**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**




x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934





For
      the
      quarterly period ended June 30, 2007





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





For
      the
      transition period from __________ to __________





Commission
      File Number: 000-29611





THE
      CHILDREN’S INTERNET, INC.


(Exact
      name of small business issuer as specified in its charter)





Nevada
            
            20-1290331(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (IRS
                Employer
              Identification
                No.)





110
      Ryan Industrial Ct., Suite 9, San Ramon, CA 94583


(Address
      of principal executive offices)





(925)
      743-9420


(Issuer's
      telephone number)





5000
      Hopyard Rd., Suite 320, Pleasanton, CA 94588


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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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
o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
oNo
x





State
      the
      number of shares outstanding of each of the issuer’s classes of common
      equity:




As
      of
      June 30, 2007, there were 31,373,738 shares of common stock issued and
      outstanding.





Transitional
      Small Business Disclosure Format (check one): Yes oNo x





**THE
      CHILDREN’S INTERNET, INC**





**INDEX**





Page
              NumberPART
                I - FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)
            1Unaudited
                Balance Sheet - June 30, 2007
            1Unaudited
                Statements of Operations - For the six months and three months ended
                June
                30, 2007 and 2006, and the period from inception to June 30,
                2007
            2Unaudited
                Statements of Cash Flows - For the six months ended June 30, 2007
                and
                2006, and the period from inception to June 30, 2007
            3Notes
                to Unaudited Financial Statements
            4Item
                2. Management's Discussion and Analysis of Financial Conditions and
                Plan
                of Operation
            17Item
                3. Controls and Procedures
            25PART
                II - OTHER INFORMATIONItem
                1. Legal Proceedings
            26Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            29Item
                5. Other Information
            29Item
                6. Exhibits and Reports on Form 8-K
            30SIGNATURES
            31








**PART
      I - FINANCIAL INFORMATION**


**ITEM
      1.**  **FINANCIAL
      STATEMENTS**





THE
      CHILDREN'S INTERNET, INC.


(A
      Development Stage Company)


BALANCE
      SHEET


As
      of
      June 30, 2007


(Unaudited)


ASSETSCurrent
                Assets:Cash
            
            $
            686Deposit
                held in escrow, offsets $37,378 account payable to Oswald & Yap (Note
                4)
            
            
            37,378Prepaid
                marketing expenses
            
            
            630Total
                Current Assets
            
            
            38,694Equipment:Equipment
                at cost
            
            
            13,034Accumulated
                depreciation
            
            
            (7,296
            )Equipment,
                net
            
            
            5,738Other
                Assets:Deposit
                - State Board of Equalization
            
            
            2,000Deferred
                tax asset, net of valuation allowance of $1,178,944
            
            
            -TOTAL
                ASSETS
            
            $
            46,432LIABILITIES
                AND STOCKHOLDERS' EQUITYCurrent
                Liabilities:Accounts
                payable and accrued expenses
            
            $
            607,600Accrued
                officers' compensation
            
            
            577,649Loans
                payable to related parties
            
            
            184,243Payroll
                taxes on accrued officers' compensation
            
            
            23,195Taxes
                payable
            
            
            3,149Total
                Current Liabilities
            
            
            1,395,836Long-Term
                Liabilities:Due
                to related party
            
            
            1,022,757TOTAL
                LIABILITIES
            
            
            2,418,593COMMITMENTS
                AND CONTINGENCIES (NOTES 3 & 4)
            
            
            -STOCKHOLDERS'
                EQUITYPreferred
                stock, $0.001 par value; 10,000,000 shares authorized; zero shares
                issued
                and outstanding
            
            
            -Common
                stock, $0.001 par value; 75,000,000 shares authorized; 31,373,738
                shares
                issued and outstanding
            
            
            31,374Additional
                paid-in capital
            
            
            2,331,566Deficit
                accumulated during the development stage
            
            
            (4,735,101
            )TOTAL
                STOCKHOLDERS' DEFICIT
            
            
            (2,372,161
            )TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            46,432





The
      accompanying notes are an integral part of the financial
      statements.


1


THE
      CHILDREN'S INTERNET, INC.


(A
      Development Stage Company)


STATEMENTS
      OF OPERATIONS


(Unaudited)





For
                the Three Months
            
            For
                the Six Months
            
            FromEnded
                June 30,
            
            Ended
                June 30,
            
            Inception2007
            
            2006
            
            2007
            
            2006
            
            to
                DateNET
                REVENUES
            
            $
            238
            
            $
            273
            
            $
            442
            
            $
            273
            
            $
            1,317COSTS
                OF REVENUES
            
            
            28
            
            
            52
            
            
            63
            
            
            52
            
            
            218Gross
                margin
            
            
            210
            
            
            221
            
            
            379
            
            
            221
            
            
            1,099OPERATING
                EXPENSESSales
                and marketing
            
            
            15,737
            
            
            7,516
            
            
            35,700
            
            
            15,855
            
            
            69,595General
                and administrative
            
            
            253,820
            
            
            275,218
            
            
            365,524
            
            
            440,736
            
            
            3,014,816Officers'
                compensation
            
            
            118,986
            
            
            109,584
            
            
            163,986
            
            
            216,264
            
            
            1,603,305Depreciation
                expense
            
            
            1,133
            
            
            1,017
            
            
            2,196
            
            
            1,990
            
            
            7,296Total
                operating expenses
            
            
            389,676
            
            
            393,335
            
            
            567,406
            
            
            674,845
            
            
            4,695,012Loss
                from operations
            
            
            (389,466
            )
            
            (393,114
            )
            
            (567,027
            )
            
            (674,624
            )
            
            (4,693,913
            )Interest
                expense
            
            
            8,081
            
            
            2,796
            
            
            16,888
            
            
            4,466
            
            
            36,388Loss
                before income taxes
            
            
            (397,547
            )
            
            (395,910
            )
            
            (583,915
            )
            
            (679,090
            )
            
            (4,730,301
            )Provision
                for income taxes
            
            
            800
            
            
            800
            
            
            800
            
            
            800
            
            
            4,800NET
                LOSS
            
            $
            (398,347
            )
            $
            (396,710
            )
            $
            (584,715
            )
            $
            (679,890
            )
            $
            (4,735,101
            )Net
                loss per common share-
                basic and diluted
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.46
            )Shares
                used in computing basic and diluted net loss per share
            
            
            26,873,738
            
            
            26,861,909
            
            
            26,873,738
            
            
            26,860,034
            
            
            10,186,133





The
      accompanying notes are an integral part of the financial
      statements.




2





THE
      CHILDREN'S INTERNET, INC.


(A
      Development Stage Company)


STATEMENTS
      OF CASH FLOWS


(Unaudited)





For the Six Months
            
            For the period fromEnded June 30,
            
            Inception through2007
            
            2006
            
            June 30, 2007CASH
                FLOWS USED IN OPERATING ACTIVITIESNet
                Loss
            
            $
            (584,715
            )
            $
            (679,890
            )
            $
            (4,735,101
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                on equipment
            
            
            2,196
            
            
            1,990
            
            
            7,296Amortization
                of prepaid marketing expenses
            
            
            630
            
            
            -
            
            
            630Stock
                compensation to directors
            
            
            30,000
            
            
            -
            
            
            345,000Stock
                compensation to officers and employees
            
            
            35,944
            
            
            39,167
            
            
            88,167Shares
                issued for services
            
            
            -
            
            
            7,800
            
            
            709,756Services
                performed as capital contribution
            
            
            7,500
            
            
            -
            
            
            602,500Expenses
                paid by former officer on behalf of company
            
            
            -
            
            
            -
            
            
            5,000Deposit
                - State Board of Equalization
            
            
            -
            
            
            (2,000
            )
            
            (2,000
            )Increase
                in current assets -Deposit
                held in escrow
            
            
            -
            
            
            -
            
            
            (37,378
            )Prepaid
                marketing expenses
            
            
            -
            
            
            (6,877
            )
            
            (1,260
            )Increase
                in current liabilities -Accounts
                payable and accrued expenses
            
            
            187,834
            
            
            205,966
            
            
            633,944Accrued
                officers' compensation
            
            
            128,375
            
            
            149,274
            
            
            577,649Loans
                payable to related parties
            
            
            184,243
            
            
            -
            
            
            184,243Net
                cash used in operating activities
            
            
            (7,993
            )
            
            (284,570
            )
            
            (1,621,554
            )CASH
                USED IN INVESTING ACTIVITIESAcquisition
                of equipment
            
            
            (838
            )
            
            (774
            )
            
            (13,034
            )Net
                cash used in investing activities
            
            
            (838
            )
            
            (774
            )
            
            (13,034
            )CASH
                PROVIDED BY FINANCING ACTIVITIESIssuance
                of common stock
            
            
            -
            
            
            -
            
            
            612,517Advances
                from majority shareholder
            
            
            8,411
            
            
            183,993
            
            
            1,479,669Majority
                shareholder advances converted to stock
            
            
            -
            
            
            -
            
            
            (456,912
            )Net
                cash provided by financing activities
            
            
            8,411
            
            
            183,993
            
            
            1,635,274Net
                change in cash and cash equivalents
            
            
            (420
            )
            
            (101,351
            )
            
            686Cash
                and cash equivalents - Beginning of period
            
            
            1,106
            
            
            103,849
            
            
            -Cash
                and cash equivalents - End of period
            
            $
            686
            
            $
            2,498
            
            $
            686SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid for interest
            
            $
            46
            
            $
            -
            
            $
            3,168Cash
                paid for taxes
            
            $
            800
            
            $
            800
            
            $
            4,800





The
      accompanying notes are an integral part of the financial
      statements.


3





**THE
      CHILDREN'S INTERNET, INC.**


**(A
      Development Stage Company)**


**NOTES
      TO UNAUDITED FINANCIAL STATEMENTS**


**June
      30, 2007**





**NOTE
      1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
      POLICIES**





Nature
      of Operations





The
      Children's Internet, Inc. (the Company) was incorporated under the laws of
      the
      State of Nevada on September 25, 1996 under the name D.W.C. Installations.
      At
      that date, 2,242,000 shares were issued to a small group of shareholders. The
      Company was primarily inactive until July 3, 2002 when Shadrack Films, Inc.
      (Shadrack) purchased 2,333,510 newly-issued shares of the Company’s common stock
      for $150,000, thereby obtaining a majority ownership interest. The total issued
      and outstanding shares of the Company were increased to 4,575,510 shares as
      a
      result of this sale to Shadrack. On December 27, 2002, the Company’s name was
      changed from D.W.C. Installations to The Children’s Internet, Inc.





The
      Company is currently authorized to conduct business in California, and as of
      July 15, 2007 the Company is headquartered in San Ramon, California. The
      Company’s primary operations consist of marketing, selling, and administering a
      secure Internet service and safe online community for children. The system,
      known as The Children’s Internet®, is not owned by the Company, but is owned by
      a related party, Two Dog Net, Inc. (“TDN”). The Company’s marketing, selling and
      administration rights derive from a Wholesale Sales & Marketing Agreement
      with TDN, through the year 2013 which includes the ability to obtain five year
      extensions.





