**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549


**FORM
      10-Q/A**


**(Amendment
      No. 1)**




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


**FOR
      THE QUARTERLY PERIOD ENDED MARCH 31, 2007**




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




**FOR
      THE TRANSITION PERIOD FROM __________ TO ___________**




*COMMISSION
      FILE NUMBER: 000-24985*







**PACIFICNET
      INC.**


(Exact
      name of registrant in its charter)





**Delaware**
            
            **91-2118007**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                Number)




**23/F,
                TOWER A, TIMECOURT, NO.6 SHUGUANG XILI,****CHAOYANG
                DISTRICT, BEIJING, CHINA 100028**
            
            **N/A**(Address
                of principal executive offices)
            
            (Zip
                Code)




Registrant’s
      telephone number, including area code:  0086-10-59225000





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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Exchange Act).




Large
      Accelerated Filer oAccelerated Filer
o                   
      Non-accelerated filer þ




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).   YES o   NO þ




As
      of May
      30, 2007, there were 11,782,072 shares of the issuer’s common stock, par value
      $0.0001 per share, outstanding.










EXPLANATORY
      NOTE:





This
      Quarterly Report on Form 10-Q/A ("Form 10-Q/A") is being filed as Amendment
      No. 1 to our Quarterly Report on Form 10-Q for the period ended March
      31,
      2007, which was originally filed with the Securities and Exchange Commission
      ("SEC") on May 31, 2007.  We are amending and restating
      the following specific items in this Form 10-Q/A:





1.       Part
      I. Item 1. Financial Statements - to restate the financial statements as of,
      and
      for the three months ended March 31, 2007, and to restate the balance sheet
      as
      of December 31, 2006;


2.       Part
      I. Item 2. Management's Discussion And Analysis of Financial Condition and
      Results of Operations.


3.       Part
      II. Item 6 - to update the officer certifications for this Form
      10-Q/A.











**PACIFICNET
      INC.**


**Form 10-Q/A
      for the Quarterly Period Ended March 31, 2007**





**TABLE
      OF CONTENTS**





**PART I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)
            4Consolidated
                Balance Sheets
            4Consolidated
                Statements of Operations
            5Consolidated
                Statements of Cash Flows
            6Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            23**PART II.**
            **OTHER
                INFORMATION**Item
                6.
            Exhibits
            30Signatures
            
            31







**PART
      I - FINANCIAL INFORMATION**


**ITEM
      1. FINANCIAL
      STATEMENTS**


**PACIFICNET
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


(In
      thousands of United States dollars, except par values and share
      numbers)


**March
                  31,**
                **2007**
                **Unaudited**
                **Restated**
              
              
              **December
                  31,**
                **2006**
                **Audited**
                **Restated****ASSETS***Current
                  Assets:*Cash
                  and cash equivalents
              
              $
              4,041
              
              
              $
              1,900Restricted
                  cash - pledged bank deposit
              
              
              235
              
              
              
              234Accounts
                  receivables, net
              
              
              8,411
              
              
              
              8,141Inventories
              
              
              428
              
              
              
              201Loan
                  receivable from related parties
              
              
              713
              
              
              
              1,706Loan
                  receivable from third parties
              
              
              178
              
              
              
              128Marketable
                  equity securities - available for sale
              
              
              568
              
              
              
              558Loans
                  to employees
              
              
              1,341
              
              
              
              770Other
                  receivables, net
              
              
              290
              
              
              
              170Other
                  current assets
              
              
              2,796
              
              
              
              3,233Total
                  Current Assets
              
              
              19,001
              
              
              
              17,041Property
                  and equipment, net
              
              
              6,656
              
              
              
              4,711Investments
                  in affiliated companies and subsidiaries
              
              
              34
              
              
              
              1,257Intangible
                  assets, net
              
              
              400
              
              
              
              323Goodwill
              
              
              6,258
              
              
              
              5,601Other
                  assets
              
              
              -
              
              
              
              471Net
                  assets held for disposition
              
              
              8,876
              
              
              
              7,522**TOTAL
                  ASSETS**
              
              $
              41,225
              
              
              $
              36,926**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  Liabilities:Bank
                  line of Credit
              
              $
              404
              
              
              $
              855Bank
                  loans-current portion
              
              
              933
              
              
              
              576Capital
                  lease obligations - current portion
              
              
              110
              
              
              
              120Accounts
                  payable
              
              
              1,277
              
              
              
              1,266Accrued
                  expenses and other payables
              
              
              1,711
              
              
              
              1,828Customer
                  deposits
              
              
              341
              
              
              
              352Loans
                  payable to related party
              
              
              577
              
              
              
              638Convertible
                  debenture
              
              
              7,854
              
              
              
              8,945Warrant
                  liability
              
              
              844
              
              
              
              904Liquidated
                  damages liability
              
              
              2,697
              
              
              
              2,837Total
                  Current Liabilities
              
              
              16,748
              
              
              
              18,321Long-term
                  liabilities:Bank
                  loans - non current portion
              
              
              2,280
              
              
              
              1,635Capital
                  lease obligations - non current portion
              
              
              104
              
              
              
              124Convertible
                  Debenture- non current portion, net
              
              
              2,307
              
              
              
              -Total
                  long-term liabilities
              
              
              4,691
              
              
              
              1,759**Total
                  liabilities**
              
              
              21,439
              
              
              
              20,080Minority
                  interest in consolidated subsidiaries
              
              
              4,206
              
              
              
              2,869Commitments
                  and contingenciesStockholders'
                  Equity:Preferred
                  stock, par value $0.0001, Authorized 5,000,000 shares Issued and
                  outstanding - noneCommon
                  stock, par value $0.0001, Authorized 125,000,000 shares; Issued
                  and
                  outstanding: March 31, 2007: 14,355,041 shares issued, 11,782,072
                  outstanding December 31, 2006: 14,155,597 issued, 11,538,664
                  outstanding
              
              
              1
              
              
              
              1Treasury
                  stock, at cost (2007 Q1: 2,572,969 shares, 2006: 2,616,933
                  shares)
              
              
              (145
              )
              
              
              (272
              )Additional
                  paid-in capital
              
              
              67,003
              
              
              
              65,757Cumulative
                  other comprehensive income (loss)
              
              
              (13
              )
              
              
              (42
              )Accumulated
                  deficit
              
              
              (50,782
              )
              
              
              (51,090
              )Less:
                  stock subscription receivable
              
              
              (484
              )
              
              
              (377
              )Total
                  Stockholders' Equity
              
              
              15,580
              
              
              
              13,977**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              41,225
              
              
              $
              36,926






The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


4




**PACIFICNET
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(Unaudited.
      In thousands of United States dollars, except earnings per share and share
      amounts)


**Three
                  months ended March 31****2007**
                **Unaudited**
                **Restated**
              
              
              **2006**
                **Unaudited**
                **Restated**Net
                  RevenuesServices
              
              $
              4,565
              
              
              $
              3,736Product
                  sales
              
              
              4,702
              
              
              
              2,936Total
                  Net Revenues
              
              
              9,267
              
              
              
              6,672Cost
                  of revenuesServices
              
              
              3,353
              
              
              
              2,577Product
                  sales
              
              
              3,375
              
              
              
              2,743Total
                  Cost of Revenues
              
              
              6,728
              
              
              
              5,320Gross
                  Profit
              
              
              2,539
              
              
              
              1,352Selling,
                  general and administrative expenses
              
              
              1,567
              
              
              
              1,079Stock-based
                  compensation expenses
              
              
              -
              
              
              
              182Depreciation
                  and amortization
              
              
              172
              
              
              
              29Total
                  Operating Expenses
              
              
              1,739
              
              
              
              1,290**INCOME(LOSS)
                  FROM OPERATIONS**
              
              
              800
              
              
              
              62Other
                  Income (Expenses):Interest
                  income (Expenses), net
              
              
              (200
              )
              
              
              (52
              )Gain
                  (Loss) in change in fair value of derivatives
              
              
              61
              
              
              
              -Sundry
                  income, net
              
              
              19
              
              
              
              15Total
                  Other Income (Expenses)
              
              
              (120
              )
              
              
              (37
              )**Income
                  (Loss) before Income Taxes and Minority Interest**
              
              
              680
              
              
              
              25Provision
                  for income taxes
              
              
              (68
              )
              
              
              (17
              )Share
                  of earnings of associated companies
              
              
              -
              
              
              
              (3
              )Minority
                  interests
              
              
              (534
              )
              
              
              (86
              )**Income
                  (Loss) from Continued Operations**
              
              
              78
              
              
              
              (81
              )Income
                  from discontinued operations
              
              
              230
              
              
              
              882**Net
                  Income**
              
              
              308
              
              
              
              801Other
                  comprehensive item:Foreign
                  exchange gain (loss)
              
              
              29
              
              
              
              (20
              )**Net
                  Comprehensive Income**
              
              $
              337
              
              
              $
              781Basic
                  Earnings (Loss) per share-Continued Operations
              
              $
              0.01
              
              
              $
              (0.01
              )Basic
                  Earnings per share-Discontinued Operations
              
              $
              0.02
              
              
              $
              0.08**Basic
                  Earnings per share**
              
              $
              0.03
              
              
              $
              0.07Diluted
                  Earnings (Loss) per share-Continued Operations
              
              $
              0.01
              
              
              $
              (0.01
              )Diluted
                  Earnings per share-Discontinued Operations
              
              $
              0.02
              
              
              $
              0.08**Diluted
                  Earnings per share**
              
              $
              0.03
              
              
              $
              0.07**Weighted
                  average number of shares - Basic**
              
              
              11,703,376
              
              
              
              10,834,299**Weighted
                  average number of shares - Diluted**
              
              
              11,997,317
              
              
              
              10,834,299




The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


5





**PACIFICNET
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(Unaudited.
      In thousands of United States dollars)


FOR
                  THE THREE MONTH
                PERIODS
                  ENDED2007
                Unaudited
                Restated
              
              
              2006
                Unaudited
                Restated**Cash
                  Flows from operating activities**Net
                  income
              
              $
              308
              
              
              $
              801*Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:*Equity
                  loss of associated companies
              
              
              -
              
              
              
              3Provision
                  for allowance for doubtful accounts
              
              
              (378
              )
              
              
              -Minority
                  Interest
              
              
              534
              
              
              
              86Unrealized
                  losses/(gain) on marketable equity securities
              
              
              -
              
              
              
              (2
              )Depreciation
                  and amortization
              
              
              306
              
              
              
              29(Gain)
                  loss from discontinued operations
              
              
              (230
              )
              
              
              -Stock-based
                  compensation
              
              
              -
              
              
              
              182Change
                  in fair value of derivatives
              
              
              (61
              )
              
              
              -*Changes
                  in current assets and liabilities net of effects from purchase
                  of
                  subsidiaries:*Accounts
                  receivable and other current assets **
              
              
              (573
              )
              
              
              (6,310
              )Inventories
              
              
              (227
              )
              
              
              76Accounts
                  payable and other accrued expenses
              
              
              294
              
              
              
              2,527**Net
                  cash used in operating activities of continued
                  operations**
              
              
              (27
              )
              
              
              (2,608
              )**Net
                  provided by operating activities of discontinued
                  operations**
              
              
              872
              
              
              
              4,756**Net
                  cash provided by operating activities**
              
              
              845
              
              
              
              2,148**Cash
                  flows from investing activities:**Decrease
                  in restricted cash
              
              
              (1
              )
              
              
              (1,490
              )Increase
                  in purchase of marketable securities
              
              
              (10
              )
              
              
              (24
              )Acquisition
                  of property and equipment
              
              
              (819
              )
              
              
              (3,794
              )Acquisition
                  of subsidiaries and affiliated companies
              
              
              88
              
              
              
              (4
              )Loans
                  receivable from third parties
              
              
              (50
              )
              
              
              -Loans
                  receivable from related party
              
              
              (33
              )
              
              
              (246
              )**Net
                  cash used in investing activities of continued
                  operations**
              
              
              (825
              )
              
              
              (5,558
              )**Net
                  cash provided by investing activities of discontinued
                  operations**
              
              
              -
              
              
              
              -**Net
                  cash used in investing activities**
              
              
              (825
              )
              
              
              (5,558
              )**Cash
                  flows from financing activities:**Decrease
                  in loan receivables
              
              
              -
              
              
              
              (43
              )Loan
                  payable to related party
              
              
              (61
              )
              
              
              (723
              )Stock
                  subscription receivable
              
              
              -
              
              
              
              (13
              )Repayments
                  under bank line of credit
              
              
              (451
              )
              
              
              (48
              )Repayments
                  of amount borrowed under capital lease obligations
              
              
              (30
              )
              
              
              (34
              )(Purchase)
                  sale of treasury shares
              
              
              127
              
              
              
              -Proceeds
                  from subscription received, exercise of stock options and
                  warrants
              
              
              -
              
              
              
              42Net
                  proceeds from issuance of convertible debenture
              
              
              2,290
              
              
              
              8,000Advances
                  under bank loans
              
              
              217
              
              
              
              1,792**Net
                  cash provided by financing activities of continued
                  operations**
              
              
              2,092
              
              
              
              8,973**Net
                  cash provided by financing activities of discontinued
                  operations**
              
              
              -
              
              
              
              -**Net
                  cash provided by financing activities**
              
              
              2,092
              
              
              
              8,973**Effect
                  of exchange rate change on cash and cash
                  equivalents**
              
              
              29
              
              
              
              -**NET
                  INCREASE IN CASH AND CASH EQUIVALENTS**
              
              
              2,141
              
              
              
              5,563**CASH
                  AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD**
              
              
              1,900
              
              
              
              3,486**CASH
                  AND CASH EQUIVALENTS, END OF THE PERIOD**
              
              $
              4,041
              
              
              $
              9,049**CASH
                  PAID FOR:**Interest
              
              $
              221
              
              
              $
              87Income
                  taxes
              
              $
              -
              
              
              $
              32**NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:**Proceed
                  from option exercised for shares receivable
              
              $
              -
              
              
              $
              35Property
                  & equipment acquired under banking loan
              
              $
              785
              
              
              $
              -Investments
                  in subsidiaries acquired through the issuance of common
                  stock
              
              $
              -
              
              
              $
              397




The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.


