that report
incidents of avian flu. Although this virus is spread through poultry
populations, it is reported in many incidents that the virus can cause an
infection to humans and is often fatal. Any outbreak of SARS or avian flu may
result the closure of our offices or other businesses where we provide our
advertising and hotel services. The occurrences of such diseases would also
affect our out-of-home advertising network to advertisers. The advertisers may
stop purchasing the advertising time and severely interrupt our business and
operations.
  The
Company cannot assure that this outbreak, particularly if the situation worsens,
will not significantly reduce the Company’s revenues, disrupt the Company’s
staffing or otherwise generally disrupt the Company’s operations.
  Due
to our assets are located in PRC, stockholders may not receive distributions
that they would otherwise be entitled to if we were declared bankruptcy or
insolvency.
  Due to the Company’s assets are located
in PRC, the assets of the Company may be outside of the jurisdiction of U.S.
courts to administer if the Company was the subject of an insolvency or
bankruptcy proceeding. As a result, if the Company was declared bankrupt or
insolvent, the Company’s stockholders may not be able to receive the
distributions on liquidation that they are otherwise entitled to under U.S.
bankruptcy law.
  If
any of our PRC companies becomes the subject of a bankruptcy or liquidation
proceeding, we may lose the ability to use and enjoy those assets, which could
materially affect our business, ability to generate revenue and the market price
of our common stock.
  To comply
with PRC laws and regulations relating to foreign ownership restrictions in the
advertising and travel businesses, we currently conduct our operations in China
through contractual arrangements with shareholders of Tianma and through
commercial agreements with shareholders of Quo Advertising, Lianhe, Bona and
Botong. As part of these arrangements, these persons hold some of the
assets that are important to the operation of our business. If any of these
entities files for bankruptcy and all or part of their assets become subject to
liens or rights of third-party creditors, we may be unable to continue some or
all of our business activities, which could affect our business, financial
condition and results of operations.
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  Our
acquisitions of Tianma, Quo Advertising, Xuanicaiyi, Lianhe and Bona were
structured to attempt to fully comply with PRC rules and regulations. However,
such arrangements may be adjudicated by relevant PRC government agencies as not
being in compliance with PRC governmental regulations on foreign investment in
traveling and advertising industries and such structures may limit our control
with respect to such entities.
  Since
2001, the PRC Government has only allowed foreign investors to run traveling
business in China if the foreign investors have at least three years of
traveling operations record outside China with annual revenue of USD 40 million.
The minimum capital investment is RMB 4 million and the foreign investors must
be members of the China Tourism Association. Moreover, the foreign investors are
restricted from running outbound travel services. In order to penetrate into
this market, we acquired a majority interest of Tianma, a travel agency
headquartered in the Guangdong province of the PRC in June 2006 through certain
contractual arrangements. With the grant of the International Travel Agency
Business License by China National Tourism Administration, Tianma is allowed to
operate outbound travel services. Through our contractual arrangements, we
designated a PRC citizen to held 55% of the equity interest of Tianma in trust
for our benefit. Tianma directly operates our traveling agent
business.
  Since
2005, the PRC government has allowed foreign investors to directly own 100% of
an advertising business if the foreign investor has at least three years of
direct operations in the advertising business outside of China or to own less
than 100% if the foreign investor has at least two years of direct operations in
the advertising industry outside of China. As we do not currently directly
operate an advertising business outside of China, we are not entitled to own
directly 100% of an advertising business in China.
  Our
advertising business was run through our contractual arrangements with our PRC
operating subsidiary Quo Advertising. Quo Advertising was owned by two PRC
citizens designated by us and directly operated our advertising network
projects. In January
2008, we restructured our advertising business after further acquiring the media
subsidiaries namely Lianhe and Bona. We, through our newly acquired company,
Lianhe, entered into an exclusive management consulting services agreement and
an exclusive technology consulting services agreement with each of Quo
Advertising, Bona and Botong. In addition, Lianhe also entered into an equity
pledge agreement and an option purchase agreement with each of the shareholders
of Quo Advertising, Bona and Botong pursuant to which these shareholders had
pledged 100% of their shares to Lianhe and granted Lianhe the option to acquire
their shares at a mutually agreed purchase price which shall first be used to
repay any loans payable to Lianhe or any affiliate of Lianhe by the registered
PRC shareholders. These commercial arrangements enable us to exert effective
control on these entities, and transfer their economic benefits to us for
financial results consolidation. For details, please refer to Item 6. “Management’s Discussion and
Analysis or Plan of Operation – Material Subsequent Events” for
details.
  Since we
believe that there is risk in our structural arrangement with advertising
entities and Tianma, we try to minimize this risk by consulting a local legal
counsel in China. The local legal counsel critically analyzes and reviews the
documents and agreements. Based on the advice given by the local legal counsel,
we make amendments in our legal documents and, if necessary, and prepare
additional legal document in order to improve our position for the case of any
legal proceeding. Although the risk cannot be avoided totally, we believe that
we performed our reasonable effort to reduce the risk arising from our
contractual arrangement.
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  We have
been and will continue to be dependent on these PRC operating companies to
operate our traveling agent and advertising business in the near future. If our
existing PRC operating subsidiaries are found to be in violation of any PRC laws
or regulations and fail to obtain any of the required permits or approvals under
any relevant PRC regulations, we could be penalized. It would have an effect on
our ability to conduct business in these aspects.
  The
PRC government regulates the travel agency, advertising and Internet industries.
If we fail to obtain or maintain all pertinent permits and approvals or if the
PRC government imposes more restrictions on these industries, our business may
be affected.
  The PRC
government regulates the travel agency, advertising and Internet industries. We
are required to obtain applicable permits or approvals from different regulatory
authorities to conduct our business, including separate licenses for Internet
content provision, advertising and travel agency activities. If we fail to
obtain or maintain any of the required permits or approvals, we may be subject
to various penalties, such as fines or suspension of operations in these
regulated businesses, which could severely disrupt our business operations. As a
result, our financial condition and results of operations may be
affected.
  We
have attempted to comply with the PRC government regulations regarding licensing
requirements by entering into a series of agreements with our affiliated Chinese
entities. If the PRC laws and regulations change, our business in China may be
affected.
  To comply
with the PRC government regulations regarding licensing requirements, we have
entered into a series of agreements with our affiliated Chinese entities to
exert operational control and secure consulting fees and other payments from
them. We have been advised by our PRC legal counsel that our arrangements with
our affiliated Chinese entities are valid under current PRC laws and
regulations. However, we cannot assure that we will not be required to
restructure our organization structure and operations in China to comply with
changing and new PRC laws and regulations. Restructuring of our operations may
result in disruption of our business, diversion of management attention and the
incurrence of substantial costs.
  The
PRC legal system embodies uncertainties, which could limit law enforcement
availability.
  The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedence. In
1979, the PRC government began to promulgate a comprehensive system of laws and
regulations governing economic matters in general. The overall effect of
legislation over the past 28 years has significantly enhanced the
protections afforded to various forms of foreign investment in China. Each of
our PRC operating subsidiaries and affiliates is subject to PRC laws and
regulations. However, these laws and regulations change frequently and the
interpretation and enforcement involve uncertainties. For instance, we may have
to resort to administrative and court proceedings to enforce the legal
protection that we are entitled to by law or contract. However, since PRC
administrative and court authorities have significant discretion in interpreting
statutory and contractual terms, it may be difficult to evaluate the outcome of
administrative court proceedings and the level of law enforcement that we would
receive in more developed legal systems. Such uncertainties, including the
inability to enforce our contracts, could affect our business and operation. In
addition, intellectual property rights and confidentiality protections in China
may not be as effective as in the United States or other countries. Accordingly,
we cannot predict the effect of future developments in the PRC legal system,
particularly with regard to the industries in which we operate, including the
promulgation of new laws. This may include changes to existing laws or the
interpretation or enforcement thereof, or the preemption of local regulations by
national laws. These uncertainties could limit the availability of law
enforcement, including our ability to enforce our agreements with Tianma,
Lianhe, Bona, Botong, and Quo Advertising with other foreign
investors.
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  Recent
PRC regulations relating to offshore investment activities by PRC residents may
increase our administrative burden and restrict our overseas and cross-border
investment activities. If our shareholders who are PRC residents fail to make
any required applications and filings under such regulations, we may be unable
to distribute profits and may become subject to liability under PRC
laws.
  The PRC
National Development and Reform Commission, NDRC, and SAFE recently promulgated
regulations that require PRC residents and PRC corporate entities to register
with and obtain approvals from relevant PRC government authorities in connection
with their direct or indirect offshore investment activities. These regulations
apply to our shareholders who are PRC residents and may apply to any offshore
acquisitions that we make in the future.
  Under the
SAFE regulations, PRC residents who make, or have previously made, direct or
indirect investments in offshore companies will be required to register those
investments. In addition, any PRC resident who is a direct or indirect
shareholder of an offshore company is required to file with the local branch of
SAFE any material change involving capital variation. This would include an
increase or decrease in capital, transfer or swap of shares, merger, division,
long-term equity or debt investment or creation of any security interest over
the assets located in China. If any PRC shareholder fails to make the required
SAFE registration, the PRC subsidiaries of that offshore parent company may be
prohibited from distributing their profits and the proceeds from any reduction
in capital, share transfer or liquidation, to their offshore parent company. The
offshore parent company may be prohibited from injecting additional capital into
their PRC subsidiaries. Moreover, failure to comply with the various SAFE
registration requirements described above could result in liability under PRC
laws for evasion of applicable foreign exchange restrictions.
  We cannot
guarantee that all of our shareholders who are PRC residents will comply with
our request to obtain any registrations or approvals required under these
regulations or other related legislation. Furthermore, as the regulations are
relatively new, the PRC government has yet to publish implementing rules, and
much uncertainty remains concerning the reconciliation of the new regulations
with other approval requirements. It is unclear how the regulations concerning
offshore or cross-border transactions will be implemented by the relevant
government authorities. The failure or inability of our PRC resident
shareholders to comply with these regulations may subject us to fines and legal
sanctions, restrict our overseas or cross-border investment activities, limit
our ability to inject additional capital into our PRC subsidiaries, and the
ability of our PRC subsidiaries to make distributions or pay dividends, or
affect our ownership structure. If any of the foregoing events occur, our
acquisition strategy, business operations and ability to distribute profits to
our investors could be affected.
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  The
PRC tax authorities may require us to pay additional taxes in connection with
our acquisitions of offshore entities that conduct their PRC operations through
their affiliates in China.
  Our
operations and transactions are subject to review by the PRC tax authorities
pursuant to relevant PRC laws and regulations. However, these laws, regulations
and legal requirements change frequently, and their interpretation and
enforcement involve uncertainties. For instance, in the case of some of our
acquisitions of offshore entities that conducted their PRC operations through
their affiliates in China, we cannot assure our investors that the PRC tax
authorities will not require us to pay additional taxes in relation to such
acquisitions, in particular where the PRC tax authorities take the view that the
previous taxable income of the PRC affiliates of the acquired offshore entities
needs to be adjusted and additional taxes be paid. In the event that the sellers
failed to pay any taxes required under PRC laws in connection with these
transactions, the PRC tax authorities might require us to pay the tax together
with late-payment interest and penalties.
  We
rely on our affiliated Chinese personnel to conduct travel and advertising
businesses. If our contractual arrangements and commercial agreement
arrangements with our affiliated Chinese personnel are violated, our related
businesses will be damaged.
  As
mentioned earlier, we depend on commercial agreements and contractual
arrangements to run our advertising and traveling businesses respectively in
China. These agreements and contracts are governed by PRC laws and provide for
the resolution of disputes through arbitration or litigation in the PRC. Upon
arbitration or litigation, these contracts would be interpreted in accordance
with PRC laws and any disputes would be resolved in accordance with PRC legal
procedures. The uncertainties in the PRC legal system could disable us to
enforce these commercial agreements and contractual arrangements. Should such a
situation occur, we may be unable to enforce these agreements and contracts, and
unable to enforce our control over our operating subsidiaries to conduct our
businesses.
  We
have limited business insurance coverage in China.
  The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. As a result, we
have limited business liability or disruption insurance coverage for our
operations in China. Any business disruption, litigation or natural disaster
might result in substantial costs and diversion of resources and have an effect
on our business and operating results.
  Our
subsidiaries and affiliated Chinese entities in China are subject to
restrictions on paying dividends or making other payments to us, which may
restrict our ability to satisfy our liquidity requirements.
  We rely
on dividends from our subsidiaries in China and consulting and other fees paid
to us by our affiliated Chinese entities. Current PRC regulations permit our
subsidiaries to pay dividends to us only out of their accumulated profits, if
any, determined in accordance with Chinese accounting standards and regulations.
In addition, our subsidiaries in China are required to set aside at least 10% of
their respective accumulated profits each year, if any, to fund certain reserve
funds. These reserves are not distributable as cash dividends. Further, if our
subsidiaries and affiliated Chinese entities in China incur debt on their own
behalf, the instruments governing the debt may restrict their ability to pay
dividends or make other payments to us, which may restrict our ability to
satisfy our liquidity requirements.
 
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  2.Risks Related to Our Media
Business
  In early
2007, we have entered into a contract to acquire Quo Advertising to expand our
business operations in the media business. Since the acquisition, we have
successfully entered into several material business agreements in Beijing,
Shanghai, Nanjing, Wuhan and so on to manage and operate LED outdoor advertising
video panels and mega-size digital video billboards. In January 2008, we
restructured our advertising business after further acquiring the media
companies namely Lianhe and Bona. We anticipate that we would enter into
agreements in other major cities to strengthen our position in the out-of-home
media business in China. In addition to the risks described above in “Risks Related to Operating a
Business in China”, we are subject to additional risks related to our
media business.
  The
media and advertising industries are highly competitive and we will compete with
companies that are larger and better capitalized.
  We have
to compete with other advertising companies in the out-of-home advertising
market. We compete for advertising clients primarily in terms of network size
and coverage, locations of our LED panels and billboards, pricing, and range of
services that we can offer. We also face competition from advertisers in other
forms of media such as out-of-home television advertising network in commercial
buildings, hotels, restaurants, supermarkets and convenience chain stores. We
expect that the competition will be more severe in the near future. The
relatively low fixed costs and the practice of non-exclusive arrangement with
advertising clients would provide a very low barrier for new entrants in this
market segment. Moreover, international advertising media companies have been
allowed to operate in China since 2005, exposing us to even greater competition.
  Moreover,
it becomes more difficult to increase the number of desirable locations in major
cities because most of the locations have already been occupied by our
competitors and limitation by municipal zoning and planning policies. In other
cities, although we could increase the locations, they would only generate less
economic return to the Company. Anyway, we anticipate the economic return would
increase with the pace of economic development of these cities. If we are unable
to increase the placement of our out-of-home advertising market, we may be
unable to expand our client base to sell advertising time slots on our network
or increase the rates we charge for time slots. As a consequence of this, our
operating margins and profitability may be reduced, and may result in a loss of
market share. Since we are a new entrant to this market segment, we have less
competitive advantages than the existing competitors in terms of experience,
expertise, and marketing force. The Company is tackling these problems by
further acquisition of well-established advertising company like Quo
Advertising, Lianhe and Bona. We cannot guarantee that we will be able to
compete against new or existing competitors to generate profit.
  Moreover,
due to the less desirable locations currently the Company has, we can only
charge the advertisers for at a lower rates. If the Company is unable to
continuously secure more desirable locations for deployment of our advertising
poster frames, we may be unable or need to lower our rates to attract
advertisers to purchase time slots from us to generate satisfactory
profit.
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  If
we cannot enter into further agreements for roadside LED video panels and
mega-size digital video billboards in other major cities in China, we may be
unable to grow our revenue base and hence unable to generate higher levels of
revenue.
  The
Company continues geographic expansion in media network by entering into
business cooperation agreements with local advertising companies to operate and
manage our roadside LED video panels and mega-size digital video billboards in
China. We have concluded several major agreements and are currently searching
for more opportunities. Nevertheless, many of the most desirable locations in
the major cities have been occupied by our competitors. If we are unable to or
need to pay extra considerations in order to enter into any new agreements, it
may highly increase our costs of sales and may be unable to convince our
advertisers to purchase more advertising time and generate our satisfactory
profits.
  If
we are unable to attract advertisers to advertise on our networks, we will be
unable to grow our revenue base to generate revenues.
  We charge
our advertisers based on the time that is used on our roadside LED video panels
and mega-size digital video billboards. The desire of advertisers to advertise
on our out-of-home media networks depends on the size and coverage of the
networks, the desirability of the locations of the LED panels and billboards,
our brand name and charging rate. If we fail to increase the number of
locations, displays and billboards in our networks to provide the advertising
services to suit the needs of our advertisers, we may be unable to attract them
to purchase our advertising time to generate revenues.
  If
the public does not accept our out-of-home advertising media, we will be unable
to generate revenue.
  The
out-of-home advertising network that we are developing is a rather new concept
in China. It is too early to conclude whether the public accept this advertising
means or not. In case the public finds any element like audio or video features
in our media
network to be disruptive or intrusive, advertisers may withdraw their requests
for purchasing time slots from us and to advertise on other networks. On the
contrary, if the viewing public is receptive toward our advertising network, our
advertisers will continue to purchase the time from us. As such, together with
other uncertainties like locations coverage, acceptance by public etc, we may be
unable to generate satisfactory revenue in our media network
business.  We
may be subject to government regulations in installing our out-of-home roadside
LED video panels and mega-size digital video billboards advertising
network.
  The
placement and installation of LED panels and billboards are subject to municipal
zoning requirements and governmental approvals. It is necessary to obtain
approvals for construction permits from the relevant supervisory departments of
the PRC government for each installation of roadside LED video panel and
mega-size digital video billboard. However, we cannot provide any guarantee that
we can obtain all the relevant government approvals for all of our installations
in China. If such approvals are not granted, we will be unable to install LED
panels or billboards on schedule, or may incur more installation
costs.
  If
we are unable to adapt to changing advertising trends and the technology needs
of advertisers and consumers, we will not be able to compete effectively and we
will be unable to increase or maintain our revenues, which may affect our
business prospects and revenues.
 
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  The
market for out-of-home advertising requires us to research new advertising
trends and the technology needs of advertisers and consumers, which may require
us to develop new features and enhancements for our advertising network. The
majority of our displays use medium-size roadside LED video panels. We also use
mega-size LED digital video billboards. We are currently researching ways that
we may be able to utilize other technology such as cable or broadband
networking, advanced audio technologies and high-definition panel technology.
Development and acquisition costs may have to be incurred in order to keep pace
with new technology needs but we may not have the financial resources necessary
to fund and implement future technological innovations or to replace obsolete
technology. Furthermore, we may fail to respond to these changing technology
needs. For instance, if the use of wireless or broadband networking capabilities
on our advertising network becomes a commercially viable alternative and meets
all applicable PRC legal and regulatory requirements, and we fail to implement
such changes on our out-of-home network and in-store network or fail to do so in
a timely manner, our competitors or future entrants into the market who do take
advantage of such initiatives could gain a competitive advantage over us. If we
cannot succeed in developing and introducing new features on a timely and
cost-effective basis, advertiser demand for our advertising networks may
decrease and we may not be able to compete effectively or attract advertising
clients, which would have an effect on our business prospects and
revenues.
  3.Risks Related to Our Travel
Business
  In
addition to the risks described above in “Risks Related to Operating a Business
in China”, we are subject to additional risks related to our travel
business.
  The
travel industry is highly competitive, which may influence our ability to
compete with other market participants.
  We
operate in markets that contain numerous competitors. Our ability to remain
competitive, attract and retain business and leisure travelers depends on our
success in distinguishing the quality, value and efficiency of our services from
those offered by others. If we are unable to compete in these areas, this could
limit our operating margins, diminish our market share and reduce our
earnings.
  We
are subject to the range of operating risks to travel-related
industry.
  The
profitability of travel-related industry that we operate in may be affected by a
number of factors, including:
  (1)
            International
      and regional economic conditions;(2)
            the
      availability of and demand for hotel rooms and apartments;(3)
            the
      desirability of particular locations and changes in travel patterns of
      domestic and foreign travelers;(4)
            taxes
      and government regulations that influence or determine wages, prices,
      interest rates, and other costs;(5)
            the
      availability of capital to allow us and joint venture partners to fund
      investments;(6)
            the
      increase in wages and labor costs, energy, mortgage interest rates,
      insurance, transportation and fuel, and other
  expenses.
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 Any one
or more of these factors could limit or reduce the demand on the travel services
market.
  The
uncertain pace of the lodging and travel industry’s recovery will continue to
influence our financial results and growth.
  Both the
Company and the lodging industry were hurt by several events occurring over the
last few years, including SARS and avian flu, and the terrorist attacks on New
York and Washington. Although showing some improvements in Asia Pacific,
business and leisure travel from United States and Europe remained depressed as
some potential travelers reduced or avoided discretionary travel in light of
safety concerns and economic declines stemming from erosion in consumer
confidence. Although both the lodging and travel industries are recovering, the
duration and full extent of that recovery remain unclear. Accordingly, our
financial results and growth could be harmed if that recovery stalls or is
reversed.
  Our
travel operations are subject to international and regional
conditions.
  Although
we conduct our business in China, our activities are susceptible to changes in
the performance of international and regional economies, as foreign travelers
constitute a fair percentage of travel population. In recent years, our business
has been hurt by decreases in travel resulting from SARS and downturns in US and
Europe economic conditions. Our future economic performance is subject to the
uncertain magnitude and duration of the economic growth in China, the prospects
of improving economic performance in other regions, the unknown pace of any
business travel recovery that results, and the occurrence of any future
incidents in China in which we operate.
  Future
increase in fuel prices and the possible downturn in the US and global economies
in 2008 may inhibit economic activity and therefore affect our travel
operations.
  The
travel business is facing two more uncertainties. First, fuel prices have surged
by 48 % in 2007 and as of February 2008 the crude oil price rise to US$100 per
barrel. Since fuel is a major cost component for airlines and traffic, the
rising fuel price has had an adverse impact on the costs of our travel business
and results lower our profitability. Second, there are indications of an
economic downturn in the US and global economies in 2008, which could have an
adverse effect on China's economic growth, which would then have a negative
impact on the China travel market.
  Our
ability to grow is in part dependent upon future acquisitions.
  The
process of identifying, acquiring and integrating future acquisitions may
constrain valuable management resources, and our failure to integrate future
acquisitions may result in the loss of key employees and the dilution of
stockholder value and have an adverse effect on our operating results. We have
acquired existing businesses and expect to continue pursuing strategic
acquisitions in the future. Completing any potential future acquisitions could
cause significant diversions of management time and resources.
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 Acquisition transactions involve
inherent risks such as:
  •
            uncertainties
      in assessing the value, strengths, weaknesses, contingent and other
      liabilities and potential profitability of acquisition or other
      transaction candidates;•
            the
      potential loss of key personnel of an acquired
  business;
  •
            the
      ability to achieve identified operating and financial synergies
      anticipated to result from an acquisition or other
      transaction;•
            problems
      that could arise from the integration of the acquired
      business;
  •
            unanticipated
      changes in business, industry or general economic conditions that affect
      the assumptions underlying the acquisition or other transaction rationale;
      and•
            unexpected
      development costs that adversely affect our
  profitability.
  Financing
for future acquisitions may not be available on favorable terms, or at all. If
we identify an appropriate acquisition candidate for our businesses, we may not
be able to negotiate the terms of the acquisition successfully, finance the
acquisition or
integrate the acquired business, technologies or employees into our existing
business and operations. Future acquisitions may not be well received by the
investment community, which may cause our stock price to fluctuate. We cannot
ensure that we will be able to identify or complete any acquisition in the
future.
  Risks
relating to acts of God, terrorist activity and war could reduce the demand for
lodging, which may affect our revenues.
  Acts of
God, such as natural disasters and the spread of contagious diseases, in the PRC
where we own and manage can cause a decline in the level of business and leisure
travel and reduce the demand for lodging. Wars (including the potential for
war), terrorist activity (including threats of terrorist activity), political
unrest and other forms of civil strife and geopolitical uncertainty can have a
similar result. Any one or more of these events may reduce the overall demand
for travel which could adversely affect our revenues.
  Our
results are likely to fluctuate because of seasonality in the travel industry in
China.
  Our
business experiences fluctuations, reflecting seasonal variations in demand for
travel services. For instance, the first quarter of each year generally
contributes the lowest portion of our annual net revenues primarily due to a
slowdown in business activity around and during the Chinese New Year holiday.
Consequently, our revenues may fluctuate from quarter to quarter throughout the
year.
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 4.Risks
Related to Our Developing e-Network Business
  We target
for developing a comprehensive and fully integrated Internet travel services
platform focusing on providing a broad range of
products and services. This includes, but is not limited to (i) Accommodation
booking and sales; (ii) Travel agencies services for air-ticket sales and, tour
packages; (iii) e-ticketing for concerts, sports events, exhibitions, etc; (iv)
Sales and delivery of gifts and souvenirs; (v) e-payment function that directly
links to payment-clearing systems of national banks, financial institutions and
mobile phone operators. These products and services will be offered at
individual service outlets located in some hotel chains, other potential
locations and on a comprehensive online website. We plan to develop this
component as a complete travel and leisure network and substantial revenue
driver.
  Our
success in e-Network depends on whether we can acquire well-established
companies and recruit expertise to consolidate and integrate our business
network.
  We will
build our e-Shop brand through acquiring travel webs in China to capture
existing users. It is a faster and more effective method than building our own
travel web site from scratch to attract new users. We will also recruit
experienced personnel to develop and fine-tune such online shopping and booking
web site to suit our specific requirements. With this web site, we can provide a
trading platform to leverage on Media and Travel Networks and establish a
comprehensive e-Shop platform.Since expanding e-Shop
product coverage through merger and acquisitions is our key development
strategy, we will look for suitable companies to acquire. If we fail to find
suitable target company for acquisition, the progress of building our e-Network
may be affected.
  Online
payment systems in China are at an early stage of development and may restrict
our ability to expand our online commerce service business.
  Online
payment systems in China are at an early stage of development. Although major
Chinese banks are instituting online payment systems, these systems are not as
widely available or acceptable to consumers in China as that in the United
States and other developed countries. In addition, compared to countries like
the United States, only a limited number of consumers in China have credit cards
or debit cards. The lack of adequate online payment systems may limit the number
of online commerce transactions that we can service. If online payment services
cannot be developed, our ability to grow our online commerce business may be
limited.
  The
Internet market has not been proven as an effective commercial medium in
China.
  The
market for Internet products and services in China has only recently begun to
develop. The Internet penetration rate, even though it is growing, is still low
in China than those in the United States and other developed countries. Since
the Internet is not yet a well-proven secured medium for commerce in China, our
future operating results from online services will depend substantially upon the
increased use and acceptance of the Internet for distribution of products and
services and facilitation of commerce in China.
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  The
Internet may not become a viable commercial marketplace in China for various
reasons in the near future. More salient impediments to Internet development in
China include:
  •
            consumer
      dependence on traditional means of
commerce;
  •
            inexperience
      with the Internet as a sales and distribution
  channel;
  •
            inadequate
      development of the necessary infrastructure to facilitate online
      commerce;
  •
            concerns
      about security, reliability, cost, ease of deployment, administration and
      quality of service associated with conducting business over the
      Internet;
  •
            inexperience
      with credit card usage or with other means of electronic payment;
      and
  •
            limited
      use of personal computers.
  If the
Internet were not widely accepted as a medium for online commerce in China, our
ability to grow our online business would be impeded.
  The
continued growth of Chinese Internet market depends on the establishment of an
adequate telecommunications infrastructure.
  Although
many private sector Internet service providers currently exist in China, almost
all access to the Internet is maintained through state owned telecommunication
operation under the administrative control and regulatory supervision of China’s
Ministry of Information Industry. In addition, the national networks in China
are connected to the Internet through government controlled international
gateways. These international gateways are the only channels through which a
Chinese user can connect to the international Internet network. We rely on China
Telecom and China Netcom to provide data communications capacity primarily
through local telecommunications lines. Although the government has announced
plans to develop the national information infrastructure, we cannot guarantee
that this infrastructure will be developed. In addition, we will have no access
to alternative networks and services, in the event of any infrastructure
disruption or failure. The Internet infrastructure in China may not support the
demands associated with continued growth in Internet usage and it may affect our
progress of building our e-Network business.
  5.Risks
Related 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 travel and advertising industries, we could be subject
to severe penalties.
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 Our
travel operations are conducted by Tianma through our contractual arrangements.
Meanwhile, our media operations are conducted by Lianhe, Botong, Bona and Quo
Advertising though commercial agreements arrangement.
  According
to the Rules on Cognizance of Qualification for Civil Aviation Transporting
Marketing Agencies (2006) and relevant foreign investment regulations
regarding to civil aviation business, a foreign investor currently cannot own
100% of an air ticketing agency in China. In addition, foreign invested air
ticketing agencies are not permitted to sell passenger tickets for domestic
flights in China. The principal regulation governing foreign ownership of travel
agencies in China is the Establishment of Foreign-controlled and Wholly
Foreign-owned Travel Agencies Tentative Provisions, as amended in February 2005.
Currently, qualified foreign investors have been permitted to establish or own a
travel agency upon the approval of the PRC government, subject to considerable
restrictions as to its scope of business. For instance, foreign travel agencies
cannot arrange for the travel of persons from mainland China to Hong Kong,
Macau, Taiwan or any other country. In addition, foreign travel agencies cannot
establish branches.
  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. Beginning 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. We do not 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. Accordingly, our PRC operating subsidiaries are currently
unable to apply for the required licenses for providing advertising services in
China. Before 2008, all of our advertising business is run through Quo
Advertising, which is owned by two PRC citizens designated by us. Quo
Advertising holds the requisite licenses to provide advertising services in
China. We have entered into contractual agreements with the shareholders of Quo
Advertising, which provide us with the substantial ability to control Quo
Advertising and its subsidiaries.
  In
January 2008, we restructured our advertising business after further acquiring
the media companies namely Lianhe and Bona. We, through our newly acquired
company, Lianhe, entered into an exclusive management consulting services
agreement and an exclusive technology consulting services agreement with each of
Quo Advertising, Bona and Botong. In addition, we entered into an equity pledge
agreement and an option agreement with each of the shareholders of Quo
Advertising, Bona and Botong and pursuant to which these shareholders had
pledged 100% of their shares to Lianhe and granted Lianhe the option to acquire
their shares at a mutually agreed purchase price which shall first be used to
repay any loans
payable to Lianhe or any affiliate of Lianhe by the registered PRC shareholders
These commercial arrangements enable us to exert effective control on these
entities, and transfer their economic benefits to us for financial results
consolidation.
  If we,
our existing or future PRC operating subsidiaries and affiliates are found to be
in violation of any 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 (SAIC), would have
broad discretion in dealing with such violations, including:
 37
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 •
            