In
      a
      Stock Purchase Agreement dated October 11, 2002, twenty-five D.W.C.
      Installations shareholders sold 2,237,000 of the original 2,242,000
“freely-tradable” shares of common stock to six individuals, two of whom are
      related to the Company’s Chief Executive Officer, Chief Financial Officer and
      Chairman of the Board, Sholeh Hamedani. Together, the two related individuals
      purchased 27% of the 2,237,000 shares sold. At the time the shares were issued,
      the Company believed the shares were "freely tradable" based on the
      representations made by its attorney at the time, Oswald & Yap, who
      structured the agreement.  Subsequently the Company determined that the
      shares were, in fact, not freely tradable and those shares would have to be
      registered.  The said shares were then registered in a SB-2 Registration
      Statement which was declared effective on May 5, 2004.





Also
      on
      October 11, 2002, the Company entered into a subsequent agreement with the
      six
      new shareholders holding the 2,237,000 “freely-tradable” shares, to issue four
      shares of restricted common stock to these shareholders or their designees,
      for
      every one “freely-tradable” share held. Pursuant to this agreement, 8,948,000
      newly-issued restricted shares of common stock were issued in exchange for
      an
      agreement to
      loan
      to TDN, the proceeds of the sales of a portion of their shares. TDN in turn
      agreed to loan a portion of these proceeds to Shadrack to finance the on-going
      operations of the Company.


4


TDN
      retained the remainder of the proceeds to help fund the on-going development,
      maintenance and technology upgrade costs of The Children’s Internet system and
      to make payments on TDN’s existing debts.





The 8,948,000 newly-issued
      shares were recorded at a value of $575,356 based on the $0.0643 per share
      paid
      by Shadrack in a previous transaction where Shadrack acquired the 2,333,510
      newly-issued shares it purchased on July 3, 2002. The $575,356 value was
      recorded by the Company as a debt financing fee. The loan agreement is such
      that
      Shadrack will not charge the Company any interest on the amounts loaned. Shares
      sold under this agreement included 1,218,990 of the “freely-tradable” shares and
      2,650,108 of the newly-issued restricted shares, for a total of 3,869,098
      shares, which were sold for a total of $2,722,341. After deducting the $494,049
      in commissions paid by TDN, the resulting net proceeds were $2,228,292. As
      of
      June 30, 2007 and 2006, the net amount loaned to the Company by Shadrack was
      $1,479,669 and $1,262,139, respectively.





During
      the year ended December 31, 2005, an additional 13,334,628 restricted shares
      of
      common stock were issued . Of
      these
      shares, 13,054,628 were issued to Shadrack, a related party and majority
      shareholder, for conversion of existing debt and 280,000 shares were issued
      to
      Crosslink Financial Communications, a non-related party 1  in
      payment for providing investor relation services .





On
      June
      9, 2006, 15,600 shares were issued to two principals of Brazer Communications
      under a public relations consulting agreement, as explained in Note
      4.





On
      June
      29, 2007, 4,500,000 shares were issued to the name of TCI Holding Company,
      LLC
      and deposited in escrow on July 3 rd in
      accordance with the Definitive Interim Stock Purchase Agreement between TCI
      and
      TCI Holding Company, LLC, as explained in Note 4, thereby increasing the
      Company’s total issued and outstanding shares of common stock to 31,373,738 at
      June 30, 2007.





Development
      Stage Enterprise





The
      Company is a development stage enterprise as defined by Statement of Financial
      Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development
      Stage Enterprises.” All losses accumulated since the inception of the Company
      have been considered as part of the Company’s development stage activities. The
      Company is devoting the majority of its efforts to activities focused
      on marketing The Children’s Internet® service and on
      financial planning, raising capital, developing sales strategies and new
      marketing materials and implementing its business plan. The Company is
      considered to be a development stage company even though its planned principal
      operations have commenced, because there have been no significant revenues
      earned by the Company to date.





Additionally,
      the Company is not a shell company as defined in Rule 12b-2 of the Exchange
      Act.




1 Although
        Crosslink Financial Communications was not a related party at the time of
        the
        issuance, the principal shareholder of Crosslink, William L. Arnold, became
        President of the Company under an Executive Employment Agreement on December
        30,
        2005.


5





Revenue
      Recognition





In
      December 2003, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 104 “Revenue Recognition, corrected copy” to
      revise and clarify SAB No. 101, “Revenue Recognition in Financial Statements”,
      issued in 1999 and 2000. Pursuant to these bulletins and the relevant generally
      accepted accounting principles, the Company recognizes revenue when services
      are
      rendered to subscribers under contractual obligation to pay monthly subscription
      amounts for such services.





**NOTE
      2 – INTERIM FINANCIAL INFORMATION**





Basis
      of Presentation





The
      accompanying unaudited interim financial statements have been prepared in
      conformity with accounting principles generally accepted in the United States
      of
      America pursuant to Regulation S-B of the Securities and Exchange Commission,
      which contemplates continuation of the Company as a going concern. At present,
      the Company has not generated any significant revenues from its established
      sources of revenue and has had net losses and negative cash flow since its
      inception. These factors raise substantial doubt about the Company's ability
      to
      continue as a going concern. Without the realization of additional capital
      or
      established revenue sources, it would be unlikely for the Company to continue
      as
      a going concern. The financial statements do not include any adjustments
      relating to the recoverability and classification of recorded asset amounts,
      or
      amounts and classification of liabilities that might be necessary should the
      Company be unable to continue in existence.





These
      interim financial statements should be read in conjunction with the Company's audited
      financial statements and related notes as contained in the Company's Form 10-KSB
      for the year ended December 31, 2006. In the opinion of management, the interim
      financial statements reflect all adjustments, including normal recurring
      adjustments, necessary for fair presentation of the interim periods presented.
      The results of operations for the six months ended June 30, 2007 are not
      necessarily indicative of results of operations to be expected for the full
      year.





Going
      Concern





The
      accompanying financial statements have been prepared on a going concern basis,
      which contemplates the realization of assets and the settlement of liabilities
      and commitments in the normal course of business. As reflected in the
      accompanying financial statements, the Company had net losses and negative
      cash
      flow from operations for the six month periods ended June 30, 2007 and 2006,
      and
      accumulated net losses and negative cash flow from operations of $4,735,101
      and
      $1,621,554, from inception through June 30, 2007.





The
      Company has been sued by the Securities and Exchange Commission as explained
      in
      Note 4. This action raises substantial doubt concerning the Company’s ability to
      continue as a going concern. The ability of the Company to continue as a going
      concern is dependent on its ability to generate profitable operations in the
      future by implementing its business plan and/or to obtain the necessary
      financing to meet its obligations, and repay its liabilities arising from normal
      business operations when they come due. The outcome of these matters cannot
      be
      predicted with any certainty at this time. Management plans to continue to
      provide for its capital needs during the year ended December 31, 2007 by
      incurring additional debt financing from related parties and is seeking debt
      or
      equity financing from unrelated parties, with the proceeds to be used to fund
      continuing operations. Management is currently negotiating with a prospective
      buyer, TCI Holding Company, LLC, to purchase controlling interest in the
      Company, as reported in a Form 8-K filed with the Securities and Exchange
      Commission on June 21, 2007 and explained in Note 4. The financial statements
      do
      not include any adjustments that might be necessary if the Company is unable
      to
      continue as a going concern.


6


**NOTE
      3 - RELATED PARTY TRANSACTIONS** ****




Services
      Provided




On
      January 26, 2005, the Company’s Board of Directors resolved that starting
      January 1, 2005, all salary due and payable to the Company's Chief Executive
      Officer, Chief Financial Officer, and Director, Sholeh Hamedani, would be
      accrued when earned. The decision will be made at the end of each year whether
      to make the payment in cash, shares of the Company’s restricted common stock, or
      a combination of both. Accordingly, for each of the six-month periods ended
      June
      30, 2007 and 2006, $90,000 has been accrued and charged to Officers’
Compensation. For the period from August 2002 through the end of 2004, Sholeh
      Hamedani provided services to the Company at a total cumulative fair market
      value of $435,000, which was contributed to Additional Paid-in Capital.
      Accordingly, she will not seek payment for the services provided during that
      period. Also, the salary of the Company’s President, William L. Arnold, was not
      fully paid, but was accrued from May 1, 2006 through August 31, 2006. Beginning
      on September 1, 2006, Mr. Arnold took an unpaid leave of absence.




During
      the quarter ended June 30, 2007, Roaya Wooler and Soraiya Smida, sisters of
      the
      Chief Executive Officer of the Company, both of whom have twelve years
      experience with Two Dog Net developing and marketing the product, performed
      consulting services for the Company and were paid a total of $9,846 for their
      services during the quarter.




Advances




With
      the
      exception of short-term advances totaling $156,228 made during the first six
      months of 2007 by Nasser Hamedani, a related party as explained below, and
      short-term advances totaling $28,015 made by Larry
      Wheeler, father of Tyler Wheeler, the Company’s Chief Software Architect
      Consultant and a director, as of
      the date of this report all of the Company’s funding has been provided by
      Shadrack Films, Inc., its majority stockholder. The total amount advanced by
      Shadrack through June 30, 2007 and 2006 was $1,479,669 and $1,262,139,
      respectively. In February 2005, the Company owed Shadrack approximately $457,000
      for loans made by Shadrack to the Company for funding all of the Company’s
      operations since entering the development stage on July 3, 2002. On February
      15,
      2005, the Company's Board of Directors authorized and approved the conversion
      of
      debt totaling $456,912 owed by the Company to Shadrack, into 13,054,628 shares
      of the Registrant's restricted common stock at a conversion price of $.035
      per
      share.





Shadrack
      Films, Inc. is an entity owned and controlled by the Company's Chief Executive
      Officer, Chief Financial Officer and Chairman of the Board, Sholeh Hamedani,
      who
      is its sole officer, director and shareholder. Shadrack also owned 2,333,510
      shares of the Company's common stock, of which it sold 1,277,150 of its
      restricted shares  in
      reliance on an exemption from registration pursuant to Section 4(1 1/2) of
      the
      Securities Act of 1933, to approximately 130 investors between July 2004 and
      June 2005. In addition, Shadrack paid for services, on behalf of the Company,
      valued at $35,000 with 70,000 restricted shares of the Company’s common stock.
      Together with the 13,054,628 shares issued upon conversion of the debt, Shadrack
      owns an aggregate of 14,040,988 shares of the Company's common stock or 52.2%
      without giving effect to any presently exercisable options.


7


Beneficial
      Ownership





The
      Company, Shadrack and Two
      Dog
      Net, Inc. (TDN), are
      related parties, in that, the Company's Chief Executive Officer, Chief Financial
      Officer, and Director, Sholeh Hamedani, is the sole shareholder of Shadrack
      which as of June 30, 2007 owns 52.2% of the Company's common stock. Ms. Hamedani
      was President of TDN until she resigned on August 1, 2002 and is a 10%
      shareholder of TDN. In addition, TDN’s current President, Chairman and Founder,
      Nasser Hamedani, is the father of Sholeh Hamedani.