6


**PACIFICNET
      INC. AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**


(Amounts
      expressed in United States dollars unless otherwise stated)





**1.
      BASIS OF PRESENTATION**





***Description
      of Operations***- PacificNet Inc. (referred to herein as
      "PacificNet" or the "Company") is a leading provider of gaming technology,
      e-commerce, and Customer Relationship Management (CRM) in China. Our gaming
      products are specially designed for the Chinese and Asian gamers, and we focus
      on integrating localized Chinese and Asian themes and content, advanced
      graphics, digital sound effects and popular domestic music, with secondary
      bonus
      games and jackpots. Our gaming products include: Multi-player Electronic Table
      Games - Baccarat, Sicbo, Fish-Prawn-Crab, and Roulette machines, server based
      games (SBG) with multiple client betting stations, slot and bingo machines,
      video lottery terminals (VLTs), amusement with prices (AWP) machines, gaming
      cabinet and client/server system designs, online i-gaming software design,
      and
      multimedia entertainment kiosks. PacificNet's gaming clients include the leading
      hotels, casinos, and gaming operators in Macau, Asia, and Europe, and our
      ecommerce and CRM clients include the leading telecom companies, banks,
      insurance, travel, marketing and business services companies and telecom
      consumers in Greater China such as China Telecom, China Mobile, Unicom, PCCW,
      Hutchison Telecom, Bell24, Motorola, Nokia, SONY, TCL, Huawei, American Express,
      Citibank, HSBC, Bank of China, Bank of East Asia, DBS, TNT, China and Hong
      Kong
      government. PacificNet employs about 1,200 staff in its various subsidiaries
      throughout China with offices in Hong Kong, Beijing, Shanghai, Shenzhen,
      Guangzhou, Macau and Zhuhai China, in the USA, and in the
      Philippines.




***Consolidated
      Interim Financial Statements*** - The consolidated financial
      statements have been prepared in accordance with U.S. generally accepted
      accounting principles (“GAAP”) for interim financial reporting consistent in all
      material respects with those applied in the Company’s Annual Report on Form
      10-K, as amended, for the year ended December 31, 2006, but do not include
      all disclosures required by GAAP. You should read these interim consolidated
      financial statements in conjunction with the audited financial statements,
      including the notes thereto, and the other information set forth in the
      Company’s Annual Report on Form 10-K, as amended, for the year ended
      December 31, 2006. The unaudited consolidated financial statements include
      the accounts of PacificNet Inc. and its subsidiaries and variable interest
      entities (“VIEs”) for which the Company is the primary beneficiary. All
      significant intercompany balances and transactions have been eliminated in
      consolidation. In the opinion of management, all material adjustments considered
      necessary for a fair presentation of the Company’s interim results have been
      reflected. PacificNet’s 2006 Annual Report on Form 10-K includes certain
      definitions and a summary of significant accounting policies and should be
      read
      in conjunction with this report. The results for interim periods are not
      necessarily indicative of annual results.




***Use
      of Estimates*** - The preparation of the consolidated financial
      statements in conformity with GAAP requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and reported amounts of revenues and expenses during the reporting
      period. Actual results could differ from those estimates, and such differences
      may be material to the financial statements. Certain prior year amounts have
      been reclassified to conform to the current year presentation.




***Reclassification***- Certain prior period amounts have been reclassified to conform
      to the current period presentation.




***Going
      Concern***




As
      shown
      in the accompanying consolidated financial statements, the Company incurred
      accumulated losses of $50.8 million and $51.1 million as of March 31, 2007
      and
      December 31, 2006, respectively. These matters raise substantial doubt about
      the
      Company’s ability to continue as a going concern.




In
      view
      of the matters described in the preceding paragraph, recoverability of a major
      portion of the recorded asset amounts shown in the accompanying balance sheet
      is
      dependent upon continued operations of the Company, which in turn is dependent
      upon the Company’s ability to raise additional capital, obtain financing and to
      succeed in its future operations. 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 as a going concern.




The
      Company has taken certain restructuring steps to provide the necessary capital
      to continue its operations. These steps included, but were not limited to:
      1)
      accelerate disposal and spin-off of unprofitable or unfavorable
      return-on-investment non-gaming operations; 2) focus on execution of the new
      high potential gaming business initiatives; 3) acquisition of profitable and/or
      strategic operations through issuance of equity instruments; 4) formation of
      strategic relationship with key gaming operators in Asia; and 5) issuance and/or
      restructure of new long-term convertible debentures.




On
      April
      30, 2007, the Company entered into a sale and purchase agreement to dispose
      of
      its interest in Guangzhou3G for a consideration of US$6 million. The deal was
      subsequently reopened for renegotiation in November 2007 (See note
      17).




On
      May 15
& 20, 2007, the Company entered into various definitive agreements to reduce
      its equity interests in certain unprofitable subsidiaries to 15%, namely:
      Linkhead, Clickcom, PacTelso, PacSo and PacPower (See note 17).




7




**2.
      RECENT PRONOUNCEMENTS**




In
      March 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on
      issue number 06-10, “Accounting for Deferred Compensation and Postretirement
      Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance
      Arrangements,” (“EITF 06-10”). EITF 06-10 provides guidance to help companies
      determine whether a liability for the postretirement benefit associated with
      a
      collateral assignment split-dollar life insurance arrangement should be recorded
      in accordance with either SFAS No. 106, “Employers’ Accounting for
      Postretirement Benefits Other Than Pensions” (if, in substance, a postretirement
      benefit plan exists), or Accounting Principles Board Opinion No. 12 (if the
      arrangement is, in substance, an individual deferred compensation contract).
      EITF 06-10 also provides guidance on how a company should recognize and measure
      the asset in a collateral assignment split-dollar life insurance contract.
      EITF
      06-10 is effective for fiscal years beginning after December 15, 2007
      (Novell’s fiscal 2008), though early adoption is permitted. The management is
      currently evaluating the effect of this pronouncement on financial
      statements.




In
      February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for
      Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal
      years beginning after November 15, 2007. Early adoption is permitted subject
      to
      specific requirements outlined in the new Statement. Therefore, calendar-year
      companies may be able to adopt FAS 159 for their first quarter 2007 financial
      statements.




The
      new
      Statement allows entities to choose, at specified election dates, to measure
      eligible financial assets and liabilities at fair value that are not otherwise
      required to be measured at fair value. If a company elects the fair value option
      for an eligible item, changes in that item's fair value in subsequent reporting
      periods must be recognized in current earnings. FAS 159 also establishes
      presentation and disclosure requirements designed to draw comparison between
      entities that elect different measurement attributes for similar assets and
      liabilities. The management is currently evaluating the effect of this
      pronouncement on financial statements.




In
      September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
      Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
      88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
      employer to recognize the over funded or underfunded status of a defined benefit
      postretirement plan (other than a multiemployer plan) as an asset or liability
      in its statement of financial position and to recognize changes in that funded
      status in the year in which the changes occur through comprehensive income
      of a
      business entity or changes in unrestricted net assets of a not-for-profit
      organization. The requirement to measure plan assets and benefit obligations
      as
      of the date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008. The Company currently
      does not have any defined benefit plan and so FAS 158 will not affect the
      financial statements.




In
      September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the Board having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This Statement is effective for
      financial statements issued for fiscal years beginning after November 15, 2007,
      and interim periods within those fiscal years. The management is currently
      evaluating the effect of this pronouncement on financial
      statements.




**3.
      EARNINGS PER SHARE**




Basic
      and
      diluted earnings or loss per share (EPS) amounts in the financial statements
      are
      computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is
      based on the weighted average number of common shares outstanding. Diluted
      EPS
      is based on the weighted average number of common shares outstanding plus
      dilutive common stock equivalents. Basic EPS is computed by dividing net
      income/loss available to common stockholders (numerator) by the weighted average
      number of common shares outstanding (denominator) during the period Diluted
      EPS
      is calculated by dividing net earnings by the weighted average number of common
      shares outstanding and other dilutive securities. Dilutive earnings per share
      for the period ended March 31, 2007 exclude the potential dilutive effect of
      889,456 warrants because their impact would be anti-dilutive based on current
      market prices. 690,909 convertible debentures are tested by using if-converted
      method. The result shows when convertible debentures are included in the
      computation, diluted EPS increases. According to SFAS No.128, those convertible
      debentures are ignored in the computation of diluted EPS. All per share and
      per
      share information are adjusted retroactively to reflect stock splits and changes
      in par value.




The
      reconciliation of the numerators and denominators of the basic and diluted
      EPS
      calculations was as follows:


**Three
                  Months Ended March 31,****(IN
                  THOUSANDS OF UNITED STATES DOLLARS, EXCEPT WEIGHTED SHARES AND
                  PER SHARE
                  AMOUNTS)**
              
              **2007**
              
              
              **2006**Numerator:
                  Net Income
              
              $
              308
              
              
              $
              801Denominator:Weighted-average
                  shares used to compute basic EPS
              
              
              11,703,376
              
              
              
              10,834,299Weighted-average
                  shares used to compute diluted EPS
              
              
              11,997,317
              
              
              
              10,834,299Basic
                  earnings per common share:
              
              $
              0.03
              
              
              $
              0.07Diluted
                  earnings per common share:
              
              $
              0.03
              
              
              $
              0.07




8


**4.
      OTHER CURRENT ASSETS**




Other
      current assets consist of the following (in thousands):





**March
                31,**
              **2007**
            
            
            **December
                31, 2006****Unaudited**
              **Restated**
            
            
            **Audited**
              **Restated**Prepayment
            
            $
            725
            
            
            $
            1,048Utilities
                deposit
            
            
            1,326
            
            
            
            1,292Receivable
                from Lion Zone Holdings Ltd
            
            
            385
            
            
            
            485Prepaid
                expenses
            
            
            360
            
            
            
            408Total
            
            $
            2,796
            
            
            $
            3,233





**5.
      GOODWILL AND BUSINESS ACQUISITIONS**




The
      changes in the carrying amount of goodwill for the following reporting periods
      are summarized below:


Group
                  1.
              
              
              Group
                  2.
              
              
              Group
                  3.(US$000s)
              
              Outsourcing
                Services
              
              
              Telecom
                Value-Added
                Services
              
              
              Products
                (Gaming
                  and
                Technology)
              
              
              Total
                  RestatedBalance
                  as of December 31, 2006
              
              $
              3,964
              
              
              $
              461
              
              
              $1,176
              
              
              $5,601Goodwill
                  acquired during this quarter
              
              
              -
              
              
              
              -
              
              
              
              657
              
              
              
              657Balance
                  as of March 31, 2007
              
              $3,964
              
              
              $
              461
              
              
              $1,833
              
              
              $6,258





The
      Company acquired additional 31% interest in Take 1 Technology Ltd on January
      5,
      2007 and recorded additional goodwill amounting to $657,000. Prior to
      acquisition of additional interest, the Company owned 20% interest in Take
      1
      Technology Ltd (See note 12).





**6.
      ACCRUED EXPENSES & OTHER PAYABLES**





Accrued
      expenses and other payables comprises of the following as of March 31, 2007
      and
      December 31, 2006.





(in
                  thousands of US Dollars):
              
              2007
                Unaudited
                Restated
              
              
              2006
                Audited
                RestatedProfessional
                  fee
              
              $
              695
              
              
              $
              321Director
                  fee
              
              
              88
              
              
              
              100Salaries
                  and benefit payable
              
              
              156
              
              
              
              792Marketing
                  expense
              
              
              588
              
              
              
              389Others
              
              
              184
              
              
              
              226Total
              
              $
              1,711
              
              
              $
              1,828





**7.
      STOCKHOLDERS' EQUITY**




a)
      COMMON
      STOCK




For
      the
      three month period ended March 31, 2007, the Company had the following equity
      transactions: (i) 199,444 shares of common stock were issued as the monthly
      principal redemption shares for 8 million convertible debentures from January
      to
      March. Such shares are valued at $ 1,090,914; (ii) 41,426 treasury shares were
      sold to the open market with total consideration $127,000.




9




b)
      STOCK
      OPTION PLAN




Prior
      to
      January 1, 2006, PacificNet accounted for awards granted under stock-based
      compensation plans following the recognition and measurement principles of
      APB
      25, *Accounting for Stock Issued to Employees*, and related
      interpretations. Accordingly, compensation expense was recognized for awards
      granted at an exercise price less than fair market value of the underlying
      common stock on the date of grant. Effective January 1, 2006, PacificNet adopted
      the fair value recognition provisions of SFAS 123(R). See Note 2 for a
      description of the Company’s adoption of SFAS 123R. The fair value of stock
      options is determined using the Black-Scholes option pricing model, which is
      consistent with the valuation techniques previously utilized for options in
      footnote disclosures required under SFAS 123, as amended by FASB Statement
      No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure.” The determination of the fair value of stock-based compensation
      awards on the date of grant using an option-pricing model is affected by the
      Company’s stock price as well as assumptions regarding a number of complex and
      subjective variables, including the expected volatility of the Company’s stock
      price over the term of the awards, actual and projected employee stock option
      exercise behaviors, risk-free interest rate and expected dividends. The
      valuation provisions of SFAS 123(R) apply to new grants and unvested grants
      that
      were outstanding as of the effective date. For the three months ended March
      31,
      2007, no new options were granted and no options were vested, thus the
      compensation costs is zero. PacificNet elected the modified prospective method
      and therefore has not restated results for prior periods due to
      123R.