            revoking
      the business and operating licenses of our PRC subsidiaries and
      affiliates;•
            
            discontinuing
      or restricting our PRC subsidiaries’ and affiliates’
      operations;
 •
            
            imposing
      conditions or requirements with which we or our PRC subsidiaries and
      affiliates may not be able to comply;•
            
            requiring
      us or our PRC subsidiaries and affiliates 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 and commercial agreement arrangement with our
PRC operating companies and their shareholders for our China operations, which
may not be as effective in providing operational control as direct
ownership.
  In the
past, the Company has relied on contractual arrangements with the shareholders
of Tianma and Quo Advertising to operate our travel and advertising businesses
respectively. In January 2008, we restructure our advertising business after
further acquiring the media companies namely Lianhe and Bona. We, through our
newly acquired company, Lianhe, entered into a series of commercial agreements
with each of Quo Advertising, Bona and Botong and their respective registered
shareholders. It enables us to exert effective control on these entities, and
transfer their economic benefits to us for financial results consolidation.
These contractual arrangements and commercial agreement arrangements may not be
as effective in providing us with control over Tianma and media subsidiaries as
direct ownership. If our PRC operating subsidiaries or any of their subsidiaries
and shareholders fails to perform their respective obligations under these
contractual arrangements and commercial
agreement arrangements, we may have to incur substantial costs and resources to
enforce such arrangements, and rely on legal remedies under PRC law. This would
also include seeking specific performance or injunctive relief, and claiming
damages, which we cannot guarantee to be effective.
  Many of
these contractual arrangements and commercial agreement 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
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 and commercial agreements, we may not be able to exert
effective control over our operating entities, and our ability to conduct our
business may be negatively affected.
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  Contractual
arrangements and commercial agreement arrangements we have entered into among
our subsidiaries and affiliated entities 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
laws, 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 affiliates are found not to be on
an arm’s length basis or result in a reduction in tax under PRC laws, the PRC
tax authorities will disallow our tax savings, adjust the profits and losses of
our respective PRC entities and assess late payment interest and penalties
accordingly.
  Our
business operations may be affected by legislative or regulatory
changes.
  There are
no formal PRC laws or regulations that define or regulate out-of-home
advertising. It has been reported that the relevant PRC government authorities
are currently considering adopting new regulations governing out-of-home
advertising. We cannot predict the timing of establishing such regulations and
their impacts on our Company. Changes in laws and regulations or the enactment
of new laws and regulations governing placement or content of out-of-home
advertising, may affect our business prospects and results of operations. For
instance, the PRC government has promulgated regulations allowing foreign
companies to hold a 100% equity interest in PRC advertising companies starting
from December 10, 2005. We are not certain how the PRC government will
implement this regulation or how it could affect our business and our
organization structure.
  PRC
regulation of loans and direct investment by offshore holding companies to PRC
entities may delay or prevent us from raising finance to make loans or
additional capital contributions to our PRC operating subsidiaries and
affiliates.
  As an
offshore holding company of our PRC operating subsidiaries and affiliates, we
may make loans to our PRC subsidiaries and consolidated PRC affiliated entities,
or we may make additional capital contributions to our PRC subsidiaries. Any
loans to our PRC subsidiaries or consolidated PRC affiliated entities are
subject to PRC regulations and approvals.
  We may
also decide to finance Tianma or advertising subsidiaries by means of capital
contributions. These capital contributions to Tianma or advertising subsidiaries
must be approved by the PRC Ministry of Commerce or its local counterpart. We
cannot guarantee that we can obtain these government registrations or approvals
on a timely basis, if at all, with respect to future loans or capital
contributions by us to our operating subsidiaries. If we fail to receive such
registrations or approvals, these would adversely affect the liquidity of our
operating subsidiaries and our ability to expand the business.
  6.Risks Related to Corporate
and Stock Matters
  The
loss of key management personnel could harm our business and
prospects.
 39
 Table of Contents
 We depend
on key personnel who may not continue to work for us. Our success substantially
depends on the continued employment of certain executive officers and key
employees, particularly Godfrey Hui who is our founder, Chairman and Chief
Executive Officer, and Daniel So, our Vice Chairman and Managing Director. Not
only do we rely on their expertise and experience in our business, we also need
their business vision, management skills, and good relationships with our
employees and major shareholders to achieve our business targets.
  The loss
of services of these or other key officers or employees could harm our business.
If any of these individuals were to leave our company, our business and growth
prospects may be severely disrupted. We would face substantial difficulty in
hiring qualified successors and could experience a loss in productivity while
any such successor obtains the necessary training and experience.
  The
market for the Company’s common stock is illiquid.
  The
Company’s common stock is traded on the Over-the-Counter Bulletin Board. It is
thinly traded compared to larger and more widely known companies in its
industry. Thinly traded common stock can be more volatile than stock trading in
an active public market. The Company cannot predict the extent of an active
public market for its common stock.
  We
have a limited operating history and if we are not successful in continuing to
grow our business, then we may have to scale back or even cease our ongoing
business operations.
  The
Company has a limited operating history and is still in the development stage.
Our Company’s operations will be subject to all the risks inherent in the
establishment of a developing enterprise and the uncertainties arising from the
absence of a significant operating history. We may be unable to locate
recoverable reserves or operate on a profitable basis. We are in the development
stage and potential investors should be aware of the difficulties encountered.
If our business plan is not successful, and we are not able to operate
profitably, investors may lose some or all of their investments in our
Company.
  Our
acquisitions of Tianma, Quo Advertising, Xuancaiyi, Lianhe, Bona and any future
acquisitions may expose us to potential risks and have an affect on our ability
to manage our business.
  It is our
strategy to expand our business, especially in e-Network, through acquisitions
like that of Tianma, Quo Advertising, Xuancaiyi, Lianhe and Bona. We would keep
on searching for appropriate opportunities to acquire more businesses or to form joint
ventures, etc. that are complementary to our core business. For each
acquisition, our management encounters whatever difficulties during the
integration of new operations, services and personnel with our existing
operations. We may also expose ourselves to other potential risks like
unforeseen or hidden liabilities of the acquired companies, the allocation of
resources from our existing business to the new operations, uncertainties in
generating expected revenue, employee relationships and governing by new
regulations after integration. The occurrence of any of these unfavorable events
in our recent acquisitions or possible future acquisitions could have an effect
on our business, financial condition and results of operations.
  There
may be unknown risks inherent in our acquisitions of Tianma, Quo Advertising,
Xuancaiyi, Lianhe and Bona.
  Although
we had conducted due diligence with respect to the acquisition of Tianma, Quo
Advertising, Xuancaiyi, Lianhe and Bona, there is no assurance that all risks
associated with the companies have been revealed. To protect us from associated
liabilities, we have received guarantees of indemnification from the original
owners. However, if we were to enforce such guarantees, it could be very costly
and time consuming. The possibility of unknown risks in those acquisitions could
affect our business, financial condition and results of operations.
 40
 Table of Contents
 All
of our directors and officers are outside the United States. It may be difficult
for investors to enforce judgments obtained against officers or directors of the
Company.
  All of
our directors and officers are nationals and/or residents of countries other
than the United States, and all their assets are located outside the United
States. As a result, it may be difficult for investors to effect service of
process on our directors or officers, or enforce within the United States or
Canada any judgments obtained against us or our officers or directors, including
judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. Consequently, you may be prevented
from pursuing remedies under U.S. federal securities laws against them. In
addition, investors may not be able to commence an action in a Canadian court
predicated upon the civil liability provisions of the securities laws of the
United States. The foregoing risks also apply to those experts identified in
this Annual Report that are not residents of the United States.
  Our
substantial indebtedness and related interest payments could adversely affect
our operations.
  Since
November 2007, we have issued convertible promissory notes with warrants. Our
related interest payments on such convertible promissory notes could impose
financial burdens on us. If further new debt is added to our consolidated debt
level, the related risks that we now face could intensify. Covenants in the
convertible notes and warrants agreements governing our existing convertible
notes, and debt we may incur in the future, may materially restrict our
operations, including our ability to incur debt, pay dividends, make certain
investments and payments, and encumber or dispose of assets. In addition,
financial covenants contained in agreements relating to our existing and future
debt could lead to a default in the event our results of operations do not meet
our plans and we are unable to amend such financial covenants prior to default.
An event of default under any debt instrument, if not cured or waived, could
have a material adverse effect on us, our financial condition and our capital
structure.
  We
need additional funds to expand our business through company and project
acquisitions. If we are unable to raise additional funds, we would be restricted
from further business expansion.
  Since we
are at the expansion stage of our business, we may require further funding for
capital investment in acquiring target companies and projects. To raise funds,
we may, upon having the consent from our investors, need to issue new equities
or bonds which could result in additional dilution to our shareholders and in
operating and financing covenants that would restrict our operations and
strategy. If we are unable to raise additional funds, our business expansion
would be hampered.
  If
we issue additional shares, this may result in dilution to our existing
stockholders.
  Our
Certificate of Incorporation authorizes the issuance of 800,000,000 shares of
common stock and 5,000,000 shares of preferred stock. Our Board of Directors has
the authority to issue additional shares up to the authorized capital stated in
the Certificate of Incorporation. Our Board of Directors may choose to issue
shares to acquire one or more businesses or to provide additional financing in
the future. The issuance of shares may result in a reduction of the book value
or market price of the outstanding shares of our common stock. If we issue
additional shares, there may be a reduction in the proportionate ownership and
voting power of all other stockholders. Further, any issuance may result in a
change of control of the Company.
 41
 Table of Contents
 The
authorized preferred stock constitutes what is commonly referred to as “blank
check” preferred stock. This type of preferred stock allows the Board of
Directors to designate the preferred stock into a series, and determine
separately for each series any one or more relative rights and preferences. The
Board of Directors may issue shares of any series without further stockholder
approval. Preferred stock authorized in series allows our Board of Directors to
hinder or discourage an attempt to gain control by a merger, tender offer at a
control premium price, or proxy contest. Consequently, the preferred stock could
entrench our management. In addition, the market price of our common stock could
be affected by the existence of the preferred stock.
  If we or our independent registered
public accountants cannot attest to our adequacy of the internal control
measures over our financial reporting, as required by Section 404 of the U.S. Sarbanes-Oxley Act in
future, we may be adversely affected.
  As a
public company, we are required to report our internal control structure and
procedures for financial reporting in our Annual Report on Form 10-KSB under
Section 404 of the U.S. Sarbanes-Oxley Act of 2002 by the SEC. The report
must contain an assessment by management about the effectiveness of our internal
controls over financial reporting. Additionally, our independent registered
public accounting firm will be required to issue reports on management’s
assessment of our internal control over financial reporting and their evaluation
of the operating effectiveness of our internal control over financial reporting.
Starting from 2008, the auditor’s report is required for every financial year
end.
  The
Company has paid attention to its internal control procedures. In 2007 we
established an internal control working group to investigate and evaluate our
operations and improve procedures wherever necessary. With the participation and
guidance of management, we have evaluated our internal control systems such that
our management can report on, and our independent public accounting firm can
attest to our internal control system pursuant to the requirements under
Section 404 of the Sarbanes-Oxley Act of 2002.
  The
Company believes that it has adequate internal control procedures in place.
However, we are still exposed to potential risks from Section 404 of the
Sarbanes-Oxley Act of 2002 that requiring companies to have high standard of
internal control procedures. It may be possible that our management cannot
attest to our effectiveness of internal controls over financial reporting.
Furthermore, even if our management attests to our internal control measures to
be effective, our independent registered public accountants may not be satisfied
with our internal control structure and procedures. If our management cannot
attest to our internal control measures at any time in the future, or if our
independent registered public accounting firm are not satisfied with our
internal control structure, it could result in an adverse impact on us in the
financial marketplace due to the loss of investor confidence in the reliability
of our financial statements, which could negatively impact our stock market
price.
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 Table of Contents
 Trading
may be restricted by the SEC, which may limit a stockholder’s ability to buy and
sell our stock.
  The SEC
has adopted Rule 15g-9, which generally defines “penny stock” to be any equity
security that has a market price (as defined) less than $5.00 per share or an
exercise price of less than $5.00 per share. Our securities are covered by rules
that impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and “accredited investors”. The term
“accredited investor” refers generally to institutions with assets in excess of
$5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse. The rules
require a broker-dealer, prior to a transaction in penny stock, to deliver a
standardized risk disclosure document in a form prepared by the SEC. This
provides information about the nature and level of risks in the penny stock
market. The broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements showing the market
value of each penny stock held in the customer’s account. The bid and offer
quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction
and must be given to the customer in writing before or with the customer’s
confirmation. In addition, these rules require that prior to a transaction in a
penny stock not otherwise exempt from these rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for the stock that is subject to these
penny stock rules. Consequently, these penny stock rules may affect the ability
of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investors’ interest in and limit the marketability of our common
stock.
  NASD
sales practice requirements may also limit a stockholder’s ability to buy and
sell our stock.
  In
addition to the “penny stock” rules described above, the National Association of
Securities Dealers (“NASD”) has adopted rules that require a broker-dealer, when
providing investment recommendations, must have reasonable grounds for believing
that the investment is suitable for that customer. Prior to recommending low
priced securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s financial status,
tax status and investment objectives. Under interpretations of these rules, the
NASD believes that there is a high probability that low priced securities will
not be suitable for at least some customers. The NASD requirements make it more
difficult for broker-dealers
to recommend their customers buying our common stock, which may limit ability of
our investors to buy and sell our stock and hence have an effect on the market
for our shares.
  Stockholders
should have no expectation of any dividends.
  The
holders of our common stock are entitled to receive dividends, when, as and if
declared by the Board of Directors out of funds of the Company legally available
for the payment of dividends. To date, we have not declared nor paid any cash
dividends. The Board of Directors does not intend to declare any dividends in
the near future, but instead intends to retain all earnings, if any, for use in
our business operations.
 43
 Table of Contents
 ENVIRONMENTAL
MATTERS
  The
Company's operations are subject to various environmental regulations. We
believe that we are in substantial compliance with applicable laws, rules and
regulations relating to the protection of the environment and that our
compliance will have no material effect on our capital expenditures, earnings or
competitive position.
  OUR
RESEARCH AND DEVELOPMENT
  No costs
have been incurred on research and development activities for the fiscal year
2007 and 2006. We, however, expect to incur research and development costs
on developing software to manage LED panels and other related activities in the
coming future.
  EMPLOYEES
  As of
December 31, 2007, the Company and its subsidiaries had 160 full-time employees
at our offices located at our Hong Kong and PRC offices.
  AVAILABLE
INFORMATION
  We file
with SEC our annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,
current reports on Form 8-K and amendments to reports to be filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. The
public may read and copy any materials we file with the SEC at the SEC’s Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the Public Reference Room by calling 1-800-SEC-0330. The
SEC maintains a website at www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC
  Our
Internet website address is www.ncnincorporated.com.
This website links to our electronic SEC filings. All the above documents are
available free of charge on our website as soon as reasonably practicable after
filing such material electronically or otherwise furnishing it to the
SEC.
  ITEM
2.         DESCRIPTION OF
PROPERTY
  The
Company's principal place of business is located at 21/F.,
Chinachem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong. The
office premises occupy 3,500 square feet. The lease is for 3
years from November 15, 2006 to November 14, 2009.
  Currently,
certain subsidiaries of the Company also maintain office premises
in Beijing, Shanghai and Guangzhou of the PRC. Our PRC principal
office premises are located at 28/F., Super Ocean Finance Center, 2067 West
Yan'an Road, Shanghai, China, which occupy 11,000 square feet and the lease is
for 3 years from July 15, 2007 to July 14, 2010. We believe that our current
offices are sufficient to meet our current and future needs.
 44
 Table of Contents
  ITEM
3.         LEGAL
PROCEEDINGS
  The
Company’s 55%-owned subsidiary, Tianma, is a defendant in proceedings brought in
Guangzhou Yuexiu District Court. The proceedings were finalized on October 9,
2006. The facts surrounding the proceeding are as follows:
  Guangdong
Yongan Travel Agency (“Yongan”) arranged a local tour in April 2001. Yongan
rented a car from an agent of Tianma but the car did not belong to Tianma. A car
accident happened during the tour, causing 20 injuries and one death. Guangzhou
Police issued a proposed determination on the responsibilities of the accidents
on May 18, 2001. The proposal determined that the driver who used a
non-functioning car was fully liable for the accident. Those tourists sued
Yongan for damages and Guangzhou Intermediate People’s Court made a final
judgment in 2004 that Yongan was liable and Yongan paid approximately RMB2.2
million ($302,000) to the injured. In 2005, Yongan sued the agent of Tianma,
Tianma and the car owner. In October 2006, the Guangzhou Yuexiu District Court
made a judgment that the agent was liable to pay RMB2.1 million ($288,000) plus
interest for damages. Tianma and the car owner have joint-and-several
liabilities.
  Tianma is
now appealing the court’s decision. The Company believes that there is a
reasonably high chance of overturning the court’s decision. In addition, the
Company has been indemnified for any future liability upon the acquisition by
the prior owners of Tianma.
  Other
than as described above, we are not aware of any material, active or
pending legal proceedings against the Company, nor are we involved as a
plaintiff in any material proceeding or pending litigation. There are no
proceedings adverse to the Company in which any of our directors, officers or
affiliates of the Company, any owner of record or beneficiary of more than 5% of
any class of voting securities of the Company, or security holder is a party or
has a material interest.
  ITEM
4.         SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS
  The
following matters were presented for stockholder vote at the annual meeting of
Stockholders held on November 19, 2007: (1) election of 9 members to our board
of directors, each to serve until our annual meeting in 2008, and until their
respective successors are qualified and elected or earlier
resignation or removal; (2) ratification of the appointment of the Company’s
independent registered public accounting firms for the fiscal year ended on
December 31, 2007; and (3) the adoption
of the Company’s 2007 Stock Option/Stock Issuance Plan. The respective votes of
each matter were indicated as follows:
  1.
Election of 9 members to our board of directors:
  Name
      of the directors
            For
            Withhold
      AuthorityGodfrey
      Hui
            36,508,402
            -0-Daley
      Mok
            36,508,402
            -0-Daniel
      So
            36,508,402
            -0-Stanley Chu
            36,508,402
            -0-Joachim
      Burger
            36,508,402
            -0-Gerd
      Jakob
            36,508,402
            -0-Edward
      Lu
            36,508,402
            -0-Peter
      Mak
            36,508,396
            6Ronglie
      Xu
            36,508,402
            -0-
 45
 Table of Contents
 2.
Ratification of the appointment of Webb & Company, P.A., Certified Public
Accountants, independent registered public accounting firm, to audit the
financial statements of the Company and its subsidiaries for the fiscal year
ended December 31, 2007, and Jimmy C.H. Cheung & Co., independent registered
public accounting firm, to audit the financial statements of the Company’s
subsidiary NCN Group Limited and subsidiaries for the fiscal year ended December
31, 2007:
  For
            Against
            AbstainWebb
      & Company, P.A.
            36,508,392
            10
            -0-Jimmy
      C.H. Cheung & Co.
            36,508,392
            10
            -0-
  3.
Adoption of the Company’s 2007 Stock Option/Stock Issuance Plan:
  For
            Against
            AbstainAdoption
      of 2007 Stock Plan
            36,496,274
            12,128
            -0-
  There
were no broker non-votes for any of the proposals.
   PART
II
  ITEM
      5.
            MARKET FOR
      THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
      BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
  Our
common stock is quoted on the National Association of Securities Dealers OTC
Bulletin Board under the symbol "NWCN.OB". As of December 31, 2007, the Company
had approximately 140 stockholders of record. Presented below is the high and
low bid information of the Company's common stock for the periods indicated. The
source of the following information is Yahoo Finance.
  OTC Bulletin Board (1)
    (2)COMMON STOCK
      MARKET
              PRICEHIGH
            LOWFISCAL
      YEAR ENDED DECEMBER 31, 2007:Fourth Quarter
            $2.95
            $1.80Third Quarter
            $2.80
            $2.03Second Quarter
            $3.12
            $2.50First Quarter
            $4.35
            $2.50FISCAL
      YEAR ENDED DECEMBER 31, 2006:Fourth Quarter
            $5.00
            $1.61Third Quarter
            $1.65
            $0.55Second Quarter
            $0.58
            $0.15First Quarter
            $0.29
            $0.10
 
 46
 Table of Contents
 (1)
            Our
      common stock began trading officially under the symbol "TTVL.OB" on the
      OTC Bulletin Board in May, 2004. On August 1, 2006, the Company changed
      its name to Network CN Inc. The trading symbol was also changed to “NWCN”
      on the OTC Bulletin Board effective August 15,
  2006.
 
 (2)
            Over-the-counter
      market quotations reflect inter-dealer prices without retail mark-up,
      mark-down or commission, and may not represent actual
      transactions.
  Our
common shares are issued in registered form. Holladay Stock Transfer (telephone:
(480) 481-3940; facsimile: (480) 481-3941) is the registrar and transfer agent
for our common stock.
  The
Company has not declared any dividends since incorporation and does not
anticipate doing so in the near future. The terms of the outstanding
promissory notes issued to affiliated funds of Och-Ziff on January 31, 2008
contain restrictions on the payment of dividends. The dividend restrictions
provide that we will not make any dividend distributions or redeem or repurchase
more than a de minimis number of shares of our common stock without the prior
written consent of the holders of these promissory notes, other than the
repurchase of shares of common stock from departing officers and
directors.
  RECENT
SALES OF UNREGISTERED SECURITIES
  Unregistered
Stock Issued During 2007
  During
the year, we issued the following unregistered shares:
  1.
            In
      January 2007, the Company issued 300,000 shares of common stock to Lina
      Zhang and Qinxiu Zhang, in partial consideration for the acquisition of
      100% of the equity interests in Quo Advertising.2
            In
      April 2007, the Company issued and sold 500,000 shares of common stock to
      an accredited investor for a per share purchase price of
      $3.00.3.
            In
      August 2007, the Company issued 173,630 shares of common stock to a
      consultant for services rendered.
  All of
the shares listed above were offered and issued pursuant to an exemption from
registration pursuant under Section 4(2)
 of the
Securities Act of 1933, as amended.
 
 Unregistered
Stock Issued Post Balance Sheet Date
 
 In
January 2008, the Company issued 1,500,000 shares of restricted common stock to
Liu Man Ling, an individual and sole shareholder of Cityhorizon (BVI) Limited in
partial consideration for the acquisition of 100% of the equity interests in
Cityhorizon (BVI) Limited and its wholly owned subsidiaries, Hui Zhong Lian He
Media Technology Co., Ltd. and Beijing Hui Zhong Bo Na Media Advertising Co.,
Ltd.
  47
 Table of Contents
  EQUITY COMPENSATION PLAN
INFORMATION
   The
following table provides information as of December 31, 2007 with respect
to compensation plans, under which securities are authorized for issuance,
aggregated as to (i) compensation plans previously approved by
securityholders, and (ii) compensation plans not previously approved by
securityholders.
  PLAN
      CATEGORY
            NUMBER OF SECURITIES
      TO
              BE ISSUED UPON
      EXERCISE OF
              OUTSTANDING OPTIONS,
              WARRANTS AND
      RIGHTS
            WEIGHTED AVERAGE
              EXERCISE PRICE OF
              OUTSTANDING OPTIONS,
              WARRANTS AND
      RIGHTS
            NUMBER OF SECURITIES
      REMAINING
              AVAILABLE FOR FUTURE
      ISSUANCE
              UNDER EQUITY
      COMPENSATION
              PLANS (EXCLUDING
      SECURITIES
              REFLECTED IN COLUMN
      (a))(a)
            (b)
            (c)Equity
      compensation
              plans
      approved by
              security
      holders
            -
            -
            7,847,740
      (1)Equity
      compensation
              plans
      not approved by
              security
      holders
            600,000
      (2)
            $1.9
            -Total
            600,000
      (2)
            $1.9
            7,847,740
  (1)
            We
      reserved 3,000,000 shares for issuance under our 2004 Stock Incentive
      Plan, of which 1,000,000 shares are still available for issuance as of
      December 31, 2007. We reserved 7,500,000 shares for issuance under our
      2007 Stock Option/Stock Issuance Plan, of which 6,847,740 are available
      for issuance as of December 31, 2007. See below subsection-"Securities Authorized for
      Issuance under Equity Compensation Plans" for more information
      about the plan.(2)
            (a)
      A warrant to purchase 200,000 shares of common stock was granted to a
      financial advisor on March 12, 2004 with an exercise price of $2.00 per
      share. The warrant may be exercised at any time until March 12, 2009. The
      warrant remained unexercised as of December 31, 2007. We agreed to
      register the shares underlying the warrant in our next registration
      statement.
  48
 Table of Contents
 
 (b)
      A warrant to purchase 100,000 shares of restricted common stock was
      granted to a consultant on August 25, 2006 with an exercise price of $0.70
      per share. One-fourth of the shares underlying the warrant become
      exercisable every 45 days beginning from the date of issuance. The warrant
      shall remain exercisable until August 25, 2016. The warrant remained
      unexercised as of December 31,
2007.
 