Licensing
      Agreement





The
      Wholesale Sales and Marketing Agreement between the Company and Two Dog Net,
      Inc., dated March 3, 2003, is an exclusive and renewable five-year agreement
      for
      the Company to be the exclusive marketers of TDN’s proprietary secure internet
      service for children pre-school to junior high called The Children's Internet®.
      Under the terms of the agreement, it is automatically renewed for additional
      five-year periods on the same terms unless either party terminates by written
      notice to the other party no less than one year before the end of the term.
      Accordingly, the earliest date on which the agreement could be terminated is
      March 3, 2013.





On
      February 15, 2005, the Company's Board of Directors authorized and approved
      an
      amendment to the March 3, 2003 Wholesale Sales and Marketing Agreement between
      the Company and TDN. The amended license agreement reduces the license fee
      for
      The Children's Internet® technology payable to TDN from $3.00 to $1.00 per
      subscriber per month. In consideration for the reduction of the fee, the Company
      granted TDN or its designees, an option to purchase the Company's currently
      restricted common stock as described below.





The
      Interim Stock Purchase Agreement with TCI Holding Company, LLC, as explained
      in
      Note 4, requires that, prior to the close of the Stock Purchase Agreement,
      TCI
      and TDN cancel the Wholesale Sales and Marketing Agreement between the two
      companies and that TDN transfer to TCI rights and interests in Intellectual
      Property, including software, trademarks, trade names, and trade secrets
      required to operate The Children’s Internet service. In turn, TCI will enter
      into a royalty agreement with TDN which will provide that TCI pay TDN a royalty
      fee of one dollar, one time, for each new TCI subscriber, for a period of two
      years from the date of the close of the Stock Purchase Agreement.





Office
      Space





The
      Company’s office space in Pleasanton, California had been leased by Shadrack
      Films, Inc. for the past three years. That lease expired on April 30, 2007.
      From
      May 1 through July 15, 2007, the same office space was rented by Shadrack on
      a
      month-to-month basis. The Company and the landlord could not reach an agreement
      on terms for a new lease. Therefore, the Company vacated the premises on July
      13, 2007 and moved its headquarters into office space in San Ramon, California.
      This office space is leased from RAM Properties by Nasser Hamedani, a related
      party, for a period of one year through July 15, 2008, with an option to renew
      for one additional year. The Company currently reimburses Mr. Hamedani for
      the
      monthly lease payment of $1,762. Costs of the relocation were approximately
      $5,000.


8




Stock
      Options Granted




As
      noted
      above, on February 15, 2005, because TDN agreed to reduce their licensing fee,
      the Company issued an option to purchase up to 18,000,000 shares of the Company's
      restricted common stock at
      an
      exercise price of $0.07 per
      share ,
      and a
      fair value of $0. The
      Option is exercisable, in whole or in part at any time and from time to time,
      for a period of five years from the date of grant. The Option also provides
      TDN
      with "piggyback" registration rights for all shares underlying the Option on
      any
      registration statement filed by the Company for a period of one year following
      any exercise of the Option. This issuance was valued at $0 because as of the
      date of issuance, the Company was under no obligation for payment to TDN since
      no sales of the product had occurred and no liability, therefore, had been
      generated. The issuance was granted primarily to induce TDN to reduce its future
      right to a royalty from sales of the product.




**NOTE
      4 – COMMITMENTS AND CONTINGENCIES**





On
      November 24, 2004, Oswald & Yap, A Professional Corporation (“O&Y”),
      formerly counsel to the Company, filed a complaint in the Superior Court of
      California, County of Orange, Case No. 04CC11623, against the Company, seeking
      recovery of allegedly unpaid legal fees in the amount of $50,984.86 in
      connection with the legal representation of the Company. Subsequently the amount
      claimed of unpaid legal fees was reduced to $37,378.43 because it was discovered
      that O&Y did not properly credit all of the payments that were made by the
      Company to O&Y. The amount of $37,378.43 was deposited in an escrow account
      by the Company on July 5, 2005. The complaint includes causes of action for
      breach of contract. The Company disputes the amounts claimed alleging that
      O&Y’s services were otherwise unsatisfactory. On May 9, 2005, O&Y
      submitted an Offer to Compromise for a $0 payment by the Company to O&Y in
      exchange for mutual releases which the Company rejected. ****





The
      Company filed a cross-complaint against O&Y alleging breach of contract,
      professional negligence, negligent representation, and breach of good faith
      and
      fiduciary duty. The Company is seeking damages in an unspecified amount for
      costs, legal fees and losses incurred. O&Y has vigorously disputed the
      claims set forth in the cross-complaint and has indicated its intention, should
      it prevail in its defense, to institute a malicious prosecution action against
      the Company, Nasser Hamedani, Sholeh Hamedani and Company counsel.





A
      cross-claim was filed in the Superior Court of California, County of Orange,
      Case No. 04CC11623 by the Company against O&Y, and the principal allegation
      is that O&Y was retained to assist its predecessor company in the purchase
      and acquisition of D.W.C. Installations with the expectation that D.W.C. had
      available free-trading shares such that the Company could immediately raise
      capital on the relevant markets and that in advising the Company through the
      purchase, O&Y failed to properly advise the Company as to the status of
      D.W.C. Installations and its shares which in fact were not free-trading. As
      a
      result of this conduct, the Company alleges damages in an unspecified amount
      but
      including purchase costs, extended operation costs, refiling costs, audit costs,
      legal fees, loan fees, lost market share, and costs for registration. Trial
      on
      the complaint and cross-complaint is set to proceed on December 17,
      2007 .


9


There
      is
      a contingent liability in connection with a Stock Purchase Agreement executed
      on
      October 11, 2002 between identified Shareholders and identified Purchasers.
      Under the terms of Stock Purchase Agreement, a payment of $150,000 is due to
      be
      paid into escrow in part consideration for purchase of the stock of D.W.C.
      Installations, Inc. The payment date is designated as 90 days from the date
      that
      the Company’s [D.W.C. Installations, Inc., a Nevada Corporation] shares of
      common stock become quoted on the over-the-counter bulletin board system. The
      shares were approved by NASDAQ OTC:BB to be quoted on the over-the-counter
      bulletin board system on December 23, 2004. If this payment is not made, there
      could be exposure in connection with the identified shareholders’ efforts to
      collect the amounts allegedly due.





The
      Company was subject to a claim by Stonefield Josephson, Inc., its former
      accountants, seeking reimbursement costs for legal fees spent in connection
      with
      the Securities and Exchange Commission inquiry of the Company. Stonefield
      Josephson, Inc.’s claim seeks recovery of $29,412.74. The Company disputes any
      amounts owed because of a settlement agreement entered into between the
      respective parties in December 2004 effectively terminating their relationship.
      This matter was submitted to binding arbitration through AAA in January 2007.
      The Arbitrator's decision was issued on February 2, 2007, awarding Stonefield
      Josephson, Inc. the sum of $19,000 plus costs and fees in the amount of $1,425
      due and payable March 15, 2007. The decision also awarded Stonefield Josephson,
      Inc. interest at the rate of 10% per annum from March 15, 2007. No amounts
      have
      been paid to Stonefield Josephson since the date of the Arbitrator’s
      decision.





On
      August
      25, 2006, the Company filed a complaint against its former accountants,
      Stonefield Josephson, Inc., and its principal Dean Skupen, in the Superior
      Court
      of California, County of Alameda, Case No. VG06286054 alleging breach of
      contract, promissory estoppel, breach of implied covenant of good faith and
      fair
      dealing, negligent misrepresentation, fraud, and unfair business practices
      arising out of defendants’ alleged failure to properly perform contractual
      obligations. The matter was subsequently transferred to Los Angeles Superior
      Court and a status conference is set for this matter on October 2,
      2007.





On
      September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a
      complaint in the United States District Court Northern District of California
      Case No. C066003CW, against among others the Company, and its CEO, Sholeh
      Hamedani, alleging against one or more defendants violations of Section 10(b)
      of
      the Exchange Act and Rule 10b-5, violations of Section 13(a) of the Exchange
      Act
      and Rules 12b-20, 13a-1, 13a-11, 13a-13, violations of Section 13(b)(2)(A)
      of
      the Exchange Act by the Company, Violations of Section 13(b)(2)(B) of the
      Exchange Act by the Company, Violations of Section 13(b)(5) of the Exchange
      Act
      and Rule 13b2-1, 13b2-2, 13a-14, 16(a). The complaint generally alleges that
      the
      Company and the individual defendants made false or misleading public statements
      regarding the Company’s business and operations, made false statements in
      various filings with the Commission and in particular the June 2005 Annual
      Report and Restatement and 2005 Current and Quarterly Reports, and that
      defendants or some of them induced investment in the Company through
      misrepresentation and omissions. The complaint seeks disgorgement, unspecified
      monetary damages, injunctive relief and other relief against the defendants.
      The
      Company has answered the complaint. Trial in the matter has been set for March
      31, 2008.


10


The
      Company is currently seeking resolution of the SEC complaint by virtue of
      settlement.  A potential settlement likely may include the Company and/or
      its principals consenting, without admitting or denying the allegations, to
      a
      judgment alleging negligent, reckless, and intentional violations of the
      federal securities laws, and other sanctions including substantial penalties.
      These penalties could range from current key members of management being barred
      from serving as either directors or officers of the Company to also including
      financial penalties and disgorgement of all profits derived by the Company
      and/or its principals who raised funds through the sale of Company stock to
      third parties. Any proposed settlement will be subject to the Commission’s
      approval and the Company cannot predict the outcome of these settlement
      negotiations. Additionally, there is no assurance that the Company will receive
      a settlement offer. Moreover, there is no assurance that the settlement offer
      (if any) will be acceptable to the Company and the prospect of litigation
      could ensue which could seriously compromise the Company's ability to achieve
      its goals and continue as a going concern.





From
      inception, Shadrack, the majority shareholder of the Company, has advanced
      to
      the Company approximately $1.5 million for operations. While the exact
      amount of the disgorgement of profits and/or penalties cannot be determined
      at
      this time, the ability to pay them by the Company or the Chief Executive Officer
      is a serious question. Any proposed settlement will be subject to the
      Commission’s approval.  The Company cannot predict the outcome of any
      settlement negotiations, the staff’s investigation, or the ultimate Commission
      action should these settlement negotiations fail. The Company has not yet
      submitted a settlement offer to the SEC. The Company expects that it will
      prepare and submit a settlement offer to the SEC. However, there is no assurance
      that the Company’s settlement offer (if any) will be acceptable to the SEC and
      the prospect of litigation could ensue which could seriously compromise the
      Company's ability to achieve its goals.