The
      status of the Stock Option Plan as of March 31, 2007, is as
      follows:




OPTIONS
                OUTSTANDING
            
            
            WEIGHTED
                AVERAGE EXERCISE PRICEOUTSTANDING,
                DECEMBER 31, 2005
            
            ****
            **756,100**
            
            
            $
            3.99Granted
            
            
            500,000
            
            
            $
            4.75Cancelled
            
            
            (491,600
            )
            
            $
            4.75Exercised
            
            
            (394,000
            )
            
            $
            2.12OUTSTANDING,
                DECEMBER 31, 2006
            
            ****
            **370,500**
            
            
            $
            2.00Granted
            
            ****
            **-**
            
            
            
            -Cancelled
            
            ****
            **-**
            
            
            
            -Exercised
            
            ****
            **-**
            
            
            
            -OUTSTANDING
                MARCH 31, 2007
            
            ****
            **370,500**
            
            
            $
            2.00





Following
      is a summary of the status of options outstanding at March 31,
      2007:




Grant
                Date
            Total
                Options
              Outstanding
            Aggregate
              Intrinsic
                Value
            Weighted
                Average Remaining
              Life
                (Years)
            Total
                Weighted
              Average
              Exercise
                Price
            Option
              Exercisable
            Weighted
              Average
              Exercise
                Price2004-7-26
            370,500
            $1,237,470
            0.32
            $2.00
            370,500
            $2.00





The
      370,500 outstanding options, which granted during year 2004, will be expired
      at
      July 26 of 2007. Those options were vested from July 1st of 2005
      with 10
      months vesting period, and the corresponding compensation cost have been
      recorded within the vesting period. The weighted-average fair value of such
      options was $1.41.The assumptions used in calculating the fair value of options
      granted using the Black-Scholes option- pricing model are as
      follows:





Risk-free
                interest rate
            2.75%Expected
                life of the options
            1.65
                yearsExpected
                volatility
            61.33%Expected
                dividend yield
            0%





No
      options were granted, cancelled and exercised during the three month period
      ended March 31, 2007.





c)
      WARRANTS




At
      March
      31, 2007, the Company had outstanding and exercisable warrants to purchase
      an
      aggregate of 1,007,138 shares of common stock. The weighted average remaining
      life is 3.09 years and the weighted average exercise price per share is $10.61
      per share.




10




Following
      is a summary of the warrant activity:





Warrants
              outstanding
            
            
            WEIGHTED
                AVERAGE
              EXERCISE
                PRICE
            
            
            Aggregate
              Intrinsic
                ValueOUTSTANDING,
                DECEMBER 31, 2005
            
            ****
            **591,138**
            
            
            $
            9.50
            
            
            $
            -Granted
            
            
            416,000
            
            
            
            -
            
            
            
            -Forfeited
            
            
            -
            
            
            
            -
            
            
            
            -Exercised
            
            
            -
            
            
            
            -
            
            
            
            -OUTSTANDING,
                DECEMBER 31, 2006
            
            ****
            **1,007,138**
            
            
            $
            10.61
            
            
            $
            -Granted
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**Forfeited
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**Exercised
            
            ****
            **-**
            
            
            ****
            **-**
            
            
            ****
            **-**OUTSTANDING,
                MARCH 31, 2007
            
            ****
            **1,007,138**
            
            
            $
            10.61
            
            
            $
            -





Following
      is a summary of the status of warrants outstanding at March 31,
      2007:




Grant
                Date
            Total
                warrants
              Outstanding
            Weighted
                Average
              Remaining
                Life (Years)
            Total
                Weighted
              Average
              Exercise
                Price
            Warrants
              Exercisable
            Weighted
              Average
              Exercise
                Price2004-1-15
            123,456
            1.79
            $7.15
            123,456
            $7.152004-11-15
            117,682
            2.63
            $3.89
            117,682
            $3.892004-12-9
            350,000
            2.69
            $12.21
            350,000
            $12.212006-3-13
            416,000
            3.95
            $12.20
            416,000
            $12.20





On
      March
      13, 2006, we issued 400,000 warrants to several institutional investors in
      connection with a private placement of $8 million in convertible debentures.
      On
      the same day we issued another 16,000 warrants to our placement agent for the
      transaction. Those warrants have a term of 5 years and immediately vesting.
      The
      assumptions used in calculating the fair value of such warrants granted using
      the Black-Scholes option- pricing model are as follows:




Risk-free
                interest rate
            4.78%Expected
                life of the options
            5.00
                yearsExpected
                volatility
            37.08%Expected
                dividend yield
            0%





No
      warrants were granted, cancelled and exercised during quarter ended March 31
      of
      2007.




d)
      TREASURY STOCK




The
      following is a summary of the movement of the Company's shares held as treasury
      stock as at March 31 of 2007:




Number
                of sharesEscrow
                shares returned to treasury in 2003
            
            
            800,000Repurchase
                in the open market
            
            
            40,888Repurchase
                of shares from Take1
            
            
            149,459Cancellation
                of former employee shares
            
            
            45,000Holdback
                shares as contingent consideration due to performance targets not
                yet met
                (1)
            
            
            529,848Termination
                with ChinaGoHi
            
            
            825,000Incomplete
                acquisition of Allink
            
            
            200,000Repurchase
                of shares from Yueshen
            
            
            24,200Shares
                sold to the open market
            
            
            (41,426
            )Balance,
                March 31, 2007
            
            
            2,572,969Shares
                outstanding at March 31, 2007
            
            
            11,782,072Shares
                issued at March 31, 2007
            
            
            14,355,041




(1)
            Includes
                shares related to Clickcom 78,000, Guangzhou (Wanrong) 138,348, IMobile
                153,500 and Games 160,000




From
      January 24th,
      2007 to Jan 30th, 2007, we
      sold
      41,426 treasury shares to the open market with total consideration
      $127,000.




11




**8.
      CONVERTIBLE DEBENTURES**




8.1
      Eight
      Million Convertible Debentures




On
      March
      13, 2006, we completed a private placement in which we sold $8,000,000 in
      convertible debentures and issued warrants to purchase up to an aggregate of
      400,000 shares of common stock. The debentures are convertible at any time
      into
      shares of our common stock at an initial fixed conversion price of $10.00 per
      share, subject to adjustments for certain dilutive events. The debentures are
      due March 13, 2009. The warrants are exercisable for a period of five years
      at
      an exercise price of $12.20 per share. At the closing of the private placement,
      we prepaid the first year's interest on debentures equal to 5% of the aggregate
      principal amount of debentures. We will pay interest in cash or shares, provided
      that certain conditions are met, at the rate of 6% for the second year the
      debentures are outstanding and then 7% for the third. Beginning January 1,
      2007,
      we are obligated to redeem up to $320,000 every month, plus accrued, but unpaid
      interest, liquidated damages and penalties. We also have the option to prepay
      the debentures at any time, provided that certain conditions have been met,
      after the 12 month anniversary of the effective date of the registration
      statement that has been filed with the Securities and Exchange Commission with
      respect to the common stock issuable upon conversion of the debentures, some
      or
      all of the outstanding debentures for cash in an amount equal to 120% of the
      principal amount outstanding, plus accrued, but unpaid interest, liquidated
      damages and penalties outstanding. At any time after the six month anniversary
      of the effective date of the registration statement, we may force the holders
      to
      convert up to 50% of the then outstanding principal amount of the debentures,
      subject to certain trading conditions being met. If any event of default occurs
      under the debentures or other related documents, the holders may elect to
      accelerate the payment of the outstanding principal amount of the debenture,
      plus accrued, but unpaid interest, liquidated damages and penalties, which
      shall
      become immediately due and payable.




Under
      the
      terms of a registration rights agreement entered into at the time of the private
      placement, the Company was obligated to file a registration statement with
      respect to the shares issuable under the debenture and the warrants by April
      30,
      2006, and have the registration statement declared effective by the SEC no
      later
      than June 28, 2006. Due to various factors, the Company did not file the
      registration statement until May 15, 2006, and it was not declared effective
      until December 8, 2006. Therefore, under the terms of the registration rights
      agreement, the Company was obligated to pay liquidated damages to
      the investors at the rate of 2% of the principal amount of the debenture
      each month beginning on June 28, 2006 until the effectiveness of the
      registration statement, which was equal to $1,120,000, in the
      aggregate.




In
      February 2007, upon reaching an agreement on the amount and payment of accrued
      liquidated damages, the Company signed a Settlement and Release Agreement with
      each of the investors. Under the terms of the Settlement and Release Agreements,
      the Company paid an aggregate $140,000 in cash as satisfaction in full of
      liquidated damages owed to Basso Fund Ltd., Basso Multi-Strategy Holding Fund
      Ltd., and Basso Private Opportunities Holding Fund Ltd. Partial liquidated
      damages owed to Whalehaven Capital Fund Ltd. were paid in the amount of $35,000
      in cash, with the remaining liquidated damages in the amount of $105,000 paid
      in
      the form of a new convertible debenture due February 2009, on substantially
      the
      same terms as the original debentures, except that interest only is paid on
      the
      new debentures until October 2008 and beginning in November 2008 until February
      2009, when the new debentures are due, the monthly redemption amount under
      the
      new debentures shall be equal to $315,000. The remaining investors also agreed
      to accept the aggregate $840,000 in liquidated damages owed to them in the
      form
      of the new convertible debentures for the amount of their respective portion
      of
      the liquidated damages. The Company also agreed to amend the original debentures
      to shorten the term for payment of the original principal amount to a 22 month
      term. As a result the monthly redemption amount for the original debenture
      increased from $320,000 to $ 363,638. All other terms and conditions of the
      original debenture remain in full force and effect. The outstanding original
      principal amount as at March 31, 2007 is $6,909,086.




C.E.
      Unterberg, Towbin L.L.C. acted as placement agent and received a negotiated
      cash
      fee in the amount of $449,500 and a warrant to purchase up to 16,000 shares
      at
      an exercise price of $12.20 per share, which expire five years from the date
      of
      issuance. The fair value of these warrants totaled $28,141. Such amount was
      charged to other assets, net, and credited to additional paid-in capital and
      will be amortized over the life of the debentures. Maxim Group also acted as
      Placement Agent and received a cash fee in the amount of $50,000.




In
      connection with the issuance of the debentures, the Company incurred $1,106,135
      of issuance costs, which primarily consisted of investment banker fees, legal
      and other professional fees. These costs have been recorded as additional
      expense during year 2006.




The
      gross
      proceeds of $8,000,000 are recorded as a current debenture liability. In
      addition, fair values attributed to the Investors’ warrants in accordance with
      EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
      and Potentially Settled in a Company’s Own Stock” are recorded as liabilities.
      The initial value related to the Investors’ warrants is $690,642. An aggregate
      gain of $60,694 representing the change in fair value of warrants was recognized
      during the three months ended March 31, 2007.




In
      accordance with recent FASB guidance, due to certain factors, including a
      liquidated damages provision in the registration rights agreement, the Company
      values and accounts for the embedded conversion feature and the warrants related
      to the debentures as derivatives. Accordingly, these derivative liabilities
      are
      measured at fair value with changes in fair value reported in earnings as long
      as they remain classified as liabilities. The Company reassesses the
      classification at each balance sheet date. If the classification required under
      EITF No. 00-19 changes as a result of events during the period, the contract
      should be reclassified as of the date of the event that caused the
      reclassification.




12




EVENT
      OF
      DEFAULT




On
      March
      16, 2007 our predecessor auditor withdrew their opinion on our previously filed
      financial statements for the years ended December 31, 2005, December 31, 2004
      and December 31, 2003. As a result, on March 27, 2007, we notified the holders
      of the outstanding convertible debenture that we suspended use of the prospectus
      contained in our Registration Statement on Form S-1 (File No. 333-134127) that
      was declared effective on December 8, 2006, due to the lack of fiscal year
      end
      2005 and 2004 audited financial statements and that they must cease selling
      under the prospectus. The suspension of the use of the prospectus after April
      17, 2007, triggered an event of default under the registration rights agreement
      and the convertible debentures, and if any of the holders so elect, they can
      accelerate and demand payment under the debentures, in accordance with the
      registration rights agreement based on the following provisions.




a)
            If,
                during the Effectiveness Period, either the effectiveness of the
                Registration Statement lapses for any reason or the Holder shall
                not be
                permitted to resell Registrable Securities under the Registration
                Statement for a period of more than 20 consecutive Trading Days or
                60
                non-consecutive Trading Days during any 12 month period, the Company
                has
                to pay ‘Mandatory Default Amount’ as the sum of (i) the greater of (A)
                130% of the outstanding principal amount of this Debenture, plus
                all
                accrued and unpaid interest hereon, or (B) the outstanding principal
                amount of this Debenture, plus all accrued and unpaid interest hereon,
                divided by the Conversion Price on the date the Mandatory Default
                Amount
                is either (a) demanded (if demand or notice is required to create
                an Event
                of Default) or otherwise due or (b) paid in full, whichever has a
                lower
                Conversion Price, multiplied by the VWAP on the date the Mandatory
                Default
                Amount is either (x) demanded or otherwise due or (y) paid in full,
                whichever has a higher VWAP, and (ii) all other amounts, costs, expenses
                and liquidated damages due in respect of this
                Debenture.




b)
            If
                any Event of Default occurs, the outstanding principal amount of
                this
                Debenture plus accrued but unpaid interest, liquidated damages and
                other
                amounts owing in respect thereof through the date of acceleration,
                shall
                become, at the Holder’s selection, immediately due and payable in cash at
                the Mandatory Default Amount. Commencing 5 days after the occurrence
                of
                any Event of Default that results in the eventual acceleration of
                this
                Debenture, the interest rate on this Debenture shall accrue at an
                interest
                rate equal to the lesser of 18% per annum or the maximum rate permitted
                under applicable law.