 (c)
      In November 2007, the Company became obligated to issue to a placement
      agent a warrant exercisable for 300,000 shares of common stock for
      services rendered in connection with the issuance of 3% convertible
      promissory notes with an exercise price of $3.00 per share in November
      2007. The warrant is exercisable for a period of two
  years
  Securities
Authorized for Issuance under Equity Compensation Plans
  In April
2004, our Board of Directors and holders of a majority of our then outstanding
common stock authorized and approved the 2004 Stock Incentive Plan (“2004
Plan”). Under the 2004 Plan, we reserved 3,000,000 shares of our common stock
for issuance upon exercise of incentive and non-qualified stock options, stock
bonuses and rights to purchase awarded from time-to-time, to our officers,
directors, employees and consultants. As of December 31, 2007, 2,000,000 shares
have been issued under the plan and 1,000,000 shares remain available for
issuance. No options, warrants or other rights to acquire shares of our common
stock have been granted or are outstanding under the plan. A registration
statement on Form S-8 was filed with the SEC with respect to 2,000,000 shares of
common stock issuable under the plan on April 22, 2004 (SEC File No.
333-114644).
  In March
2007, our Board of Directors authorized and approved the 2007 Stock Option/Stock
Issuance Plan (“2007 Plan”). The purpose of the plan is to promote the best
interests of the Company and its stockholders by providing a means of non-cash
remuneration to selected participants who contribute to the operating progress
and earning power of the Company. The plan also provides incentives to employees
and directors by offering them an opportunity to acquire a proprietary interest
in the Company. Under the 2007 Plan, we reserved 7,500,000 shares of our common
stock for issuance upon exercise of incentive and non-qualified stock options,
stock bonuses and rights to purchase awarded from time to time, to our officers,
directors, employees and consultants. A registration statement on Form S-8 was
filed with the SEC on April 6, 2007 (SEC File No. 333-141943)
with respect to 7,500,000 shares of common stock issuable under the 2007 Plan as
well as options to purchase 225,000 shares of common stock issued to the
Company’s legal counsel in February 2006. Such options were not issued under the
2004 Plan or the 2007 Plan. The Company’s stockholders approved the 2007 Plan in
November 2007.
  Both of
the Plans are currently administered by our Board of Directors. Under each plan,
the Board determines which of our employees, officers, directors and consultants
are granted awards, as well as the material terms of each award, including
whether options are to be incentive stock options or non-qualified stock
options.
  Subject
to the provisions of the Plans, and the Internal Revenue Code with respect to
incentive stock options, the Board determines who shall receive awards, the
number of shares of common stock that may be purchased, the time and manner of
exercise of options and exercise prices. At its discretion, the Board also
determines the form of consideration to be received upon exercise and may permit
the exercise price of options granted under the plans to be paid in whole or in
part with previously acquired shares and/or the surrender of options. The term
of options granted under the plans may not exceed ten years, or five years for
an incentive stock option granted to an optionee owning more than 10% of our
voting stock. The exercise price for incentive stock options may not be less
than 100% of the fair market value of our common stock at the time the option is
granted. However, incentive stock options granted to a 10% holder of our voting
stock may not be exercisable at less than 110% of the fair market value of our
common stock at the date of the grant. The exercise price for non-qualified
options will be determined by the board.
 
 49
 Table of Contents
 ITEM
      6.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
  The following discussion and analysis is based
on, and should be read in conjunction with our audited historical consolidated
financial statements, which are included elsewhere in this Annual Report.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contains statements that are forward-looking. These statements are
based on current expectations and assumptions that are subject to risk,
uncertainties and other factors. Actual results could differ materially because
of the factors discussed in Item 1.“Description of Business –Risks and
Uncertainties” and elsewhere in this Annual Report, and some of which we may not
know. All amounts are expressed in United States dollars.
  OVERVIEW
  Network
CN Inc. (“we” or “the Company”), originally incorporated on September 10, 1993,
is a Delaware company with headquarters in the Hong Kong Special Administrative
Region, the People’s Republic of China (“the PRC” or “China”). It was operated
by different management teams in the past, under different operating names,
pursuing a variety of business ventures. The most recent former name was Teda
Travel Group, Inc. On August 1, 2006, the Company changed its name to “Network
CN Inc.” in order to better reflect the Company’s vision under its new and
expanded management team.
  Our
business plan is to build a nationwide information and entertainment network in
the PRC. To achieve this goal, we have established two business divisions: our
Media Business division and our Non-Media Business division. During the latter
half of 2006, we adjusted our primary focus away from our Non-Media Business to
our Media Business and began building a media network with the goal of becoming
a nationwide leader in out-of-home, digital display advertising, roadside LED digital
video panels and mega-size video billboards. We took the first step in November
2006 by securing a media-related contract for installing and managing outdoor
LED advertising video panels. In 2007, we acquired Shanghai Quo Advertising
Company Limited (“Quo Advertising”), an advertising agency in Shanghai, China
and Xuancaiyi (Beijing) Advertising Company Limited (“Xuancaiyi”), an
advertising agency in Beijing, China. In addition, in 2007 we secured rights to
operate mega-size digital video billboards and roadside LED panels in prominent
cities in the PRC and began generating revenues from our Media Business. We
intend to continue to focus on our Media Business and actively pursue the
acquisition of additional LED operating rights and advertising contracts with
prominent customers. In 2008, we expect to place additional LED panels into
operation, which we expect will further contribute to our revenues in the second
or third quarters. See Item 1.
“Description of Business–Media Business” for more
details.
 50
 Table of Contents
 Our
Non-Media Business is comprised of two sectors: Travel Network and e-Network.
Through our Travel Network we provide agency tour services and hotel management
services. In 2006, we acquired 55% of the equity interest in Guangdong Tianma
International Travel Service Co., Ltd. (“Tianma”), a company organized under the
laws of the PRC and engaged in the provision of tour services to customers both
inside and outside of the PRC. In 2006 and 2007, we earned substantially all of
our revenues from tour services. Our Travel Network also provides day-to-day
management services to hotels and resorts in the PRC. Revenue from hotel
management services declined in 2007 as a result of a decrease in the number of
hotel properties that we manage.
  Through
our e-Network, we plan to establish a fully integrated and comprehensive
business-to-business (B2B) and business-to consumer (B2C) travel network by
providing a broad range of products and services. The development of our
e-Network is still in the planning stage and we do not expect to generate
substantial revenues from our e-Network in the near future. See Item 1. “Description of Business –
Non-Media Business” for more details.
  CONSOLIDATED
RESULTS OF OPERATIONS
  Cost of travel services primarily represents
expenses directly incurred for arranging tour or travel packages, including
service fees charged by airlines, bus operators, hotels, restaurants and other
providers.
  Cost of
advertising services primarily consists of fees to obtain rights to operate
advertising panels, advertising agency service fees and other miscellaneous
expenses.
  Professional
fees primarily consist of consultancy service fees paid to consultants and legal
counsel, stock-based compensation expense for stock, options and warrants
granted to consultants and legal counsel for services rendered calculated in
accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS
123R”), audit fees, and fees associated with the registration of securities with
the Securities and Exchange Commission.
  Payroll
primarily consists of salaries paid to executives and employees, stock-based
compensation expense for stock granted to directors, executive officers and
employees for services rendered calculated in accordance with SFAS 123R and
employee bonuses.
  Other
selling, general & administrative expenses primarily consist of amortization
expenses of intangible rights, rental expenses, depreciation expenses,
miscellaneous staff welfare and other benefits, travel expenses and
miscellaneous office expenses.
  Fiscal Year Ended December 31,
2007 Compared to Fiscal Year Ended December 31, 2006:
  The
following table highlights certain key financial information in our consolidated
statements of operations:
  2007
            
            
            2006Revenues
            
            $
            27,582,907
            
            
            $
            4,442,602Costs
      and Expenses
            
            $
            41,990,807
            
            
            $
            9,515,590Loss
      from Operations
            
            $
            (14,407,900
            )
            
            $
            (5,072,988
            )Net
      Loss from Continuing Operations
            
            $
            (19,306,579
            )
            
            $
            (4,995,002
            )Net
      Income from Discontinued Operations
            
            $
            -
            
            
            $
            526,296Net
      loss
            
            $
            (19,306,579
            )
            
            $
            (4,468,706
            )
 51
 Table of Contents
 Revenues
  Revenues
increased by 521% to $27,582,907 for the year ended December 31, 2007 as
compared to $4,442,602 for the year ended December 31, 2006, primarily as a
result of an increase in sales of travel services in fiscal 2007. Travel
services revenue increased by 502% to $26,140,355 for the year ended December
31, 2007 compared to $4,342,124 for the year ended December 31, 2006 primarily
due to the acquisition of Tianma in June 2006 and the growth of Tianma’s
revenues in fiscal 2007. In addition, advertising services revenue increased by
100% to $1,442,552 for the year ended December 31, 2007, primarily as a result
of the acquisition of Quo Advertising and Xuancaiyi in January 2007 and
September 2007, respectively.
  Cost
of Travel Services
  Cost of
travel services increased by 510% to $25,830,401 for the year ended December 31,
2007 compared to $4,231,952 for the year ended December 31, 2006 as a result of
an increase in the sale of travel services.
  Cost
of Advertising Services
  Cost of
advertising services increased by 100% to $2,795,188 for the year ended December
31, 2007 due to the acquisition of Quo Advertising and Xuancaiyi in
2007.
  Professional
Fees
  Professional
fees for the year
ended December 31, 2007 increased by 72% to $5,612,810 compared
to $3,260,103
for the year ended
December 31, 2006, primarily due to an increase in the services rendered
by our legal counsel and consultants in fiscal 2007 in order to cope with the
Company’s
expansion. In addition, the increase was also driven by an increase in
stock-based compensation expense for services rendered by legal counsel and
consultants in accordance to SFAS 123R.
  Payroll
  Payroll
increased by 308% to $4,098,842 for theyear ended
December 31, 2007 as compared to $1,004,731 for the year ended December 31,
2006, primarily due to an increase in the number of employees and more stocks
were granted to directors, executives and employees for their services rendered,
resulting an increase in the amount of non-cash stock-based compensation in
accordance to SFAS 123R.
  Non-cash
impairment charges
  Non-cash
impairment charges increased by 521% to $1,332,321 for the year ended December
31, 2007 as compared to $214,600 for the year ended December 31, 2006, primarily
due to an increase in the impairment loss recorded for our intangible rights. In
2007, we recorded an impairment loss of $516,419 and $815,902 for the intangible
rights of Quo Advertising and Tianma respectively as a result of continuous
operating loss recorded by non-LED business of Quo Advertising and tour business
of Tianma. In 2006, we recorded an impairment loss of $214,600, which mainly
represents the impairment loss recorded for the intangible right of our 99.9%
owned subsidiary, NCN Landmark International Hotel Group Limited.
 52
 Table of Contents
  Other
Selling, General and Administrative
  Other
selling, general and administrative expenses increased by 189% to $2,321,245 for
theyear
ended December 31, 2007 compared to $804,204 for theyear ended
December 31, 2006 primarily due to an increase in amortization expense of
$212,816 as a result of the acquisition of intangible rights in 2007. In
addition, staff welfare benefits and the Company’s office rental expense and
other miscellaneous administrative expenses increased due to the Company’s
expansion, including an increase in personnel.
  Interest
Expense
  Interest
expense increased to $4,989,154 for the year ended December 31, 2007 compared to
$1,416 for the year ended December 31, 2006. Of the $4,989,154 recorded in
the year ended December 31, 2007, $4,866,351 was attributed to amortization of
deferred charges and debt discount associated with convertible promissory notes
issued in late 2007 and $122,803 was attributed to interest expense on these
convertible promissory notes. The amount of interest expense for the year ended
December 31, 2006 represented interest expense associated with capital lease
obligations which were fully paid in fiscal 2007.
  Income
Taxes
  The
Company derives all of its income in the PRC and is subject to income tax in the
PRC. Income tax for theyear ended
December 31, 2007 was $7,668 as compared to $6,984 for theyear ended
December 31, 2006. Minimum income tax was recorded as the Company and its
subsidiaries operated at a loss in both fiscal 2007 and fiscal
2006.
  Net
Loss from Continuing Operations
  The
Company incurred a net loss from continuing operations of $19,306,579 for theyear ended
December 31, 2007, an increase of 287% compared to a net loss of $4,995,002 for
theyear
ended December 31, 2006. Generally, the significant increase in the loss from
continuing operations was driven by several major factors: (1) the amortization
of deferred charges and a debt discount of $4,866,351 associated with the
issuance of convertible promissory notes, (2) an increase in stock-based
compensation of $3,631,787 for services rendered by consultants, legal counsels,
directors, executives and employees, (3) an increase in impairment charges of
intangible rights of $1,117,721, (4) a loss of $1,352,636 related to our media
business in 2007 and (5) an increase in professionals fees, payroll and other
selling, general and administrative expenses recorded by the Company as a result
of our expansion.
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  Net
Income from Discontinued Operations
  The
Company recorded a one-time gain of $579,870 on the disposal of the Company’s
interest in Tianjin Teda Yide Industrial Company Limited (“Yide”) for the year
ended December 31, 2006.
  Net Loss
  The
Company recorded a net loss of $19,306,579 for theyear ended
December 31, 2007, an increase of 332% compared to $4,468,706 fortheyear ended
December 31, 2006, due to a loss from continuing operations discussed above in
“Loss from Continuing
Operations” and one-time gain on the disposal of the Company’s interest
in Yide in 2006.
  CONSOLIDATED
FINANCIAL CONDITION AND LIQUIDITY
  As of December 31, 2007, current assets were
$20,064,547, current liabilities were $8,235,037 and we had net working capital
of $11,829,510. Cash at December 31, 2007 was $2,233,528 compared to $2,898,523
at December 31, 2006, a decrease of $664,995.
  Net cash
used by operating activities for the year ended December 31, 2007 was
$21,320,216 compared to $2,318,366 for the year ended December 31, 2006, an
increase of $19,001,850. The increase in net cash used by operating activities
was attributable to an increase in both the net loss recorded by the Company and
an increase in fees paid to acquire rights to install and operate LED panels and
billboards.
  Net cash
used in investing activities for the year ended December 31, 2007 was $523,319
compared to net cash used in investing activities of $3,898,847 for the year
ended December 31, 2006, a decrease of $3,375,528. The net cash used in
investing activities in 2006 was mainly driven by the one-time acquisition of an
intangible right in the amount of $6,000,000 associated with the Changning
Project, offset by a one-time gain of $3,000,000 received from the sale of the
Company’s interest in Yide. Cash used in investing activities in fiscal 2007
mainly comprised the purchase of equipment and the acquisition of
subsidiaries.
  Net cash
provided by financing activities was $21,119,380 in fiscal 2007 compared to
$9,026,337 in fiscal 2006, an increase of $12,093,043. The increase was
primarily attributable to the issuance of convertible promissory notes in fiscal
year 2007, which included $5,000,000 in 12% convertible promissory notes, less a
commitment fee of $100,000 and $15,000,000 in 3% convertible promissory notes
less a placement agent fee of $300,000.
  Capital
Expenditures
  We
continue to seek opportunities to enter new markets, increase market share or
broaden service offerings through acquisitions. During the years ended December
31, 2007 and 2006, we acquired assets of $207,371 and $90,888 respectively,
financed through working capital.
  During
fiscal 2007, the Company contracted with Guiding Media (“Bona”) to construct 120
LED panels at various locations in the PRC at Bona’s cost. Upon completion of
the installation of such 120 LED panels on or before December 31, 2007, the
Company had an option to acquire the LED panels at the installation cost plus
15%. Instead of exercising the option to acquire the LED panels, the Company,
through its subsidiary, Lianhe, entered into a series of commercial
agreements with Bona and the registered shareholders of Bona on January 1, 2008,
pursuant to which Lianhe is able to effectively control and manage Bona and
receive the net profits of Bona. As a
result, the Company expects to be able to consolidate the results of Bona as a
variable interest entity pursuant to FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest
Entities.”See Item 6. “Management’s Discussion and
Analysis or Plan of Operation - Subsequent Events” for
details.
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  Commitments
  Since
November 2006, the Company, through its subsidiaries, NCN Media Services
Limited, Quo Advertising and Xuancaiyi, acquired rights from third parties to
operate 1,845 roadside advertising panels and 11 mega-size advertising panels
for periods ranging from 16 months to 20 years.
 
 The
following table sets forth the estimated future annual commitment of the Company
with respect to these rights as of December 31, 2007,
although the Company’s obligations to install the advertising panels are not
subject to any specific timetable:
 
 Fiscal
      yearsending
      December 31,
            
            (In
      millions)2008
            
            $
            16.52009
            
            
            13.92010
            
            
            4.02011
            
            
            3.92012
            
            
            3.6Thereafter
            
            
            23.7Total
      commitments
            
            $
            65.6
 
 The
Company is responsible for a portion of the cost of installing the 1,845
roadside advertising panels and 11 mega-size advertising panels . The Company
estimates that the capital investment, including installation costs, for each
roadside LED panel is approximately $20,000 to $25,000, and approximately
$600,000 to $2,000,000 for each mega-size digital billboard, depending
on its size.
  In order
to meet these capital commitments in 2007 the Company issued $5,000,000 in a 12%
convertible note due in 2008 and in late 2007 and January 2008 the Company
issued $50,000,000 in 3% convertible promissory notes due 2011. See Item
6. “Management’s Discussion and Analysis or Plan of Operation – Material
Subsequent Events.”
 Financing
Activities
  In 2007,
we raised additional funds through the issuance of equity and convertible
promissory notes.
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  1.
            Issuance
      of Common Stock
  In April
2007, the Company issued and sold 500,000 shares of restricted common stock, par
value $0.001 per share, for an aggregate amount of $1,500,000 in a private
placement. No investment-banking fees were paid with respect to this
transaction.
  2.
            Issuance
      of Convertible Promissory Notes
  a)  
 12% Convertible Promissory Note and Warrants
  On
November 12, 2007, the Company entered into a Note and Warrant Purchase
Agreement with Wei An Developments Limited (“Wei An”) pursuant
to which the Company issued and sold toWei An a
12% convertible promissory note in the principal amount of $5,000,000 (the
“12% Convertible Promissory Note”). The 12% Convertible Promissory Note is
convertible into the Company’s common stock at the conversion price of $2.40 per
share. Pursuant to the agreement, the Company is subject to a commitment
fee of 2% of the principal amount of the 12% Convertible Promissory Note. The
term of the 12% Convertible Promissory Note is six months and the Company has
the option to extend the 12% Convertible Promissory Note by an additional
six-month period at an interest rate of 14% per annum and be subject to an
additional commitment fee of 2% of the principal amount of the note. However,
the Company has the right to prepay all or any portion of the amounts due under
the note at any time without penalty or premium.
  In
connection with this transaction, the Company issued warrants to purchase up to
250,000 shares of the Company’s common stock at an exercise price of $2.30 per
share, exercisable for a period of two years.
  On
February 13, 2008, the Company prepaid the 12%
Convertible Promissory Note in full. No prepayment penalty was
incurred.
  b)
            3%
      Convertible Promissory Notes and
Warrants
  On
November 19, 2007, the Company, Quo Advertising and the Designated Holders (as
defined in the Purchase Agreement), entered into a 3% Note and Warrant Purchase
Agreement (the “Purchase Agreement”) with affiliated investment funds of
Och-Ziff Capital Management Group (the “Investors”). Pursuant to the Purchase
Agreement, the Company issued 3% Senior Secured Convertible Notes due June 30,
2011 in the aggregate principal amount of  US$50,000,000 (the “3%
Convertible Promissory Notes”) and warrants to acquire an aggregate amount of
34,285,715 shares of Common Stock of the Company
(the “Warrants”). The 3% Convertible Promissory Notes and Warrants were
issued in three tranches, with 3% Convertible Promissory Notes in the aggregate
principal amount of US$6,000,000, Warrants exercisable for 2,400,000 shares at
$2.50 per share and Warrants exercisable for 1,714,285 shares at $3.50 per
share, issued on November 19, 2007, 3% Convertible Promissory Notes in the
aggregate principal amount of US$9,000,000, Warrants exercisable for 3,600,000
shares at $2.50 per share and Warrants exercisable for 2,571,430 shares at $3.50
per share issued on November 28, 2007, and 3% Convertible Promissory Notes in
the aggregate principal amount of US$35,000,000, Warrants exercisable for
14,000,000 shares at $2.50 per share and Warrants exercisable for 10,000,000
shares at $3.50 per share issued on January 31, 2008. See Item 6. “Management’s Discussion and
Analysis or Plan of Operation – Material Subsequent Events.” The warrants
expire on June 30, 2011.
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 The 3%
Convertible Promissory Notes bear interest at 3% per annum payable semi-annually
in arrears and mature on June 30, 2011. The 3% Convertible Promissory Notes are
convertible into shares of common stock at an initial conversion price of $1.65
per share, subject to customary anti-dilution adjustments. In addition, the
conversion price will be adjusted downward on an annual basis if the Company
should fail to meet certain annual earnings per share (“EPS”) targets described
in the Purchase Agreement. In the event of a default, or if the Company’s actual
EPS for any fiscal year is less than 80% of the respective EPS target, certain
of the Investors may require the Company to redeem the 3% Convertible Promissory
Notes at 100% of the principal amount, plus any accrued and unpaid interest,
plus an amount representing a 20% internal rate of return on the then
outstanding principal amount. The Warrants grant the holders the right to
acquire shares of common stock at $2.50 and $3.50 per share, subject to
customary anti-dilution adjustments. The exercise price of the Warrants will
also be adjusted downward whenever the conversion price of the 3% Convertible
Promissory Notes is adjusted downward in accordance with the provisions of the
Purchase Agreement.
  The
Company believes that the issuance of the above notes enhances our plans for
aggressive expansion of our operations with significant financial support and
market-wise counseling. It will accelerate our project and make us to
becoming the market leader of out-of-home digital media network in
China.
  MATERIAL
SUBSEQUENT EVENTS
  On
January 1, 2008, the Company and its wholly owned subsidiary CityHorizon
Limited, a Hong Kong company (“CityHorizon Hong Kong”), entered into a Share
Purchase Agreement with CityHorizon Limited, a British Virgin Islands company
(“CityHorizon BVI”), Hui Zhong Lian He Media Technology Co., Ltd., a wholly
owned subsidiary of CityHorizon BVI (“Lianhe”), Beijing Hui Zhong Bo Na Media
Advertising Co., Ltd., a wholly owned subsidiary of CityHorizon BVI (“Bona”),
and Liu Man Ling, an individual and sole shareholder of CityHorizon BVI pursuant
to which the Company, through its subsidiary CityHorizon Hong Kong, acquired
100% of the issued and outstanding shares of CityHorizon BVI from Liu Man Ling.
Pursuant to the Share Purchase Agreement, the Company paid Liu Man Ling
US$5,000,000 in cash and issued Liu Man Ling 1.5 million duly authorized,
validly issued, fully paid and non-assessable shares of the Company’s common
stock.
  In
connection with the Company’s financing transaction with affiliated investment
funds of Och-Ziff Capital Management Group, effective January 1, 2008 the
Company caused its subsidiary, Lianhe, to enter into a series of commercial
agreements with Quo Advertising,
pursuant to which Lianhe provides exclusive technology and management consulting
services to Quo Advertising in exchange for services fees, which amount to
substantially all of the net income of Quo Advertising. Each of the registered
PRC shareholders of Quo Advertising also entered into equity pledge agreements
and option agreements, which cannot be amended or terminated except by written
consent of all parties, with Lianhe. Pursuant to these equity pledge agreements
and option agreements, each shareholder pledged such shareholder’s interest in
Quo Advertising for the performance of such Quo Advertising’s payment
obligations under its respective exclusive technology and management consulting
services agreements. In addition, Lianhe has been assigned all voting rights by
the shareholders of Quo Advertising and has the option to acquire the equity
interests of Quo Advertising at a mutually agreed purchase price which shall
first be used to repay any loans payable to Lianhe or any affiliate of Lianhe by
the registered PRC shareholders. At the same time, Quo Advertising terminated
its trust arrangement with Crown Winner International Limited. Effective January
1, 2008, Lianhe also entered into a series of similar commercial agreements with
Bona and Hui Zhi Bo Tong Media Advertising Beijing Co., Ltd (“Botong”), a
company organized under the laws of the PRC, and their respective registered
shareholders.
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 The
effect of these contractual arrangements is to give effective control of Quo
Advertising, Bona and Botong to Lianhe and to allow the Company to consolidate
the results of these entities as variable interest entities pursuant to FASB
Interpretation No. 46 (Revised), “Consolidation of Variable Interest
Entities”.
  On
January 31, 2008, the Company issued $35,000,000 in 3% Convertible Promissory
Notes and amended and restated $15,000,000 in 3% Convertible Promissory Notes
issued in late 2007. In addition, the Company issued additional warrants to
purchase 14,000,000 shares of the Company’s common stock at $2.50 per share and
warrants to purchase 10,000,000 shares of the Company’s common stock at $3.50
per share. Concurrently with the Third Closing, the Company loaned substantially
all the proceeds from 3% Convertible Promissory Notes to its direct wholly owned
subsidiary, NCN Group Limited (“NCN Group”), and such loan was evidenced by an
intercompany note issued by NCN Group in favor of the Company (the “NCN Group
Note”). The Company entered into a Security Agreement, dated as of January
31, 2008 pursuant to which the Company granted to the collateral agent for the
benefit of the Investors a first-priority security interest in certain of its
assets, including the NCN Group Note and 66% of the shares of NCN Group. In
addition, NCN Group and certain of the Company’s indirect wholly owned
subsidiaries each granted the Company a security interest in certain of the
assets of such subsidiaries to, among other things, secure the NCN Group Note
and certain related obligations.
  On
February 13, 2008, the Company fully paid the 12% Convertible Promissory Note
due May 2008 issued in November 2007 at a redemption price equal to 100% of the
principal amount of $5,000,000 plus accrued and unpaid interest. No penalty or
premium was charged for such prepayment.
  OFF-BALANCE SHEET
ARRANGEMENTS
  We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
  CRITICAL
ACCOUNTING POLICIES
  The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, we evaluate our estimates, including but not limited to those
related to income taxes and impairment of long-lived assets. We base our
estimates on historical experience and on various other assumptions and factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Based on our
ongoing review, we plan to adjust to our judgments and estimates where facts and
circumstances dictate. Actual results could differ from our
estimates.
  We
believe the following critical accounting policies are important to the
portrayal of our financial condition and results and require our management's
most difficult, subjective or complex judgments, often because of the need to
make estimates about the effect of matters that are inherently
uncertain.
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 Table of Contents
  1.Equipment,net
  Equipment
is stated at cost, less accumulated depreciation. Depreciation is provided using
the straight-line method over the estimated useful life of the assets, which is
from three to five years. When equipment is retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is reflected in the statement of operations.
Repairs and maintenance costs on equipment are expensed as
incurred.
  2.Intangible rights,
net
  Equipment
is stated at cost, less accumulated depreciation. Depreciation is provided using
the straight-line method over the estimated useful life of the assets, which is
from three to five years. When equipment is retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is reflected in the statement of operations.
Repairs and maintenance costs on equipment are expensed as
incurred.
  3.Impairment ofLong-Lived
Assets
  Long-lived
assets, including intangible rights with definite lives, are reviewed for
impairment whenever events or changes in circumstance indicate that the carrying
amount of the assets may not be recoverable. An intangible right that is not
subject to amortization is reviewed for impairment annually or more frequently
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. An impairment loss is recognized when the
carrying amount of a long-lived asset and intangible right exceeds the sum of
the undiscounted cash flows expected to be generated from the asset’s use and
eventual disposition. An impairment loss is measured as the amount by which the
carrying amount exceeds the fair value of the asset calculated using a
discounted cash flow analysis.
  4.Convertible Promissory NotesandWarrants
  In 2007,
the Company issued 12% convertible promissory note and warrants and 3%
convertible promissory notes and warrants. The Company allocated the proceeds of
the convertible promissory notes between convertible promissory notes and the
financial instruments related to warrants associated with convertible promissory
notes based on their relative fair values at commitment date. The fair value of
the financial instruments related to warrants associated with convertible
promissory notes was determined utilizing the Black-Scholes option pricing model
and the respective allocated proceeds to warrants is recorded in additional
paid-in capital. The embedded beneficial conversion feature associated with
convertible promissory notes was recognized and measured by allocating a portion
of the proceeds equal to the intrinsic value of that feature to additional
paid-in capital in according to EITF Issue No. 98-5,“Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio” and EITF Issue No. 00-27,“Application of Issue
No. 98-5 to Certain Convertible Instruments”.
  The
portion of debt discount resulting from allocation of proceeds to the financial
instruments related to warrants associated with convertible promissory notes is
being amortized to interest expense over the life of the convertible promissory
notes, using the effective yield method. For portion of debt discount resulting
from allocation of proceeds to the beneficial conversion feature, it is
recognized as interest expenses over the minimum period from the date of
issuance to the date of earliest conversion, using the effective yield
method.
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 5.Revenue
Recognition
  For hotel
management services, the Company recognizes revenue in the period when the
services are rendered and collection is reasonably assured.
  For tour
services, the Company recognizes services-based revenue when the services have
been performed. Guangdong Tianma International Travel Service Co., Ltd
(“Tianma”) offers independent leisure travelers bundled packaged-tour products,
which include both air-ticketing and hotel reservations. Tianma’s packaged-tour
products cover a variety of domestic and international destinations.
  Tianma
organizes inbound and outbound tour and travel packages, which can incorporate,
among other things, air and land transportation, hotels, restaurants and tickets
to tourist destinations and other excursions. Tianma books all elements of such
packages with third-party service providers, such as airlines, car rental
companies and hotels, or through other tour package providers and then resells
such packages to its clients. A typical sale of tour services is as
follows:
  1.
            Tianma,
      in consultation with sub-agents, organizes a tour or travel package,
      including making reservations for blocks of tickets, rooms, etc. with
      third-party service providers. Tianma may be required to make deposits,
      pay all or part of the ultimate fees charged by such service providers or
      make legally binding commitments to pay such fees. For air-tickets, Tianma
      normally books a block of air tickets with airlines in advance and pays
      the full amount of the tickets to reserve seats before any tours are
      formed. The air tickets are usually valid for a certain period of time. If
      the pre-packaged tours do not materialize and are eventually not formed,
      Tianma will resell the air tickets to other travel agents or customers.
      For hotels, meals and transportation, Tianma usually pays an upfront
      deposit of 50-60% of the total cost. The remaining balance is then settled
      after completion of the tours.
  2.
            Tianma,
      through its sub-agents, advertises tour and travel packages at prices set
      by Tianma and sub-agents.
  3.
            Customers
      approach Tianma or its appointed sub-agents to book an advertised packaged
      tour.
  4.
            The
      customers pay a deposit to Tianma directly or through its appointed
      sub-agents.
  5.
            When
      the minimum required number of customers (which number is different for
      each tour based on the elements and costs of the tour) for a particular
      tour is reached, Tianma will contact the customers for tour confirmation
      and request full payment. All payments received by the appointed
      sub-agents are paid to Tianma prior to the commencement of the
      tours.
  6.
            Tianma
      will then make or finalize corresponding bookings with outside service
      providers such as airlines, bus operators, hotels, restaurants, etc. and
      pay any unpaid fees or deposits to such
  providers.
  Tianma is
the principal in such transactions and the primary obligor to the third-party
providers, regardless of whether it has received full payment from its
customers. In addition, Tianma is also liable to the customers for any claims
relating to the tours, such as accidents or tour services. Tianma has adequate
insurance coverage for accidental loss arising during the tours. The Company
utilizes a network of sub-agents who operate strictly in Tianma’s name and can
only advertise and promote the business of Tianma with the prior approval of
Tianma.
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 For
advertising services, the Company recognizes revenue in the period when
advertisements are either aired or published.
  6.Stock-based
Compensation
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment”, a
revision to SFAS No. 123,“Accounting for Stock-Based Compensation”, and superseding APB Opinion
No. 25, “Accounting for Stock
Issued to Employees” and its related implementation guidance. Effective
January 1, 2006, the Company adopted SFAS 123R, using a modified prospective
application transition method, which establishes accounting for stock-based
awards in exchange for employee services. Under this application, the Company is
required to record stock-based compensation expense for all awards granted after
the date of adoption and nonvested awards that were outstanding as of the date
of adoption. SFAS 123R requires that stock-based compensation cost is measured
at grant date, based on the fair value of the award, and recognized in expense
over the requisite services period.
  Common
stock, stock options and warrants issued to other than employees or directors in
exchange for services are recorded on the basis of their fair value, as required
by SFAS No. 123R, which is measured as of the date required by EITF
Issue 96-18,“Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services”. In accordance with
EITF 96-18, the non-employee stock options or warrants are measured at
their fair value by using the Black-Scholes option pricing model as of the
earlier of the date at which a commitment for performance to earn the equity
instruments is reached (“performance commitment date”) or the date at which
performance is complete (“performance completion date”). The stock-based
compensation expenses are recognized on a straight-line basis over the shorter
of the period over which services are to be received or the vesting period.
Accounting for non-employee stock options or warrants which involve only
performance conditions when no performance commitment date or performance
completion date has occurred as of reporting date requires measurement at the
equity instruments then-current fair value. Any subsequent changes
in the market value of the underlying common stock are reflected in the expense
recorded in the subsequent period in which that change occurs.
  7.Income
Taxes
  The
Company accounts for income taxes under SFAS No. 109, “Accounting for Income
Taxes”. Under SFAS 109, deferred tax assets and liabilities are provided
for the future tax effects attributable to temporary differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases, and for the expected future tax benefits from items
including tax loss carry forwards.
  Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or reversed. Under SFAS 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
  8.Foreign Currency
Translation
  The
assets and liabilities of the Company’s subsidiaries and variable interest
entities (VIEs) denominated in currencies other than United States (“U.S.”)
dollars are translated into U.S. dollars using the applicable exchange rates at
the balance sheet date. For statement of operations’ items, amounts denominated
in currencies other than U.S. dollars were translated into U.S. dollars using
the average exchange rate during the period. Equity accounts were translated at
their historical exchange rates. Net gains and losses resulting from translation
of foreign currency financial statements are included in the statements of
stockholders’ equity as accumulated other comprehensive income (loss). Foreign
currency transaction gains and losses are reflected in the statements of
operations.
  9.              Consolidation
of variable interest entity
 