On
      December 30, 2005, William L. Arnold, the principal shareholder of Crosslink
      Financial Communications, Inc., the Company’s former investor relations
      consulting firm, was appointed by the Chairman to act as President of the
      Company under an Executive Employment Agreement. Compensation includes a monthly
      salary of $10,000, of which $2,500 per month was deferred with 9% accrued
      interest until January 2007. The
      agreement also includes a
      combination of nonqualified and qualified stock options (the Stock Option).
      The
      Stock Option is for the purchase of up to 1,000,000 shares at an option price
      of
      $0.55 per share, and expires on December 31, 2010. The closing market price
      was
      $0.48 per share on the date of the agreement. One half of the Stock Option
      vested immediately and the remaining 500,000 option shares will vest at the
      rate
      of 1/36 th each
      month until fully vested. Commencing on September 1, 2006, Mr. Arnold took
      a
      voluntary unpaid leave of absence. During Mr. Arnold’s leave of absence the
      vesting of his options was suspended. Of the 500,000 option shares which vested
      immediately, 360,000 are Incentive Stock Options (ISO’s). The remaining 640,000
      option shares are non-qualified. Additionally the agreement includes a performance bonus of up to 50% of the
      annual salary to be paid on or before the sixtieth day following the
      close of the Company's fiscal year, provided that the Employee meets the
      performance standards as established by Board of Directors. Pursuant to
      this provision, $40,000 was accrued as an expense for the period of January
      1
      through August 31, 2006. If the stock-based compensation provisions of
      SFAS No. 123R had been adopted prior to January 1, 2006, the fair
      value of the 500,000 shares which vested on December 30, 2005 under the Stock
      Option would have been recorded at $235,000 .


11


Subsequent
      to the filing of the Company’s Form 10-KSB on May 18, 2007, Mr. Arnold advised
      the Company that he disagreed with the Company’s position that his unpaid leave
      of absence was voluntary. Mr. Arnold informed the Company that he believed
      his
      leave of absence resulted from the Company’s breach of the Executive Employment
      Agreement. The Company and Mr. Arnold have had discussions in an effort to
      resolve the differences between the parties but, to date, have not reached
      agreement. On August 8, 2007, Mr. Arnold advised the Company that he intends
      to
      take legal action against the Company to enforce the terms of his Employment
      Agreement. Mr. Arnold claims $520,000 in damages from the Company. The Company
      believes that Mr. Arnold violated the terms of his Employment Agreement when
      he
      voluntarily left his position as President in September of 2006. The Company
      believes it is only obligated to pay Mr. Arnold for back pay and bonus plus
      interest, for the period prior to September 2006. The total amount that the
      Company believes it owes Mr. Arnold as of June 30, 2007 is $89,274. This amount
      is reflected in the Company’s financial statements.





Adverse
      outcomes in some or all of the claims pending against the Company may result
      in
      significant monetary damages or injunctive relief against the Company that
      could
      adversely affect the Company’s ability to conduct its business. Although
      management currently believes that resolving all of these matters, individually
      or in the aggregate, will not have a material adverse impact on the Company’s
      financial position or results of operations, the litigation and other claims
      are
      subject to inherent uncertainties and management’s view of these matters may
      change in the future. There exists the possibility of a material adverse impact
      on the Company’s financial position and the results of operations for the period
      in which the effect of an unfavorable final outcome becomes probable and
      reasonably estimable.





The
      Company is not aware of any other pending or threatened litigation that could
      have a material adverse effect on its business.





On
      June
      9, 2006, the Company entered into a public relations consulting agreement with
      Brazer Communications of Mill Valley, CA to launch a media relations campaign
      to
      increase public awareness of the Company and its product. Under this agreement,
      overall fees were set at $4,700 per month for the contract period of six months
      ended on December 8, 2006. In addition to the monthly fees, on the date of
      the
      agreement 15,600 restricted shares were awarded to two principals of Brazer
      Communications. The fair market value of these shares was $7,800, and was
      amortized over the period of the agreement.





On
      January 9, 2007, the Company signed a 12-month co-location agreement with
      Evocative, Inc. to house the Company’s search engine, servers and related
      equipment at Evocative’s data center in Emeryville, California. This agreement
      replaced a similar 13-month agreement which began in October 2003 and was
      continued on a month-to-month basis. The new agreement adds a managed firewall
      service. The basic annual cost under this agreement is $35,988.





On
      February 12, 2007, the Company entered into an agreement with Convergys Customer
      Management Group Inc. of Cincinnati, Ohio to provide subscriber management
      services, including inbound telephone coverage 24/7, capturing caller
      information, providing toll-free numbers and daily reporting of orders and
      leads. This agreement replaced an existing agreement entered into on April
      5,
      2005. The term of the current agreement continues until the expiration of 30
      days after either party gives the other party written notice of its intent
      to
      terminate. Under the agreement, inbound live phone services are billed at $0.738
      per minute for the first million minutes annually, $0.72 for the second million
      minutes and $0.702 per minute thereafter. The
      minimum purchase commitment is $2,500 per month, which is waived for the first
      three months of service and during up to four months per year when no television
      infomercials are being aired.


12


On
      March
      1, 2007, the Company entered into an oral agreement to pay Tim T. Turner, the
      amount of $13,125 per month as a consultant until such time as Mr. Turner and
      the Company entered into an employment agreement. On April 2, 2007, the Company
      entered into an Executive Employment Agreement with Mr. Turner, whereby Mr.
      Turner will become the Director of Finance and Operations for the Company.
      Upon
      the Company obtaining Directors and Officers Insurance, Mr. Turner will be
      appointed an officer of the Company and made a member of the Company’s Board of
      Directors. The agreement states that Mr. Turner shall receive
      a yearly salary of $157,500. He shall earn a monthly salary of $13,125 of which
      $5,000 will be paid in cash and $8,125 shall be deferred and accrued for a
      maximum period of twelve months from the date of this Agreement. In the event
      that the Company raises, during this twelve-month period, additional capital,
      through loans, equity investment or both, in the aggregate sum of one million
      dollars, Mr. Turner’s monthly cash compensation shall be increased to $6,562.50.
      The balance of Mr. Turner’s monthly compensation of $6,562.50 shall be deferred
      and accrued.  At
      the
      end of the twelve month period, the total amount of Mr. Turner’s deferred
      compensation shall be payable by the Company, and the cash compensation will
      be
      increased to $13,125 per month.




In
      the
      event that the Company, acting in good faith, determines that it does not have
      the resources to pay Mr. Turner deferred compensation, Mr. Turner and the
      Company have agreed that the total amount of deferred compensation will be
      converted into a note payable to Mr. Turner by the Company. The Note shall
      have
      a term of one year and shall accrue interest at the annual rate of 7.75%, or
      2.5
      % above the Federal Funds Rate then in effect, whichever amount is higher,
      payable at the end of each calendar month. At the end of the Note term, the
      principal amount and any unpaid earned interest shall be due and payable. The
      Note will have a Warrant attached to it that will enable the holder to purchase
      shares of the Company’s common stock. The number of shares of the Company’s
      common stock that will be purchasable under the terms of the Warrant will be
      equal to the principal amount of the Note multiplied by four and divided by
      the
      then current market price of the Company’s common stock. The Warrant Shares will
      be unregistered and subject to Rule 144. The Warrant Shares shall have piggyback
      registration rights. The term of the Warrant will be five years from the date
      of
      issue. Mr. Turner’s monthly salary will otherwise be payable pursuant to the
      Company’s normal payroll practices. The Note will continue to be due and payable
      with interest from the date issued.





In
      addition to the Base Salary, Mr. Turner shall participate in a bonus program
      in
      which Mr. Turner will earn an annual bonus equal to 50% of Mr. Turner’s Base
      Salary subject to Mr. Turner meeting the performance objectives established
      by
      the Company.





On
      April
      30, 2007, the Company and the Board of Directors adopted “The Children’s
      Internet, Inc. 2007 Equity Incentive Plan” (the “Plan”). The purpose of the Plan
      is to provide incentives to attract, retain and motivate eligible persons whose
      present and potential contributions are important to the success of the Company
      by offering them an opportunity to participate in the Company's future
      performance through awards of Options, Restricted Stock and Stock Bonuses.
      Under
      the terms of the Plan, the Company has made available six million (6,000,000)
      Shares of the Company’s stock to be issued to Officers, Directors, Employees,
      Consultants and Advisors to the Company with certain restrictions as set forth
      in the Plan. The
      Plan
      will be administered by a Committee of the Board of Directors. The Plan will
      terminate ten years from the effective date of the Plan unless terminated
      earlier under terms of the Plan.


13


On
      June
      15, 2007, the Company entered into a Definitive Interim Stock Purchase Agreement
      (the “ISPA”) with The Children’s Internet Holding Company, LLC (“TCI Holding”)
      and Shadrack Films, Inc., the majority shareholder, pursuant to which TCI
      Holding, subject to certain conditions, has agreed to purchase from the Company
      a total of 120 million authorized but unissued shares of the Company’s common
      stock, and from Shadrack an additional 10 million shares of the Company’s common
      stock. The purchase price for the shares is an aggregate of $8 million, of
      which
      $1.5 million is to be used by the Company to pay down certain indebtedness,
      and
      $500,000 is to be paid to Shadrack for the purchase of 10,000,000 shares of
      the
      Company’s Common Stock held by Shadrack, and the balance will be paid to the
      Company.




The
      ISPA
      is intended to be replaced by a final stock purchase agreement (the “FSPA”),
      which the parties have agreed to negotiate and enter into no later than 45
      days
      from the end of TCI Holding’s due diligence process, unless extended by consent
      of both parties.





An
      escrow
      agreement was signed and became effective on July 3, 2007, under which TCI
      Holding agreed to place $500,000 of the purchase price into an escrow account,
      with the first $300,000 deposited on July 6, 2007, and the balance to be
      deposited after completion of due diligence and upon TCI Holding notifying
      the
      Company that TCI Holding elects to proceed with the FSPA. The Company has agreed
      to place 7,500,000 of its currently authorized but unissued shares of common
      stock into the escrow account, with the first 4,500,000 deposited on July 3,
      2007 and the balance to be deposited after completion of due diligence and
      upon
      TCI Holding notifying the Company that TCI Holding elects to proceed with the
      FSPA. The escrowed cash and shares will be the sole remedy of the parties if
      an
      event of default under the ISPA, or the FSPA, occurs. The certificate for the
      4,500,000 shares to be deposited on July 3 rd was
      issued by the Company’s transfer agent on June 29, 2007. Therefore, the
      Company’s total issued and outstanding shares increased by 4,500,000 as of that
      date. On August 9, 2007, the Company and TCI Holdings amended the ISPA. Under
      the Amendment, $300,000 which was placed in escrow by TCI Holding pursuant
      to
      the ISPA was released from escrow, $150,000 to TCI to be used pay down certain
      specified current payables and $150,000 released back to TCI Holding. The
      Amendment also made certain changes to the events of default and SEC settlement
      provisions of the ISPA as
      reported in a Form 8-K filed with the Securities and Exchange Commission on
      August 15, 2007.





From
      June
      15, 2007 until the closing occurs under the FSPA, or earlier termination of
      the
      ISPA or FSPA, the Company has agreed not to solicit, discuss, negotiate or
      enter
      into any agreement or understanding with any third party relating to a sale,
      merger or acquisition of the Company, or the sale of a material portion of
      its
      assets, without the prior written consent of TCI Holding.