Due
      to
      the provisions mentioned above and as per the terms of the Debenture, the
      Company has reclassified the remaining principal amount of the Debenture of
      $6,909,086 and the principal amount of the new Debentures of $945,000 to current
      liabilities.




The
      Company accrued 2% as liquidated damages and 30% as mandatory default amount
      from the date of ineffectiveness of registration statement as
      follows:


($,000)
            March
                  31, 2007Liquidated
                damages
            2%
            
            $450Mandatory
                default
            30%
            
            2,247Total
            
            
            $2,697




Such
      amounts have been recorded as liquidated damages liability as of March 31,
      2007.




The
      Company issued 199,444 shares to redeem $1,090,909 of convertible note as of
      March 31, 2007.




8.2
      Five
      Million Convertible Note




On
      February 7, 2007, PacificNet Games Limited (PacGames), a 51% owned subsidiary
      of
      the Company, entered into a definitive $5 million convertible secured note
      financing agreement with Pope Asset Management, LLC (Pope), an institutional
      investor. Proceeds of the financing are to provide PacGames with additional
      working capital to expand its gaming technology operations, to make further
      synergistic acquisitions in China and for general corporate
      purposes.




The
      $5
      million convertible secured note issued to Pope matures on February 6, 2010.
      Subject to reaching certain net income milestones during fiscal year 2007,
      the note is convertible into an equity interest of PacGames ranging between
      26%
      to 32% . The interest rate of the convertible note has initially been set at
      8%,
      and shall increase to 15% if the note is not converted prior to maturity.
      PacGames received the first payment of $2.5 million during the first quarter
      of
      2007.




In
      connection with the issuance of the note, PacGames incurred issuance costs
      of
      $204,121, which primarily consisted of investment banker fees, legal and other
      professional fees. These costs have been capitalized and will be amortized
      over
      three years, the life of the note. Interest accrual as of March 31, 2007
      amounted to $29,041.




13




Following
      is the summary of convertible debenture:




**March
                31,**
              **2007**($,000)Convertible
                debenture
            
            
            $
            2,500Unamortized
                financing cost
            
            
            
            (193
            )$
            2,307




**9.
      SEGMENT INFORMATION**




The
      Company has classified its operating segments in accordance with SFAS No. 131
      “DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.” 
Operating segments comprise reporting entities that exhibit similar long-term
      financial performance based on the nature of the products and services with
      similar economic characteristics such as margins, business practices and target
      market. The four operating segments are as follows:




(1)
      Outsourcing Services - involves human voice services such as Business Process
      Outsourcing, CRM, call center, IT Outsourcing and software development services.
      These types of services are conducted through our subsidiaries EPRO,
      Smartime/Soluteck and PacificNet Solution Ltd.




(2)
      Telecom Value-Added Services (VAS) - primarily involves machine voice services
      such as Interactive Voice Response, SMS and related VAS, which are conducted
      through our subsidiaries such as ChinaGoHi (discontinued), Linkhead
      (discontinued), Clickcom (discontinued) and Guangzhou 3G/Sunroom. For example,
      Linkhead is a master reseller of NMS hardware and software platforms in China,
      and its voice cards are used as an integral part of voice hardware using CPCI
      industry control machines, and also by Media Servers to support access from
      PSTN
      and VoIP, Softswitch and 3G networks.




(3)
      Product (Telecom & Gaming) Services Group - involves communication and
      gaming products, GSM/CDMA/3G Products, Multimedia Communication Kiosks. This
      Group includes the following subsidiaries: PacificNet Communications Limited,
      iMobile, Allink, Take1 and PacificNet Games. PacificNet Games Limited (PacGames)
      is a leading developer of Asian electronic gaming machines, multi-player
      electronic gaming technology solutions and gaming related maintenance, IT,
      and
      distribution services for the leading hotel and casino operators based in the
      Macau and other Asian gaming markets.




(4)
      Other
      Business - other administrative, financial and investment services and non-core
      businesses such as PacificNet Power Limited (PacPower), Pacific Financial
      Services Limited, etc.




The
      Company's reportable segments are operating units, which represent the
      operations of the Company's significant business operations. Summarized
      financial information concerning the Company's reportable segments is shown
      in
      the following table. The "Other" column includes the Company's other
      insignificant services and corporate related items, and, as it relates to
      segment earnings/(loss), income and expense not allocated to reportable
      segments.




For
                the three months ended March 31, 2007
            Group
                1.
            Group
                2.
            Group
                3.
            Group
                4.
            Total(in
                thousands, except percentages)
            Outsourcing
                Services
            Telecom
                Value-Added Services
            Products
                (Telecom & Gaming)
            Other
                Business
            (Restated)($)
            ($)
            ($)
            ($)
            ($)Revenues
            3,963
            527
            4,773
            4
            9,267(%
                of Total Revenues)
            43%
            6%
            52%
            
            100%Income
                / (Loss) from Operations
            400
            (3)
            1,196
            (793)
            800(%
                of Total Profit)
            50%
            
            150%
            (99)%
            100%Total
                Assets
            8,322
            (2,140)
            15,875
            19,168
            41,225(%
                of Total Assets)
            20%
            (5)%
            39%
            46%
            100%Goodwill
            3,964
            461
            1,833
            
            6,258Geographic
                Area
            HK,
                PRC
            HK,
                PRC
            HK,
                PRC, Macau
            HK,PRC




14





For
                the three months ended March 31, 2006
            Group
                1.
            Group
                2.
            Group
                3.
            Group
                4.
            Total(in
                thousands, except percentages)
            Outsourcing
                Services
            Telecom
                Value-Added Services
            Products
                (Telecom & Gaming)
            Other
                Business
            (Restated)($)
            ($)
            ($)
            ($)
            ($)Revenues
            3,022
            295
            3,355
            
            6,672(%
                of Total Revenues)
            45%
            4%
            50%
            
            100%Income
                / (Loss) from Operations
            206
            15
            359
            (518)
            62%
                of Total Profit)
            332%
            24%
            579%
            (835)%
            100%Total
                Assets
            12,088
            15,011
            6,089
            13,221
            46,409(%
                of Total Assets)
            26%
            32%
            13%
            28%
            100%Goodwill
            3,964
            
            
            
            3,964Geographic
                Area
            HK,PRC
            HK,PRC
            HK,PRC,
                Macau
            HK,PRC





Product
      and service revenues classified by major geographic areas are as follows (in
      thousands of US Dollars):





For
                the three months ended
              March
                31, 2007
            Hong
                Kong, Macau
            PRC
            United
                States
            Total
              (Restated)Product
                revenues
            2,137
            1,550
            1,015
            4,702Service
                revenues
            3,492
            1,073
            -
            4,565





For
                the three months ended
              March
                31, 2006
            Hong
                Kong, Macau
            PRC
            United
                States
            Total
              (Restated)Product
                revenues
            2,936
            -
            -
            2,936Service
                revenues
            3,027
            709
            -
            3,736




**10.
      RELATED PARTY TRANSACTIONS**




LEASE
      AGREEMENT




In
      November 2004, the Company entered into a lease agreement with EPRO for rental
      space in the amount of $1,923 per month. The term of the lease was one year
      and
      renewable by either party.




LOAN
      DUE FROM RELATED PARTIES




At
      March
      31, 2007, there was a total loan receivable of approximately $713,000 due from
      related parties. Included in which were $279,000 from MOABC, an affiliated
      company that is 15% owned by PacificNet, and $434,000 from shareholders and
      directors of certain of the Company’s subsidiaries in connection with the
      acquisition of those subsidiaries. The amounts due from shareholders and
      directors of subsidiaries are comprised of $254,000 due from a shareholder
      of
      Yueshen, $64,000 due from a director of Soluteck and $116,000 due from a
      director of PACT Communications. Terms of these related parties loan receivables
      and payables are summarized below:




LOAN
      TO MOABC




MOABC
      is
      an affiliated company, 15% owned by PacificNet, as of March 31, 2007. A
      convertible loan of $279,000 is outstanding from MOABC as of March 31, 2007.
      Terms of the convertible loan provide PacificNet an option at any time during
      the term of the loan to convert in part or in whole of the then outstanding
      loan
      principle into equity interest of MOABC, at $23,160 for each 1% of MOABC
      shares.




LOAN
      TO YUESHEN’S SHAREHOLDER




As
      of
      March 31, 2007, there was a loan outstanding of $254,000 receivable from the
      shareholder of Yueshen. This loan is secured by 106,240 PacificNet shares.
      Further discussion of the Company’s legal dispute with Yueshen can be found
      under Part II of this 10Q document - Item1: Legal Proceedings.




15




LOAN
      TO SOLUTECK’S DIRECTOR




As
      of
      March 31, 2007, there was a loan outstanding of $64,000 receivable from a
      director of Soluteck, due on December 14 for three consecutive years ending
      2007. The interest rate for the loan is 8% per annum plus 5% penalty interest
      in
      case it has not been timely paid. The loan is collateralized with 100,000
      PacificNet’s shares owned by the borrowing director and Ms Iris Lo, and the
      remaining assets of Smartime Holding Ltd.




LOAN
      TO COMMUNICATIONS' DIRECTOR




As
      of
      March 31, 2007, there was a loan outstanding of $116,000 receivable from a
      director of Communications, due on August 31, 2007. The interest rate for the
      loan is 10% per annum plus 1% penalty interest per month in case of delinquency.
      The loan is secured by 30,000 PacificNet shares.




LOAN
      DUE TO RELATED PARTIES




As
      of
      March 31, 2007, there was an outstanding loan payable of $577,000 due to
      related parties. Included in which was a loan payable of $292,000 to a
      shareholder of EPRO. The loan was advanced to Epro by a shareholder of EPRO
      on
      behalf of the Company for working capital purposes. The loan is due on August
      4,
      2010. Interest is charged at Hong Kong prime lending rate.




As
      of
      March 31, 2007, a loan of $285,000 was payable to a shareholder of Smartime.
      The
      loan was advanced to Smartime by a shareholder of Smartime on behalf of the
      Company for working capital purposes.




**11.
      COMMITMENTS AND CONTINGENCIES**




OPERATING
      LEASES - The Company leases warehouse and office space under operating leases
      with fixed monthly rentals. None of the leases included contingent rentals.
      Lease expense charged to operations for 2007 Q1 amounted to $152,000 (2006
      Q1:
      $128,000). Future minimum lease payments under non-cancelable operating leases
      are $655,000 for the period from January 2007 to December 2008 and $684,000
      for
      the period from January 2008 to December 2011, respectively.




RESTRICTED
      CASH - Term deposit of $235,000 has been pledged to certain financial
      institutions for bank line overdraft protection of Epro.




BANK
      LINE
      OF CREDIT - As of March 31, 2007, the Company’s outstanding bank line of credit
      were as follows:




(i)
            Epro
                has an overdraft banking facility of up to $294,000 with certain
                banking
                institutions, which is secured by a pledge of its fixed deposits
                of
                $235,000. Interest is charged at Hong Kong Prime Rate and payable
                at the
                end of each calendar month or the date of settlement, whichever is
                earlier.(ii)
            Smartime
                has an overdraft banking facility of up to $110,000 with a Hong Kong
                banking institution. This overdraft facility is secured by a personal
                deposit account of a director of
                Smartime.




BANK
      LOANS - Tabulated below are bank loans outstanding (in
      thousands):




**March
                31,**
              **2007**
            
            
            **December
                31, 2006**Unaudited
              Restated
            
            
            
            Audited
              RestatedSecured
                [1]
            
            $
            2,476
            
            
            $
            1,668Unsecured
            
            
            737
            
            
            
            543Current
                portion
            
            
            (933
            )
            
            
            (576
            )Non
                current portion
            
            $
            2,280
            
            
            $
            1,635




[1]
      The
      loans were secured by the following: joint and several personal guarantees
      executed by certain directors of the subsidiary of the Company; corporate
      guarantee executed by a subsidiary of the Company; second legal charge over
      a
      property owned by a subsidiary of the Company; and pledged bank deposits of
      $235,000 (2006: $234,000) of a subsidiary of the Company.




16




Aggregate
      future maturities of borrowing for the next five years are as follows (in
      thousands of US Dollars):




April
                2007 to
              March
                2008
            
            
            April
                2008 to
              March
                2009
            
            
            April
                2009 to March 2010
            
            
            April
                2010 to
              March
                2011
            
            
            April
                2011 to
              March
                2012
            
            
            Thereafter
            
            
            TOTALBeijing
                PACT office mortgage (1)
            
            $
            51
            
            
            $
            54
            
            
            $
            57
            
            
            $
            43
            
            
            $
            81
            
            
            $
            761
            
            
            $
            1,047Shenzhen
                PACT office mortgage (2)
            
            
            21
            
            
            
            23
            
            
            
            24
            
            
            
            26
            
            
            
            28
            
            
            
            648
            
            
            
            770Sub-total
            
            
            72
            
            
            
            77
            
            
            
            81
            
            
            
            69
            
            
            
            109
            
            
            
            1,409
            
            
            
            1,817Bank
                loans (3)
            
            
            437
            
            
            
            404
            
            
            
            131
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            972AR
                factoring loans (3)
            
            
            424
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            424Sub-total
            
            
            861
            
            
            
            404
            
            
            
            131
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,396TOTAL
            
            $
            933
            
            
            $
            481
            
            
            $
            212
            
            
            $
            69
            
            
            $
            109
            
            
            $
            1,409
            
            
            $
            3,213




(1)
            Fixed
                mortgages expiring in 2012 at interest rate of 5.5% per
                annum.(2)
            Fixed
                mortgage expiring in 2012 at interest rate of 6.2% per
                annum.