 In
accordance with FIN 46R, VlEs are generally entities that lack sufficient equity
to finance their activities without additional financial support from other
parties or whose equity holders lack adequate decision making ability. All VIEs
with which the Company is involved must be evaluated to determine the primary
beneficiary of the risks and rewards of the VIE. The primary beneficiary is
required to consolidate the VIE for financial reporting
purposes.
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 RECENT
ACCOUNTING PRONOUNCEMENTS
  In September 2006, FASB issued SFAS 157,“Fair Value Measurements”.
This statement defines fair value and establishes a framework for measuring fair
value in generally accepted accounting principles. More precisely, this
statement sets forth a standard definition of fair value as it applies to assets
or liabilities, the principal market (or most advantageous market) for
determining fair value (price), the market participants, inputs and the
application of the derived fair value to those assets and liabilities. The
effective date of this pronouncement is for all full fiscal and interim periods
beginning after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 157 on its financial statements and related
disclosures.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” which permit entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of adopting SFAS 159 on its financial statements
and related disclosures.
 In
December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations”
(“SFAS No. 141 (R)”), replacing SFAS No. 141, “Business Combinations”
(“SFAS No. 141”), and SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an Amendment of ARB
No.51”.
SFAS No. 141(R) retains the fundamental requirements of SFAS No. 141,
broadens its scope by applying the acquisition method to all transactions and
other events in which one entity obtains control over one or more other
businesses, and requires, among other things, that assets acquired and
liabilities assumed be measured at fair value as of the acquisition date, that
liabilities related to contingent consideration be recognized at the acquisition
date and re-measured at fair value in each subsequent reporting period, that
acquisition-related costs be expensed as incurred, and that income be recognized
if the fair value of the net assets acquired exceeds the fair value of the
consideration transferred. SFAS No. 160 establishes accounting and
reporting standards for non controlling interests (i.e. minority interests)
in a subsidiary, including changes in a parent’s ownership interest in a
subsidiary and requires, among other things, that noncontrolling interests in
subsidiaries be classified as a separate component of equity. Except for the
presentation and disclosure requirements of SFAS No. 160, which are to
be applied retrospectively for all periods presented, SFAS No. 141 (R)
and SFAS No. 160 are to be applied prospectively in financial
statements issued for fiscal years beginning after December 15, 2008. The
Company is currently assessing the impact of adopting
SFAS No. 141 (R) and SFAS No. 160 on its financial
statements and related disclosures.
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 ITEM
7.        FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
  The
financial statements are attached to this Annual Report on Form 10-KSB as
Appendix A. The report of Company's Independent Registered Public
Accounting Firms appear at Page F-1 through F-2 hereof, the financial
statements of the Company appear at Page F-3 through F-32 hereof.
  ITEM
8.        CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  Not
applicable.
  ITEM8A.CONTROLS
AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  As
required by Rule 13a-15 under the Exchange Act, as of the end of the period
covered by this Annual Report, being December 31, 2007, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. This evaluation ("Evaluation") was performed by our Chief Executive
Officer and our Chief Financial Officer in consultation with our accounting
personnel.
  Based
upon the Evaluation, our Chief Executive Officer and our Chief Financial Officer
have concluded that as of the end of the period covered by this Annual Report,
our disclosure controls and procedures were effective.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  The
Company’s management is responsible for establishing and maintaining an adequate
system of internal control over financial reporting. Internal control over
financial reporting is a process designed 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. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
  Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Further, because of changes in conditions,
effectiveness of internal control over financial reporting may vary over
time.
 63
 Table of Contents
 A
significant deficiency is a control deficiency, or combination of control
deficiencies, that adversely affects the company’s ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more
than a remote likelihood that a misstatement of the company’s annual or interim
financial statements that is more than inconsequential will not be prevented or
detected. An internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
  Management
of the Company conducted an evaluation of the effectiveness of the Company’s
internal control over financial reporting based on
the framework and criteria established in Internal Control- Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on the Company’s evaluation under the COSO
framework, management concluded that its internal control over financial
reporting was effective as of December 31, 2007.
  This
Annual Report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this Annual Report."
  ChangesIn Internal Control Over Financial
Reporting.
  There has
been no change in our internal control over financial reporting that occurred
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to affect, our internal control over financial
reporting.
  ITEM 8B.OTHER INFORMATION
  None.
  PART III
  ITEM 9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE GOVERNANCE
      PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT
  The
following table sets forth the names, ages and positions held with respect to
each Director and Executive Officer of the Company.
  Name
            Age
            Position
            Director
      SinceGodfrey
      Hui
            48
            Chief
      Executive Officer and Chairman of the Board
            2002Daley
      Mok
            47
            Chief
      Financial Officer, Corporate Secretary and Director
            2006Daniel
      So
            51
            Managing
      Director and Vice Chairman
            2005Benedict
      Fung
            59
            PresidentStanley Chu
            30
            General
      Manager and Director
            2006Joachim
      Burger
            64
            Director
            2007Gerd
      Jakob
            50
            Director
            2007Edward
      Lu
            35
            Director
            2007Peter
      Mak
            46
            Director
            2007Ronglie
      Xu
            76
            Director
            2007
 64
 Table of Contents
 Each
Director serves until our 2008 annual stockholders meeting and until their
respective successors are duly elected and qualified or earlier
resignation or removal.
  On
September 1, 2007, Raymond Chan resigned as a member of the Board of
Directors of the Company. Mr. Chan’s resignation was due to personal
reasons and not because of any disagreement with the Company on any matter
relating to the Company’s operations, policies or practices.
  Godfrey Huihas been a
Director and the Chief Executive Officer of the Company since April 2002.
Mr. Hui began his career in the hotel industry in 1985. He has worked for
several international and regional hotel groups and has become one of the top
hotel professionals in the Greater China Area. From November 1998 through March
2000, Mr. Hui was responsible for management and financial issues at
Hopewell Holdings Limited, where he worked in various capacities including
Director of Operations, Finance and Development of the Hotel Division, Executive
Assistant to the Chairman, Chairman of the Executive Committee, and Group
Financial Controller of Hopewell Holdings Limited. From June 1993 through
November 1998, Mr. Hui was involved in hotel management for Mega Hotels
Management Limited, where he served as Director of Finance, Development and
Operations. Mr. Hui held a bachelors of science in business management and
a masters degree in finance and investment.
  Daley Mokjoined the Company
on January 3, 2006. He was appointed Chief Financial Officer on March 23,
2006 and was appointed to the Company’s Board on September 25, 2006. Prior to
joining the Company, Dr. Mok served as Director of DM Services,
a business consulting firm from March 2001 to January 2006. Dr. Mok started
his career in auditing with Peat Marwick, before progressing to the commercial
field. Having worked in Hong Kong and Australia, Dr. Mok has gathered
over twenty years of experience in multinational companies including the Swire
Group, the CLP Group, Digital Equipment Corporation, CDH Properties, the
Grosvenor Shaw Group and the Grass Valley Group. Dr. Mok is a qualified
accountant with memberships in the Hong Kong Institute of Certified Public
Accountants and CPA Australia. Dr. Mok held a masters degree in international
business law and a doctoral degree in business administration.
  Daniel Sowas appointed to the
Company’s Board on December 28, 2005. Mr. So was appointed as the Managing
Director of the Company on June 27, 2006. Mr. So began his career in China
in the early 1980s when economic reform was just beginning. His career spans
diverse fields including semiconductors, electronics, computer manufacturing,
computer applications, software and system development, telecommunication,
datacom, medical and health, and retail and property development. He was the
chief executive officer of Wangfujing Plaza and Chang A Wangfujing Building in
Beijing, as well as the Vice Chairman and founder of the Chess Technology Group.
Mr. So received a Bachelors of Science in zoology from Washington State
University.
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 Table of Contents
 Benedict Fung joined the
Company on January 3, 2006 and was appointed President on March 23,
2006. From March 2003 to January 2006, Mr. Fung served as director and
chief financial officer of Masterpipings Holdings Limited. From March 2001
to March 2003, Mr. Fung served as a director and vice president, finance of
AIC Asia Int'l Corporation. Mr. Fung has been active in the
hospitality industry for more than twenty years working as an executive in
various international hotel chains and hotel investment companies, including
Mandarin Oriental, Hyatt International, the Peninsula Hotel Group, Regal
International Hotels, STDM Hotels (Macau) and the Miramar Hotel Group. Mr.
Fung held a degree in hospitality management and is a member of the British
Association of Hospitality Accountants and International Association of
Hospitality Accountants USA.
  Stanley Chu was appointed to
the Company’s Board on May 3, 2006 and was appointed General Manager on June 27,
2006. Mr. Chu worked in various commercial banks in San Francisco before
returning to Asia. In 2004, Mr. Chu served as Vice President Business
Development of Librett Group in Beijing where he was responsible for identifying
profitable projects, bringing in investors/funds to potential projects,
maximizing investors’ return by implementing dynamic business strategies and
acquiring companies or projects with outstanding growth potential. During his
tenure with the Librett Group, Mr. Chu was involved in many projects
throughout China including in the areas of real estate, retail operation and
franchising, food and beverage franchising, marketing, and financial and
investment banking services. Mr. Chu received a Bachelors of Science in
international business from the University of San Francisco.
  Joachim Burger was appointed
to the Company’s Board on September 1, 2007. Mr. Burger has served as the chief
executive officer of Lingnan Huayuan Hospitality Co. Ltd. since February 2006.
He also served as the managing director of International Hoteliers &
Associates, Shanghai from September 2003 to January 2006 as well as Key Hotels
International Beijing, from September 2002 to August 2003. Mr. Burger has more
than 35 years of experience developing and operating hotels in Europe and Asia. His career
in the hospitality industry began in 1964 in Germany when he graduated from Bad
Reichenhall Hotel Training School in Austria. Mr. Burger has worked for a
number of luxury hotels and restaurants across Europe and Asia and for Hilton
Hotels in Bangkok, Manila, Guam and the Philippines. In a career spanning more
than three decades and three continents, Mr. Burger has created and
developed a number of large hotels, restaurants and commercial projects in Asia.
In 2000, Mr. Burger completed the Advance Management Program at Cornell
University to prepare himself for the new challenges of the 21stCentury.
  Gerd Jakob was appointed to
the Company’s Board on September 1, 2007. Since 2003, Dr. Jakob has served as
the chairman of RG Group in Frankfurt, a company that specializes in asset
management and securities trading. Since 2004 and 2001, he has also served as
the Chairman of CONET Technologies AG, a company involved in the acquisition,
holding, management and advisory of information technology companies, and the
Chairman of TNG Energy AG, a holding company for various Russian oil and gas
production companies, respectively. He is the director and founding member of
SWGI Growth Fund (Cyprus) Ltd, an investment fund listed on Bermuda Stock
Exchange which invests in the oil and gas sector in Russia. Dr. Jakob
received a Ph.D. degree in philosophy from Canterbury University and a Masters
of Science in shipping trade and finance from London City Business
School.
 66
 Table of Contents
 Edward Lu was appointed to the
Company’s Board on September 1, 2007. Mr. Lu is a Certified Public Accountant
with over 11 years of experience in public accounting. For the last 11 years, he
has been involved in numerous auditing, taxation and consulting engagements for
real estate development and hotel/hospitality management projects in the U.S. He
served as senior tax manager of Chang, Chang & Company, CPA’s from September
2002 to June 2005 and as senior manager of Sue Yen Leo, CPA’s from June 2005 to
May 2006. He is now the president of Edward C Lu, CPA, AAC. His expertise
extends to all areas of taxation and accounting affecting individuals, trusts,
partnerships, corporations and off-shore companies. Mr. Lu received a
Bachelors of Science in accounting in 1995 from the California State University
of Los Angeles.
  Peter Mak was appointed to the
Company’s Board on September 1, 2007. Mr. Mak is the managing director of
Venfund Investment, a boutique investment bank, which he co-founded in late
2001. Prior to founding Venfund Investment, Mr. Mak was a partner of Arthur
Andersen Worldwide and the managing partner of Arthur Andersen Southern China.
Mr. Mak serves as an independent non-executive director and audit committee
chairman of the following public companies in the U.S., Hong Kong, China and
Singapore: Trina Solar Limited, China GrenTech Corp. Ltd., Dragon Pharmaceutical
Inc., Shenzhen Victor Onward Textile Industrial Co. Ltd., Gemdale Industries
Inc., Huabao International Holdings Ltd. and Bright World Precision Machinery
Ltd. Mr. Mak is a graduate of the Hong Kong Polytechnic University. Mr. Mak
is a fellow member of the Association of Chartered Certified Accountants, UK,
and the Hong Kong Institute of Certified Public Accountants.
  Ronglie Xu was appointed to
the Company’s Board on September 1, 2007. Dr. Xu is the Deputy Chairman of the
Scientific and Technical Committee in the Ministry of Construction in China
during the latest five years, Dr. Xu is also the President of the China Civil
Engineering Society, and the President of the China Construction Machinery
Institute, as well as a part-time professor at Tsinghua and Tongji Universities.
For the past 50 years, Dr. Xu has held executive positions in Chinese
state-owned construction and engineering companies. Dr. Xu also is a
foreign member of the Royal Swedish Academy of Engineering
Sciences IVA and a chartered builder of the United Kingdom. In 1987 he was
awarded first prize for science and technology advancements by the Chinese
Ministry of Construction and in 1988 he was awarded national honors for
outstanding contributions in science and technology advancements in China.
Dr. Xu is widely published throughout the world.
  There are
no family relationships among any of our directors or executive officers. There
are no arrangements or understandings among any of the directors, executive
officers or other persons pursuant to which any officer or director was selected
to serve as a director or officer.
  Involvement
in Certain Legal Proceedings
  None of
our directors or executive officers have been involved in any of the following
events that occurred during the past five years:
  1.
            any
      bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the
      bankruptcy or within two years prior to that
  time;
  2.
            any
      conviction in a criminal proceeding or being subject to a pending criminal
      proceeding (excluding traffic violations and other minor
      offenses);
 67
 Table of Contents
 3.
            being
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities or banking activities;
      or
  4.
            being
      found by a court of competent jurisdiction (in a civil action), the
      Commission or the Commodity Futures Trading Commission to have violated a
      federal or state securities or commodities law, and the judgment has not
      been reversed, suspended, or
vacated.
  Corporate Governance Matters
  On
September 1, 2007, the Board of Directors formed the following standing
committees: Audit, Nominating and Remuneration. The Board of Directors has
adopted a written charter for each of these committees, copies of which can be
found on our website at www.ncnincorporated.com.
All members of the committees appointed by the Board of Directors are
non-employee directors and are independent directors within the meaning set
forth in the rules of the American Stock Exchange.
  The
following chart details the current membership and the membership of each
committee during fiscal year 2007.
  Name
      of Director
            Audit
            Nominating
            RemunerationPeter
      Mak
            CGerd
      Jakob
            M
            
            MEdward
      Lu
            M
            MJoachim
      Burger
            
            C
            MRonglie
      Xu
            
            M
            CM =
      MemberC =
      Chairman
 
 Audit
Committee
  The Audit
Committee oversees our accounting, financial reporting and audit processes;
appoints, determines the compensation of, and oversees, the independent
auditors; pre-approves audit and non-audit services provided by the independent
auditors; reviews the results and scope of audit and other services
provided by the independent auditors; reviews the accounting principles and
practices and procedures used in preparing our financial statements; and reviews
our internal controls.
 
 The Audit
Committee works closely with management and our independent auditors. The Audit
Committee also meets with our independent auditors without members of management
present, on a quarterly basis, following completion of our auditors’ quarterly
reviews and annual audit and prior to our earnings announcements, to review the
results of their work. The Audit Committee also meets with our independent
auditors to approve the annual scope and fees for the audit services to be
performed.
  68
 Table of Contents
 
 Each of
the Audit Committee members is an independent director within the meaning set
forth in the rules of the American Stock Exchange, as currently in effect. In
addition, the Board of Directors has determined that each of Messrs. Jakob,
Lu and Mak is an “audit committee financial expert” as defined by SEC rules. Mr.
Mak and Mr. Lu are qualified accountants with many years of finance and audit
experience, while Mr. Jakob is the chairman of a company specializing in asset
management and securities trading, where one of his responsibilities is to
oversee the company’s finance function.
  RemunerationCommittee
  The
Remuneration Committee (i) oversees and makes general recommendations to
the Board of Directors regarding our compensation and benefits policies;
(ii) oversees, evaluates and approves cash and stock compensation plans,
policies and programs for our executive officers; and (iii) oversees and
sets compensation for the Board of Directors.
  Each
current member of the Remuneration Committee is an independent director within
the meaning set forth in the rules of the American Stock Exchange, as currently
in effect.
 
 Nominating
Committee
 
 The
Nominating Committee (i) considers and periodically reports on matters
relating to the identification, selection and qualification of the Board of
Directors and candidates nominated to the Board of Directors and its committees;
(ii) develops and recommends governance principles applicable to the
Company; and (iii) oversees the evaluation of the Board of Directors and
management from a corporate governance perspective. Each member of the
Nominating Committee is an independent director within the meaning set forth in
the rules of the American Stock Exchange, as currently in
effect.
 
 We have
not adopted any procedures by which security holders may recommend nominees
to our Board of Directors.
  Communications with the Board of
Directors
 
 Although
we do not have a formal policy regarding communications with the Board of
Directors, stockholders may communicate with the Board of Directors by
submitting an email to info@ncnincorporated.com
or by writing to us at Network CN Inc., Attention: Investor Relations, 21/F.,
Chinachem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong. Stockholders
who would like their submission directed to a member of the Board of Directors
may so specify. All communications will be reviewed by our General Manager and
General Counsel.
 
 Code of Business Conduct and
Ethics. A Code of Business Conduct and Ethics is a written standard
designed to deter wrongdoing and to promote (a) honest and ethical conduct, (b)
full, fair, accurate, timely and understandable disclosure in regulatory filings
and public statements, (c) compliance with applicable laws, rules and
regulations, (d) prompt reporting violation of the code and (e) accountability
for adherence to the Code. We are not currently subject to any law, rule or
regulation requiring that we adopt a Code of Ethics. However, we have adopted a
code of business conduct and ethics that applies to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. Such code of business
conduct and ethics is available on our corporate website at www.ncnincorporated.com.
 69
 Table of Contents
 COMPLIANCE
WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
  Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers, directors and beneficial owner of more than 10% of a registered class
of our equity securities to file with the Securities and Exchange Commission
statements of ownership and changes in ownership. The same persons are required
to furnish us with copies of all Section 16(a) forms they file. Based solely on
our review of such forms furnished to us during the most recent fiscal year, we
believe that all of our executive officers, directors and beneficial owner of
more than 10% of a registered class of our equity securities complied with the
applicable filing requirements.
  ITEM 10 .
            EXECUTIVE
      COMPENSATION
 
 The
following table sets forth summary information concerning compensation paid or
accrued for services rendered to the Company in all capacities to (i) the
Company’s Chief Executive Officer and (ii) the Company’s other two most highly
compensated executive officers who were serving as executive officers
(collectively “Named Executive Officers”) at the end of fiscal year 2007. In
2006, only Godfrey Hui, Daniel So and Daley Mok had annual compensation that
exceeded $100,000.
 