The
      Company has also agreed to cause Two Dog Net, Inc. (“TDN”) to transfer to TCI
      Holding as part of the closing “The Children’s Internet®” and “Safe Zone
      Technology®” software and other related trademarks, registrations and software
      applications, as such software, trademarks, registrations, and software
      applications related solely to the business of The Children’s Internet. After
      the
      Closing, TCI Holding has agreed to pay to TDN or its designee a one-time royalty
      fee of $1 for each subscriber of The Children’s Internet secure on-line service
      during the two-year period commencing on the closing date, which is to be paid
      30 days after receipt by the Company of its first monthly user fee from each
      subscriber.


14


Completion
      of the transaction is subject to a number of conditions, including negotiation
      and execution of the FSPA, amendment of the Company’s articles of incorporation
      to increase its authorized shares of common stock to 250 million (which will
      require consent of a majority of the shareholders) and dismissal or settlement
      of all litigation by the Securities and Exchange Commission against the Company
      to the satisfaction of TCI Holding.





**NOTE
      5 – COMMON STOCK**





On
      February 15, 2005, the Company’s Board of Directors authorized a 2 for 1 forward
      split of the Company's issued and outstanding common stock to shareholders
      of
      record on March 7, 2005, in the form of a 100% stock dividend. The effective
      date of the forward split on the NASDAQ OTC: BB was March 11, 2005.





On
      June
      9, 2006, 15,600 common shares were issued to Brazer Communications under a
      public relations consulting agreement, as explained in Note 4.





On
      June
      29, 2007, 4,500,000 common shares were issued and deposited in escrow on July
      3 rd in
      accordance with the Definitive Interim Stock Purchase Agreement between TCI
      and
      TCI Holding Company, LLC, as explained in Note 4.





No
      other
      new shares were issued by the Company during the period from January 1, 2006
      through the date of this report.





**NOTE
      6 – NON-MONETARY TRANSACTIONS**





Deferred
      Charge





As
      explained in Note 3, on February 15, 2005, the Company’s Board of Directors
      granted an option to Two Dog Net, Inc., a related party, to purchase up to
      18,000,000 shares of the Company’s restricted common stock. This option was
      valued at $0.





Conversion
      of Debt to Common Stock





As
      explained in Note 3, on
      February 15, 2005, the Company's Board of Directors authorized and approved
      the
      conversion of debt totaling $456,912 owed to Shadrack Films, Inc., the majority
      shareholder, into 13,054,628 shares of the Company’s restricted common stock at
      a conversion price of $.035 per share .





Stock-based
      Compensation





On
      February 15, 2005, the Company’s Board of Directors granted Tyler Wheeler, the
      Company’s Chief Software Architect Consultant and a director, an option to
      purchase up to 1,000,000 shares of the Company’s restricted common stock at an
      exercise price of $0.07, and a fair value of $315,000. The option is
      exercisable, in whole or in part at any time and from time to time, for a period
      of five years from the date of grant. This option to purchase Company shares
      was
      based on a fair market value of $0.315 per share. The
      option was valued using the Black-Scholes option pricing model, which was
      developed for estimating the fair value of traded options, and taking into
      account that the exercisable option shares are restricted. The value of $315,000
      was recorded as an expense for services when the option was
      granted.


15


During
      2006, options to purchase 611,112 shares at $0.55 per share, granted
      to William
      L. Arnold , became
      vested under his executive employment agreement based on his service as
      President of the Company. The
      vested options were valued at $52,223 using the Black-Scholes option pricing
      model based on the grant-date fair value in accordance with
      SFAS No. 123R.





As
      explained in Note 4, on June 9, 2006, 15,600 restricted shares were awarded
      to
      two principals of Brazer Communications under a six-month contract to perform
      public relations consulting services for the Company. The fair market value
      of
      these shares was $7,800.





On
      April
      30,  2007,
      subject to the terms of the 2007 Equity Incentive Plan, the Company granted
      qualified stock options to two employees, Tim Turner, pursuant to the terms
      of
      Mr. Turner’s Executive Employee Agreement, and John Heinke, the Company’s
      Controller. Mr. Turner was granted options to purchase 2,687,374 shares
      of
      the Company’s common stock at the purchase price of $0.081 per share. Of the
      total options, 300,000 shares vested immediately and the balance of 2,387,374
      shares vest at the rate of one thirty-sixth per month of employment. Mr. Heinke
      was granted options to purchase 300,000 shares of the Company’s common stock at
      the purchase price of $0.081 per share. Mr. Heinke’s options vest at the rate of
      one thirty-sixth per month of employment. The purchase price of $0.081 per
      share
      for Mr. Turner and Mr. Heinke’s options was the fair market value of the shares
      at the date of the grant.





On
      April,
      30, 2007, subject to the terms of the 2007 Equity Incentive Plan, the Company
      granted unqualified stock options to three of the Company’s four Directors,
      Roger Campos, Jamshid Ghosseiri and Tyler Wheeler. Each Director was granted
      options to purchase 125,000 shares of the Company’s common stock at the purchase
      price of $0.081 per share which was the fair market value of the shares at
      the
      date of the grant. The options for the three Directors vested immediately upon
      grant.





The
      value
      of the options granted on April 30, 2007 and discussed in the preceding two
      paragraphs, was based on a fair market value of $0.08 per share at the grant
      date, which was computed using the Black-Scholes option pricing model. The
      total
      value of option shares vested during the quarter ended June 30, 2007 was
      $65,944, which was recorded as an expense of the period.





Contributed
      Capital





For
      the
      period from January 1 through March 31, 2007, Shadrack Films, Inc., the majority
      shareholder, provided to the Company the half-time services of John Heinke,
      CPA,
      as Controller, at a fair market value of $7,500, which was contributed to
      Additional Paid-in Capital. Accordingly, he will not seek payment for the
      services provided during that period.


16


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
      OPERATION**





The
      following discussion and analysis should be read in conjunction with our
      financial statements, including the notes thereto, appearing elsewhere in this
      Report.





**Forward-Looking
      Statements**





The
      following information contains certain forward-looking statements of management
      of the Company. Forward-looking statements are statements that estimate the
      happening of future events and are not based on historical fact. Forward-looking
      statements may be identified by the use of forward-looking terminology, such
      as
“may,”“could,”
      “expect,” “estimate,” “anticipate,” “plan,” “predict,” “probable,” “possible,”
“should,” “continue,” or similar terms, variations of those terms or the
      negative of those terms. The forward-looking statements specified in the
      following information have been compiled by our management on the basis of
      assumptions made by management and considered by management to be reasonable.
      Our future operating results, however, are impossible to predict and no
      representation, guaranty, or warranty is to be inferred from those
      forward-looking statements.





**Critical
      Accounting Policies and Estimates**





The
      Company's financial statements have been prepared in accordance with accounting
      principles generally accepted in the United States of America, which
      contemplate continuation of the Company as a going concern .
      The
      preparation of these financial statements requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      the disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual
      results could differ from those estimates.


17


**RESULTS
      OF OPERATIONS**





**Selected
      Financial Data**




The
      following selected statement of operations and balance sheet data for the period
      from September 25, 1996, the date of our inception, through June 30, 2007 and
      for the six months ended June 30, 2007 as compared to the six months ended
      June
      30, 2006 were derived from our financial statements and notes thereto included
      in this report which are unaudited. Historical results are not necessarily
      indicative of results that may be expected for any future period. The following
      data should be read in conjunction with "Plan of Operation" below, and our
      unaudited financial statements, including the related notes to the financial
      statements.





For the six
              months ended
              June 30, 2007
            
            For the six
              months ended
              June 30, 2006
            
            For the period
              from September
              25, 1996
              (inception)
              through June 30,
              2007**Statement of Operations
                Data:**Net
                revenues
            
            $
            442
            
            $
            273
            
            $
            1,317Operating
                expenses
            
            $
            567,406
            
            $
            674,845
            
            $
            4,695,012Operating
                loss
            
            $
            (567,067
            )
            $
            (674,624
            )
            $
            (4,693,913
            )Net
                loss
            
            $
            (584,715
            )
            $
            (679,890
            )
            $
            (4,735,101
            )





As of June 30, 2007**Balance
                Sheet Data:**Total
                assets
            
            $
            46,432Total
                liabilities
            
            $
            2,418,593Total
                stockholders' deficit
            
            $
            (2,372,161
            )





Our
      operating expenses decreased by $107,439 for the six months ended June 30,
      2007,
      as compared to the six months ended June 30, 2006. The decrease was primarily
      due to decreases of $52,278 in officer compensation and $227,298 in legal
      expenses. The decrease in officer compensation was attributable to the unpaid
      leave of absence taken by the President, William L. Arnold, from September
      1,
      2006 through the date of this report, partially offset by the engagement of
      Tim
      Turner as Director of Finance and Operations on April 2, 2007. The decrease
      in
      legal expenses resulted primarily from more litigation activity in 2006 due
      to
      the suit against former legal counsel Oswald & Yap and in responding to the
      SEC inquiry. The decreases mentioned were partially offset by increases in
      consulting fees of $81,236,accounting expenses of $60,739 due to the re-audit
      of
      the year ended 2005, and the $30,000 computed value of options granted to three
      directors, two of whom had served for over five years without
      compensation.




**Plan
      of Operation**




This
      plan
      of operation contains forward-looking statements that involve risks,
      uncertainties, and assumptions. The actual results may differ materially from
      those anticipated in these forward-looking statements as a result of certain
      factors, including, but not limited to, those described elsewhere in this
      report.


18




On
      September 10, 2002, we entered into a License Agreement with Two Dog Net for
      an
      exclusive worldwide license to market and sell The Children’s Internet® service.
      We subsequently replaced the royalty and license agreement with a new Wholesale
      Sales & Marketing Agreement with the same effective date of September 10,
      2002. The new agreement provides for us to be the exclusive marketers of Two
      Dog
      Net’s proprietary secure Internet service for pre-school to junior high school
      aged children called The Children’s Internet®. We further amended this agreement
      in February 2005 to decrease the per user fee to Two Dog Net from $3.00 to
      $1.00. In consideration for this decrease of the royalty fee, Two Dog Net was
      granted an option to acquire 18,000,000 shares of the Company’s restricted
      common stock at an exercise price of $.07 per share for five years from the
      date
      of grant. The shares underlying the option have “piggy back” registration rights
      for a period of one year following any exercise of the option.




Two
      Dog
      Net did not give written notice to terminate the contract one year prior to
      the
      expiration of the initial five-year term. Therefore, the licensing agreement
      was
      automatically renewed for an additional five years expiring in
      2013.




The
      Company released The Children’s Internet®, version 9.0, to the market on March
      2, 2006. The Company is the exclusive marketer and distributor of The Children's
      Internet® membership-based service created just for kids. In the August 2004
      issue of PC Magazine, The Children's Internet® was ranked as Editors' Choice in
      the category of "Kids' Browsers and Services," and was voted number one over
      AOL, EarthLink and MSN Premium 9. Additionally in August 2006, The Children's
      Internet® was declared winner of Outstanding Products of 2006 by iParenting
      Media Awards in the software category. Shortly thereafter in September 2006,
      The
      Children's Internet® received the coveted National Parenting Center's Seal of
      Approval.