(3)
            Interest
                rates charged range from Hong Kong Prime Lending Rate to Prime +
                2%.




CAPITAL
      LEASE OBLIGATIONS - The Company leases various equipments under capital leases
      expiring in 2009. Aggregate minimum future lease payments under capital leases
      for each of the next three years are as follows: 2007: $110,000; 2008: $80,000;
      2009:$24,000, and thereafter: none.




Aggregate
                future lease payments2007
            
            $
            110,0002008
            
            
            80,0002009
            
            
            24,000Thereafter
            
            
            -Total
            
            
            224,000Current
                portion
            
            
            (110,000
            )Non-current
                portion
            
            $
            104,000




**12.
      ACQUISITION**




TAKE
      1
      TECHNOLOGIES GROUP LIMITED




On
      January 05, 2007, we entered into an agreement for PacificNet to exercise the
      option to acquire an additional 31% interest in Take 1. The completion date
      for
      the new Securities Subscription Agreement was January 05, 2007, with a
      contingent consideration of $965,505 (to be paid entirely with shares of
      PacificNet: 149,459 PACT Shares, valued at $6.46 per share). As a result,
      PacificNet has become the majority and controlling shareholder of Take1 with
      our
      ownership percentage increasing from 20% to 51%.




An
      initial equity investment of 30% in Take 1 was made in April 2004 by the
      Company, through its subsidiary PacificNet Strategic Investment Holdings
      Limited, for a consideration of $1,156,812, comprising $385,604 in cash and
      $771,208 in 149,459 PacificNet shares at $5.16 per share. PacificNet’s interest
      in Take 1 was reduced to 20% in the year 2005 from 30% as a result of PacificNet
      repurchasing an aggregate of 149,459 at nominal value.




17




Summarized
      below were the assets acquired and liabilities assumed for Take 1 in the
      acquisition:




Estimated
                fair values:Current
                Assets
            
            $
            106,422Intangible
                asset
            
            
            64,665Total
                Assets Acquired
            
            
            171,087Liabilities
                assumed
            
            
            (728,156
            )Net
                assets acquired
            
            
            (557,069
            )Investment
                on equity method
            
            
            385,604Loss
                from Investment
            
            
            (285,260
            )Goodwill
            
            $
            657,413




At
      March
      31, 2007, goodwill of $657,413 represents the excess of the purchase price
      over
      the fair value of the net tangible and identifiable intangible assets acquired
      and is not deductible for tax purposes and the total amount of goodwill is
      reported under reportable segment for Products (Telecom &
Gaming).




In
      accordance with SFAS 142, goodwill is not amortized but is tested for impairment
      at least annually. The purchase price allocation for Take 1 acquisition is
      based
      on a management's estimates and overall industry experience. Immediately after
      the signing of the definitive agreement, the Company obtained effective control
      over Take 1. Accordingly, the operating results of Take 1 have been consolidated
      with those of the Company starting January 05, 2007. Pursuant to SFAS 141
      "Business Combinations", the earn-out consideration is considered contingent
      consideration, which will not become certain until the audited combined
      after-tax profit of US$128,205 for the quarter ended March 31, 2007 is
      available. Accordingly, the contingent consideration of 149,459 shares has
      not
      been reflected in the consolidated financial statements of the Company as of
      March 31, 2007.




**UNAUDITED
      PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE QUARTER ENDED
      MARCH 31, 2007 AND 2006**




The
      following is an un-audited pro forma consolidated financial information for
      the
      quarter ended March 31, 2006 and 2007, as presented below, reflects the
      results of operations of the Company assuming the acquisition occurred on
      January 1, 2006 and 2007, respectively, and after giving effect to the
      purchase accounting adjustments. These pro forma results have been prepared
      for
      information purposes only and do not purport to be indicative of what operating
      results would have been had the acquisitions actually taken place on January
      1, 2006 and 2007, respectively, and may not be indicative of future
      operating results.




Three
                months ended September 30(un-audited and in thousands of U.S. dollars)
            
            2007
            
            
            2006Revenue
            
            $
            9,267
            
            
            $
            6,916Operating
                income
            
            $
            800
            
            
            $
            47Net
                profit
            
            $
            308
            
            
            $
            796Earnings
                per share – basic
            
            $
            0.03
            
            
            $
            0.07Earnings
                per share – diluted
            
            $
            0.03
            
            
            $
            0.07




Accordingly,
      PacificNet included the financial results of Take 1 in its consolidated 2007
      financial results from January 5, 2007 through March 31, 2007.




**13.
      INVESTMENTS IN AFFILIATED COMPANIES**




Investments
      in affiliated companies consists of the following as of March 31,
      2007:





(US$
                thousands)
            COLLATERAL/OWNERSHIP
                % AND BUSINESS DESCRIPTIONAMOUNT
            DESCRIPTIONINVESTMENTS
                IN AFFILIATED COMPANIES:Glad
                Smart
            $30
            15%
                ownership interestCommunity
                media co.
            $4
            5%
                ownership interestTotal
            $
                34




18




**14.
      LEGAL PROCEEDINGS.**




**1.
      Lawsuit between PacificNet Power Limited and Johnson Controls Hong Kong Limited
      (JCHKL), a subsidiary of Johnson Controls Inc.  (NYSE:JCI)
      (www.jci.com )**




On
      January 19, 2007, Johnson Controls Hong Kong Limited filed a claim against
      PacificNet Power Limited (a 51% owned subsidiary of PacificNet) in the High
      Court of the Hong Kong Special Administrative Region seeking HK$4,800,000 as
      payment for services rendered to replace 3 sets of rane water-cooled chillers,
      together with energy saving performance (the "Chiller System"), at the Fortress
      Tower in Hong Kong.




In
      connection with the claim, PacificNet Power reviewed a letter from its client,
      China Weal Property Management Ltd., dated January 22, 2007 stating that the
      construction work by JCHKL had not been completed as of the date of the letter,
      and that certain violations itemized in a letter issued by the Hong Kong
      Environment Protection Department (EPD) (Noise Abatement Notice No. N806030)
      addressed to JCHKL with respect to acoustic problems with JCHKL’s equipment had
      not been abated.




The
      board
      of directors of PacificNet Power Limited has reviewed the case with its client,
      China Weal Property Management Ltd., and our Hong Kong legal counsel and it
      is
      our belief that the project work undertaken JCHKL is defective in numerous
      aspects, as evidenced by the letter from government letter issued by
      EPD.  As a result, we believe the construction work was not been
      completed by JCHKL, and therefore, JCHKL is not entitled to payment for its
      services.




On
      February 13, 2007, we instructed our Hong Kong legal counsel to issue a Defense
      and Counterclaim to JCHKL to counter-claim that ( i) JCHKL's construction work
      has not complied with the applicable rules and regulations of various government
      authorities in Hong Kong; (ii) the Chiller System provided by JCHKL was
      defective and merchantable unfit and JCHKL has failed and/or refused to rectify
      such defective works; and (iii) JCHKL shall return the work deposit in the
      amount of  HK$1,500,000 to PacificNet Power Limited and shall
      compensate and keep PacificNet Power Limited indemnified against all the loss
      and damages suffered as a result of any claims from the China Weal Property
      Management Ltd.




The
      case
      is now in the discovery stage before proceeding to the stage of fixing a date
      for trial in the High Court of Hong Kong and we intend to vigorously defend
      ourselves against the allegations. We are unable to predict the outcome of
      these
      actions, or a reasonable estimate of the range of possible loss, if
      any.




**2.
      Lawsuit between PacificNet Power Limited and Johnson Controls Hong Kong Limited
      (JCHKL), a subsidiary of Johnson Controls Inc.  (NYSE:JCI)
      (www.jci.com )**




On
      or
      about December, 2005, Johnson Controls Hong Kong Limited approached PacificNet
      Power Limited (a 51% owned subsidiary of PacificNet) and made a representation
      that they had submitted a tender to “The Incorporated Owners of Nan Fung Centre,
      Tsuen Wan (“the Employer”) for the “construction and replacement works of
      existing air-cooled chiller plant by new water-cooled chiller plant for Tsuen
      Wan Nan Fung Centre and energy saving performance contract” (“the Contract”).
      JCHKL invited and induced PacificNet Power Limited to act as the main contractor
      for the Contract and it would then act as a sub-contractor.




PacificNet
      Power also expressly made known to JCHKL that the said construction and
      replacement works and the guaranteed energy saving should meet all the tender
      requirements if PacificNet Power accepted the invitation to act as the main
      contractor for the Contract, and PacificNet Power further said that if there
      should be any quality defects with the system and/ or the construction work,
      the
      Employer and/ or their prospective tenants would claim against JCHKL and JCHKL
      should compensate.




PacificNet
      Power however received some correspondences and complaints from the Employer
      about the poor and/ or sub-standard works done by JCHKL. PacificNet Power,
      after
      separate investigation, discovered the poor workmanship and sub-standard works
      done by JCHKL. PacificNet Power, after separate investigation, discovered the
      poor workmanship and sub-standard works done by JCHKL. Accordingly, the Employer
      and/ or their representatives have delayed the monthly installments payment
      to
      PacificNet Power.




On
      April
      23, 2007, we instructed our lawyers issued a letter to the Defendant requesting
      and demanding them, being the sub-contractor of the Construction and Replacement
      Works Contract, to take immediate rectification action within seven days from
      the date of the said letter to (i) rectify and complete all outstanding
      defective works of the Construction and Replacement Works Contract; (ii) replace
      the water-cooled chiller plant and/or equipments which are not conformed with
      the requirements of the tender documents previously submitted by the Defendant
      to the Employer; and (iii) improve the poor performance of energy saving of
      the
      new water-cooled chiller plant.




Despite
      the said letter, JCHKL had failed and/ or refused to rectify and complete all
      outstanding works and/ or replace the defective system. And therefore PacificNet
      Power claims against JCHKL for: (i) refund HK$6,414,300.00, being the Contract
      Price paid by PacificNet Power to JCHKL; (ii) costs and expenses incurred by
      Power to rectify all defective works of the Contract; (iii) all damage and
      loss
      suffered by PacificNet Power, and further and other relief.




On
      July
      25, 2007, JCHKL issued a Defense and Counterclaim to PacificNet Power to argue
      that: (i) they had carried out the works according to the Contract terms; (ii)
      the works had been approved by PKL Consultants Limited, the consultant
      representative of the Employer; and (iii) a sum of HK$30,000 is still due and
      owing by PacificNet Power to JCHKL.




The
      case
      is now in the discovery stage before proceeding to the stage of fixing a date
      for trial in the High Court of Hong Kong. We are unable to predict the outcome
      of these actions, or a reasonable estimate of the range of possible loss, if
      any.




19




**15. RESTATEMENT**




On
      March
      19, 2007 our predecessor auditor withdrew their opinion on our previously filed
      financial statements for the years ended December 31, 2005 and 2004 due to
      uncertainties around certain option grants during the said period. An
      independent investigation in this connection has been performed by our Audit
      Committee to address this matter.




In
      its
      May 3, 2007 Report, the Audit Committee concluded that, “...the Audit Committee
      did indeed find that, although the number and terms of option grants were being
      fixed by the Compensation Committee who deferred to the Board merely for a
      secondary review approval; whereby the Board of Directors still maintained
      the
      authority to cancel a prerequisite grant consummated by the Compensation
      Committee, therefore that Grant could likely be interpreted only as final at
      the
      date of approval of the company’s Board of Directors. Hence, with this approach
      which seems to be more aligned with the SEC interpretation, financial
      restatement would be required to account for the granting of options that were
      “in the money” due to procedural administrative delay and the difference in the
      Compensation Committee grant date and the Board of Directors approval date.
      Accordingly, the Audit Committee recommended to the Board of Directors of
      Pacificnet, Inc. to charge additional stock based compensation expense to the
      company’s financial statements for the fiscal years ended December 31, 2003,
      2004 and 2005 respectively...”




Based
      on
      the Audit Committee Recommendations, extra stock-based compensation charges
      of
      approximately $0.3 million, $1.2 million and $0.1 million were charged to each
      of the years ended December 31, 2005, 2004 and 2003, respectively. Also, for
      the
      years ended December 31, 2005 and 2004, the Company determined that its
      allowance for bad debts on the accounts receivable was understated by $3.5
      Million and $0.28 million in the years ended December 31, 2005 and 2006,
      respectively. The Company also restated impairment of goodwill for certain
      subsidiaries ($3.7 million and $2.6 million in the years ended December 31,
      2005
      and 2004, respectively) and accrued certain 2005 bonus payable in 2006 amounting
      to $600,000. Also, the Company concluded that the consolidation of certain
      entity (Yueshen) was wrongly reflected as the Company did not have control
      over
      the management of the entity.





Following
      the reaudit of its financial statements for the years ended December 31, 2005
      and 2004, the Company restated its financials statements for the year ended
      December 31, 2006.





In
      the
      course of the financial statements restatement for the year ended December
      31,
      2006, management has decreased total non-current assets by $1 million worth
      of
      goodwill as a result of the re-audit restatement to the ending goodwill balances
      as at December 31, 2005. Further, management has also decreased total selling,
      general and administrative expenses by an aggregate of $6.3 million. Said
      decrease comprises of extra goodwill impairment amounting to approximately
      $3.7
      million and $2.6 million, respectively, already charged to the restated Selling,
      General and Administrative expenses for the years ended December 31, 2005 and
      2004. An impairment of investment of $1.2 million was also recorded for the
      year
      ended December 31, 2006 for an entity disposed in 2006.





Following
      the restatements of its financials statements for the years ended December
      31,
      2006, December 31, 2005 and December 31, 2004 the Company is restating its
      first
      quarter review for the year 2007 to account for the effects of its prior year’s
      restatements.