 Summary
Compensation Table
 
 Name
      and Principal Position
            Year
            Salary
              ($)
            Bonus
              ($)
            (1)
              Stock
              Awards
      ($)
            Nonqualified
              DeferredCompensationEarnings
              ($)
            (2)
              All
      Other
              Compensation
              ($)
            Total
              ($)Godfrey
      Hui, Chairman of the Board and Chief Executive Officer
            2007
            152,308
            -
            529,250
            -
            203,755
            885,3132006
            107,692
            79,487
            23,400
            -
            18,461
            229,040Daniel
      So, Vice Chairman and Managing Director
            2007
            103,590
            -
            568,000
            -
            106,859
            778,4492006
            44,872
            37,286
            44,793
            -
            1,538
            128,489Daley
      Mok, Director, Chief Financial Officer and Corporate
    Secretary
            2007
            97,179
            -
            262,750
            -
            46,910
            406,8392006
            76,923
            19,231
            7,800
            -
            1,538
            105,492
 
 (1) In
2007, Mr. Hui, Mr. So and Dr. Mok received stock awards of 75,000, 100,000 and
25,000 shares respectively, pursuant to the terms of their employment agreements
for services rendered during the six months ended June 30, 2007. In addition,
Mr. Hui, Mr. So and Dr. Mok received stock awards of 200,000, 200,000 and
100,000 shares, respectively, pursuant to the terms of their new employment
agreements dated July 23, 2007 for services rendered during the six months ended
December 31, 2007.These amounts reflect the
value determined by the Company for accounting purposes for these awards and do
not reflect whether the recipient has actually realized a financial benefit from
the award. This column represents the dollar amount recognized for financial
statement reporting purposes for the 2007 fiscal year for stock awards granted
to each of the Named Executive Officers in 2007 as well as prior fiscal years,
in accordance with SFAS 123R. Pursuant to SEC rules, the amounts shown exclude
the impact of estimated forfeitures related to service-based vesting conditions.
No stock awards were forfeited by any of the Named Executive Officers in 2007.
For additional information, see Note 12 of our financial statements. For
information on the valuation assumptions for grants made prior to 2007, see the
notes in our financial statements in the Form 10-KSB for the respective
year.
 
 70
 Table of Contents
  (2) All
other compensation represents (1) contribution paid by the Company into a
mandatory pension fund for the benefit of the Named Executive Officers and (2)
income tax reimbursement to be paid to the Named Executive Officers in order to
sufficiently cover their Hong Kong personal income taxes resulting from their
employment under new employment agreements dated July 23, 2007, except Godfrey
Hui whose income tax reimbursement is computed based on his employment under
both the last and new employment agreements. As the aggregate of all other
perquisites and other personal benefits received by each Named Executive Officer
was less than $10,000, they are not included in the above.
 
 Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements
  1. Our
Chief Executive Officer, Godfrey Hui, was a party to a renewed employment
agreement with our subsidiary NCN Group Management Limited, effective January 1,
2006, whereby Mr. Hui serves as the Chief Executive Officer of the Company and
such subsidiary. The agreement did not contain a definitive termination date and
is terminable by NCN Group Management Limited on three months’ notice. Mr. Hui
was entitled to a monthly salary of HK$70,000 ($8,974) and was eligible for an
annual bonus of HK$400,000 ($51,282) after completion of one calendar year of
service. Such bonus would be paid on a pro-rata basis for the first calendar
year from the date of employment until the end of the last day of that calendar year. Mr.
Hui was also eligible to receive 150,000 shares of common stock of the Company
following each of his first two full years of employment.
  2. Our
Managing Director, Daniel So, was also a party to an employment agreement with
our subsidiary NCN Group Management Limited, dated June 27, 2006, whereby Mr. So
serves as the Managing Director of the Company and such subsidiary. The
agreement did not contain a definitive termination date and was terminable by
NCN Group Management Limited on one-month notice. Mr. So was entitled to a
monthly salary of HK$50,000 ($6,410) and was eligible for an annual bonus of
HK$250,000 ($32,051) after completion of one calendar year of service. Such
bonus would be paid on a pro-rata basis for the first calendar year from the
date of employment till the end of the last day of that calendar year. Mr. So
was also eligible to receive 200,000 shares of common stock of the Company
following each of his first two full years of employment.
  3. Our
Chief Financial Officer, Daley Mok, was also a party to an employment
agreement with our subsidiary NCN Group Management Limited, dated January 3,
2006, whereby Dr. Mok serves as the Chief Financial Officer of the Company
and such subsidiary. The agreement did not contain a definitive termination date
and is terminable by NCN Group Management Limited on one-month notice.
Dr. Mok was entitled to a monthly salary of HK$50,000 ($6,410) and was
eligible to be paid bonuses, from time to time, at the discretion of NCN Group
Management Limited’s Board of Directors, of cash, stock or other valid form of
compensation. Dr. Mok was also eligible to receive 50,000 shares of common
stock of the Company following each of his first two full years of
employment.
 
 71
 Table of Contents
  On July
23, 2007, NCN Group Management Limited entered into new Executive Employment
Agreements (the “Agreements”) with Godfrey Hui, Daniel So and Daley Mok, which
Agreements were effective on July 1, 2007. Pursuant to the Agreements, each
Named Executive Officer receives a monthly base salary and is entitled to
receive shares of the Company’s common stock as follows:
 
 Named
      Executive Officer
            Base
      Salary
              ($)
      (1)
            Common
      Stock GrantGodfrey
      Hui
            15,384
            2,000,000(2)Daniel
      So
            10,256
            2,000,000(3)Daley
      Mok
            8,974
            1,500,000(4)
 
 (1) The
Named Executive Officers’ base salary is paid in Hong Kong dollars. The amounts
set forth in this table are in U.S. dollars based on an exchange rate of HK$:US$
= 7.8:1
 
 (2)
Pursuant to Mr. Hui’s employment contract, he is entitled to a stock grant of
2,000,000 shares of the Company’s common stock. The Company granted Mr. Hui
200,000 shares of the Company’s common stock in 2007. Pursuant to the employment
agreement, the Company has agreed to grant Mr. Hui 300,000 shares in 2008,
400,000 shares in 2009, 500,000 shares in 2010 and 600,000 shares in 2011
provided that Mr. Hui is employed by the Company on the date of grant. The grant
shall be subject to all terms of the Company’s 2007 stock option/stock issuance
plan or any future stock option/stock issuance plan under which it is
issued.
  (3)
Pursuant to Mr. So’s employment contract, he is entitled to a stock grant of
2,000,000 shares of the Company’s common stock. The Company granted Mr. So
200,000 shares of the Company’s common stock in 2007. Pursuant to the employment
agreement, the Company has agreed to grant Mr. So 300,000 shares in 2008,
400,000 shares in 2009, 500,000 shares in 2010 and 600,000 shares in 2011
provided that Mr. So is employed by the Company on the date of grant. The grant
shall be subject to all terms of the Company’s 2007 stock option/stock issuance
plan or any future stock option/stock issuance plan under which it is
issued.
 
 (4)
Pursuant to Mr. Mok’s employment contract, he is entitled to a stock grant
1,500,000 shares of the Company’s common stock. The Company granted Mr. Mok
100,000 shares of the Company’s common stock in 2007. Pursuant to the employment
agreement, the Company has agreed to grant Mr. Mok 200,000 shares in 2008,
300,000 shares in 2009, 400,000 shares in 2010 and 500,000 shares in 2011
provided that Mr. Mok is employed by the Company on the date of grant. The grant
shall be subject to all terms of the Company’s 2007 stock option/stock issuance
plan or any future stock option/stock issuance plan under which it is
issued.
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 Table of Contents
 In
addition to base salaries and stock grants disclosed above, the Agreements
include the following material provisions:
 
 ·
            Each
      Agreement shall continue until termination by either party with
      three-month advance notice or for cause or
  disability;
 
 ·
            Discretionary
      bonus as determined by the Board of Directors of NCN Group based on the
      realization of financial and performance goals of the Company and NCN
      Group;
  ·
            In
      the event employment is terminated other than for cause, disability, or in
      the event of their resignation for good reason, each officer is entitled
      to severance payments consisting of his then base salary for 48 months
      provided there has been no change in control of either NCN Group or the
      Company, or for 60 months if there has been a change in control of either
      NCN Group or the Company in the preceding one year; In addition, each
      officer shall be entitled to accelerated vesting of all stock grants, as
      of the date of such termination other than for cause, remain unexercised
      and unvested, to the extent permissible by
law.
  ·
            In
      the event employment is terminated for disability, each officer shall be
      potentially eligible for disability benefits under any Company-provided
      disability plan in which he then participate, and shall be entitled to
      accelerated vesting of all stock grants, as of the date of such
      disability, remain unexercised and unvested, to the extent permissible by
      law.·
            Restrictive
      covenants on other employment after termination for a period of six months
      without the approval of NCN Group’s Board of Directors, non-solicitation
      of customer, suppliers or employees of NCN Group Management Limited, and
      confidentiality.
 
 ·
            Income
      tax reimbursement which will be sufficient to cover their Hong Kong
      personal income taxes resulting from their employment under the
      Agreement.
 
 During
the years ended December, 31, 2007, the Company recognized an aggregate of
$529,250, $568,000 and $262,750 respectively, as stock-based compensation for
shares issued and granted to Mr. Hui, Mr. So and Dr. Mok pursuant to their
employment contracts entered into 2006 and 2007 as mentioned for services
rendered during fiscal 2007.
  Other
than as described above, we have no other employment contracts, compensatory
plans or arrangements, including payments to be received from the Company, with
respect to any Named Executive Officers of the Company, which would in any way
result in payments to any such person because of his resignation, retirement or
other termination of employment with the Company, any change in control of the
Company, or a change in the person's responsibilities following a change in
control of the Company.
  73
 Table of Contents
  Outstanding
Equity Awards at Fiscal Year-End
  The
Company’s Named Executive Officers had no (1) unexercised option awards
or (2) unearned shares, units or other rights under any equity incentive
plan that have not vested or (3) other shares that have not vested as
of the fiscal year end.
 
 Director
Compensation
  The
following table provides information about the actual compensation earned by
non-employee directors who served during the 2007 fiscal year:
  
 Name
      of non-employee director
            Fees
      Earned orPaid
              in
      Cash($)
            Stock
      Awards($)(1)
            Total($)Joachim
      Burger
            8,333
            13,380
            21,713Gerd
      Jakob
            5,000
            8,920
            13,920Edward
      Lu
            5,000
            8,920
            13,920Peter
      Mak
            8,333
            13,380
            21,713Ronglie
      Xu
            8,333
            13,380
            21,713
 
 (1)  These
amounts reflect the value determined by the Company for accounting purposes for
these awards and do not reflect whether the recipient has actually realized a
financial benefit from the awards. This column represents the dollar amount
recognized for financial statement reporting purposes for fiscal year 2007 for
stock awards granted to each of the non-employee directors in fiscal year 2007,
in accordance with FAS 123R. Pursuant to SEC rules, the amounts shown exclude
the impact of estimated forfeitures related to service-based vesting conditions.
No stock awards were forfeited by any of our non-employee
directors in fiscal year 2007. For additional information, see Note 12 of our
financial statements included herein.
 
 No
compensation was paid or payable to the directors for their services as
directors of the Company in 2006.
 
 ITEM 11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
 
 The
following tables set forth information as of March 6, 2008, regarding the
beneficial ownership of our common stock, (a) each stockholder who is known by
the Company to own beneficially in excess of 5% of our outstanding common stock;
(b) each director known to hold common stock; (c) the Company’s chief executive
officer; and (d) the executive officers and directors as a group. Except as
otherwise indicated, all persons listed below have (i) sole voting power and
investment power with respect to their shares of common stock, except to the
extent that authority is shared by spouses under applicable law, and (ii) record
and beneficial ownership with respect to their shares of stock. The percentage
of beneficial ownership is based upon 71,546,608 shares of common stock
outstanding as of March 6, 2008. Unless otherwise identified, the address of the
directors and officers of the Company listed above is 21st Floor.,
Chinachem Century Tower, 178 Gloucester Road, Wanchai, Hong Kong.
 74
 Table of Contents
 
 NAME
      AND ADDRESS OF
              BENEFICIAL
      OWNER
            
            AMOUNT
      OF
              BENEFICIAL
              OWNERSHIP
            
            
            PERCENT
      OF
              CLASS
              OF
      STOCK
              OUTSTANDINGOfficers
      and DirectorsGodfrey
      Hui
            
            
            825,000
            
            
            
            
            *Daley
      Mok
            
            
            150,000
            
            
            
            
            *Daniel
      So
            
            
            200,000
            
            
            
            
            -Stanley
      Chu
            
            
            80,000
            
            
            
            
            -Joachim
      Burger
            
            
            -
            
            
            
            
            -Gerd
      Jakob
            
            
            250,000
            
            
            
            
            *Edward
      Lu
            
            
            -
            
            
            
            
            -Peter
      Mak
            
            
            -
            
            
            
            
            -Ronglie
      Xu
            
            
            -
            
            
            
            
            -Benedict
      Fung
            
            
            170,000
            
            
            
            
            *All
      Officers and Directors as a Group (ten
      individuals)
            
            
            1,675,000
            
            
            
            
            2.3%-
            
            
            
            
            -5%
      Beneficial Owners
            
            
            
            
            
            
            
            -Bloompoint
      Investment Limited
            
            
            14,900,000
            
            
            
            
            20.8%Room
      1607, ING Tower, 308 Des Voeux Road, Central, Hong Kong
 * Less than 1%
  ITEM
12.              CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
  Related
Transactions
 
 Except as
set forth below, during our last two fiscal years, we have not entered into any
material transactions or series of transactions that would be considered
material in which any officer, director or beneficial owner of 5% or more of any
class of our capital stock, or any immediate family member of any of the
preceding persons, had a direct or indirect material interest:
 
 1.
            During
      the years ended December 31, 2007 and 2006, the Company received hotel
      management service fees of $nil and $100,478 respectively from two
      properties it manages that are owned by a
  stockholder.
 
 75
 Table of Contents
 2.
            During
      the years ended December 31, 2007 and 2006, the Company paid rent of
      $nil and $47,489 respectively for office premises leased from a
      director and stockholder.
 
 3.
            On
      December 21, 2007, the Company acquired 100% of voting shares of Linkrich
      Enterprise Advertising and Investment Limited, a dormant corporation
      incorporated in the Hong Kong Special Administrative Region, the PRC on
      March 16, 2001 from a director at a consideration of $1,282 which is the
      par value of the voting shares. .
  Director
Independence
  Our Board
of Directors consists of nine members. The Company has adopted the independence
standards promulgated by the American Stock Exchange. Based on these standards,
the Board has determined that five of the members of the Board of Directors are
“independent” as defined under the rules of the American Stock Exchange. The
five independent directors are Joachim Burger, Gerd Jakob, Edward Lu, Peter Mak
and Ronglie Xu.
  PART IV
  ITEM 13.
            EXHIBITS
  (a)
            The
      following financial statements are filed as a part of this Form 10-KSB in
      Appendix A hereto:
 
 i.
            Report
      of Independent Registered Public Accounting
  Firms
   ii.
            Consolidated
      balance sheet as of December 31,
2007
   iii.
            Consolidated
      statements of operations and comprehensive loss for the years ended
      December 31, 2007 and 2006
   iv.
            Consolidated
      statement of stockholders’ equity for the years ended December 31, 2007
      and 2006
   v.
            Consolidated
      statements of cash flows for the years ended December 31, 2007 and
      2006
   vi.
            Notes
      to consolidated financial statements for the years ended December 31, 2007
      and 2006
  (b)
            The
      following Exhibits are filed as part of this Annual Report on Form
      10-KSB:
  76
 Table of Contents
 
 Exhibit
      No.
            Description3.1
            Amended
      And Restated Certificate Of Incorporation incorporated herein by reference
      from Exhibit A to Registrant’s Definitive Information Statement on
      Schedule 14C filed with the SEC on January 10, 2007.3.2
            Amended
      and Restated By-Laws, adopted on January 10, 2006, is incorporated herein
      by reference from Exhibit 3-(II) to Registrant’s Current Report on Form
      8-K filed with the SEC on January 18, 2006.4.1
            Form
      of Registrant’s Common Stock Certificate.4.2
            Form
      of Amended and Restated Secured Convertible Promissory Note (incorporated
      herein by reference from Registrant's Current Report on Form 8-Kfiled with
      the SEC on February 6, 2008).4.3
            Form
      of Warrant (incorporated herein by reference from Registrant's Current
      Report on Form 8-K filed with the SEC on February 6,
  2008).4.4
            Form
      of Convertible Promissory Note (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on November 14,
      2007).4.5
            Form
      of Warrant (incorporated herein by reference from Registrant's Current
      Report on Form 8-K filed with the SEC on November 14,
    2007).4.6
            TEDA
      Travel Group, Inc. 2004 Stock Incentive Plan (incorporated herein by
      reference from Registrant's Registration Statement on Form S-8 filed with
      the SEC on April 22, 2004).4.7
            2007
      Stock Option/Stock Issuance Plan (incorporated herein by reference from
      Registrant's Registration Statement on Form S-8 filed with the SEC on
      April 6, 2007).10.1
            Purchase
      Agreement, dated November 19, 2007 (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on November 26,
      2007).10.2
            First
      Amendment to Note and Warrant Purchase Agreement, dated January 31, 2008
      (incorporated herein by reference from Registrant's Current Report on Form
      8-K filed with the SEC on February 6, 2008).10.3
            Security
      Agreement, dated January 31, 2008 (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on February 6,
      2008).10.4
            Registration
      Rights Agreement, dated November 19, 2007 (incorporated herein by
      reference from Registrant's Current Report on Form 8-K filed with the SEC
      on November 26, 2007).10.5
            Share
      Purchase Agreement dated January 1, 2008 (incorporated herein by reference
      from Registrant's Current Report on Form 8-K filed with the SEC on January
      7, 2008).10.6
            Agreement
      for Co-operation in Business between Shanghai Quo Advertising Company
      Limited and Wuhan Weiao Advertising Company Limited dated as of August 16,
      2007 (incorporated herein by reference from Registrant's Current Report on
      Form 8-K filed with the SEC on August 21, 2007).10.7
            Note
      and Warrant Purchase Agreement dated November 12, 2007 by and between the
      Company and Wei An Developments Limited (incorporated herein by reference
      from Registrant's Current Report on Form 8-K filed with the SEC on
      November 14, 2007).10.8
            Executive
      Employment Agreement by and between the NCN Group and Chin Tong Godfrey
      Hui dated July 23, 2007 (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on July 24,
      2007).
  77
 Table of Contents
  10.9
            Executive
      Employment Agreement by and between the NCN Group and Kuen Kwok So dated
      July 23, 2007 (incorporated herein by reference from Registrant's Current
      Report on Form 8-K filed with the SEC on July 24,
2007).10.10
            Executive
      Employment Agreement by and between the NCN Group and Daley Yu Luk Mok
      dated July 23, 2007 (incorporated herein by reference from Registrant's
      Current Report on Form 8-K filed with the SEC on July 24,
      2007).10.11
            Executive
      Employment Agreement by and between the NCN Group and Hing Kuen Benedict
      Fung dated July 23, 2007 (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on July 24,
      2007).10.12
            Executive
      Employment Agreement by and between the NCN Group and Stanley Kam Wing Chu
      dated July 23, 2007 (incorporated herein by reference from Registrant's
      Current Report on Form 8-K filed with the SEC on July 24,
      2007).10.13
            Contract
      for the Rebuilding and Leasing of Advertisement Light Boxes on Nanjing
      Road  Pedestrian Street (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on June 26,
      2007) .10.14
            Agreement
      for Advertising Business dated April 26, 2007, by and among Shanghai Quo
      Advertising Company Limited, a subsidiary of Network CN Inc., and Shanghai
      Yukang Advertising Company Limited (incorporated herein by reference from
      Registrant's Current Report on Form 8-K filed with the SEC on May 2,
      2007).10.15
            Stock
      Transfer Agreement dated January 24, 2007 (incorporated by reference to
      the Company’s Current Report on Form 8-K filed with the Securities and
      Exchange Commission on January 25, 2007).10.16
            Agreement
      for Co-operation and Agency in the Publication of Advertisements dated
      April 14, 2007, by and among Shanghai Quo Advertising Company Limited, a
      subsidiary of Network CN Inc., and Shanghai Qian Ming Advertising Company
      Limited (incorporated herein by reference from Registrant's Current Report
      on Form 8-K filed with the SEC on April 20, 2007).10.17
            Stock
      Transfer Agreement between Youwei Zheng and NCN Management Services
      Limited for acquisition of 55% equity interest in Guangdong Tianma
      International Travel Service Co., Ltd., dated June 16, 2006 (incorporated
      herein by reference from Registrant’s Current Report on Form 8-K filed
      with the SEC on March 30, 2007).10.18
            Business
      Joint Venture Agreement, between Shanghai Zhong Ying Communication
      Engineering Company Limited and Shanghai Quo Advertising Company Limited
      to manage LED outdoor project in Huangpu district of Shanghai, China
      (incorporated herein by reference from Registrant’s Current Report on Form
      8-K filed with the SEC on February 7, 2007).10.19
            Business
      Joint Venture Agreement, between Nanjing Yiyi Culture Advertising Company
      Limited and Shanghai Quo Advertising Company Limited to manage LED outdoor
      project in Nanjing (incorporated herein by reference from Registrant’s
      Current Report on Form 8-K filed with the SEC on February 15,
      2007).
  78
 Table of Contents
  10.20
            Common
      Stock Purchase Agreement, dated February 27, 2007, between Registrant and
      Lo Chun Yu Toby (incorporated herein by reference from Registrant’s
      Current Report on Form 8-K filed with the SEC on February 27,
      2007).10.21
            Business
      Joint Venture Agreement, between Wuhan Xin An Technology Development
      Company Limited and Shanghai Quo Advertising Company Limited to manage LED
      outdoor project in Wuhan (incorporated herein by reference from
      Registrant’s Current Report on Form 8-K filed with the SEC on March 1,
      2007).14.1
            Code
      of Business Conduct and Ethics for Network CN Inc. as approved by the
      Board of Directors as of December 31, 2003, is incorporated herein by
      reference from Registrant’s Annual Report on Form 10-KSB filed with the
      SEC on April 13, 2005.21.1
            Subsidiaries
      of the Registrant. *23.1
            Consent
      of independent auditors Webb & Company, P.A. *23.2
            Consent
      of independent auditors Jimmy C.H. Cheung & Co. *24.1
            Power
      of Attorney (included in the Signatures section of this
      report).31.1
            Rule
      13a-15(e)/15d-15(e) Certification by the Chief Executive Officer.
      *31.2
            Rule
      13a-15(e)/15d-15(e) Certification by the Chief Financial Officer.
      *32.1
            Certification
      by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
      *32.2
            Certification
      by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
      *
 *
Filed herewith.
  ITEM14.             PRINCIPAL ACCOUNTANT FEES AND
SERVICES
  
 Webb
& Company, P.A., Certified Public Accountants, and Jimmy C.H. Cheung &
Co., Certified Public Accountants are our Independent Registered Public
Accountants engaged to examine our financial statements for the fiscal years
ended December 31, 2007 and December 31, 2006. The following table shows
the fees that we paid or accrued for the audit and other services provided by
Webb & Company, P.A., and Jimmy C.H. Cheung & Co., for the fiscal years
ended December 31, 2007 and 2006.
 Fee
      Category
              
              2007
              
              
              2006Audit
      Fees
              
              $
              150,597
              
              
              $
              105,427Audit-Related
      Fees
              
              $
              --
              
              
              $
              --Tax
      Fees
              
              $
              --
              
              
              $
              --All
      Other
      Fees
              
              $
              --
              
              
              $
              --
 79
 Table of Contents
  Audit
Fees
  This
category includes the audit of our annual financial statements, review of
financial statements included in our annual and quarterly reports and services
that are normally provided by the independent registered public accounting firms
in connection with engagements for those fiscal years. This category also
includes advice on audit and accounting matters that arose during, or as a
result of, the audit or the review of interim financial statements.
  Audit-Related
Fees
  This category consists of assurance and
related services by the independent registered public accounting firms that are
reasonably related to the performance of the audit or review of our financial
statements and are not reported above under “Audit Fees”. The services for the
fees disclosed under this category include services relating to our registration
statement and consultation regarding our correspondence with the
SEC.
  Tax Fees
  This
category consists of professional services rendered for tax compliance and tax
advice.
  All Other Fees
  This category consists of fees for
other miscellaneous items
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report on Form 10-KSB to be
signed on its behalf by the undersigned, thereunto duly authorized.
  Date:
March 13, 2008
  NETWORK
      CN INC.By:
      /s/ Godfrey HuiGodfrey
      HuiChief
      Executive Officer
  
 POWER OF ATTORNEY
  Each
person whose signature appears below appoints Godfrey Hui his or her
attorney-in-fact, with full power of substitution and re-substitution, to sign
any and all amendments to this report on Form 10-KSB of Network CN Inc., and to
file them, with all their exhibits and other related documents, with the
Securities and Exchange Commission, ratifying and confirming all that their
attorney-in-fact and agent or his or her substitute or substitutes may lawfully
do or cause to be done by virtue of this appointment. In accordance with the
Exchange Act, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated:
 80
 Table of Contents
  Name
            
            Title
            Date/s/
      Godfrey Hui
            
            Director
      and Chief Executive Officer
            March
      13, 2008Godfrey
      Hui/s/
      Daley Mok
            
            Director
      and Chief Financial Officer
            March
      13, 2008Daley
      Mok/s/
      Daniel So
            
            Managing
      Director
            March
      13, 2008Daniel
      So/s/
      Stanley Chu
            
            Director
            March
      13, 2008Stanley
      Chu/s/
      Peter Mak
            
            Director
            March
      13, 2008Peter
      Mak
   
 81
 Table of Contents
  APPENDIX
A
  NETWORK CN INC. AND
SUBSIDIARIES
 CONSOLIDATED FINANCIALSTATEMENTS
  CONTENTS
  PAGES
              F-1–F-2
              REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRMSPAGE
              F-3
              CONSOLIDATED
      BALANCE SHEET AS OF DECEMBER 31, 2007PAGE
              F-4
              CONSOLIDATED
      STATEMENTS OF OPERATIONSAND
      COMPREHENSIVE LOSSFOR
      THE YEARS ENDED DECEMBER 31, 2007AND
      2006PAGE
              F-5
              CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31,
      2007AND
      2006PAGE
              F-6
              CONSOLIDATED
      STATEMENTS OFCASH
      FLOWS FOR THE YEARS ENDED DECEMBER 31, 2007AND
      2006PAGES
              F-7–F-32
              NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTSFOR
      THE YEARS ENDEDDECEMBER
      31, 2007AND
      2006
        Table of Contents
   
  REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
   To the Board of Directors of:
 Network CN Inc. and
Subsidiaries
  We have audited the accompanying
consolidated balance sheet of Network CN Inc. and subsidiaries as of December
31, 2007, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows
for the years then ended
December 31, 2007and 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit
the financial statements of
certain foreign, wholly owned or majority owned subsidiaries, which statements
reflect total assets of $25.0millionand $10.5 millionand total revenue of $27.6millionand $4.4 million for 2007 and 2006
respectively. Those
statements were audited by
other accountants whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for the certain foreign, wholly
owned or majority owned subsidiaries, is based on the reports of other
accountants.
  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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
  In our opinion, the consolidated
financial statements referred to above present fairly in all material respects,
the financial position of
Network CN Inc. and subsidiaries as of December 31, 2007and the results of its operations and
its cash flows for the years ended December 31, 2007and2006inconformity with accounting principles
generally accepted in theUnited States ofAmerica.
   /s/ WEBB
& COMPANY, P.A.
 WEBB & COMPANY,
P.A.
 Certified Public
Accountants
  Boynton Beach,Florida
 March 12, 2008
   1501 Corporate Drive, Suite150•Boynton Beach,FL33426
 Telephone: (561) 752-1721 • Fax: (561)
734-8562
 www.cpawebb.com
  F-1
 Table of Contents
  Jimmy C.H. Cheung &
      Co
                Certified Public
      Accountants
                (A member of Kreston
      International)
              
              Registered with the Public
      Company
                Accounting Oversight
      Board
   REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
  To the Board of Directors
of:
 Network CN Inc.
  We have audited the
consolidated balance sheet of NCN Group Limited and subsidiaries as of December
31, 2007 and the related statements of operations, stockholders’ equity and cash
flows for the years ended December 31, 2007 and 2006. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
  We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits of the financial statements 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 NCN Group Limited and subsidiaries as of December 31,
2007 and the results of its operations and its cash flows for the years ended
December 31, 2007 and 2006, in conformity with accounting principles generally
accepted in the United States of America.
 