We
      believe The Children's Internet® is the most comprehensive, smart solution to
      the problems inherent to a child’s unrestricted and unsupervised Internet
      access. We offer a protected online service and "educational super portal"
      specifically designed for children, pre-school to junior high, providing them
      with SAFE, real-time access to the World Wide Web; access to hundreds of
      thousands of the best pre-selected, pre-approved educational and entertaining
      web pages accessed through a secure propriety browser and search
      engine.




During
      2006 and 2007, the technology on which the product is based and the
      functionality of the service was improved. The Company increased the number
      of
      approved websites within the search engine and portals database by over 50%.
      The
      Company, through Two Dog Net, also substantially upgraded the underlying system
      infrastructure by increasing redundant servers and improving control procedures
      which in turn increased the reliability of the service. Additionally, during
      2007, where appropriate, the Company contracted with third party companies
      to
      outsource administrative support services and effectively put in place the
      infrastructure to support the marketing initiatives. These outsource providers
      handle telemarketing and the order taking process and media
      placement.


19


**The
      Business Model**




The
      product sells for $9.95 per month to the consumer. The user must already have
      internet access, either through dial-up, DSL or cable broadband. We utilize
      both
      retail and wholesale channels of distribution.




The
      Company will focus on establishing long term, value-driven relationships
      with:





·
            Parents
                and Kids


·
            The
                School Market: School Administrators and
                Teachers


·
            Major
                ISP’s such as Comcast, Yahoo, AOL,
                etc.


·
            Non-profit
                organizations such as religious groups, Boy Scouts and Girl Scouts,
                etc.


·
            ISP
                customers with an interest in protecting their families




The
      product is launched and generating minimal revenues through our grass roots
      marketing efforts as well as some online marketing initiatives. At the end
      of
      the last quarter, in March of 2007, we aired our updated Infomercial on various
      television stations from New York to California for an initial three week media
      test which was the first part of an overall three month media campaign. The
      Company intended to continue to run the media test to identify the markets
      that
      met or exceeded our response criteria in order to build the permanent television
      schedule to ”roll-out” the Infomercial on a national basis. However, due to
      unforeseen expenses we did not have the anticipated budget in place to continue
      to run the media test in the second quarter of 2007. Nevertheless, we still
      believe that utilizing the Infomercial to launch the advertising and consumer
      marketing program to build brand recognition and generate revenues from monthly
      subscriptions will be the cornerstone of an overall successful marketing
      plan.




During
      the second quarter of 2007, the Company took additional steps to upgrade the
      product and expand market opportunities. The Company developed a downloadable
      version of the product and made it available online as a free download at the
      Company’s corporate web site, www.childrensinternet.com .
      The
      downloadable version was released as part of our marketing plan to increase
      distribution opportunities and to coincide with the infomercial launch.
      Potential subscribers simply click on "Order Now" and can download the
      installation software directly from the Internet for a free 30-day trial thereby
      obviating the requirement to order a CD and wait for it to be shipped to them.




During
      the second quarter of 2007, we expanded our online marketing initiatives by
      launching an opt-in e-mail marketing and sales campaign that targeted
      approximately five million likely customers. In addition the Company utilized
      the services of a search engine optimization consulting firm to enhance the
      Company’s web placement on popular search engines.




As
      part
      of an overall expansion program to make the service marketable to a variety
      of
      affiliate websites like parenting portals and homework help portals the Company
      spent considerable time to doubled the number of approved web pages in the
      white
      list of acceptable sites used by the Company’s secure search engine and content
      portals. We believe this will allow us to establish strategic alliances with
      partners who have a major online presence for cross-promotional and visibility
      programs to co-market and co-brand the service.




We
      plan
      to continue our grass roots sales and online marketing efforts until such
      time that the Company raises significant capital required to implement a
      broad based Sales and Marketing Plan. We would focus our sales and marketing
      programs using a number of traditional and some less traditional marketing
      techniques to generate product awareness and build brand awareness. Among these
      are;


20


·
            **Direct
                Response Marketing**.The
                TV Infomercial will be the cornerstone of our consumer-marketing
                program.
                This direct response-marketing vehicle provides a number of advantages
                including; a direct sale opportunity, brand awareness development,
                cost
                effectiveness, and rapid market response and feedback.





·
            **Spot
                Media**.
                In markets where consumer reaction to our Direct Response Marketing
                program is high, we will run spot television and radio commercials
                in
                support of our Direct Response campaign to further enhance brand
                awareness
                and reinforce the consumer purchase decision. We will also be
                opportunistic marketers, purchasing airtime around relevant programming,
                such as MSNBC’s “To Catch a Predator”
program.





·
            **Public
                Relations**.Public
                relations activities will combine events, special promotions, and
                traditional media relations with the objective of maintaining top-of-mind
                awareness of the product with consumers and media. We will work with
                our
                strategic partners, where possible and appropriate, to maximize resources
                and obtain optimum media coverage.





·
            **Internet
                Advertising**.
                The Company will employ Internet advertising on targeted sites frequented
                by parents of school-aged children. Advertising will also be placed
                on
                sites that specifically address Internet security for
                children.





·
            **School
                Sales Initiative**.
                Schools are a natural vehicle for reaching our target audience, parents
                of
                school-aged children. The Company will initiate a major sales effort
                aimed
                at forming partnerships with schools and teachers to bring awareness
                of
                our product to children and their parents. The Company has tested
                this
                concept with local school districts and the response has been excellent.





·
            **Fundraising
                Initiative**.
                The Company will establish a fundraising program for use by schools
                as
                well as other children’s organizations, as a fund raising vehicle. This
                program will enable such organizations to raise funds by selling
                subscriptions to The Children’s Internet service. A portion of the sales
                price will be refunded to the selling organization. The advantage
                of TCI’s
                fund raising program over other fund raising vehicles is that our
                program
                functions like an annuity, providing continued funding to the
                participating organization for as long as their members continue
                to
                subscribe to The Children's Internet
                service.





·
            **Strategic
                Partnerships.**Strategic
                partnerships will be an important component of our overall marketing
                strategy. Strategic partners can provide “legitimacy” for the brand. These
                partners can also expose the Company’s product to a large base of
                potential new customers. Joint public relations and marketing efforts
                can
                be a very cost effective mechanism. ISP’s, web portals, telecommunications
                companies, child oriented companies and public interest groups will
                be
                target strategic partners.


21


We
      believe the combined effect of this coordinated marketing program will be to
      build awareness of our product amongst our target consumer, to establish The
      Children’s Internet as the premiere product in the minds of consumers and to
      drive this motivated consumer base to make the purchase decision to subscribe
      to
      The Children’s Internet service.




**Channels
      of Distribution:**





The
      Children's Internet, Inc. will employ both direct and indirect sales channels.





Also,
      subject to secure financing, we will hire a direct sales force. The primary
      targets will be the largest Internet Service Providers as well as other national
      organizations that market to the most appropriate demographic groups for our
      service. We believe one or more of the largest ISPs in the United States will
      recognize the first mover advantage opportunity and will use The Children’s
      Internet to not only offer this much needed product to their existing customers,
      but also to take a significant market share from their competition. We also
      believe that almost any company that markets to our demographics will want
      to
      seize the public relations goodwill that will accrue to any company offering
      our
      service.





The
      indirect channel, composed of non-salaried independent agents and wholesale
      distributors, will target a wide range of opportunities, from local charities
      to
      national organizations where they may have an influential contact. These sales
      agents will have the opportunity to employ secondary resellers to work for
      them,
      but we will not market using a multi-level marketing plan. Through grassroots
      efforts during 2006 the Company entered into sales agent agreements with ten
      individuals. Through 2007, the Company intends to continue to support these
      sales agents in their efforts to distribute the product on an individual basis,
      through organizations and through key strategic online service
      providers.




**Future
      Products and Services**




In
      the
      future, we anticipate generating revenues via advertising sold to the purveyors
      of children goods and services. As well, we intend to engage in the
      merchandising of The Children’s Internet® themed products, from clothing to toys
      to books, but for the foreseeable future we will focus strictly on the
      successful distribution of our core service.




**Market
      Share, Cash Flow and Profitability**




Although
      market data is not exact, and varies depending on the source, our plan is based
      on the belief that in the United States alone there are an approximately 48
      million homes with internet access with children under the age of 16. Our model,
      with a mix of business generated from the respective channels of distribution,
      indicates we can be cash flow positive and profitable with less than 0.5% of
      the
      market.




**LIQUIDITY
      AND RESOURCES**




As
      of
      June 30, 2007, we had net loss from inception of approximately $4,735,000.
      Of
      this amount, approximately $603,000 represents the estimated fair market value
      for the cost of wages, if paid, for services rendered by our Chief Executive
      Officer, Controller and James Lambert, an outside financial consultant (we
      have
      recorded these amounts for the cost of wages and, since they did not charge
      the
      Company, as additional paid-in capital), $1,844,000 represents professional
      fees
      such as legal and accounting expenses, $575,000 represents a debt financing
      fee,
      $381,000 represents officers and directors compensation for which an options
      to
      purchase common stock was issued, $578,000 represents accrued officers
      compensation, and the balance of $754,000 consists primarily of payroll,
      occupancy and telecommunications costs including internet costs, net of
      approximately $1,000 in revenues. To date, Shadrack, the majority shareholder,
      has funded all of our expended costs, with the exception of short-term advances
      totaling approximately $184,000 made by other related parties during the first
      two quarters of 2007.


22




Currently,
      we are dependent on funding from Shadrack and other related parties for our
      current operations and for providing office space and utilities that for the
      six
      months ended June 30, 2007, averaged $20,500 per month in operating costs,
      exclusive of professional fees and officer compensation accrued but unpaid.
      Through June 30, 2007, the amount funded by Shadrack totaled approximately
      $1,480,000. On June 30, 2007, the balance due to Shadrack was approximately
      $1,023,000. The difference of approximately $457,000 was converted to common
      stock on February 15, 2005, when the Company’s Board of Directors authorized the
      conversion of all debt owed to Shadrack into 13,054,628 shares of restricted
      common stock at a conversion price of $0.035 per share. Shadrack is under no
      obligation to continue funding our operations and could stop at any time without
      notice. Furthermore, Shadrack currently has limited financial resources.
      Therefore, additional funding for the Company through Shadrack is dependent
      on
      Shadrack’s ability to raise funds in the future, for which there is no
      assurance.




Where
      practicable, we plan to contract with third party companies to outsource
      administrative support services that effectively support the growth of the
      business. These outsource providers handle technical support, telemarketing
      and
      the order taking process and media placement. We believe this strategy will
      minimize the number of employees required to manage our intended growth through
      2007.




On
      June
      9, 2006, the Company entered into a public relations consulting agreement with
      Brazer Communications of Mill Valley, CA to launch a media relations campaign
      to
      increase public awareness of the Company and its product. Under this agreement,
      overall fees were set at $4,700 per month for the contract period of six months
      ended on December 8, 2006. In addition to the monthly fees, on the date of
      the
      agreement 15,600 restricted post-split shares were awarded to two principals
      of
      Brazer Communications. The fair market value of these shares was $7,800, and
      was
      amortized over the period of the agreement.