Following
      are the effects of the restatement on the period ended March 31, 2007 and the
      year ended December 31, 2006:





Three
                  Months ended
                March
                  31, 2007
              
              
              Year
                  ended
                December
                  31, 2006**Consolidated
                  Balance Sheets:**
              
              As
                  reported
              
              
              As
                  restated
              
              
              As
                  reported
              
              
              As
                  restatedASSETS:Current
                  assets
              
              $
              19,126
              
              
              $
              19,001
              
              
              $
              17,041
              
              
              $
              17,041Non-current
                  assets
              
              
              26,285
              
              
              
              22,224
              
              
              
              24,841
              
              
              
              19,885Total
                  assets
              
              $
              45,411
              
              
              $
              41,225
              
              
              $
              41,882
              
              
              $
              36,926LIABILITIESCurrent
                  liabilities
              
              $
              14,959
              
              
              $
              16,748
              
              
              $
              17,376
              
              
              $
              18,321Non-current
                  liabilities
              
              
              6,480
              
              
              
              4,691
              
              
              
              2,704
              
              
              
              1,759Total
                  liabilities
              
              
              21,439
              
              
              
              21,439
              
              
              
              20,080
              
              
              
              20,080Minority
                  interest
              
              
              7,126
              
              
              
              4,206
              
              
              
              6,874
              
              
              
              2,869STOCKHOLDERS'   EQUITYCommon
                  stock
              
              
              1
              
              
              
              1
              
              
              
              1
              
              
              
              1Treasury
                  stock
              
              
              (130
              )
              
              
              (145
              )
              
              
              (257
              )
              
              
              (272
              )Additional
                  paid-in capital
              
              
              64,560
              
              
              
              67,003
              
              
              
              63,124
              
              
              
              65,757Cumulative
                  other comprehensive income (loss)
              
              
              249
              
              
              
              (13
              )
              
              
              220
              
              
              
              (42
              )Accumulated
                  deficit
              
              
              (47,431
              )
              
              
              (50,782
              )
              
              
              (47,739
              )
              
              
              (51,090
              )Stock
                  subscription receivable
              
              
              (403
              )
              
              
              (484
              )
              
              
              (421
              )
              
              
              (377
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              16,846
              
              
              
              15,580
              
              
              
              14,928
              
              
              
              13,977TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              45,411
              
              
              $
              41,225
              
              
              $
              41,882
              
              
              $
              36,926




20






Three
                  Months ended
                March
                  31, 2007
              
              
              Three
                  Months ended
                March
                  31, 2006As
                  reported
              
              
              As
                  restated
              
              
              As
                  reported
              
              
              As
                  restated**Consolidated
                  Statements of Operations:**Net
                  revenue
              
              $
              9,267
              
              
              $
              9,267
              
              
              $
              6,672
              
              
              $
              6,672Cost
                  of sales
              
              
              (6,728
              )
              
              
              (6,728
              )
              
              
              (5,320
              )
              
              
              (5,320
              )Gross
                  profit
              
              
              2,539
              
              
              
              2,539
              
              
              
              1,352
              
              
              
              1,352Selling,
                  General and Administrative expenses
              
              
              (1,567
              )
              
              
              (1,567
              )
              
              
              1,079
              
              
              
              1,079Stock-based
                  compensation expenses
              
              
              -
              
              
              
              -
              
              
              
              (182
              )
              
              
              (182
              )Income
                  from operations
              
              
              800
              
              
              
              800
              
              
              
              62
              
              
              
              62Income
                  before income taxes, minority interest and discontinued
                  operations
              
              
              680
              
              
              
              680
              
              
              
              25
              
              
              
              25Income/(loss)
                  before discontinued operations
              
              
              78
              
              
              
              78
              
              
              
              (81
              )
              
              
              (81
              )Income from
                discontinued operations
              
              
              230
              
              
              
              230
              
              
              
              882
              
              
              
              882Net
                  income available to common stockholders
              
              $
              308
              
              
              $
              308
              
              
              $
              801
              
              
              $
              801Earnings
                  per common share:Basic
              
              $
              0.03
              
              
              $
              0.03
              
              
              $
              0.07
              
              
              $
              0.07Diluted
              
              $
              0.03
              
              
              $
              0.03
              
              
              $
              0.07
              
              
              $
              0.07Shares
                  used in computing earnings per share:Basic
              
              
              11,719,168
              
              
              
              11,703,376
              
              
              
              10,855,761
              
              
              
              10,834,299Diluted
              
              
              12,013,109
              
              
              
              11,997,317
              
              
              
              11,526,945
              
              
              
              10,834,299**Consolidated
                  Statements of Cash Flows**Net
                  income
              
              $
              308
              
              
              $
              308
              
              
              $
              801
              
              
              
              4801Stock-based
                  compensation
              
              
              -
              
              
              
              -
              
              
              
              182
              
              
              
              182Net
                  cash provided by (used in) operating activities
              
              
              (100
              )
              
              
              845
              
              
              
              (157
              )
              
              
              2,148Net
                  cash used in investing activities
              
              
              (913
              )
              
              
              (825
              )
              
              
              (2,190
              )
              
              
              (5,558
              )Net
                  cash provided by financing activities
              
              
              2,271
              
              
              
              2,092
              
              
              
              7,619
              
              
              
              8,973Effect
                  of exchange rate on cash & cash equivalent
              
              
              29
              
              
              
              29
              
              
              
              18
              
              
              
              -NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              $
              4,041
              
              
              $
              4,041
              
              
              $
              3,778
              
              
              $
              5,563
  **16.
      CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS**




The
      Company's operations are carried out in the PRC. Accordingly, the Company's
      business, financial condition and results of operations may be influenced by
      the
      political, economic and legal environments in the PRC, by the general state
      of
      the PRC's economy. The Company's business may be influenced by changes in
      governmental policies with respect to laws and regulations, anti-inflationary
      measures, currency conversion and remittance abroad, and rates and methods
      of
      taxation, among other things.




**17. SUBSEQUENT
      EVENTS**




**Sale
      of Interest in Guangzhou 3G Information Technology Co., Ltd. ("Guangzhou
      3G")**




On
      April
      30, 2007, the Company entered into a definitive agreement to sell its 51% entire
      interest in Guangzhou 3G Information Technology Co., Ltd. ("Guangzhou 3G"),
      a
      leading provider of Customer Relationship Management (CRM), mobile internet,
      e-commerce and gaming technology in China, Consideration for the 51% interest
      of
      Guangzhou 3G was US$6 million, to be paid in cash in 5 installments over 7
      months after the agreement signing.  The Company acquired 51%
      controlling interest in Guangzhou 3G in March of 2005 for US$5.5 million
      consideration which was paid partially in cash and mostly in PACT stock. The
      Company’s interest in Guangzhou 3G decreased from 51% to 0% after the
      transaction. Absent any explicit closing conditions contained in the said
      agreement, the disposal was completed upon title transfer during the second
      quarter of 2007.




**Sale
      of Interest in PacificNet Clickcom Limited ("Clickcom")**




On
      May
      15, 2007, the Company entered into a definitive agreement to sell its 36% entire
      interest in PacificNet Clickcom Limited. ("Clickcom"), a leading Value-Added
      Services (VAS) company in China, to Mr. Ou Zhenbin, a Chinese residence.
      Consideration for the 36% interest of Clickcom was RMB10,000 to be paid in
      cash
      within 90 days after the agreement signing.  The Company’s interest in
      Clickcom decreased from 51% to 15% after the
      transaction.




21




**Sale
      of Interest in PacificNet Solutions Limited. ("PacSo")**




On
      May
      18, 2007, the Company entered into a definitive agreement to sell its 45% equity
      interest in PacSo, a company registered under the laws of Hong Kong SAR, China
      and engaged in systems integration, software application, and e-business
      solutions services, to Mr. Alex Au, a resident of Hong Kong SAR, China.
      Consideration for the 45% interest of PacSo was HK$4,500 (or US$583), to be
      paid
      within 90 days after signing of the agreement. The Company’s interest in PacSo
      decreased from 60% to 15% after the transaction.Absent any explicit
      closing conditions contained in the said agreement, the disposal was completed
      upon title transfer during the third quarter of 2007.




**Sale
      of Interest in PacificNet Power Limited ("PacPower")**




On
      May
      18, 2007, the Company entered into a definitive agreement to sell its 36% equity
      interest in PacPower, a company registered under the laws of Hong Kong SAR,
      China and engaged in air-conditioning contracting and consulting businesses,
      to
      Mr. Alex Au, a resident of Hong Kong SAR, China. Consideration for the 36%
      interest of PacPower was HK$3,600 (or US$466), to be paid within 90 days after
      signing of the agreement. The Company’s interest in PacPower decreased from 51%
      to 15% after the transaction. Absent any explicit closing conditions contained
      in the said agreement, the disposal was completed upon title transfer during
      the
      third quarter of 2007.




**Sale
      of Interest in Linkhead Technology Bejing Limited.
      ("Linkhead")**




On
      May
      20, 2007, the Company entered into a definitive agreement to sell its 36% equity
      interest in Linkhead, a PRC limited liability corporation engaged in the
      business of resaling of NMS hardware and software platforms in China, to Mr.
      Mu
      Yingliang, a resident of People’s Republic of China. Consideration for the 36%
      interest of Linkhead was RMB10,000 (or US$1,295), to be paid within 90 days
      after signing of the agreement. The Company’s interest in Linkhead decreased
      from 51% to 15% after the transaction. Absent any explicit closing conditions
      contained in the said agreement, the disposal was completed upon title transfer
      during the third quarter of 2007.




**Sale
      of Interest in PacificNet Telecom Solution Inc.
      ("PacTelso")**




On
      May
      20, 2007, the Company entered into a definitive agreement to sell its 36% equity
      interest in PacTelso, an intermediate holding company registered under the
      laws
      of British Virgin Islands, to Mr. Mu Yingliang, a resident of People’s Republic
      of China. Consideration for the 36% interest of PacTelso was RMB10,000 (or
      US$1,295), to be paid within 90 days after signing of the agreement The
      Company’s interest in PacTelso decreased from 51% to 15% after the
      transaction.Absent
      any explicit closing conditions contained in the said agreement, the disposal
      was completed upon title transfer during the third quarter of 2007.




**Sale
      of Interest in MOABC.com ("MOABC")**




On
      May
      20, 2007, the Company entered into a definitive agreement to sell its 5% equity
      interest in MOABC, a PRC limited liability corporation engaged in the business
      of value-added services platform providing, to Mr. Jack Ou, a resident of
      People’s Republic of China. Consideration for the 5% interest of MOABC was
      RMB5,000 (or US$647), to be paid within 90 days after signing of the agreement.
      The Company’s interest in MOABC decreased from 20% to 15% after the
      transaction.




Information
      relating to the operations of the subsidiaries up to the periods of disposal
      during the three month period ended March 31, 2007 is as follows (in thousands
      of US Dollars):




Linkhead
            Power
            Clickcom
            PacTelso
            Solutions
            MOABC
            3G
            TotalIncome(loss)
                from discontinued operations
            (8)
            -
            (1)
            -
            1
            (23)
            261
            230Net
                assets held for disposition
            1,134
            -
            812
            -
            1
            (42)
            6,971
            8,876




**Revocation
      of Sale &
Purchase Agreement of PacificNet Clickcom Limited
      ("Clickcom")**




On
        May
        15, 2007, the Company entered into a definitive agreement to sell its 36%
        entire
        interest in PacificNet Clickcom Limited. ("Clickcom"), a leading Value-Added
        Services (VAS) company in China, to Mr. Ou Zhenbin, a Chinese residence.
        Consideration for the 36% interest of Clickcom was RMB10,000 to be paid in
        cash
        within 90 days after the agreement signing.  The Company’s interest in
        Clickcom decreased from 51% to 15% after the transaction.  On November
        22, 2007, the said agreement was revoked by the Seller as a result of
        non-payment by the Buyer..
  **Acquisition
        Of Guangdong Poly Blue Express Communications Co.Ltd (Guangdong
        Poly)**




On
      September 5, 2007, the company entered into an agreement to acquire (subject
      to
      meeting of certain conditions) an aggregate of 51% equity interest in Guangdong
      Poly Blue Express Communications Co., Ltd. (Guangdong
      Poly).  Guangdong Poly is a leading operator approved by China's
      Welfare Lottery Center to develop and operate real-time electronic
      paperless lottery services in China, in accordance to the rules and regulations
      set by China's Welfare Lottery Center. Total consideration
      payable for the purchase of Guangdong Poly was US$2 million, in which US$1
      million payable in PACT restricted shares and US$1 million payable in
      cash.




Due
      to
      outstanding closing conditions, the acquisition was not closed until October
      25,
      2007.




22




**Lawsuit
        between PacificNet Inc. and HLB Hodgson Impey Cheng (HLB or Defendant), a
        firm
        of Chartered Accountants and Certified Public Accountants in Hong
        Kong**
  On
        September 20, 2007, PacificNet Inc. filed a claim against its former auditors
        HLB Hodgson Impey Cheng (HLB), a firm of Chartered Accountants and Certified
        Public Accountants, in the High Court of the Hong Kong Special Administrative
        Region seeking refund of the professional fees, compensation of professional
        fees and expenses for Company to engage and deploy new auditors to take over
        the
        incomplete audit works from the Defendant and returning and/or providing
        all
        relevant accounting records, vouchers, audit program and working papers retained
        by the Defendant and losses and damages incurred.




The
      case
      is now in the pleadings stage. We are unable to predict the outcome of these
      actions, or a reasonable estimate of the range of possible loss, if
      any.