  /s/ Jimmy
C.H. Cheung & Co
 JIMMY C.H. CHEUNG &
CO
 Certified Public
Accountants
  Hong Kong
 Date: February 29, 2008
  
 1607 Dominion Centre, 43
      Queen’s Road East, Wanchai, Hong
      Kong
                Tel: (852) 25295500 Fax: (852)
      28651067 Email: jchc@krestoninternational.com.hk
                Website:
      http://www.jimmycheungco.com
  F-2
 Table of Contents
  NETWORK CN INC. AND
SUBSIDIARIES
 CONSOLIDATED BALANCE
SHEET
 AS OF
DECEMBER 31, 2007
  ASSETSCurrent
      Assets
              
              NoteCash
              
              
              
              
              $
              2,233,528Accounts receivable, net
              
              
              4
              
              
              
              1,093,142Prepayments for advertising operating
      rights
              
              
              
              
              
              
              13,636,178Prepaid expenses and other current
    assets
              
              
              
              
              
              
              3,101,699Total Current Assets
              
              
              
              
              
              
              20,064,547Equipment,
      Net
              
              
              5
              
              
              
              257,403Intangible
      Rights, Net
              
              
              6
              
              
              
              6,114,550Deferred
      Charges, Net
              
              
              7
              
              
              
              670,843TOTAL
      ASSETS
              
              
              
              
              
              $
              27,107,343LIABILITIES AND
      STOCKHOLDERS’ EQUITYCurrent
      LiabilitiesAccounts payable, accrued expenses and other
      payables
              
              
              8
              
              
              $
              3,490,586Current liabilities from discontinued
    operations
              
              
              15
              
              
              
              3,65512%
      convertible promissory note, net
              
              
              10
              
              
              
              4,740,796Total Current Liabilities
              
              
              
              
              
              
              8,235,0373%
      Convertible Promissory Notes Due 2011, NET
              
              
              10
              
              
              
              12,545,456TOTAL
      LIABILITIES
              
              
              
              
              
              
              20,780,493COMMITMENTS
      AND CONTINGENCIES
              
              
              11MINORITY
      INTERESTS
              
              
              
              
              
              
              347,874STOCKHOLDERS’
      EQUITYPreferred stock, $0.001 par value, 5,000,000
      sharesnone issued and outstanding
              
              
              
              
              
              
              -Common stock, $0.001 par value, 800,000,000
      shares69,151,608 shares issued and
      outstanding
              
              
              
              
              
              
              69,152Additional paid-in capital
              
              
              12
              
              
              
              35,673,586Accumulated deficit
              
              
              
              
              
              
              (29,829,059
              )Accumulated other comprehensive income
              
              
              
              
              
              
              65,297TOTAL
      STOCKHOLDERS’ EQUITY
              
              
              
              
              
              
              5,978,976TOTAL LIABILITIES AND
      STOCKHOLDERS’ EQUITY
              
              
              
              
              
              $
              27,107,343
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-3
 Table of Contents
  NETWORK CN INC. AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF
OPERATIONSANDCOMPREHENSIVE LOSS
 FOR THE
YEARS ENDED DECEMBER 31, 2007AND
2006
 
 Note
              
              
              2007
              
              
              2006REVENUESTravelservices
              
              
              
              
              $
              26,140,355
              
              
              $
              4,342,124Advertising services
              
              
              
              
              
              1,442,552
              
              
              
              -Related parties
              
              
              13
              
              
              
              -
              
              
              
              100,478Total Revenues
              
              
              
              
              
              
              27,582,907
              
              
              
              4,442,602COSTS AND
      EXPENSESCost of travel services
              
              
              
              
              
              
              25,830,401
              
              
              
              4,231,952Cost of advertising services
              
              
              
              
              
              
              2,795,188
              
              
              
              -Professional fees
              
              
              
              
              
              
              5,612,810
              
              
              
              3,260,103Payroll
              
              
              
              
              
              
              4,098,842
              
              
              
              1,004,731Non-cash impairment charges
              
              
              6
              
              
              
              1,332,321
              
              
              
              214,600Other selling, general &
    administrative
              
              
              
              
              
              
              2,321,245
              
              
              
              804,204Total Costs and Expenses
              
              
              
              
              
              
              41,990,807
              
              
              
              9,515,590LOSS
      FROM OPERATIONS
              
              
              
              
              
              
              (14,407,900
              )
              
              
              (5,072,988
              )OTHER
    INCOMEInterest income
              
              
              
              
              
              
              26,811
              
              
              
              38,395Other income
              
              
              
              
              
              
              9,284
              
              
              
              23,334Total Other Income
              
              
              
              
              
              
              36,095
              
              
              
              61,729INTEREST
      EXPENSEAmortization of deferred charges and debt
      discount
              
              
              10
              
              
              
              4,866,351
              
              
              
              -Interest expense
              
              
              
              
              
              
              122,803
              
              
              
              1,416Total Interest Expense
              
              
              
              
              
              
              4,989,154
              
              
              
              1,416NET
      LOSS BEFORE INCOME TAXES AND MINORITY INTERESTS
              
              
              
              
              
              
              (19,360,959
              )
              
              
              (5,012,675
              )Income taxes
              
              
              17
              
              
              
              (7,668
              )
              
              
              (6,984
              )Minority interests
              
              
              
              
              
              
              62,048
              
              
              
              24,657NET LOSS FROM CONTINUING
      OPERATIONS
              
              
              
              
              
              
              (19,306,579
              )
              
              
              (4,995,002
              )DISCONTINUED
      OPERATIONSLoss from discontinued operations
              
              
              15
              
              
              
              -
              
              
              
              (53,574
              )Gain on disposal of an affiliate
              
              
              15
              
              
              
              -
              
              
              
              579,870NET
      INCOME FROM
                DISCONTINUED
      OPERATIONS
              
              
              
              
              
              
              -
              
              
              
              526,296NET
      LOSS
              
              
              
              
              
              
              (19,306,579
              )
              
              
              (4,468,706
              )OTHER
      COMPREHENSIVE INCOMEForeign currency translation gain
              
              
              
              
              
              
              61,817
              
              
              
              3,480COMPREHENSIVE
      LOSS
              
              
              
              
              
              $
              (19,244,762
              )
              
              $
              (4,465,226
              )NET
      INCOME (LOSS) PER COMMON SHARE – BASIC AND DILUTEDLoss
      per common share from continuing operations
              
              
              14
              
              
              $
              (0.28
              )
              
              $
              (0.10
              )Income
      per common share from discontinued operations
              
              
              14
              
              
              
              -
              
              
              
              0.01Net
      loss per common share – basic and diluted
              
              
              14
              
              
              $
              (0.28
              )
              
              $
              (0.09
              )WEIGHTED
      AVERAGE SHARES OUTSTANDING – BASIC AND DILUTED
              
              
              14
              
              
              
              68,556,081
              
              
              
              52,489,465
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-4
 Table of Contents
 NETWORK CN INC. AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’EQUITY
 FOR THE
YEARS ENDED DECEMBER 31, 2007AND
2006
 Common
StockShare
                
                
                
                Amount
                
                
                
                Additional Paid-In
      Capital
                
                
                
                Deferred
                  Stock-Based
      Compensation
                
                
                
                Accumulated
                  Deficit
                
                
                
                AccumulatedOther
                  Comprehensive
      Income
                
                
                
                TotalBalance as of December 31,
      2005
                
                
                21,846,885
                
                
                $
                21,847
                
                
                $
                8,087,078
                
                
                $
                (66,355
                )
                
                $
                (6,053,774
                )
                
                $
                -
                
                
                $
                1,988,796Issuance of stock for private
      placement
                
                
                42,086,333
                
                
                
                42,086
                
                
                
                9,615,959
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9,658,045Issuance of stock for acquisition
      of a subsidiary
                
                
                362,500
                
                
                
                363
                
                
                
                102,587
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                102,950Issuance of stock for service
      rendered by consultants and legal counsel
                
                
                3,005,000
                
                
                
                3,005
                
                
                
                4,873,995
                
                
                
                (2,845,000
                )
                
                
                -
                
                
                
                -
                
                
                
                2,032,000Contribution from a
      stockholder
                
                
                -
                
                
                
                -
                
                
                
                16,781
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                16,781Stock-based compensation for stock
      options/warrants issued to consultant and legal counsel for
      service
                
                
                -
                
                
                
                -
                
                
                
                25,551
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                25,551Amortization of deferred
      stock-based compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                66,355
                
                
                
                -
                
                
                
                -
                
                
                
                66,355Translation
      adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,480
                
                
                
                3,480Net loss for the
      year
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (4,468,706
                )
                
                
                -
                
                
                
                (4,468,706
                )Balance as of December 31,
      2006
                
                
                67,300,718
                
                
                $
                67,301
                
                
                $
                22,721,951
                
                
                $
                (2,845,000
                )
                
                $
                (10,522,480
                )
                
                $
                3,480
                
                
                $
                9,425,252Issuance of stock for private
      placement
                
                
                500,000
                
                
                
                500
                
                
                
                1,499,500
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,500,000Issuance of stock for acquisition
      of a subsidiary
                
                
                300,000
                
                
                
                300
                
                
                
                843,300
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                843,600Issuance of stock for service
      rendered by directors and officers
                
                
                607,260
                
                
                
                607
                
                
                
                166,227
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                166,834Issuance of stock for service
      rendered by consultants
                
                
                218,630
                
                
                
                219
                
                
                
                441,785
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                442,004Exercise of warrants by a
      consultant
                
                
                225,000
                
                
                
                225
                
                
                
                22,275
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                22,500Stock-based compensation for stock
      granted to directors, officers and employees for
      service
                
                
                -
                
                
                
                -
                
                
                
                2,378,380
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,378,380Stock-based compensation for stock
      option/warrants issued to consultants for service
                
                
                
                
                
                
                
                
                
                
                27,921
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                27,921Stock-based compensation for stock
      warrants issued to a placement agent for service
                
                
                -
                
                
                
                -
                
                
                
                21,305
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                21,305Amortization of deferred
      stock-based compensation
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,845,000
                
                
                
                -
                
                
                
                -
                
                
                
                2,845,000Value
      of warrants associated with convertible notes
                
                
                -
                
                
                
                -
                
                
                
                2,823,670
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,823,670Value of beneficial conversion
      feature of convertible notes to common stock
                
                
                -
                
                
                
                -
                
                
                
                4,727,272
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4,727,272Translation
      adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                61,817
                
                
                
                61,817Net loss for the
      year
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (19,306,579
                )
                
                
                -
                
                
                
                (19,306,579
                )Balance as of December 31,
      2007
                
                
                69,151,608
                
                
                $
                69,152
                
                
                $
                35,673,586
                
                
                $
                -
                
                
                $
                (29,829,059
                )
                
                $
                65,297
                
                
                $
                5,978,976
 The accompanying notes are
an integral part of the consolidated financial statements.
  F-5
 Table of Contents
  NETWORK CN INC. AND
SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH
FLOWS
 FOR THE
YEARS ENDED DECEMBER 31, 2007AND
2006
 
 2007
              
              
              2006CASH FLOWS FROM OPERATING
      ACTIVITIES:Net
      loss
              
              $
              (19,306,579
              )
              
              $
              (4,468,707
              )Add:
      Loss from discontinued operations
              
              
              -
              
              
              
              53,574(19,306,579
              )
              
              
              (4,415,133
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization:Equipment
      and intangible rights
              
              
              528,635
              
              
              
              289,148Deferred
      charges and debt discount
              
              
              4,866,351
              
              
              
              -Stock-based
      compensation for service
              
              
              5,755,693
              
              
              
              2,123,906Allowance
      for doubtful debts
              
              
              10,716
              
              
              
              15,542Non-cash
      impairment charges
              
              
              1,332,321
              
              
              
              214,600Loss
      on disposal of equipment
              
              
              5,350
              
              
              
              -Gain
      on disposal of subsidiaries / affiliate
              
              
              (10,096
              )
              
              
              (579,870
              )Minority
      interests
              
              
              (62,048
              )
              
              
              (8,081
              )Changes
      in operating assets and liabilities, net of effects from
      acquisitions:Accounts
      receivable
              
              
              (614,589
              )
              
              
              (134,659
              )Prepayments
      for advertising operating rights
              
              
              (13,636,178
              )
              
              
              -Prepaid
      expenses and other current assets
              
              
              (2,375,340
              )
              
              
              (7,306
              )Accounts
      payable, accrued expenses and other payables
              
              
              2,185,548
              
              
              
              276,626Net
      cash used in continuing operations
              
              
              (21,320,216
              )
              
              
              (2,225,227
              )Net
      cash used in discontinued operations
              
              
              -
              
              
              
              (93,139
              )Net
      cash used in operating activities
              
              
              (21,320,216
              )
              
              
              (2,318,366
              )CASH FLOWS FROM INVESTING
      ACTIVITIES:Proceeds
      from disposal of an affiliate
              
              
              -
              
              
              
              3,000,000Proceeds
      from disposal of subsidiaries
              
              
              551
              
              
              
              -Proceeds
      from disposal of equipment
              
              
              2,668
              
              
              
              -Purchase
      of equipment
              
              
              (207,371
              )
              
              
              (90,888
              )Purchase
      of intangible right
              
              
              -
              
              
              
              (6,000,000
              )Net
      cash used in acquisition of subsidiaries, net
              
              
              (319,167
              )
              
              
              (807,959
              )Net cash used in investing
      activities
              
              
              (523,319
              )
              
              
              (3,898,847
              )CASH FLOWS FROM FINANCING
      ACTIVITIES:Decrease
      in amounts due to related parties
              
              
              -
              
              
              
              (639,130
              )Proceeds
      from issuance of common stock in private placement, net of
      costs
              
              
              1,500,000
              
              
              
              9,658,045Proceeds
      from exercise of warrants issued for service
              
              
              22,500
              
              
              
              -Proceeds
      from issuance of 12% convertible promissory note, net of
    costs
              
              
              4,900,000
              
              
              
              -Proceeds
      from issuance of 3% convertible promissory notes, net of
    costs
              
              
              14,700,000
              
              
              
              -Repayment
      of capital lease obligation
              
              
              (3,120
              )
              
              
              (9,359
              )Contribution
      from a stockholder
              
              
              -
              
              
              
              16,781Net cash provided by financing
      activities
              
              
              21,119,380
              
              
              
              9,026,337EFFECT
      OF EXCHANGE RATE CHANGES ON CASH
              
              
              59,160
              
              
              
              3,480NET
      (DECREASE) INCREASE IN CASH
              
              
              (664,995
              )
              
              
              2,812,604CASH,
      BEGINNING OF PERIOD
              
              
              2,898,523
              
              
              
              85,919CASH, END OF
      PERIOD
              
              $
              2,233,528
              
              
              $
              2,898,523SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the year for:Income
      taxes
              
              $
              -
              
              
              $
              19,450Interest
      paid for 12% convertible promissory note
              
              $
              78,934
              
              
              $
              -Interest
      paid for capital lease arrangement
              
              $
              421
              
              
              $
              5,423Non-cash
      activities:Issuance
      of common stock for acquisition of a subsidiary (Note 9)
              
              $
              843,600
              
              
              $
              102,950
  The
accompanying notes are an integral part of the consolidated financial
statements.
  F-6
 Table of Contents
  NETWORK CN INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
 FOR THE
YEARS ENDED DECEMBER 31, 2007AND
2006
 
 NOTE
      1
              ORGANIZATIONAND
      PRINCIPAL ACTIVITIESNetwork
      CN Inc., originally incorporated on September 10, 1993, is a Delaware
      company with headquarters in the Hong Kong Special Administrative Region,
      the People’s Republic of China (“the PRC” or “China”). Network CN Inc. and
      its subsidiaries (collectively “NCN” or the “Company”) were operated by
      different management teams in the past, under different operating names,
      pursuing a variety of business ventures. The most recent former name was
      Teda Travel Group, Inc. On August 1, 2006, the Company was renamed from
      “Teda Travel Group, Inc.” to “Network CN Inc.” in order to better reflect
      the Company’s vision under the new and expanded management team. The
      Company is mainly engaged in building a nationwide information and
      entertainment network in China through its businesses in Travel Network
      and Media Network.
                
                To
      take advantage of China's booming travel market, in June 2006, the
      Company, through its subsidiary NCN Management Services Limited ("NCN
      Management Services"), acquired 55% of the equity interests of Tianma
      International Travel Service Co., Ltd ("Tianma"), a travel agency
      headquartered in Guangdong Province in the PRC. In order to comply with
      certain PRC laws relating to foreign entities' ownership of travel
      agencies in the PRC, the former owner of Tianma holds 55% of the equity
      interests in Tianma in trust for the benefit of NCN Management Services.
      The laws of the PRC govern the agreements by which the Company acquired
      Tianma and by which the former owner of Tianma holds such equity interest
      in trust. Through the contractual arrangements, NCN Management Services is
      deemed the primary beneficiary of Tianma and Tianma being deemed a
      subsidiary of NCN Management Services under the requirements of FASB
      Interpretation No. 46 (Revised), "Consolidation of Variable Interest
      Entities" ("FIN 46(R)").
                  
                  PRC
      regulations currently limit foreign ownership of companies that provide
      advertising services. In order to help the Company to grow its advertising
      business in China, on January 31, 2007, pursuant to a Purchase and Sales
      Agreement and Trust Agreements, Crown Winner International Limited ("Crown
      Winner), a wholly-owned subsidiary of the Company, is deemed the primary
      beneficiary of Shanghai Quo Advertising Company Limited ("Quo
      Advertising") resulting in Quo Advertising being deemed a subsidiary of
      Crown Winner under the requirements of FIN 46(R). On September 1, 2007,
      Quo Advertising acquired 51% of the equity interests of Xuancaiyi
      (Beijing) Advertising Company Limited ("Xuancaiyi"), an advertising agency
      in Beijing, China.
                  
                  Accordingly,
      the effect of the above contractual arrangements is to give the Company
      effective control of Tianma and Quo Advertising and to allow the Company
      to consolidate the results of Tianma, Quo Advertising and Xuancaiyi
      pursuant to FIN 46(R).
                Details
      of the Company’s principal subsidiaries as of December 31, 2007 are
      described in Note 3 – Subsidiaries.NOTE2
              SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES(A)Basis
      of Presentation
                
                The
      consolidated financial statements of the Company have been prepared in
      accordance withaccountingprinciples
      generally accepted intheUnited
      States ofAmerica.
                
                (B)
      Principles of Consolidation
                
                The
      consolidated financial statements include the financial statements of
      Network CN Inc., its subsidiaries and its variable interest entities
      (VIEs). In May 2006, the management of the Company decided to discontinue
      the business and wind down the operations of Teda (Beijing) Hotels
      Management Limited, a wholly owned subsidiary which has been accounted for
      as discontinued operations since the fourth quarter of 2006 and the wind
      down process was yet to be completed as of December 31, 2007. All
      significant intercompany transactions and balances have been eliminated
      upon consolidation.
                
                In
      accordance with Interpretation No. 46R, Consolidation of Variable Interest
      Entities (“FIN 46R”), VIEs are generally entities that lack sufficient
      equity to finance their activities without additional financial support
      from other parties or whose equity holders lack adequate decision making
      ability. All VIEs with which the Company is involved must be evaluated to
      determine the primary beneficiary of the risks and rewards of the VIE. The
      primary beneficiary is required to consolidate the VIEs for financial
      reporting purposes. The Company has concluded that Tianma and Quo
      Advertising are VIEs and that the Company is the primary beneficiary.
      Under the requirements of FIN 46R the Company consolidated the financial
      statements of Tianma and Quo Advertising as VIEs of the
      Company.(C)
      Use
      of Estimates
                
                In
      preparing financial statements in conformity with generally accepted
      accounting principles, management is required to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      the disclosure of contingent assets and liabilities as of the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reported period. Actual results could differ from those
      estimates. Differences from those estimates are reported in the period
      they become known and are disclosed to the extent they are material to the
      financial statements taken as a whole.
                
                (D)
      CashandCashEquivalents
                
                Cash
      includes cash on hand, cash accounts, and interest bearing savings
      accounts placed with banks and financial institutions. For purposes of the
      cash flow statements, the Company considers 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, 2007 and 2006, the Company had
      no cash equivalents.
   F-7
 Table of Contents
 (E)
      Equipment,Net
                
                Equipment
      is stated at cost, less accumulated depreciation. Depreciation is provided
      using the straight-line method over the estimated useful life of the
      assets, which is from three to five years. When equipment is retired or
      otherwise disposed of, the related cost and accumulated depreciation are
      removed from the respective accounts, and any gain or loss is reflected in
      the statement of operations. Repairs and maintenance costs on equipment
      are expensed as incurred.
                
                (F)IntangibleRights,Net
                
                Intangible
      rights are stated at cost, less accumulated amortization and provision for
      impairment loss. Intangible rights that have indefinite useful lives are
      not amortized. Other intangible rights with finite useful lives are
      amortized on straight-line basis over their estimated useful lives of 16
      months to 20 years. The amortization methods and estimated useful lives of
      intangible rights are reviewed regularly.
                
                (G)Impairment
      ofLong-Lived
      Assets
                
                Long-lived
      assets, including intangible rights with definite lives, are reviewed for
      impairment whenever events or changes in circumstance indicate that the
      carrying amount of the assets may not be recoverable. An intangible right
      that is not subject to amortization is reviewed for impairment annually or
      more frequently whenever events or changes in circumstances indicate that
      the carrying amount of the asset may not be recoverable. An impairment
      loss is recognized when the carrying amount of a long-lived asset and
      intangible right exceeds the sum of the undiscounted cash flows expected
      to be generated from the asset’s use and eventual disposition. An
      impairment loss is measured as the amount by which the carrying amount
      exceeds the fair value of the asset calculated using a discounted cash
      flow analysis.
                
                (H)Deferred
      Charges, Net
                
                Deferred
      charges are fees and expenses directly related to an issuance of
      convertible promissory notes, including placement agents’ fee. Deferred
      charges are capitalized and amortized over the life of the convertible
      promissory notes using the effective interest method. Amortization of
      deferred charges is included in interest expense on the consolidated
      statements of operations while the unamortized balance is included in
      deferred charges on the consolidated balance
  sheet.
  F-8
 Table of Contents
  (I)Convertible
      Promissory NotesandWarrants
                  
                  In
      2007, the Company issued 12% convertible promissory note and warrants and
      3% convertible promissory notes and warrants. The Company allocated the
      proceeds of the convertible promissory notes between convertible
      promissory notes and the financial instruments related to warrants
      associated with convertible promissory notes based on their relative fair
      values at commitment date. The fair value of the financial instruments
      related to warrants associated with convertible promissory notes was
      determined utilizing the Black-Scholes option pricing model and the
      respective allocated proceeds to warrants is recorded in additional
      paid-in capital. The embedded beneficial conversion feature associated
      with convertible promissory notes was recognized and measured by
      allocating a portion of the proceeds equal to the intrinsic value of that
      feature to additional paid-in capital in according to EITF Issue No.
      98-5,“Accounting for Convertible Securities with Beneficial Conversion Features
      or Contingently Adjustable Conversion Ratio” and EITF Issue No.
      00-27,“Application
      of Issue No. 98-5 to Certain Convertible Instruments”.
                  
                  The
      portion of debt discount resulting from allocation of proceeds to the
      financial instruments related to warrants associated with convertible
      promissory notes is being amortized to interest expense over the life of
      the convertible promissory notes, using the effective yield method. For
      portion of debt discount resulting from allocation of proceeds to the
      beneficial conversion feature, it is recognized as interest expenses over
      the minimum period from the date of issuance to the date of earliest
      conversion, using the effective yield method.
                  
                  (J)
      Revenue Recognition
                  
                  For
      hotel management services, the Company recognizes revenue in the period
      when the services are rendered and collection is reasonably
      assured.
                  
                  For
      tour services, the Company recognizes services-based revenue when the
      services have been performed. Guangdong Tianma International Travel
      Service Co., Ltd (“Tianma”) offers independent leisure travelers bundled
      packaged-tour products, which include both air-ticketing and hotel
      reservations. Tianma’s packaged-tour products cover a variety of domestic
      and international destinations.
                  
                  Tianma
      organizes inbound and outbound tour and travel packages, which can
      incorporate, among other things, air and land transportation, hotels,
      restaurants and tickets to tourist destinations and other excursions.
      Tianma books all elements of such packages with third-party service
      providers, such as airlines, car rental companies and hotels, or through
      other tour package providers and then resells such packages to its
      clients. A typical sale of tour services is as follows:
                  
                  1.    Tianma,
      in consultation with sub-agents, organizes a tour or travel package,
      including making reservations for blocks of tickets, rooms, etc. with
      third-party service providers. Tianma may be required to make deposits,
      pay all or part of the ultimate fees charged by such service providers or
      make legally binding commitments to pay such fees. For air-tickets, Tianma
      normally books a block of air tickets with airlines in advance and pays
      the full amount of the tickets to reserve seats before any tours are
      formed. The air tickets are usually valid for a certain period of time. If
      the pre-packaged tours do not materialize and are eventually not formed,
      Tianma will resell the air tickets to other travel agents or customers.
      For hotels, meals and transportation, Tianma usually pays an upfront
      deposit of 50-60% of the total cost. The remaining balance is then settled
      after completion of the
tours.
  F-9
 Table of Contents
 2.   
      Tianma, through its sub-agents, advertises tour and travel packages at
      prices set by Tianma and sub-agents.
                    
                    3.    Customers
      approach Tianma or its appointed sub-agents to book an advertised packaged
      tour.
                    
                    4.    The
      customers pay a deposit to Tianma directly or through its appointed
      sub-agents.
                    
                    5.    When
      the minimum required number of customers (which number is different for
      each tour based on the elements and costs of the tour) for a particular
      tour is reached, Tianma will contact the customers for tour confirmation
      and request full payment. All payments received by the appointed
      sub-agents are paid to Tianma prior to the commencement of the
      tours.
                    
                    6.   
      Tianma will then make or finalize corresponding bookings with outside
      service providers such as airlines, bus operators, hotels, restaurants,
      etc. and pay any unpaid fees or deposits to such providers.
                    
                    Tianma
      is the principal in such transactions and the primary obligor to the
      third-party providers, regardless of whether it has received full payment
      from its customers. In addition, Tianma is also liable to the customers
      for any claims relating to the tours, such as accidents or tour services.
      Tianma has adequate insurance coverage for accidental loss arising during
      the tours. The Company utilizes a network of sub-agents who operate
      strictly in Tianma’s name and can only advertise and promote the business
      of Tianma with the prior approval of Tianma.
                    
                    For
      advertising services, the Company recognizes revenue in the period when
      advertisements are either aired or published.
                    