On
      January 9, 2007, the Company signed a 12-month co-location agreement with
      Evocative, Inc. to house the Company’s search engine, servers and related
      equipment at Evocative’s data center in Emeryville, California. This agreement
      replaced a similar 13-month agreement which began in October 2003 and was
      continued on a month-to-month basis. The new agreement adds a managed firewall
      service. The basic annual cost under this agreement is $35,988.





On
      February 12, 2007, the Company entered into an agreement with Convergys Customer
      Management Group Inc. of Cincinnati, Ohio to provide subscriber management
      services, including inbound telephone coverage 24/7, capturing caller
      information, providing toll-free numbers and daily reporting of orders and
      leads. This agreement replaced an existing agreement entered into on April
      5,
      2005. The term of the current agreement continues until the expiration of 30
      days after either party gives the other party written notice of its intent
      to
      terminate. Under the agreement, inbound live phone services are billed at $0.738
      per minute for the first million minutes annually, $0.72 for the second million
      minutes and $0.702 per minute thereafter. The minimum purchase commitment is
      $2,500 per month, which is waived for the first three months of service and
      during up to four months per year when no television infomercials are being
      aired.


23


On
      April
      2, 2007, the Company entered into an Executive Employment Agreement with Tim
      T.
      Turner, whereby Mr. Turner will become the Director of Finance and Operations
      for the Company. Upon the Company obtaining Directors and Officers Insurance,
      Mr. Turner will be appointed an officer of the Company and made a member of
      the
      Company’s Board of Directors. The agreement states that Mr. Turner
      shall receive
      a yearly salary of $157,500. He shall earn a monthly salary of $13,125 of which
      $5,000 will be paid in cash and $8,125 shall be deferred and accrued for a
      maximum period of twelve months from the date of this Agreement. In the event
      that the Company raises, during this twelve-month period, additional capital,
      through loans, equity investment or both, in the aggregate sum of one million
      dollars, Mr. Turners monthly cash compensation shall be increased to $6,562.50.
      The balance of Mr. Turner’s monthly compensation of $6,562.50 shall be deferred
      and accrued.  At
      the
      end of the twelve month period, the total amount of Mr. Turner’s deferred
      compensation shall be payable by the Company, and the cash compensation will
      be
      increased to $13,125 per month.




In
      the
      event that the Company, acting in good faith, determines that it does not have
      the resources to pay Mr. Turner deferred compensation, Mr. Turner and the
      Company agree that the total amount of deferred compensation will be converted
      into a note payable to Mr. Turner by the Company. The Note shall have a term
      of
      one year and shall accrue interest at the annual rate of 7.75%, or 2.5 % above
      the Federal Funds Rate then in effect, whichever amount is higher, payable
      at
      the end of each calendar month. At the end of the Note term, the principal
      amount and any unpaid earned interest shall be due and payable. The Note will
      have a Warrant attached to it that will enable the holder to purchase shares
      of
      the Company’s common stock. The number of shares of the Company’s common stock
      that will be purchasable under the terms of the Warrant will be equal to the
      principal amount of the Note multiplied by four and divided by the then current
      market price of the Company’s common stock. The Warrant Shares will be
      unregistered and subject to Rule 144. The Warrant Shares shall have piggyback
      registration rights. The term of the Warrant will be five years from the date
      of
      issue. Mr. Turner’s monthly salary will otherwise be payable pursuant to the
      Company’s normal payroll practices. The Note will continue to be due and payable
      with interest from the date issued.





In
      addition to the Base Salary, Mr. Turner shall participate in a bonus program
      in
      which Mr. Turner will earn an annual bonus equal to 50% of Mr. Turner’s Base
      Salary subject to Mr. Turner meeting the performance objectives established
      by
      the Company.




On
      April
      30, 2007, the Company and the Board of Directors adopted “The Children’s
      Internet, Inc. 2007 Equity Incentive Plan” (the “Plan”). The purpose of the Plan
      is to provide incentives to attract retain and motivate eligible persons whose
      present and potential contributions are important to the success of the Company
      by offering them an opportunity to participate in the Company's future
      performance through awards of Options, Restricted Stock and Stock Bonuses.
      Under
      the terms of the Plan, the Company has made available six million (6,000,000)
      Shares of the Company’s stock to be issued to Officers, Directors, Employees,
      Consultants and Advisors to the Company with certain restrictions as set forth
      in the Plan. The Plan will be administered by a Committee of the Board of
      Directors. The Plan will terminate ten years from the effective date of the
      Plan
      unless terminated earlier under terms of the Plan.


24




The
      Company’s office space in Pleasanton, California had been leased by our majority
      shareholder, Shadrack Films, Inc., which expired on April 30, 2007. From May
      1
      through July 15, 2007, we rented our office space on a month-to-month basis.
      The
      Company and the landlord could not reach an agreement on terms for a new lease
      and we vacated the premises on July 13, 2007, and moved our headquarters into
      office space in San Ramon, California. This office space is leased by Nasser
      Hamedani, a related party, who we reimburse for the monthly lease payment of
      $1,762.




**Going
      Concern Uncertainty**





Through
      the date of this report, we have relied almost exclusively on loans from
      Shadrack to fund all of our expenses. There is no assurance that Shadrack will
      be able or willing to continue such funding. We will be required to obtain
      additional funds through private placements of debt or equity securities or
      by
      other borrowing. There is no assurance that such additional financing will
      be
      available when required in order to proceed with our business plan. Further,
      our
      ability to respond to competition or changes in the market place or to exploit
      opportunities will be significantly limited by lack of available capital
      financing. If we are unsuccessful in securing the additional capital needed
      to
      continue operations within the time required, we will not be in a position
      to
      continue operations. In this event, we would attempt to sell the Company or
      file
      for bankruptcy.





**Off-Balance
      Sheet Arrangements**





None.





**ITEM
      3.**  **CONTROLS
      AND PROCEDURES**





DISCLOSURE
      CONTROLS AND PROCEDURES





(a) Restatement.





In
      the
      course of the due diligence for the Annual Report on Form 10-KSB of the Company
      for the fiscal year ended December 31, 2004, our management identified an
      agreement that the Company had entered into with five of our shareholders on
      October 11, 2002. This agreement provided that in consideration for the
      agreement of these shareholders to loan an affiliate of the Company proceeds
      from the sale of their shares of common stock of the Company to third parties,
      the Company would issue four shares of its restricted common stock for every
      one
      share owned. The aggregate number of shares of restricted common stock that
      the
      Company was obligated to issue pursuant to the agreement was 8,948,000 shares.
      The agreement was not disclosed in any of the Company’s previous SEC filings or
      otherwise included as an exhibit as a result of an error of omission. In
      addition, the 8,948,000 shares to be issued were not included in any of the
      Company’s financial statements for the fiscal years ended December 31, 2003 or
      2002, nor in any interim reporting period through September 30, 2004.


25


Management
      brought this matter to the attention of its Board of Directors and the Board
      of
      Directors brought it to the attention of the Company’s independent auditor.
      After discussions with management, the Board of Directors determined that
      previously reported financial information for the Company be restated to reflect
      the agreement. In light of the expected restatement, the Company filed a Form
      8-K on April 21, 2005 under Item 4.02 (a) advising that due to an error, its
      previously issued financial statements for the fiscal years ended December
      31,
      2003 and 2002 and such interim periods covered thereby and for the interim
      periods in fiscal 2004 should no longer be relied upon.





(b) Evaluation
          of Disclosure Controls and Procedures and Remediation





In
      connection with the restatement, under the direction of our Chief Executive
      Officer and Controller, we reevaluated our disclosure controls and procedures.
      We identified a material weakness in our internal controls and procedures
      relating to the handling and disclosure of material agreements. In order to
      prevent the same kind of mistake noted above, the Company implemented a review
      system whereby all agreements which have a material effect on the Company are
      reviewed by the Chief Executive Officer and outside counsel and filed. Copies
      are forwarded to the Company’s accounting department where they are logged and
      processed for follow-up. In addition to the above, we constantly monitor our
      procedures and when necessary hire outside consultants to make sure that the
      Company’s corporate compliance program is up to date with all SEC Rules and
      recommendations.





We
      believe that as of the date of this filing, the process enumerated above
      remediates the weaknesses that were identified in our internal
      controls.





**PART
      II - OTHER INFORMATION**





**ITEM
      1.** **LEGAL
      PROCEEDINGS**





**Oswald
      & Yap v. The Children’s Internet, Inc.**




On
      November 24, 2004, Oswald & Yap, A Professional Corporation (“O&Y”),
      formerly counsel to the Company, filed a complaint in the Superior Court of
      California, County of Orange, Case No. 04CC11623, against the Company, seeking
      recovery of allegedly unpaid legal fees in the amount of $50,984.86 in
      connection with the legal representation of the Company. Subsequently the amount
      claimed of unpaid legal fees was reduced to $37,378.43 because it was discovered
      that O&Y did not properly credit all of the payments that were made by the
      Company to O&Y. The amount of $37,378.43 was deposited in an escrow account
      by the Company on July 5, 2005. The complaint includes causes of action for
      breach of contract. The Company disputes the amounts claimed alleging that
      O&Y’s services were otherwise unsatisfactory. On May 9, 2005, O&Y
      submitted an Offer to Compromise for a $0 payment by the Company to O&Y in
      exchange for mutual releases which the Company rejected. ****





The
      Company filed a cross-complaint against O&Y alleging breach of contract,
      professional negligence, negligent representation, and breach of good faith
      and
      fiduciary duty. The Company is seeking damages in an unspecified amount for
      costs, legal fees and losses incurred.




26


O&Y
      has vigorously disputed the claims set forth in the cross-complaint and has
      indicated its intention, should it prevail in its defense, to institute a
      malicious prosecution action against the Company, Nasser Hamedani, Sholeh
      Hamedani and Company counsel.




A
      cross-claim was filed in the Superior Court of California, County of Orange,
      Case No. 04CC11623 by the Company against O&Y, and the principal allegation
      is that O&Y was retained to assist its predecessor company in the purchase
      and acquisition of D.W.C. Installations with the expectation that D.W.C. had
      available free-trading shares such that the Company could immediately raise
      capital on the relevant markets and that in advising the Company through the
      purchase, O&Y failed to properly advise the Company as to the status of
      D.W.C. Installations and its shares which in fact were not free-trading. As
      a
      result of this conduct, the Company alleges damages in an unspecified amount
      but
      including purchase costs, extended operation costs, refiling costs, audit costs,
      legal fees, loan fees, lost market share, and costs for registration. Trial
      on
      the complaint and cross-complaint is set to proceed on December 17,
      2007.