**Pacificnet
      Inc. vs Iroquois Master Fund, Ltd.**




On
      October 3, 2007 Iroquois Master Fund, Ltd. filed a complaint in the Supreme
      Court of the State of New York against PacificNet Inc., claiming that the
      Company is in default for failure to pay principal and interest under the
      Amended and Restated Convertible Debenture due March 2009 (the Amended
      Debenture) in the principal amount of $3,000,000 and interest on the Convertible
      Debenture due February 2009 (the ‘‘New Debenture’’) in the principal amount of
      $420,000.




As
      of
      October 2, 2007, Iroquois claims that the outstanding principal amount of the
      Amended Debenture was $2,045,452, and accrued but unpaid interest amount was
      $30,682.  Iroquois claims that, as of October 2, 2007, the mandatory
      default amount, as calculated under the terms of the Amended Debenture due
      and
      owing  is $2,698,974.




As
      of
      October 2, 2007, Iroquois claims that the outstanding principal amount of the
      New Debenture was $420,000, and accrued but unpaid interest amount was $6,300.
      Iroquois claims that, as of October 2, 2007, the mandatory default amount,
      as
      calculated under the terms of the New Debenture, due and owing is
      $554,190.




As
      of the
      date of the complaint, Iroquois Master Fund, Ltd. was seeking damages of
      $3,253,163.80 in the aggregate, together with any accrued but unpaid interest
      through the date of judgment.  Iroquois Master Fund, Ltd. also
      demanded for the reimbursement of its attorney fees and other costs and expenses
      incurred together with costs and disbursements of this action and such other
      and
      further relief as to the court seems just and proper.




**ITEM
      2.   MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS**




THE
      FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION
      CONTAINED IN THE FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
      APPEARING ELSEWHERE HEREIN AND IN CONJUNCTION WITH THE MANAGEMENT'S DISCUSSION
      AND ANALYSIS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A ( Amendment
      No.1) FOR THE YEAR ENDED DECEMBER 31, 2006 .




**PRELIMINARY
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**




The
      statements contained in this Form 10-Q/A that are not purely historical are
      forward-looking statements within the meaning of Section 27A of the Securities
      Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
      1934,
      as amended. These include statements about the Company's expectations, beliefs,
      intentions or strategies for the future, which are indicated by words or phrases
      such as "anticipate," "expect," "intend," "plan," "will," "the Company
      believes," "management believes" and similar words or phrases. The
      forward-looking statements are based on the Company's current expectations
      and
      are subject to certain risks, uncertainties and assumptions, including those
      set
      forth in the discussion under "Description of Business," including the "Risk
      Factors" described in that section, and "Management's Discussion and Analysis
      of
      Financial Condition and Results of Operations." The Company's actual results
      could differ materially from results anticipated in these forward-looking
      statements. All forward-looking statements included in this document are based
      on information available to the Company on the date hereof, and the Company
      assumes no obligation to update any such forward-looking statements.




23




**FACTORS
      THAT COULD AFFECT FUTURE RESULTS**




Factors
      that might cause actual results, performance or achievements to differ
      materially from those projected or implied in such forward-looking statements
      include, among other things:




—
            the
                impact of competitive products;—
            changes
                in laws and regulations;—
            adequacy
                and availability of insurance coverage;—
            limitations
                on future financing;


—
            increases
                in the cost of borrowings and unavailability of debt or equity
                capital;—
            the
                inability of the Company to gain and/or hold market
                share;—
            exposure
                to and expense of resolving and defending liability claims and other
                litigation;—
            consumer
                acceptance of the Company's
                products;


—
            managing
                and maintaining growth;—
            customer
                demands;—
            market
                and industry conditions,—
            the
                success of product development and new product introductions into
                the
                marketplace;


—
            the
                departure of key members of management, and—
            the
                effect of the United States War on Terrorism, as well as other risks
                and
                uncertainties that are described from time to time in the Company's
                filings with the Securities and Exchange
                Commission.




Regarding
      one of our subsidiaries, for example, Epro is engaged in the business of
      providing outsourced call center services with over 15 years of field experience
      in Hong Kong and China. The factors that could affect current and future results
      are as follows:




—
            insufficient
                sales forces for business development & account
                servicing;—
            lack
                of PRC management team in operation;—
            less
                familiarity on partners' product knowledge;—
            deployment
                costs of a new HR application and the costs to upgrade the call center
                computer system;


—
            increasing
                operations costs (cost of salaries, rent, interest rates & inflation)
                under rising economy in Hong Kong;—
            insufficient
                brand awareness initiatives in the market;—
            salary
                increases due to an active labor market in Hong Kong and GuangZhou;
                and—
            increasing
                competition of call center solutions in the Hong Kong and PRC
                markets.




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




Our
      discussion and analysis or plan of operations is based upon our consolidated
      financial statements, which have been prepared in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      financial statements requires us to make estimates and judgments that affect
      the
      reported amounts of assets, liabilities, revenues and expenses, and related
      disclosure of contingent assets and liabilities.




On
      an
      on-going basis, we evaluate our estimates, including those related to accounts
      receivable reserves, provisions for impairment losses of affiliated companies
      and other intangible assets, income taxes and contingencies. We base our
      estimates on historical experience and on various other assumptions that are
      believed to be reasonable under the circumstances, the results of which form
      the
      basis for making judgments about the carrying values of assets and liabilities
      that are not readily apparent from other sources. Actual results may differ
      from
      these estimates under different assumptions or conditions.




Management
      believes the following critical accounting policies reflect our more significant
      estimates and assumptions used in the preparation of our consolidated financial
      statements:




24




*Allowance
      For Doubtful Accounts*




We
      evaluate the collectibility of our trade receivables based on a combination
      of
      factors. We regularly analyze our significant customer accounts, and, when
      we
      become aware of a specific customer's inability to meet its financial
      obligations to us, such as in the case of bankruptcy filings or deterioration
      in
      the customer's operating results or financial position, we record a specific
      reserve for bad debt to reduce the related receivable to the amount we
      reasonably believe is collectible. We also record reserves for bad debt for
      all
      other customers based on a variety of factors including the length of time
      the
      receivables are past due, the financial health of the customer, macroeconomic
      considerations and historical experience. If circumstances related to specific
      customers change, our estimates of the recoverability of receivables could
      be
      further adjusted. In the event that our trade receivables become uncollectible,
      we would be forced to record additional adjustments to receivables to reflect
      the amounts at net realizable value. The accounting effect of this entry would
      be a charge to earnings, thereby reducing our net earnings. Although we consider
      the likelihood of this occurrence to be remote based on past history and the
      current status of our accounts, there is a possibility of this
      occurrence.




In
      the
      beginning of the third quarter of 2006, the Chinese government announced that
      it
      would implement several new policies regarding mobile phone value-added service
      providers effective from July 10, 2006. These policies include a “double
      confirmation” policy and the requirement that value-added service providers
      provide one-month trial subscriptions. By requiring that mobile phone customers
      “double-confirm” their intention to purchase services, and by requiring free
      subscriptions, the Chinese government has negatively affected value-added
      service providers.




*Inventory*




Our
      inventory purchases and commitments are made in order to build inventory to
      meet
      forecasted demand for our products. We perform a detailed assessment of
      inventory for each period, which includes a review of, among other factors,
      demand requirements, product life cycle and development plans, component cost
      trends, product pricing and quality issues. Based on this analysis, we record
      adjustments to inventory for excess, obsolescence or impairment, when
      appropriate, to reflect inventory at net realizable value. Revisions to our
      inventory adjustments may be required if actual demand, component costs or
      product life cycles differ from our estimates. In the event we were unable
      to
      sell our products, the demand for our products diminished, and/or other
      competitors offered similar or better products, we would be forced to record
      an
      adjustment to inventory for impairment or obsolescence to reflect inventory
      at
      net realizable value. The accounting effect of this entry would be a charge
      to
      earnings, thereby reducing our net earnings.




*Income
      Taxes*




We
      record
      a valuation allowance to reduce our deferred tax assets to the amount that
      is
      more likely than not to be realized. We have considered future market growth,
      forecasted earnings, future taxable income, and the mix of earnings in the
      jurisdictions in which we operate and prudent and feasible tax planning
      strategies in determining the need for a valuation allowance. We currently
      have
      recorded a full valuation allowance against net deferred tax assets as we
      currently believe it is more likely than not that the deferred tax assets will
      not be realized. In the event we determine that we would not be able to realize
      all or part of our net deferred tax assets in the future, an adjustment to
      the
      deferred tax assets would be charged to earnings in the period such
      determination is made. Likewise, if we later determine that it is more likely
      than not that the net deferred tax assets would be realized, the previously
      provided valuation allowance would be reversed.




*Contingencies*




We
      may be
      subject to certain asserted and unasserted claims encountered in the normal
      course of business. It is our belief that the resolution of these matters will
      not have a material adverse effect on our financial position or results of
      operations, however, we cannot provide assurance that damages that result in
      a
      material adverse effect on our financial position or results of operations
      will
      not be imposed in these matters. We account for contingent liabilities when
      it
      is probable that future expenditures will be made and such expenditures can
      be
      reasonably estimated.




*Valuation
      of Long-Lived Assets Including Goodwill and Purchased Intangible
      Assets*




We
      review
      property, plant and equipment, goodwill and purchased intangible assets for
      impairment whenever events or changes in circumstances indicate the carrying
      value of an asset may not be recoverable. Our asset impairment review assesses
      the fair value of the assets based on the future cash flows the assets are
      expected to generate. An impairment loss is recognized when estimated
      undiscounted future cash flows expected to result from the use of the asset
      plus
      net proceeds expected from disposition of the asset (if any) are less than
      the
      carrying value of the asset. This approach uses our estimates of future market
      growth, forecasted revenue and costs, expected periods the assets will be
      utilized and appropriate discount rates. Such evaluations of impairment of
      long-lived assets including goodwill arising on a business combination and
      purchased intangible assets are an integral part of, but not limited to, our
      strategic reviews of our business and operations performed in conjunction with
      restructuring actions. When an impairment is identified, the carrying amount
      of
      the asset is reduced to its estimated fair value. Deterioration of our business
      in a geographic region or within a business segment in the future could also
      lead to impairment adjustments as such issues are identified. The accounting
      effect of an impairment loss would be a charge to earnings, thereby reducing
      our
      net earnings.




25




*Convertible
      Debt*




In
      accordance with recent FASB accounting
      guidance, due to certain factors, including a liquidated damages provision
      in
      the registration rights agreement and an indeterminate amount of shares to
      be
      issued upon conversion of the debentures, the Company values and accounts for
      the embedded conversion feature related to the Debentures, the Investors’
warrants, and the registration rights as derivative liabilities. Accordingly,
      these derivative liabilities are measured at fair value with changes in fair
      value reported in earnings as long as they remain classified as liabilities.
      The
      Company reassesses the classification at each balance sheet date. If the
      classification required under EITF No. 00-19 changes as a result of events
      during the period, the contract should be reclassified as of the date of the
      event that caused the reclassification.




The
      fair
      value of these derivative instruments, as determined by applying the
      Black-Scholes valuation model, is adjusted quarterly. The Black-Scholes
      valuation model requires the input of highly subjective assumptions, including
      the expected stock price volatility. Additionally, although the Black-Scholes
      model meets the requirements of SFAS 133, the fair values generated by the
      model may not be indicative of the actual fair values as our derivative
      instruments have characteristics significantly different from traded options.
      Accordingly, the results obtained could be significantly different if other
      assumptions were used. The effect of this entry would be a charge to net
      earnings, thereby either increasing or reducing our net earnings based upon
      the
      assumptions used and the results obtained.




**NATURE
      OF THE OPERATIONS OF THE COMPANY**




**NATURE
      OF BUSINESS**




PacificNet
      Inc. (http://www.PacificNet.com) is a leading provider of gaming technology,
      e-commerce, and Customer Relationship Management (CRM) in China. Our gaming
      products are specially designed for the Chinese and Asian gamers, and we focus
      on integrating localized Chinese and Asian themes and content, advanced
      graphics, digital sound effects and popular domestic music, with secondary
      bonus
      games and jackpots. Our gaming products include: Multi-player Electronic Table
      Games - Baccarat, Sicbo, Fish-Prawn-Crab, and Roulette machines, server based
      games (SBG) with multiple client betting stations, slot and bingo machines,
      video lottery terminals (VLTs), amusement with prices (AWP) machines, gaming
      cabinet and client/server system designs, online i-gaming software design,
      and
      multimedia entertainment kiosks. PacificNet's gaming clients include the leading
      hotels, casinos, and gaming operators in Macau, Asia, and Europe, and our
      ecommerce and CRM clients include the leading telecom companies, banks,
      insurance, travel, marketing and business services companies and telecom
      consumers in Greater China such as China Telecom, China Mobile, Unicom, PCCW,
      Hutchison Telecom, Bell24, Motorola, Nokia, SONY, TCL, Huawei, American Express,
      Citibank, HSBC, Bank of China, Bank of East Asia, DBS, TNT, China and Hong
      Kong
      government. PacificNet employs about 1,200 staff in its various subsidiaries
      throughout China with offices in Hong Kong, Beijing, Shanghai, Shenzhen,
      Guangzhou, Macau and Zhuhai China, USA, and the Philippines.




**PacificNet's
      Gaming Products:**




Our
      gaming products are specially designed for the Chinese and Asian gamers, and
      we
      focus on integrating localized Chinese and Asian themes and content, advanced
      graphics, digital sound effects and popular domestic music, with secondary
      bonus
      games and jackpots. Our gaming products include:




•
      Multi-player Electronic Table Games: Baccarat, Sicbo, Fish-Prawn-Crab, and
      Roulette Machines, server based games (SBG) with multiple client betting
      stations.