                    (K)
      Stock-based Compensation
                    
                    In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Payment”, a revision to SFAS No. 123,“Accounting for Stock-Based Compensation”, and superseding APB
      Opinion No. 25, “Accounting
      for Stock Issued to Employees” and its related implementation
      guidance. Effective January 1, 2006, the Company adopted SFAS 123R, using
      a modified prospective application transition method, which establishes
      accounting for stock-based awards in exchange for employee services. Under
      this application, the Company is required to record stock-based
      compensation expense for all awards granted after the date of adoption and
      nonvested awards that were outstanding as of the date of adoption. SFAS
      123R requires that stock-based compensation cost is measured at grant
      date, based on the fair value of the award, and recognized in expense over
      the requisite services period.
                    
                    Common stock, stock
      options and warrants issued to other than employees or directors in
      exchange for services are recorded on the basis of their fair value, as
      required by SFAS No. 123R, which is measured as of the date required
      by EITF Issue 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees
      for Acquiring, or in Conjunction with Selling, Goods or Services”.
      In accordance with EITF 96-18, the non-employee stock options or
      warrants are measured at their fair value by using the Black-Scholes
      option pricing model as of the earlier of the date at which a
      commitment for performance to earn the equity instruments isreached (“performance
      commitment date”)
      or the date at which performance is complete (“performance
      completion date”).
      The stock-based compensation expenses are recognized on a straight-line
      basis over the shorter of the period over which services are tobe
      received or the vesting period. Accounting for non-employee stock options
      or warrants which involve only performance conditions when no performance
      commitment date or performance completion date has occurred as of
      reporting date requires measurement atthe
      equity instruments then-current fair value. Any subsequent changes in the
      market value of the underlying common stock are reflected in the expense
      recorded in the subsequent period in which that change
      occurs.
  F-10
 Table of Contents
   (L)
      Income Taxes
                  
                  The
      Company accounts for income taxes under SFAS No. 109, “Accounting
      for Income Taxes”. Under SFAS 109, deferred tax assets and
      liabilities are provided for the future tax effects attributable to
      temporary differences between the financial statement carrying amounts of
      assets and liabilities and their respective tax bases, and for the
      expected future tax benefits from items including tax loss carry
      forwards.
                  
                  Deferred
      tax assets and liabilities are measured using enacted tax rates expected
      to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or reversed. Under SFAS 109, the
      effect on deferred tax assets and liabilities of a change in tax rates is
      recognized in income in the period that includes the enactment
      date.
                  
                  (M)
      Comprehensive Income (Loss)
                  
                  The
      Company follows SFAS No. 130, “Reporting
      Comprehensive Income” for the reporting and display of its
      comprehensive income (loss) and related components in the financial
      statements and thereby reports a measure of all changes in equity of an
      enterprise that results from transactions and economic events other than
      transactions with the shareholders. Items of comprehensive income (loss)
      are reported in both the consolidated statement of operations and
      comprehensive loss and the consolidated statement of stockholders’
      equity.
                  
                  (N)
      Earnings (Loss) Per Common Share
                  
                  Basic
      earnings (loss) per common share are computed by dividing the net income
      (loss) attributable to holders of common stock by the weighted average
      number of shares of common stock outstanding during the period. Diluted
      earnings (loss) per share is computed by dividing net income (loss) by the
      weighted average number of common shares including the dilutive effect of
      common share equivalents then outstanding.
                  
                  The
      diluted net loss per share is the same as the basic net loss per share for
      the years ended December 31, 2007 and 2006 as all potential ordinary
      shares including stock options and warrants are anti-dilutive and are
      therefore excluded from the computation of diluted net loss per
      share.
   F-11
 Table of Contents
  (O)OperatingLeases
                  
                  Leases
      where substantially all the rewards and risks of ownership of assets
      remain with the leasingcompanyare
      accounted for as operating leases.Paymentsmade
      under operating leases are charged to the consolidated
      statements of operations on astraight-line
      basis over the lease period.
                  
                  (P)
      Foreign Currency Translation
                  
                  The
      assets and liabilities of the Company’s subsidiaries denominated in
      currencies other than United States (“U.S.”) dollars are translated into
      U.S. dollars using the applicable exchange rates at the balance sheet
      date. For statement of operations’ items, amounts denominated in
      currencies other than U.S. dollars were translated into U.S. dollars using
      the average exchange rate during the period. Equity accounts were
      translated at their historical exchange rates. Net gains and losses
      resulting from translation of foreign currency financial statements are
      included in the statements of stockholders’ equity as accumulated other
      comprehensive income (loss). Foreign currency transaction gains and losses
      are reflected in the statements of operations.
                  
                  (Q)
      Fair Value of Financial Instruments
                  
                  The
      carryingvalue
      of the Company’s
      financialinstruments,which
      consist of cash, accounts receivables, prepaid expenses
      and other current assets,accounts payable, accrued expenses and
      other payables,approximatesfair valuedue
      to the short-termmaturities.
                  
                  The carrying value
      of the Company’s financial instruments related to warrants associated with
      convertible promissory notes issued in 2007 is stated at a value being
      equal to the allocated proceeds of convertible promissory notes based on
      the relative fair value of notes and warrants. In the measurement of the
      fair value of these instruments, the Black-Scholes option pricing model is
      utilized, which is consistent with the Company’s historical valuation
      techniques. These derived fair value estimates are significantly affected
      by the assumptions used. The allocated value of the financial instruments
      related to warrants associated with convertible promissory notes is
      recorded as an equity, which does not require to mark-to-market as of each
      subsequent reporting period,
                  
                  (R)
      Concentration of Credit Risk
                  
                  The
      Companyplacesits
      cash with various financial institutions.The
      Company believes that no significant credit risk exists as these cash
      investments are made with high-credit-qualify
      financial institutions.
                  
                  All
      the revenue of the Company and a significant portion of the Company’s
      assets are generated and located in China. The Company’s business
      activities and accounts receivables are mainly from tour services and
      advertising services. Deposits are usually collected from customers in
      advance and the Company performs ongoing credit evaluation of its
      customers. The Company believes that no significant credit risk exists as
      credit loss.
  F-12
 Table of Contents
  (S)Segmental
      Reporting
                  
                  SFAS
      No. 131, “Disclosures
      about Segments of an Enterprise and Related Information”
      establishes standards for reporting information about operating segments
      on a basis consistent with the Company’s internal organization structure
      as well as information about geographical areas, business segments and
      major customers in financial statements. The Company’s operating segments
      are organized internally primarily by the type of services rendered. In
      2007, the Company changed their operating segments as a result of change
      of internal organization structure by management. It is the management’s
      view that the services rendered by the Company are of three operating
      segments: Media Network, Travel Network and Investment Holding in
      2007.
                  
                  (T)
      Recent Accounting Pronouncements
                  
                  In
      September 2006, FASB issued SFAS 157,“Fair Value Measurements”. This statement defines fair value and
      establishes a framework for measuring fair value in generally accepted
      accounting principles. More precisely, this statement sets forth a
      standard definition of fair value as it applies to assets or liabilities,
      the principal market (or most advantageous market) for determining fair
      value (price), the market participants, inputs and the application of the
      derived fair value to those assets and liabilities. The effective date of
      this pronouncement is for all full fiscal and interim periods beginning
      after November 15, 2007. The Company is currently evaluating the
      impact of adopting SFAS 157 on its financial statements and related
      disclosures.
                  
                  In
      February 2007, the FASB issued SFAS No. 159, “The
      Fair Value Option for Financial Assets and Financial Liabilities”
      which permit entities to choose to measure many financial instruments and
      certain other items at fair value that are not currently required to be
      measured at fair value. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007. The Company is currently evaluating the
      impact of adopting SFAS 159 on its financial statements and related
      disclosures.
                  
                  In
      December 2007, the FASB issued SFAS No. 141 (Revised),“Business
      Combinations”(“SFAS No.141
      (R)”),
      replacing SFAS No. 141,“Business
      Combinations”(“SFAS No.141”),
      and SFAS No. 160,“Noncontrolling
      Interests in Consolidated
      Financial Statements—an
      Amendment of ARB No.51”.
      SFAS No. 141(R) retainsthe
      fundamental requirements of SFAS No. 141, broadens its scope by
      applying the acquisition method to all transactions and other events in
      which
      one entity obtains control over one or more other businesses, and
      requires, among other things, thatassets
      acquired and liabilities assumed be measuredatfair
      value as of the acquisition date,
      thatliabilities
      related
      to contingent consideration
      berecognizedatthe
      acquisition date
      and re-measuredatfair
      value in each subsequent reporting period, thatacquisition-related
      costs be expensed as incurred, and thatincome
      be recognized if the fair value of the net assets acquired exceeds the
      fair valueof
      the consideration
      transferred. SFAS No. 160 establishes accounting and reporting
      standards for noncontrolling
      interests (i.e. minority interests) in a subsidiary, including changes in
      a parent’s
      ownership interest in a subsidiary and requires, among other
      things, thatnoncontrolling
      interests in subsidiaries be classified as a separate
      component of equity. Except for the presentation
      and disclosure requirements of SFAS No. 160, which are to be
      applied retrospectively for all periods presented,
      SFAS No.141
      (R) and SFAS No. 160 are to be applied prospectively in
      financial statements
      issued for fiscal years beginning after December 15, 2008.The
      Company iscurrentlyassessing
      the impactof
      adoptingSFAS No. 141
      (R)andSFAS No. 160on
      its financial statements
      and related
disclosures.
 F-13
 Table of Contents
  NOTE
      2
              RECLASSIFICATIONCertain
      prior year amounts have been reclassified to conform to the current
      period’s presentation. The reclassification did not have an effect on
      total revenues, total expenses, loss from operations, net loss and net
      loss per share.
  NOTE3
              SUBSIDIARIESDetails
      of the Company’s principal consolidated subsidiaries as of December 31,
      2007 were as follows:Name
              Place
      of
                incorporation
              Ownership
                interest
                attributable to
                the Company
              Principal activitiesNCN Group Limited
              British
      Virgin Islands
              100%
              Investment
      holdingNCN Media Services Limited
              British
      Virgin Islands
              100%
              Investment
      holdingNCN Management Services Limited
              British
      Virgin Islands
              100%
              Investment
      holdingCrown Winner International Limited
              Hong
      Kong
              100%
              Investment
      holdingCityhorizon Limited
              Hong
      Kong
              100%
              Investment
      holdingNCN Group Management Limited
              Hong
      Kong
              100%
              Provision
      of administrative and management servicesNCN Huamin Management Consultancy (Beijing) Company
Limited
              The
      PRC
              100%
              Provision
      of administrative and management servicesShanghai Quo Advertising Company Limited
              The
      PRC
              100%
              Provision
      of advertising servicesXuancaiyi (Beijing) Advertising Company Limited
              The
      PRC
              51%
              Provision
      of advertising servicesGuangdong Tianma International Travel Service Co., Ltd.
              The
      PRC
              55%
              Provision
      of tour servicesNCN Landmark International Hotel Group Limited
              British
      Virgin Islands
              99.9%
              Provision
      of hotel management servicesBeijing NCN Landmark Hotel Management Limited
              The
      PRC
              99.9%
              Provision
      of hotel management servicesTeda (Beijing) Hotels Management Limited
              The
      PRC
              100%
              Dormant
      and undergo wind down processNCN Asset Management Services Limited
              British
      Virgin Islands
              100%
              DormantNCN Travel Services Limited
              British
      Virgin Islands
              100%
              DormantNCN Financial Services Limited
              British
      Virgin Islands
              100%
              DormantNCN
      Hotels Investment Limited
              British
      Virgin Islands
              100%
              DormantNCN
      Pacific Hotels Limited
              British
      Virgin Islands
              100%
              DormantLinkrich
      Enterprise Advertising and Investment Limited
              Hong
      Kong
              100%
              DormantRemarks:
                1)
      The Company disposed of Know Win Investments Inc. and Simple Win Limited
      in the fourth quarter of 2007 and recorded a gain of $10,096
      accordingly.
                
                2)
      The Company acquired Shanghai Quo Advertising Company Limited and Linkrich
      Enterprise Advertising and Investment Limited in 2007. In addition, the
      Company also acquired 51% of the equity interest of Xuancaiyi (Beijing)
      Advertising Company Limited in 2007. The Company also established its
      wholly owned subsidiary, Cityhorizon Limited, in 2007.
  F-14
 Table of Contents
  NOTE4
              ACCOUNTS
      RECEIVABLE,
      NETAccounts
      receivable,
      net as of December 31, 2007 consisted of the following:
  Accounts
      receivable
              
              $
              1,093,142Less:
      allowance for doubtfuldebts
              
              
              -Total
              
              $
              1,093,142
   For
      the years ended December 31, 2007and
      2006,
      the Company recorded a provision for doubtfuldebtsfor
      accounts receivableof$niland
      $15,542 respectively.NOTE
      5
                EQUIPMENT,
      NETEquipment, netas of December 31,
      2007consisted of the
      following:
 Office
      equipment
                
                $
                315,367Furniture and
      fixtures
                
                
                75,177Less: accumulated depreciation
                
                
                (133,141
                )Total
                
                $
                257,403
  Depreciation
      expenses for the years ended December 31, 2007and
      2006amounted
      to$56,603and
      $29,926respectively.NOTE
      6
                  INTANGIBLERIGHTS,
      NETThe following table set forth
      information for intangible rights subject to amortization and intangible
      right not subject to
      amortizationas of
      December 31, 2007:
  F-15
 Table of Contents
 Amortized
      intangible rightsGross
      carrying amount
            
            $
            7,825,267Less:
      accumulated amortization
            
            
            (999,106
            )Less:
      provision for impairment loss
            
            
            (711,611
            )Amortized
      intangible rights, net
            
            
            6,114,550Unamortized
      intangible rightGross
      carrying amount
            
            
            815,902Less:
      provision for impairment
            
            
            (815,902
            )Unamortized
      intangible right, net
            
            
            -Intangible
      rights, net
            
            $
            6,114,550
   Total
amortization expense of intangible rights of the Company for the years ended
December 31, 2007 and 2006 amounted to $472,032 and $259,216 respectively and is
expected to be as follows over the next five
years:
  Fiscal
      yearsending
      December 31,2008
            
            $
            739,5502009
            
            
            300,0002010
            
            
            300,0002011
            
            
            300,0002012
            
            
            300,000Thereafter
            
            
            4,175,000$
            6,114,550
  In 2007,
the Company performed an impairment review on its intangible rights and recorded
an aggregate impairment loss of $1,332,321 for the intangible rights of Shanghai
Quo Advertising Company Limited (“Quo Advertising”) and Tianma for the year
ended December 31, 2007.
  The
Company compared the undiscounted cash flows to the carrying value of Quo
Advertising’s intangible right as a result of the non-LED business of Quo
Advertising is shrinking and recording a continuous operating loss. The Company
determined that the intangible right of Quo Advertising which associated with
non-LED advertising business should be fully provided with impairment loss. An
impairment loss of $516,419 included in non-cash impairment charges on the
consolidated statements of operation for the year ended December 31, 2007 was
recorded accordingly.
  For the
intangible right of Tianma, which associated with operating right to conduct
tour business, the Company compared the undiscounted cash flows to the carrying
values of Tianma’s intangible right as a result of continuous operating loss
recorded by Tianma . The Company has determined the intangible right should be
fully provided with impairment loss based on discounted cash flow model.
Accordingly, the Company recorded an impairment loss of $815,902 which was
included in non-cash impairment charges on the consolidated statements of
operation for the year ended December 31, 2007 accordingly.
  F-16
 Table of Contents
  NOTE
      7
            DEFERRED
      CHARGES, NETDeferred charges, net as of
      December 31, 2007 were as
  follows:
  Deferred
      charges
            
            $
            700,000Less:
      accumulated amortization
            
            
            (29,157
            )Total
            
            $
            670,843
  
 Amortization
      of deferred charges included in interest expense for the years ended
      December 31, 2007 and 2006 amounted to $29,157 and $nil
      respectively.
  NOTE
      8
            ACCOUNTS PAYABLE,
      ACCRUED EXPENSES AND OTHER
    PAYABLESAccounts payable, accrued expenses
      and other payables as of December 31, 2007 consisted of the
      following:
   Accounts
      payable
            
            $
            1,303,941Accrued
      professional fee
            
            
            17,530Accrued
      staff benefit and related fees
            
            
            638,899Other
      accrued expenses
            
            
            614,838Other
      payables
            
            
            915,378Total
            
            $
            3,490,586
   NOTE
      9
            BUSINESS
      COMBINATION(a)  
      Acquisition of Quo AdvertisingOn
      January 31, 2007, the Company acquired 100% of the equity interests of Quo
      Advertising, an advertising agency headquartered in Shanghai, China,
      pursuant to a Purchase and Sales Agreement and Trust Agreements entered
      with Lina Zhang and Qinxiu Zhang dated January 24, 2007. The acquisition
      helped the Company to grow its advertising business in China. The Company
      paid $64,000 in cash and issued 300,000 shares of the Company’s common
      stock of par value of $0.001 each, totaling $843,600 in exchange for 100%
      of the equity interest of Quo Advertising. The total consideration was
      $907,600.The
      acquisition has been accounted for using the purchase method of accounting
      and the results of operations of Quo Advertising have been included in the
      Company's consolidated statement of operations since the completion of the
      acquisition on January 31, 2007.
  F-17
 Table of Contents
  The
      allocation of the purchase price is as
follows:
   Cash
            
            $
            18,001Accounts
      receivable
            
            
            83,791Prepaid
      expenses and other current assets
            
            
            298,559Equipment,
      net
            
            
            15,114Intangible
      right
            
            
            536,540Accounts
      payable, accrued expenses and other payables
            
            
            (44,405
            )Total
      purchase price
            
            $
            907,600
  Identifiable
      intangible right of $536,540 is measured at fair value as of the date of
      the acquisition and amortized over 20 years. The intangible right of Quo
      Advertising was fully provided with impairment loss in 2007. For details,
      please refer to Note 6 – Intangible Rights, Nets for details.(b) Acquisition of
      XuancaiyiEffective
      September 1, 2007, the Company, through Quo Advertising, acquired 51% of
      the equity interests of Xuancaiyi (Beijing) Advertising Company Limited
      (“Xuancaiyi”), an advertising agency in Beijing, China, for a
      consideration of up to RMB 12,245,000 (equivalent to US$1,666,943) in
      cash. Xuancaiyi secured the rights to operate a 758 square-meter mega-size
      high resolution LED advertising billboard in a prominent location in
      Beijing, China. The investment in Xuancaiyi will strengthen the Company’s
      Media Network in China. The acquisition has been accounted for using the
      purchase method of accounting and the results of operations of Xuancaiyi
      have been included in the Company's consolidated statement of operations
      since the acquisition date on September 1, 2007.The
      purchase consideration, to be paid fully in cash, is payable as
      follows:
  1.
              An
      initial payment of RMB2,500,000 (approximately US$330,128);2.
              Up
      to RMB 2,454,300 (approximately US$336,680) based on Xuancaiyi’s net
      profit for the four months ended December 31, 2007;3.
              Up
      to RMB 1,834,500 (approximately US$251,656) based on Xuancaiyi’s net
      profit for the first quarter of fiscal year 2008;4.
              Up
      to RMB 1,827,400 (approximately US$250,682) based on Xuancaiyi’s net
      profit for the second quarter of fiscal year 2008;5.
              Up
      to RMB1,819,100 (approximately US$249,543) based on Xuancaiyi’s net profit
      for the third quarter of fiscal year 2008; and6.
              Up
      to RMB1,809,700 (approximately US$248,254) based on Xuancaiyi’s net profit
      for the fourth quarter of fiscal year 2008.The
      initial payment of RMB2,500,000 (equivalent to US$330,128) was made in
      September 2007. The allocation of the initial payment is as
      follows:
  F-18
 Table of Contents
  Cash
            
            $
            57,971Prepaid
      expenses and other current assets
            
            
            82,150Equipment,
      net
            
            
            6,955Intangible
      right
            
            
            586,066Accounts
      payable, accrued expenses and other payables
            
            
            (85,833
            )Minority
      Interests
            
            
            (317,181
            )Total
      purchase price
            
            $
            330,128
  Identifiable
      intangible right of $586,066 is measured at fair value as of the date of
      the acquisition and is amortized over 16 months based on initial contract
      period with Xuancaiyi’s media
partner.
  As
      of December 31, 2007, based on the net profits for the four months ended
      December 31, 2007 of Xuancaiyi, no further cash payment is expected to be
      made with respect to the first earn-out consideration. Pursuant to SFAS
      141 “Business
      Combinations”, the earn-out consideration is considered contingent
      consideration, which will not become certain until the net profits of
      Xuancaiyi for the coming quarters have been determined. As a result, the
      obligation to pay the contingent consideration has not been reflected in
      the consolidated financial statements of the Company as of December 31,
      2007.
  Unaudited Pro forma
      Consolidated Financial Information
                
                The
      table below summarizes the unaudited pro forma results of operations
      assuming the acquisitions of Quo Advertising and Xuancaiyi were completed
      on January 1, 2007 and 2006. These unaudited pro forma results have been
      prepared for information purposes only and do not purport to be indicative
      of what the operating results would have been had the acquisitions
      actually taken place on January 1, 2007 and 2006, and may not be
      indicative of future operating
results.
 Years
      ended December 312007
            
            
            2006(Unaudited)
            
            
            (Unaudited)Revenues
            
            $
            27,619,599
            
            
            $
            6,712,060Loss
      before income taxes and minority interests
            
            $
            (19,467,525
            )
            
            $
            (4,663,042
            )Net
      loss
            
            $
            (19,413,521
            )
            
            $
            (4,119,211
            )Net
      loss per shareBasic and
      diluted
            
            $
            (0.28
            )
            
            $
            (0.08
            )
   F-19
 Table of Contents
 
 NOTE10
            CONVERTIBLE
      PROMISSORY NOTES AND WARRANTS(a)   12%
      Convertible Promissory Note and WarrantsOn
      November 12, 2007, the Company entered into a 12% Note and Warrant
      Purchase Agreement with Wei An Developments Limited (“Wei An”) with
      respect to the purchase by Wei An a convertible promissory note in the
      principal account of $5,000,000 at interest rate of 12% per annum (the
      “12% Convertible Promissory Note”). The 12% Convertible Promissory
      Note is convertible into the Company’s common stock at the conversion
      price of $2.40 per share. Pursuant to the agreement, the Company is
      subject to a commitment fee of 2% of the principal amount of the 12%
      Convertible Promissory Note. The term of the 12% Convertible Promissory
      Note is six months and the Company has the option to extend the 12%
      Convertible Promissory Note by an additional six-month period at an
      interest rate of 14% per annum and be subject to an additional commitment
      fee of 2% of the principal amount of the note. However, the Company has
      the right to prepay all or any portion of the amounts due under the note
      at any time without penalty or premium.In
      addition, pursuant to the Warrant Purchase Agreement, the Company issued
      warrants to purchase up to 250,000 shares of the Company’s common stock at
      the exercise price of $2.30 per share, which are exercisable for a period
      of two years.(b)   3%
      Convertible Promissory Notes and warrantsOn
      November 19, 2007, the Company, Quo Advertising and the Designated Holders
      (as defined in the Purchase Agreement), entered into a 3% Note and Warrant
      Purchase Agreement (the “Purchase Agreement”) with affiliated investment
      funds of Och-Ziff Capital Management Group (the “Investors”). Pursuant to
      the Purchase Agreement, the Company agreed to issue 3% Senior Secured
      Convertible Notes due June 30, 2011 in the aggregate principal amount of
      up to $50,000,000 (the “3% Convertible Promissory Notes”) and warrants to
      acquire an aggregate amount of 34,285,715 shares of common stock of the
      Company (the “Warrants”). The 3% Convertible Promissory Notes and
      Warrants are issued and issuable in three tranches, with Convertible Notes
      in the aggregate principal amount of $6,000,000, Warrants exercisable for
      2,400,000 shares at $2.50 per share and Warrants exercisable for 1,714,285
      shares at $3.50 per share, issued on 19 November, 2007, Convertible Notes
      in the aggregate principal amount of $9,000,000, Warrants exercisable for
      3,600,000 shares at $2.50 per share and Warrants exercisable for 2,571,430
      shares at $3.50 per share issued on 28 November 2007, and Convertible
      Notes in the aggregate principal amount of $35,000,000, Warrants
      exercisable for 14,000,000 shares at $2.50 per share and Warrants
      exercisable for 10,000,000 shares at $3.50 per share to be issued in the
      third tranche, which was completed in January 2008. Please refer to Note
      18 - Subsequent Events for details. The warrants shall expire on June 30,
      2011, pursuant to the Purchase Agreement.The
      3% Convertible Promissory Notes bear interest at 3% per annum payable
      semi-annually in arrears and mature on June 30, 2011. The 3% Convertible
      Promissory Notes are convertible into shares of common stock at an initial
      conversion price of $1.65 per share, subject to customary anti-dilution
      adjustments. In addition, the conversion price will be adjusted
      downward on an annual basis if the Company should fail to meet certain
      annual earnings per share (“EPS”) targets described in the Purchase
      Agreement. In the event of a default, or if the Company’s actual EPS for
      any fiscal year is less than 80% of the respective EPS target, certain of
      the investors may require the Company to redeem the 3% Convertible
      Promissory Notes at 100% of the principal amount, plus any accrued and
      unpaid interest, plus an amount representing a 20% internal rate of return
      on the then outstanding principal amount. The Warrants grant the holders
      the right to acquire shares of common stock at $2.50 and $3.50 per share,
      subject to customary anti-dilution adjustments. The exercise price of the
      Warrants will also be adjusted downward whenever the conversion price of
      the 3% Convertible Promissory Notes is adjusted downward in accordance
      with the provisions of the Purchase
Agreement.
  F-20
 Table of Contents
  As of
December 31, 2007, none of the conversion options and warrants associated with
the above convertible promissory notes was exercised.
  The
following table details the accounting treatment of the convertible promissory
notes:
   12%
      Convertible
              Promissory
      Note
            
            
            3%
      Convertible
              Promissory
      Notes
            
            
            TotalProceeds
      of convertible promissory notes
            
            $
            5,000,000
            
            
            $
            15,000,000
            
            
            $
            20,000,000Allocation
      of proceeds:Allocated
      relative fair value of warrants
            
            
            (333,670
            )
            
            
            (2,490,000
            )
            
            
            (2,823,670
            )Allocated
      intrinsic value of beneficial conversion feature
            
            
            -
            
            
            
            (4,727,272
            )
            
            
            (4,727,272
            )Total
      net proceeds of the convertible promissory notes as of December 31,
      2007
            
            
            4,666,330
            
            
            
            7,782,728
            
            
            
            12,449,058Amortization
      of debt discount for the year ended December 31, 2007
            
            
            74,466
            
            
            
            4,762,728
            
            
            