**Stock
      Purchase Agreement**





There
      is
      a contingent liability in connection with a Stock Purchase Agreement executed
      on
      October 11, 2002 between identified Shareholders and identified Purchasers.
      Under the terms of Stock Purchase Agreement, a payment of $150,000 is due to
      be
      paid into escrow in part consideration for purchase of the stock of D.W.C.
      Installations, Inc. The payment date is designated as 90 days from the date
      that
      the Company’s [D.W.C. Installations, Inc., a Nevada Corporation] shares of
      common stock become quoted on the over-the-counter bulletin board system. The
      shares were approved by NASDAQ OTC:BB to be quoted on the over-the-counter
      bulletin board system and a symbol was assigned on December 23, 2004. If this
      payment is not made, there could be exposure in connection with the identified
      shareholders’ efforts to collect the amounts allegedly due.





**Stonefield
      Josephson, Inc. Arbitration**





The
      Company was subject to a claim by Stonefield Josephson, Inc., the former
      accountants for the Company, seeking reimbursement costs for legal fees spent
      in
      connection with the Securities and Exchange Commission inquiry of the Company.
      Stonefield Josephson, Inc.’s claim seeks recovery of $29,412.74. The Company
      disputes any amounts owed because of a settlement agreement entered into between
      the respective parties in December 2004 effectively terminating their
      relationship. This matter was submitted to binding arbitration through AAA
      in
      January 2007. The arbitrator’s decision was issued on February 2, 2007, awarding
      Stonefield Josephson, Inc. the sum of $19,000 plus costs and fees in the amount
      of $1,425 due and payable March 15, 2007. The decision also awarded Stonefield
      Josephson, Inc. interest at the rate of 10% per annum from March 15, 2007.
      No
      amounts have been paid to Stonefield Josephson since the date of the
      Arbitrator’s decision.





**The
      Children’s Internet, Inc. v. Stonefield Josephson, Inc.**





On
      August
      25, 2006, the Company filed a complaint against its former accountants,
      Stonefield Josephson, Inc., and its principal Dean Skupen, in the Superior
      Court
      of California, County of Alameda, Case No. VG06286054 alleging breach of
      contract, promissory estoppel, breach of implied covenant of good faith and
      fair
      dealing, negligent misrepresentation, fraud, and unfair business practices
      arising out of defendants’ alleged failure to properly perform contractual
      obligations. The matter was subsequently transferred to Los Angeles Superior
      Court and a status conference is set for this matter on October 2,
      2007.


27


**SEC
      Complaint**





On
      September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a
      complaint in the United States District Court Northern District of California
      Case No. C066003CW, against among others the Company, and its CEO, Sholeh
      Hamedani, alleging against one or more defendants violations of Section 10(b)
      of
      the Exchange Act and Rule 10b-5, violations of Section 13(a) of the Exchange
      Act
      and Rules 12b-20, 13a-1, 13a-11, 13a-13, violations of Section 13(b)(2)(A)
      of
      the Exchange Act by the Company, Violations of Section 13(b)(2)(B) of the
      Exchange Act by the Company, Violations of Section 13(b)(5) of the Exchange
      Act
      and Rule 13b2-1, 13b2-2, 13a-14, 16(a). The complaint generally alleges that
      the
      Company and the individual defendants made false or misleading public statements
      regarding the Company’s business and operations, made false statements in
      various filings with the Commission and in particular the June 2005 Annual
      Report and Restatement and 2005 Current and Quarterly Reports, and that
      defendants or some of them induced investment in the Company through
      misrepresentation and omissions. The complaint seeks disgorgement, unspecified
      monetary damages, injunctive relief and other relief against the defendants.
      The
      Company has answered the complaint. Trial in the matter has been set for March
      31, 2008.





The
      Company is currently seeking resolution of the SEC complaint by virtue of
      settlement.  A potential settlement likely may include the Company and/or
      its principals consenting, without admitting or denying the allegations, to
      a
      judgment alleging negligent, reckless, and intentional violations of the
      federal securities laws, and other sanctions including substantial penalties.
      These penalties could range from current key members of management being barred
      from serving as either directors or officers of the Company to also including
      financial penalties and disgorgement of all profits derived by the Company
      and/or its principals who raised funds through the sale of Company stock to
      third parties. Any proposed settlement will be subject to the Commission’s
      approval and the Company cannot predict the outcome of these settlement
      negotiations. Additionally, there is no assurance that the Company will receive
      a settlement offer. Moreover, there is no assurance that the settlement offer
      (if any) will be acceptable to the Company and the prospect of litigation
      could ensue which could seriously compromise the Company's ability to achieve
      its goals and continue as a going concern.




**William
      L. Arnold**


On
      February 25, 2005, we entered into a Consulting Agreement with Crosslink
      Financial Communications, Inc., of which William L. Arnold is the principal
      shareholder. Crosslink represented the Company in stockholder communications
      and
      public relations with existing shareholders, brokers, dealers and other
      investment professionals as to the Company's current and proposed activities,
      and in consulting with management. For undertaking this engagement the Company
      agreed to issue a “Commencement Bonus” payable in the form of 200,000 restricted
      shares of the Company's common stock. In addition, the Company agreed to a
      monthly stock compensation of 8,000 shares of common stock every month on the
      contract anniversary date, and a cash fee of $5,000 per month for the term
      of
      the Agreement. Out of this fee, Crosslink paid for complementary services (e.g.,
      other mailing services, email services, database extensions) up to an average
      of
      $2,500 per month.


28


The
      agreement, which was originally for a term commencing February 25, 2005 and
      ending twelve months thereafter, was terminated at the end of December 2005
      because there was a mutual desire for Mr. Arnold to be involved on a daily
      basis. Hence, on December 30, 2005, he was hired as the Company’s President.
      Beginning on September 1, 2006, Mr. Arnold took an unpaid leave of
      absence.





Subsequent
      to the filing of our Form 10-KSB on May 18, 2007, Mr. Arnold advised us that
      he
      disagreed with our position that his unpaid leave of absence was voluntary.
      Mr.
      Arnold informed us that he believed his leave of absence resulted from the
      Company’s breach of his Executive Employment Agreement. We have had discussions
      with Mr. Arnold in an effort to resolve the differences between the parties
      but,
      to date, have not reached agreement. On August 8, 2007, Mr. Arnold advised
      us
      that he intends to take legal action against the Company to enforce the terms
      of
      his Employment Agreement. Mr. Arnold claims $520,000 in damages from the
      Company. We believe that Mr. Arnold violated the terms of his Employment
      Agreement when he voluntarily left his position as President in September of
      2006. We believe that we are only obligated to pay Mr. Arnold for back pay
      and
      bonus plus interest, for the period prior to September 2006. The total amount
      that we believe is owed to Mr. Arnold as of June 30, 2007 is $89,274, which
      amount is reflected in our financial statements.





Adverse
      outcomes in some or all of the claims pending against us may result in
      significant monetary damages or injunctive relief against us that could
      adversely affect our ability to conduct our business. Although management
      currently believes that resolving all of these matters, individually or in
      the
      aggregate, will not have a material adverse impact on our financial position
      or
      results of operations, the litigation and other claims are subject to inherent
      uncertainties and management’s view of these matters may change in the future.
      There exists the possibility of a material adverse impact on our financial
      position and the results of operations for the period in which the effect of
      an
      unfavorable final outcome becomes probable and reasonably estimable.





We
      are
      not aware of any other pending or threatened litigation that could have a
      material adverse effect on our business.





**ITEM
      2.**  **UNREGISTRED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**





The
      Company had no “Unregistered Sales of its securities during the period covered
      by this report.





**ITEM
      5.**  **OTHER
      INFORMATION**





On
      October 3, 2006, the Company received notice from its independent accountant,
      Marc Lumer & Co. (“Lumer”) that they had resigned as auditors of the Company
      effective immediately. On October 9, 2006, the Company received a second letter
      from Lumer stating that they had withdrawn their opinions on our previous
      financial statements for unstated reasons.





During
      the prior fiscal year, Lumer’s report on the Company’s financial statements did
      not contain an adverse opinion or a disclaimer of opinion, audit scope, or
      accounting principles nor were the reports qualified or modified except as
      to
      uncertainty with respect to going concern, audit scope, or accounting
      principles.


29


During
      the prior two fiscal years ended December 31, 2004 and December 31, 2005, and
      the subsequent interim periods through the date of resignation, there were
      no
      disagreements with Lumer on any matter of accounting principles or practices,
      financial statement disclosure, or auditing scope or procedure which, if not
      resolved to the satisfaction of Lumer would have caused Lumer to make reference
      to the matter in their reports. There were no "reportable events", as that
      term
      is described in Item 304(a)(1)(v) of Regulation S-K.





On
      March
      29, 2007, the Company entered into an agreement with the firm of Hunter,
      Flemmer, Renfro & Whitaker, LLP of Sacramento, California to replace Lumer
      as the Company’s independent accountant. On May 14, 2006, the agreement was
      replaced with an agreement for Hunter, Flemmer, Renfro & Whitaker, LLP to
      audit the financial statements for the year ended December 31, 2006 and the
      year
      ended December 31, 2005. This agreement was approved by the Company’s Board of
      Directors.





**ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K**





The
      following documents are filed as part of this Report:





(a)
      Exhibits:





No.
            
            Title31.1
            
            Certification
                of Chief Executive Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200231.2
            
            Certification
                of Chief Financial Officer Pursuant to the Securities Exchange Act
                of
                1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 200232
            
            Certification
                Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002




(b)
      Reports on Form 8-K:





On
      April
      5, 2007, the Company filed a Current Report on Form 8-K reporting that the
      accounting firm of Hunter, Flemmer, Renfro & Whitaker, LLP had been retained
      to replace the Company’s previous accountant. The engagement letter for the
      audit of the financial statements for the year ended December 31, 2006 was
      attached.





On
      April
      6, 2007, the Company filed a Current Report on Form 8-K reporting the Employment
      Agreement signed with Tim T. Turner on April 2, 2007, to serve as Director
      of
      Finance and Operations of the Company.





On
      May
      25, 2007, the Company filed a Current Report on Form 8-KA reporting a new
      engagement agreement with Hunter, Flemmer, Renfro & Whitaker, LLP which
      included re-auditing the financial statements for the year ended December 31,
      2005, on which the former accountant had withdrawn its opinion. In addition,
      a
      letter approving the statements made in this Form 8-KA received from the
      previous accountant was reported.


30


On
      June
      21, 2007, the Company filed a Current Report on Form 8-K reporting a Definitive
      Interim Stock Purchase Agreement with The Children’s Internet Holding Company,
      LLC, for the purchase of 120 million new shares of the Company’s common stock
      and 10 million shares of the Company’s common stock held by Shadrack Films,
      Inc., for an aggregate price of $8 million.





On
      August
      15, 2007, the Company filed a Current Report on Form 8-K reporting Amendment
      No.
      1 to the Definitive Interim Stock Purchase Agreement by and between The
      Children’s Internet, Inc., The Children’s Internet Holding Company, LLC and
      Shadrack Films, Inc., dated August 9, 2007.





**SIGNATURES**




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





DATED:
                August 20, 2007
            The
                Children’s Internet, Inc./S/
                SHOLEH HAMEDANIBy:
                Sholeh HamedaniIts:
                Chief Executive Officer, and Chief Financial
              Officer
                (Principal Executive Officer, Principal
              Financial
                Officer and Principal Accounting
              Officer)


31