            4,837,194Net
      carrying value of convertible promissory notes
            
            $
            4,740,796
            
            
            $
            12,545,456
            
            
            $
            17,286,252
  Warrant
and Beneficial Conversion Features
  The fair
value of the financial instruments associated with warrants of both 12%
convertible promissory note and 3% convertible promissory notes was determined
utilizing Black-Scholes option pricing model, which is consistent with the
Company’s historical valuation methods. The following assumptions and estimates
were used in the Black-Scholes option pricing model: (1) 12% convertible
promissory note: volatility of 182%; an average risk-free interest rate of
3.52%; dividend yield of 0%; and an expected life of 2 years, (2) 3% convertible
promissory notes: volatility of 47%; an average risk-free interest rate of
3.30%; dividend yield of 0%; and an expected life of 3.5 years.
  F-21
 Table of Contents
  The
warrants issued in connection with 12% convertible promissory note and 3%
convertible promissory notes meet the criteria of EITF 00-19, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock”for equity classification. Accordingly, the conversion features do not
require derivative accounting. The intrinsic value of beneficial conversion
feature is calculated in according to EITF Issue No. 98-5,“Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio” and EITF Issue No. 00-27,“Application of Issue No. 98-5 to
Certain Convertible Instruments”. For 3% convertible promissory note, as
the effective conversion price after allocating a portion of the proceeds to the
warrants was less than the Company’s market price of common stock at commitment
date, it was considered to have a beneficial conversion feature while for 12%
convertible promissory note, no beneficial conversion feature existed. The value
of beneficial conversion feature is recorded as a reduction in the carrying
value of the convertible promissory notes against additional paid-in capital. As
3% convertible promissory notes are convertible at the date of issuance, the
respective debt discount being equal to the value of beneficial conversion
feature of $4,727,272 is fully amortized through interest expense as of the date
of issuance.
  Amortization of Deferred Charges and
Debt Discount
  The
amortization of deferred charges and debt discount for the year ended December
31, 2007 were as follows:
  Warrants
            
            
            Conversion
      Features
            
            
            Deferred
      Charges
            
            
            Total12%
      convertible promissory note
            
            $
            74,466
            
            
            $
            -
            
            
            $
            19,301
            
            
            $
            93,7673%
      convertible promissory notes
            
            
            35,456
            
            
            
            4,727,272
            
            
            
            9,856
            
            
            
            4,772,584Total
            
            $
            109,922
            
            
            $
            4,727,272
            
            
            $
            29,157
            
            
            $
            4,866,351
  NOTE11
              COMMITMENTS
      AND CONTINGENCIES(a) Commitments1. Rental Lease
      CommitmentThe
      Company’s existing rental leases do not contain significant restrictive
      provisions. The following is a schedule by year of future minimum lease
      obligations under non-cancelable rental operating leases as of
      December 31, 2007:
   Fiscal
      yearsending
      December 31,2008
            
            $
            445,5832009
            
            
            325,3602010
            
            
            109,943Total
            
            $
            880,886
   F-22
 Table of Contents
  Total
      rental expense associated with operating leases for the years ended
      December 31, 2007 and 2006 were $593,441 and $118,423
      respectively.2. Annual Rights and Operating Fee
      CommitmentSince November 2006,
      the Company, through its subsidiaries NCN Media Services Limited, Quo
      Advertising and Xuancaiyi, has acquired rights from third parties to
      operate 1,845 roadside advertising panels and 11 mega-size advertising
      panels for periods ranging from 16 months to 20 years.The following table sets forththe estimated futureannual commitment of
      the Company with respect totherights1,845 roadside
      advertising panels and 11 mega-size advertising panels that the Company
      held as of December 31, 2007:
  Fiscal
      yearsending
      December 31,
            
            (In
      millions)2008
            
            $
            16.52009
            
            
            13.92010
            
            
            4.02011
            
            
            3.92012
            
            
            3.6Thereafter
            
            
            23.7Total
            
            $
            65.6
    (b)Contingencies
  The
Company accounts for loss contingencies in accordance with SFAS 5, “Accounting for Loss Contingencies”and other related guidelines. Set forth below is a description of certain
loss contingencies as of December 31, 2007 and management’s opinion as to the
likelihood of loss in respect of loss contingency.
  The
Company’s 55%-owned subsidiary, Tianma, is a defendant in proceedings brought in
the Guangzhou Yuexiu District Court. The proceedings were finalized on October
9, 2006. The facts surrounding the proceeding are as follows:
  Guangdong
Yongan Travel Agency (“Yongan”) arranged a local tour in April 2001. Yongan
rented a car from an agent of Tianma but the car did not belong to Tianma. A car
accident happened during the tour, causing 20 injuries and one death. Guangzhou
Police issued a proposed determination on the responsibilities of the accidents
on May 18, 2001. The proposal determined that the driver who used a
non-functioning car was fully liable for the accident. Those tourists sued
Yongan for damages and Guangzhou Intermediate People’s Court made a final
judgment in 2004 that Yongan was liable and Yongan paid approximately RMB2.2
million ($302,000) to the injured. In 2005, Yongan sued the agent of Tianma,
Tianma and the car owner. In October 2006, the Guangzhou Yuexiu District Court
made a judgment that the agent was liable to pay RMB2.1 million ($288,000) plus
interest for damages. Tianma and the car owner have joint-and-several
liabilities.
  F-23
 Table of Contents
  Tianma is
now appealing the court’s decision. The Company believes that there is a
reasonably high chance of overturning the court’s decision. In addition, the
Company has been indemnified for any future liability upon the acquisition by
the prior owners of Tianma. Accordingly, no provision has been made by the
Company to the above claims as of December 31, 2007.
  NOTE12 STOCKHOLDERS’EQUITY
   (a)Stock, Options and Warrants Issued for
Services
  1. In
February 2006, the Company issued an option to purchase up to 225,000 shares of
common stock to its legal counsel at an exercise price of $0.10 per share. So
long as the counsel’s relationship with the Company continues, one-twelfth of
the shares underlying the option vest and become exercisable each month from the
date of issuance. The option may be exercised for 120 days after termination of
the relationship. The fair market value of the option was estimated on the grant
date using the Black-Scholes option pricing model as required by SFAS 123R with
the following assumptions and estimates: expected dividend 0%, volatility 147%,
a risk-free rate of 4.5% and an expected life of one (1) year. The value of an
option recognized during the years ended December 31, 2007 and 2006 was
approximately $1,317 and $11,010 respectively. The options were exercised in
April 2007.
  2. In
August 2006, the Company issued a warrant to purchase up to 100,000 shares of
restricted common stock to a consultant at an exercise price $0.70 per share.
One-fourth of the shares underlying the warrant become exercisable every 45 days
beginning from the date of issuance. The warrant shall remain exercisable until
August 25, 2016. The fair market value of the warrant was estimated on the grant
date using the Black-Scholes option pricing model as required by SFAS 123R with
the following assumptions and estimates: expected dividend 0%, volatility 192%,
a risk-free rate of 4.5% and an expected life of one (1) year. The value
recognized for the years ended December 31, 2007 and 2006 was approximately
$26,604 and $14,451 respectively.
  3. In
April 2007, the Company issued 45,000 S-8 shares of common stock of par value of
$0.001 each, totaling $18,000 to its legal counsel for services
rendered.
  4. In
April 2007, the Company issued 377,260 S-8 shares of common stock of par value
of $0.001 each, totaling $85,353 to its directors and officers for services
rendered.
  5. In
July 2007, NCN Group Management Limited entered into Executive Employment
Agreements (the “Agreements”) with Godfrey Hui, Chief Executive Officer, Daniel
So, Managing Director, Daley Mok, Chief Financial Officer, Benedict Fung, the
President, and Stanley Chu, General Manager. Pursuant to the Agreements, each
executive was granted shares of the Company’s common stock subject to annual
vesting over five years in the following amounts:  Mr. Hui, 2,000,000
shares; Mr. So, 2,000,000 shares; Dr. Mok 1,500,000 shares; Mr. Fung 1,200,000
shares and Mr. Chu, 1,000,000 shares. In connection with these stock grants and
in accordance with SFAS 123R, the Company recognized non-cash stock-based
compensation of $1,709,400 included in Payroll on the consolidated statement of
operations for the year ended December 31, 2007. The Company issued an aggregate
660,000 S-8 shares of common stock to them on January 2, 2008.
  F-24
 Table of Contents
  6. In
August 2007, the Company issued 173,630 shares of restricted common stock of par
value of $0.001 each, totaling $424,004 to a consultant for services rendered.
The value of stock grant is fully amortized and recognized during the year ended
December 31, 2007.
  7. In
August 2007, the Company issued 230,000 S-8 shares of common stock of par value
of $0.001 each, totaling $69,500 to its directors and officers for services
rendered.
  8. In
September, 2007, the Company entered into a service agreement with independent
directors, Peter Mak, Gerd Jakob, Edward Lu, Ronglie Xu and Joachim Burger.
Pursuant to the service agreements, each independent director was granted shares
of the Company’s common stock subject to a vesting period of ten months in the
following amounts: Peter Mak:15,000 shares; Ronglie Xu:15,000 shares; Joachim
Burger:15,000 shares, Gerd Jakob:10,000 shares and Edward Lu:10,000 shares. In
connection with these stock grants and in accordance with SFAS 123R, the Company
recognized $57,980 of non-cash stock-based compensation included in Payroll on
the consolidated statement of operation for the year ended December 31,
2007.
  9. In
November 2007, the Company was obligated to issue a warrant to purchase up to
300,000 shares of restricted common stock to a placement agent for provision of
agency services in connection with the issuance of 3% convertible promissory
notes as mentioned in Note 10 – Convertible Promissory Notes and Warrants at an
exercise price $3.0 per share which are exercisable for a period of two years.
The fair value of the warrant was estimated on the grant date using the
Black-Scholes option pricing model as required by SFAS 123R with the following
weighted average assumptions: expected dividend 0%, volatility 182 %, a
risk-free rate of 4.05 % and an expected life of two (2) year. The value of the
warrant recognized for the years ended December 31, 2007 was
$21,305.
  10. In
December 31, 2007, the Company committed to grant 235,000 S-8 shares of common
stock to certain employees of the Company for their services rendered during the
year ended December 31, 2007. In connection with these stock grants and in
accordance with SFAS 123R, the Company recognized non-cash stock-based
compensation of $611,000 included in Payroll on the consolidated statement of
operation for the year ended December 31, 2007. Such 235,000 S-8 shares were
issued on January 2, 2008.
  The
amortization for the deferred stock-based compensation recorded in the Company
for the years ended December 31, 2007 and 2006 was $2,845,000 and $66,355
respectively.
  (b)   Stock
Issued for Acquisition
  In
January 2007, in connection with the acquisition of Quo Advertising, the Company
issued 300,000 shares of restricted common stock of par value of $0.001 each,
totaling $843,600.
  (c)   Stock
Issued for Private Placement
  In April
2007, the Company issued and sold 500,000 shares of restricted common stock of
par value of $0.001 each, totaling $1,500,000 in a private placement. No
investment banking fees were incurred as a result of this
transaction.
  F-25
 Table of Contents
  (d)   Conversion
      Option and Stock Warrants Issued in Notes ActivitiesOn
      November 12, 2007, pursuant to the 12% Note and Warrant Purchase Agreement
      of $5,000,000, the Company issued warrants to purchase up to 250,000
      shares of the Company’s common stock at the exercise price of $2.30 per
      share, which are exercisable for a period of two years to Wei An. The
      allocated proceeds to the warrants of $333,670 based on the relative fair
      value of 12% Convertible Promissory Notes and warrants were recorded as
      reduction in the carrying value of the note against additional-paid in
      capital. As the effective conversion price is higher than the Company’s
      market price of common stock at commitment date, no beneficial conversion
      existed. Please refer to Note 10 – Convertible Promissory Note and Warrant
      for details.On November 19, 2007, pursuant to the 3% Note
      and Warrant purchase Agreement, the Company issued warrants to purchase up
      to 2,400,000 shares of the Company’s common stock at the exercise price of
      $2.5 per share and 1,714,285 shares of the Company’s common stock at the
      exercise price of $3.5 per share associated with the convertible notes of
      $6,000,000 in the first closing. On November 28, 2007, the Company also
      issued warrants to purchase up to 3,600,000 shares of the Company’s common
      stock at the exercise price of $2.5 per share and 2,571,430 shares of the
      Company’s common stock at the exercise price of $3.5 per share. The
      allocated proceeds to these warrants were $2,490,000 in aggregate which
      were recorded as reduction in the carrying value of the notes against
      additional paid-in capital. As the effective conversion price after
      allocating a portion of the proceeds to the warrants was less than the
      Company’s market price of common stock at commitment date, it was
      considered to have a beneficial conversion feature with value of
      $4,727,272 recorded as a reduction in the carrying value of the notes
      against additional paid-in capital. Please refer to Note 10 – Convertible
      Promissory Note and Warrant for details.NOTE13
              RELATED PARTY TRANSACTIONSExcept as set forth
      below, during our last two fiscal years, the Company have not entered into
      any material transactions or series of transactions that would be
      considered material in which any officer, director or beneficial owner of
      5% or more of any class of the Compnay’s capital stock, or any immediate
      family member of any of the preceding persons, had a direct or indirect
      material interest:During
      the years ended December 31, 2007 and 2006, the Company received
      hotel management service fees of $nil and $100,478 respectively from
      two properties it manages that are owned by a stockholder.During
      the years ended December 31, 2007 and 2006, the Company paid rent of
      $nil and $47,489 respectively for office premises leased from a
      director and stockholder.On December 21,
      2007, the Company acquired 100% of voting shares of Linkrich Enterprise
      Advertising and Investment Limited, a dormant corporation incorporated in
      the Hong Kong Special Administrative Region, the PRC on March 16, 2001
      from a director at a consideration of $1,282 which is the par value of the
      voting shares.
 F-26
 Table of Contents
  NOTE14
            NET
      LOSS PER COMMON SHARENet loss per share informationfor the years ended
      December 31, 2007 and
      2006 was as follows:
   2007
            
            
            2006Numerator:Net
      loss from continuing operations
            
            $
            (19,306,579
            )
            
            $
            (4,995,002
            )Net
      income from discontinued operations
            
            
            -
            
            
            
            526,296Net
      loss attributable to stockholders
            
            $
            (19,306,579
            )
            
            $
            (4,468,706
            )Denominator:Weighted
      average number of shares outstanding, basic
            
            
            68,556,081
            
            
            
            52,489,465Effect of dilutive
      securitiesOptionsand
    warrants
            
            
            -
            
            
            
            -Weighted
      average number of shares outstanding, diluted
            
            
            68,556,081
            
            
            
            52,489,465Earnings/(Losses)
      per ordinary share – basic and dilutedContinuing
      operations
            
            $
            (0.28
            )
            
            $
            (0.10
            )Discontinued
      operations
            
            
            -
            
            
            
            0.01Net
      loss per share – basic and diluted
            
            $
            (0.28
            )
            
            $
            (0.09
            )
      The
diluted net loss per share is the same as the basic net loss per share for the
years ended December 31, 2007 and 2006 as all potential ordinary shares
including stock options and warrants are anti-dilutive and are therefore
excluded from the computation of diluted net loss per share. The securities that
could potentially dilute basic earnings (loss) per share in the future that were
not included in the computation of diluted earnings (loss) per share because of
anti-dilutive effect during the years ended December 31, 2007 and 2006 were
summarized as follows:
  2007
            
            
            2006Potential
      common equivalent shares:Stock
      options for services
            
            
            -
            
            
            
            205,501Stock
      warrants for services (1)
            
            
            122,394
            
            
            
            39,337Warrants
      associated with convertible promissory notes
            
            
            364,436
            
            
            
            -Conversion
      feature associated with convertible promissory notes to common
      stock
            
            
            11,174,242
            
            
            
            -Common stock to be granted to
      directors executivesandemployees for services (including
      nonvested shares)
            
            
            8,000,000
            
            
            
            937,260Total
            
            
            19,661,072
            
            
            
            1,182,098Remarks:
  (1)
            As of December 31, 2007, the
      number of potential common equivalent shares associated with warrants
      issued for services was 122,394, which was related to (1) a warrant to
      purchase 200,000 common stock issued to a consultant in 2004 for service
      rendered at an exercise price of $2.00, which expired in March 2009 and
      (2) a warrant to purchase100,000 common stock issued by the Company to a
      consultant in 2006 for service rendered at an exercise price of $0.70,
      which expired in August 2016.
  F-27
 Table of Contents
  NOTE15
            INVESTMENT
      HELD FOR DISCONTINUED OPERATIONS(a)   Tianjin
      Teda Yide Industrial Company LimitedOn April 29, 2006,
      the Company completed the sale of all of its equity interest in a PRC real
      estate joint venture, namely Tianjin Teda Yide Industrial Company Limited
      (“Yide”, formerly Tianjin Yide Real Estate Company Limited) pursuant to a
      Purchase and Sale of Stock Agreement (the “Agreement”) entered with Far
      Coast Asia Limited (“Far Coast”). Far Coast paid the Company a deposit of
      $800,000 in respect of the sale in January 2006 and a balance payment of
      $2.2 million was paid on March 31, 2006 (the “Purchase Price”). The
      Purchase Price was paid to the Company in Hong Kong dollars. Far Coast and
      its affiliated entities have no prior relationship to the Company and its
      affiliated entities.In accordance with
      FASB Interpretation No. 35,“Criteria for
      Applying the Equity Method of Accounting for Investments in Common
      Stock—an
      interpretation of APB Opinion No.18”
      (“FIN 35”),the use of the
      equity method of accounting for the investment is required if the investor
      has the ability to exercise significant influence over the operating and
      financial policies of the investee. However, management of the Company has
      determined that the failure by the Company to obtain financial information
      subsequent to September 30, 2005 has resulted in the loss of significant
      influence over the operating and financial policies of Yide. As such, the
      use of the equity method was therefore no longer appropriate and the
      Company accounted for its investment from October 1, 2005 to April 29,
      2006, the date of completion of the sale, under the cost
  method.On
      April 29, 2006, the Company completed the sale of all of its equity
      interest in Yide and recorded a gain on the disposal of the affiliate of
      $579,870 in 2006 accordingly.
  F-28
 Table of Contents
    (b)    Teda
      (Beijing) Hotels Management LimitedWith equity holding
      of 100%, Teda (Beijing) Hotels Management Limited (“Teda BJ”) has been
      accounted for as a wholly owned subsidiary. In later half of 2006, because
      of a change in business direction, the Company determined to dispose Teda
      BJ and began winding down its operations. No further transaction
      associated with Teda BJ was recorded during the year ended December 31,
      2007 and the process of winding down Teda BJ was yet to be completed as of
      December 31, 2007. We treated it as discontinued operations and the effect
      on financial statements are as follows:
    Effect
      on Consolidated Balance Sheet
            
            2007
            
            
            2006Current liabilities from
      discontinued operations
            
            $
            (3,655
            )
            
            $
            (3,655
            )Effect on Consolidated Statements
      ofOperationsRevenues
            
            $
            -
            
            
            $
            142,557Professional
      fee
            
            
            -
            
            
            
            (376
            )Payroll
            
            
            -
            
            
            
            (109,550
            )Other selling, general and
      administrative
            
            
            -
            
            
            
            (86,359
            )Other
income
            
            
            -
            
            
            
            93Interest
    income
            
            
            -
            
            
            
            61Loss from discontinued
      operations
            
            $
            -
            
            
            $
            (53,574
            )
 NOTE 16
              BUSINESS
    SEGMENTSThe Company has
      changed their operating segments in 2007 as a result of change of internal
      organization structure by management. The Company currently operates three
      operating segments instead of two operating segments in 2006. Each segment
      operates exclusively. The Company’s Media Network segment provides
      marketing communications consultancy services to customers in China. The
      Company’s Travel Network segment provides tour services as well as
      management services to hotels and resorts in China. The Company’s
      Investment Holding segment represents the companies which provide
      administrative and management services to its subsidiaries or fellow
      subsidiaries. The accounting policies of the segments are the same as
      described in the summary of significant accounting policies. There are no
      inter-segment sales.
 
 2007
                
                Media
    Network
                
                
                Travel
    Network
                
                
                Investment
                  Holding
                
                
                TotalRevenue
                
                $
                1,442,552
                
                
                $
                26,140,355
                
                
                $
                -
                
                
                $
                27,582,907Net loss from continuing operations
                
                
                (4,457,881
                )
                
                
                (953,905
                )
                
                
                (13,894,793
                )
                
                
                (19,306,579
                )Depreciation and amortizationEquipment
      and intangible rights
                
                
                483,750
                
                
                
                9,505
                
                
                
                35,380
                
                
                
                528,635Deferred
      charges and debt discount
                
                
                -
                
                
                
                -
                
                
                
                4,866,351
                
                
                
                4,866,351Non-cash impairment
      charges
                
                
                516,419
                
                
                
                815,902
                
                
                
                -
                
                
                
                1,332,321Interest
      expense
                
                
                -
                
                
                
                -
                
                
                
                122,803
                
                
                
                122,803Assets
                
                
                23,509,377
                
                
                
                2,119,999
                
                
                
                1,477,967
                
                
                
                27,107,343Capital Expenditures
                
                
                137,960
                
                
                
                3,007
                
                
                
                66,404
                
                
                
                207,371
  2006
                
                Property
      Management
                
                
                Travel
    Agency
                
                
                TotalRevenue
                
                $
                214,108
                
                
                $
                4,228,494
                
                
                $
                4,442,602Net loss from continuing
      operations
                
                
                (4,939,516
                )
                
                
                (55,486
                )
                
                
                (4,995,002
                )Netgainfrom discontinued
      operations
                
                
                526,296
                
                
                
                -
                
                
                
                526,296Depreciation and amortization
                
                
                288,344
                
                
                
                804
                
                
                
                289,148Assets
                
                
                9,849,607
                
                
                
                677,527
                
                
                
                10,527,134Capital Expenditures
                
                
                72,010
                
                
                
                18,878
                
                
                
                90,888
   F-29
 Table of Contents
 NOTE17
              INCOME
      TAXES
  Income is
subject to taxation in various countries in which the Company operate. The loss
before income taxes and minority interests by geographical locations for the
years ended December 31, 2007 and 2006 was summarized as
follows:
 2007
            
            
            2006United
    States
            
            $
            8,935,819
            
            
            $
            2,395,882Foreign
            
            
            10,425,140
            
            
            
            2,616,793$
            19,360,959
            
            
            $
            5,012,675
 
 Income
tax expenses by geographical locations for the years ended December 31, 2007 and
2006 was summarized as follows:
  2007
            
            
            2006CurrentUnited States
            
            $
            -
            
            
            $
            -Foreign
            
            
            7,668
            
            
            
            6,984$
            7,668
            
            
            $
            6,984DeferredUnited States
            
            $
            -
            
            
            $
            -Foreign
            
            
            -
            
            
            
            -$
            -
            
            
            $
            -
  F-30
 Table of Contents
  The
reconciliation of the effective income tax of the Company to the U.S.federal statutory rate (the
principal tax jurisdiction of the Company) was as follows:
  2007
            
            
            2006Expected income tax
      benefit
            
            $
            6,582,726
            
            
            $
            1,519,360Operating loss carriedforward
            
            
            (3,038,178
            )
            
            
            (814,600
            )Tax effect on foreign income which
      is not subjectU.S.federal corporate income tax rate
      of 34%
            
            
            (3,536,880
            )
            
            
            (711,744
            )$
            7,668
            
            
            $
            6,984
  An
analysis of the Company’s deferred tax liabilities and deferred tax assets as of
December 31, 2007 and 2006 was as follows:
  2007
            
            
            2006Deferred tax assets:Net operating losscarried
      forward
            
            $
            5,391,534
            
            
            $
            2,353,356Less:valuation
      allowance
            
            
            (5,391,534
            )
            
            
            (2,353,356
            )Netdeferred tax
      assets
            
            $
            -
            
            
            $
            -
  The
Company provided a full valuation allowance against the deferred tax assets as
of December 31, 2006 and 2007 due to the uncertainty surrounding the
realizability of these benefits in future tax returns.
   NOTE
18                SUBSEQUENT
EVENTS
  On
January 1, 2008, the Company and its wholly owned subsidiary CityHorizon
Limited, a Hong Kong company (“CityHorizon Hong Kong”), entered into a Share
Purchase Agreement with CityHorizon Limited, a British Virgin Islands company
(“CityHorizon BVI”), Hui Zhong Lian He Media Technology Co., Ltd., a wholly
owned subsidiary of CityHorizon BVI (“Lianhe”), Beijing Hui Zhong Bo Na Media
Advertising Co., Ltd., a wholly owned subsidiary of CityHorizon BVI (“Bona”),
and Liu Man Ling, an individual and sole shareholder of CityHorizon BVI pursuant
to which the Company, through its subsidiary CityHorizon Hong Kong, acquired
100% of the issued and outstanding shares of CityHorizon BVI from Liu Man Ling.
Pursuant to the Share Purchase Agreement, the Company paid the Liu Man Ling
US$5,000,000 in cash and issued Liu Man Ling 1.5 million duly authorized,
validly issued, fully paid and non-assessable shares of the Company’s common
stock.
  In
connection with the Company’s financing transaction with affiliated investment
funds of Och-Ziff Capital Management Group, effective January 1, 2008 the
Company caused its subsidiary, Lianhe, to enter into a series of commercial
agreements with Quo Advertising, pursuant to which Lianhe provides exclusive
technology and management consulting services to Quo Advertising in exchange for
services fees, which amount to substantially all of the net income of Quo
Advertising. Each of the registered PRC shareholders of Quo Advertising also
entered into equity pledge agreements and option agreements, which cannot be
amended or terminated except by written consent of all parties, with Lianhe.
Pursuant to these equity pledge agreements and option agreements, each
shareholder pledged such shareholder’s interest in Quo Advertising for the
performance of such Quo Advertising’s payment obligations under its respective
exclusive technology and management consulting services agreements. In addition,
Lianhe has been assigned all voting rights by the shareholders of Quo
Advertising and has the option to acquire the equity interests of Quo
Advertising at a mutually agreed purchase price which shall first be used to
repay any loans payable to Lianhe or any affiliate of Lianhe by the registered
PRC shareholders. At the same time, Quo Advertising terminated its trust
arrangement with Crown Winner International Limited. Effective January 1, 2008,
Lianhe also entered into a series of similar commercial agreements with Bona and
Hui Zhi Bo Tong Media Advertising Beijing Co., Ltd (“Botong”), a company
organized under the laws of the PRC, and their respective registered
shareholders.
   F-31
 Table of Contents
 The
effect of these contractual arrangements is to give effective control of Quo
Advertising, Bona and Botong to Lianhe and to allow the Company to consolidate
the results of these entities as variable interest entities pursuant to FIN 46
(Revised), “Consolidation of
Variable Interest Entities”.
  On
January 31, 2008, the Company issued $35,000,000 in 3% Convertible Promissory
Notes and amended and restated $15,000,000 in 3% Convertible Promissory Notes
issued in late 2007. In addition, the Company issued additional warrants to
purchase 14,000,000 shares of the Company’s common stock at $2.50 per share and
warrants to purchase 10,000,000 shares of the Company’s common stock at $3.50
per share. Concurrently with the Third Closing, the Company loaned substantially
all the proceeds from 3% Convertible Promissory Notes to its direct wholly owned
subsidiary, NCN Group Limited (“NCN Group”), and such loan was evidenced by an
intercompany note issued by NCN Group in favor of the Company (the “NCN Group
Note”). The Company entered into a Security Agreement, dated as of January
31, 2008 pursuant to which the Company granted to the collateral agent for the
benefit of the Investors a first-priority security interest in certain of its
assets, including the NCN Group Note and 66% of the shares of NCN Group. In
addition, NCN Group and certain of the Company’s indirect wholly owned
subsidiaries each granted the Company a security interest in certain of the
assets of such subsidiaries to, among other things, secure the NCN Group Note
and certain related obligations.
  On
February 13, 2008, the Company fully redeemed 12% promissory notes due May 2008
which was issued in November 2007 at a redemption price equal to 100% of the
principal amount of $5,000,000 plus accrued and unpaid interest. No penalty or
premium was charged for such early redemption.
        F-32