•
Slot
      Machines


•
Bingo
      and Keno Machines


•
Video
      Lottery Terminals (VLTs)


•
      Server-Based Gaming Machines (SBG)


•
      Amusement With Prices (AWP) Machines


•
Online
      iGaming Software Development


•
      Client-Server Gaming Systems


•
CMM
      Level 3 Certified Gaming Software Development Center in China with 200
      Professional Software Developers


•
Gaming
      Systems, Cabinet Design and Sales, Parts Sales, OEM Games. We design and sell
      gaming machine cabinets, replacement parts.





**PacificNet's
      Business Units:**


1.
      Gaming
      Technology: Electronic Gaming Machines, Mobile Games, i-Gaming
      Software.


2.
      Legacy
      Business: CRM, E-commerce and Telecom Products


Our
      goal
      is to take a leading role in providing customer relationship management (CRM)
      and gaming technology, which are rapidly expanding business sectors in
      Asia.




26





**PaificNet’s
      Major Operating Subsidiaries**


—
            **PacificNet
                Games Limited (PacGames)**, is a leading provider of Asian
                multi-player electronic gaming machines, gaming technology solutions,
                gaming related maintenance, IT and distribution services for the
                leading
                hotel, casino and slot hall operators based in Macau, China and other
                Asian gaming markets.—
            Take1
                Technologies (www.take1technologies.com) , is in the business of
                designing
                and manufacturing electronic multimedia entertainment kiosks, coin-op
                kiosks and machines, electronic gaming machines (EGM), bingo and
                slot
                machines, AWP (Amusements With Prizes) games, server-based downloadable
                games systems, and Video Lottery Terminals (VLT) such as Keno and
                Bingo
                machines, including hardware, software, and
                cabinets.


—
            Pacific
                Solutions Technology, is a CMM Level 3 certified software development
                center with over 200 software programmers located in Shenzhen, China,
                and
                specializes in the development of client-server systems, internet
                e-commerce software, online and casino gaming systems and slot machines,
                banking and telecom applications using Microsoft Visual C++, Java,
                and
                other rapid application development tools.—
            PacificNet
                Epro (www.EproTel.com.hk): CRM Call Center and Customer Services
                Outsourcing


—
            PacificNet
                Clickcom (www.clickcom.com.cn), MOABC.com : VAS,SP,( SMS,
                WAP)—
            Guangzhou
                Wanrong (www.my2388.com) : VAS, SP, (SMS,MMS,IVR,WAP, Java
                Games)


—
            PacificNet
                Communications Limited,—
            iMobile,
                (www.imobile.com.cn, www.18900.com,
                wap.17wap.com)





**PacificNet
      Gaming Technology**




**1.
      Participation games**: company-owned gaming machines that we lease based
      upon any of the following payment methods are referred to as participation
      games: (1) a percentage of the net win of the gaming machines, (2) fixed daily
      fees, or (3) in the case of wide-area progressive gaming machines, a percentage
      of the amount wagered or a combination of a fixed daily fee and a percentage
      of
      the amount wagered.


**2.
      Wide Area Game Network, Community Gaming**: electronically link gaming
      machines that are located across multiple casinos within a gaming jurisdiction.
      The linked gaming machines contribute to and compete for large, system-wide
      progressive jackpots and are designed to increase gaming machine play for
      participating casinos by giving the players the opportunity to win a larger
      jackpot than on a stand-alone gaming machine.


**3.
      Local Area Progressive Jackpots (LAP) participation games**:
      electronically links gaming machines that are located within a single casino
      to
      a progressive jackpot for that specific casino.


**4.
      Video Lottery Terminals**: video gaming machines featured with localized
      Chinese and Asian themes and contents, advanced graphics, digital sound effects
      and music and incorporate many of the same features from our other gaming
      machines.


**5.
      Server-based Gaming**: a gaming system in which game content and
      peripherals are configured, maintained and refreshed over a network that links
      groups of gaming machines to a remote server that also enables custom
      configuration by operators and central determination of game
      outcomes.




**Gaming
      Market Overview on Macau, China**




As
      of the
      end of 2006, Macau (a Special Administrative Region of the People's Republic
      of
      China) has become the largest and fastest-growing gaming market in the world,
      and surpassed the Las Vegas Strip in total revenues. According to statistics
      provided by Macau government, in 2006, Macau's gaming revenues exceeded US$7
      billion (MOP 56.2 billion patacas), surpassing the Las Vegas Strip gaming
      revenues of US$6.6 billion. Macau borders Zhuhai City of Guangdong Province
      of
      China, one of the country's wealthiest and most developed regions and is an
      hour
      away from Hong Kong via ferry. In 2006, the number of tourists visiting Macau
      reached an all-time record of 22 million, an increase of 17 percent compared
      with 2005, of which 55% or 12 million visitors were from mainland China. At
      the
      end of 2006, there were 22 casinos, 83 hotels and similar establishments in
      Macau with close to 13,000 rooms. By 2010, the number of tourists is expected
      to
      nearly double to nearly 30 million visitors per year. Approximately one billion
      people live within a three-hour flight of Macau. Numerous hotel, gaming, and
      other projects are in the works in Macau which are expected to add over 10,000
      guest rooms and over 20,000 live entertainment seats in eight separate venues.
      The number of hotel-casinos in operation and in development in Macau continues
      to grow, including well-known Chinese names such as Galaxy and Melco, and famous
      Las Vegas names such as the Sands, the Venetian, Wynn Resort and Crown Macau.
      With the disposable income of the average Chinese on the rise, Macau's gaming
      and entertainment market is expected to grow for years to come. Macau is the
      only area in China where gambling is legal.




**RESULTS
      OF OPERATIONS**





**REVENUES**





Revenues
      for the three months ended March 31, 2007 were amounted to $9,267,000, which
      represented a quarter-over-quarter increase of 39% as compared to $6,672,000
      for
      the three months ended March 31, 2006. The increase in revenues was mainly
      due
      to the Products (Telecom & Gaming), primarily driven by the Company’s high
      growth gaming technology businesses, and organic growth in Outsourcing Services
      Group, which posted a quarter-over-quarter increase of 42.3% and 31.1%
      respectively. The revenues in services and product sales during the first
      quarter of 2007 increased by 60.1% and 22.2% compared to the same periods of
      2006. Segmented financial information of the three business operating groups
      is
      set out below followed by a brief discussion of each business
      group.




27




THREE
      MONTHS ENDED MARCH 31, 2007 COMPARED TO
      THREE MONTHS ENDED MARCH 31, 2006





For
                The Three Months Ended March 31, 2007
            Group
                1
            Group
                2.
            Group
                3
            Group
                4
            TOTALOutsourcing
            Telecom
                Value-Added
            Products
            OtherIn
                thousands of US Dollars
            Services
            Services
            (Telecom
                & Gaming)
            Business($)
            ($)
            ($)
            ($)
            ($)Revenues
            3,963
            527
            4,773
            4
            9,267Earnings
                / (Loss) from Operations
            400
            (3)
            1,196
            (793)
            800




For
                The Three Months Ended March 31, 2006
            Group
                1
            Group
                2.
            Group
                3
            Group
                4
            TOTALOutsourcing
            Telecom
                Value-Added
            Products
            OtherIn
                thousands of US Dollars
            Services
            Services
            (Telecom
                & Gaming)
            Business($)
            ($)
            ($)
            ($)
            ($)Revenues
            3,022
            295
            3,355
            -
            6,672Earnings
                / (Loss) from Operations
            206
            15
            359
            (518)
            62





(1)
            Outsourcing
                services: The quarter-over-quarter increase of 31.1% in outsourcing
                services for the three months ended March 31, 2007 was primarily
                due to
                the growth in outsourcing contact center in Hong Kong. Pricing was
                highly
                competitive but demand for outbound calling lists, in-sourcing operators
                and sub-contract call center facilities management, for American
                Express
                and MetLife, remained strong. Outsourcing revenues made up 42.8%
                of the
                Company's total revenues for the first quarter of the
                year.





(2)
            Telecom
                Value-added Services (VAS): Revenue for the three months ended March
                31,
                2007 was $527,000, a quarter-over-quarter increase of 78.6% as compare
                to
                the same period of 2006. VAS revenues made up 5.7% of the Company's
                total
                revenues for the first quarter of the
                year.





(3)
            Products
                (Telecom & Gaming): Revenue for the three months ended March 31, 2007
                was $4,773,000, a quarter-over-quarter increase of 42.3% as compare
                to the
                same period of 2006. Products revenues made up 51.5% of the Company's
                total revenues for the first quarter of the year. During the quarter,
                the
                Company’s mobile phone distribution business in Greater China remained
                steady. The Company owned one of the largest on-line mobile phone
                distribution portals in China and was one of the top five largest
                mobile
                phone wholesalers in Hong Kong. Increase is primarily due to buildup
                of
                revenues derived from the Company’s emerging gaming technology businesses.
                Significant traction has been gained from continued winning of high
                profile gaming orders from the fast growing Asian gaming technology
                provider market. Company managed to continue build up excellent
                relationships with leading casino operators in Macau and the rest
                of Asia
                with its world class multi-player electronic table game machines
                customized to the taste of Asian gaming customers. In addition, winning
                the bid of providing electronic slot machines to various leading
                gaming
                operators’ slot halls in Europe also pushed revenues during the
                quarter.





**COST
      OF REVENUES**




Cost
      of
      revenues for the three months ended March 31, 2007 was $6,728,000, an increase
      of 26% from $5,320,000 for the three months ended March 31, 2006,
      respectively. The cost of revenues in services sales and product sales
      for the three months ended March 31, 2007 increased by 30% and 23%,
      respectively, in each case compared with the respective period in 2006. The
      increase in cost of revenues lagged behind the corresponding increase in
      revenues, which amounted to approximately 39%. Cost of revenues savings were
      primarily due to the contribution from higher margin gaming technology
      businesses.




**GROSS
      PROFIT**




Gross
      profit for the three months ended March 31, 2007 was $2,539,000, a significant
      increase of 88% as compared to $1,352,000 for the three months ended March
      31,
      2006. Gross margin was 27% for the three months ended March 31, 2007, compared
      to 20% for the three months ended March 31, 2006. The improvement in gross
      margin for the quarter was primarily due to increased contributions from higher
      margin gaming technology subsidiaries. Out of their 19% revenue mix, gross
      profit of the Company’s gaming technology businesses represented 39% of the
      quarter’s total gross profit. Gross margins of the Company’s gaming technology
      businesses averaged more than 50%.




28




**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES**




Selling,
      general and administrative expenses totaled $1,567,000 for the three months
      ended March 31, 2007, an increase of 45% as compared to $1,079,000 for the
      first
      quarter of FY2006. Selling, general and administrative expenses as a percentage
      of revenue, however, recorded only a small quarter-over-quarter increase from
      16% to 17%. Selling, general and administrative expenses consist primarily
      of
      staff salaries, rent, insurance and traveling costs. The quarter-over-quarter
      increase in total general and administrative expenses during the three months
      ended March 31, 2007 was mainly due to the increase in consultant and labor
      costs as a result of new product development as well as rental and utilities
      expenses for the expansion of the Company’s gaming technology subsidiaries and
      call centers in Hong Kong and China.




SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSES
            
            Three
                months ended March 31,(in
                thousands, except percentages)
            
            2007
            
            
            2006
            
            
            Percentage
                Change($)
            
            
            ($)
            
            
            (%)Remuneration
                and related
            
            
            1,041
            
            
            
            581
            
            
            
            79Office
            
            
            300
            
            
            
            215
            
            
            
            40Travel
            
            
            91
            
            
            
            40
            
            
            
            128Entertainment
            
            
            40
            
            
            
            16
            
            
            
            150Professional
                (legal and consultant)
            
            
            290
            
            
            
            65
            
            
            
            346Audit
            
            
            20
            
            
            
            18
            
            
            
            11Selling
            
            
            111
            
            
            
            52
            
            
            
            113Other
            
            
            52
            
            
            
            92
            
            
            
            (43
            )Recovery
                of provisions for doubtful accounts
            
            
            (378
            )
            
            
            -
            
            
            
            n/aTotal
            
            
            1,567
            
            
            
            1,079
            
            
            
            45




**INCOME
      / (LOSS) FROM OPERATIONS**




On
      a
      quarter-over-quarter basis, income from operations for the three months ended
      March 31, 2007increased to $800,000, a significant increase of 1,100% as
      compared to $62,000 for the same period of prior year. Segmented operating
      incomes of $400,000, $3,000, and $1,196,000 for the three months ended March
      31,
      2007 were generated from the Company's three business groups: (1) CRM
      Outsourcing Services, (2) Telecom Value-Added Services, and (3) Products
      (Telecom & Gaming) Services, respectively. This compares to operating
      incomes of $206,000, $15,000 and $359,000 from the same groups for the same
      period last year, respectively. Improved profitability of continuing operations
      evidenced the success of the Company’s new gaming technology strategy, as
      reflected by the significant gaming technology operating income.




**INCOME
      TAXES**




Income
      tax provision was $68,000 for the three months ended March 31, 2007, a
      quarter-over-quarter increase of 300% as compared to $17,000 for the same
      quarter last year. Interim income tax provisions are based upon management’s
      estimate of taxable income and the resulting consolidated effective income
      tax
      rate for the full year. As a result, such interim estimates are subject to
      change as the year progresses and more information becomes available. We expect
      our income taxes to increase as our net income increases and the tax holidays
      we
      have benefited from in Hong Kong and the PRC expire.




**MINORITY
      INTERESTS**




Minority
      interests for the three months ended March 31, 2007 totaled $534,000 compared
      with $86,000 for the same period of the prior year, representing minority
      ownership interests in subsidiaries consolidated in the Company’s consolidated
      financial statements.




**NET
      INCOME**




Net
      income for the three months ended March 31, 2007 amounted to $308,000, recording
      a quarter-over-quarter decrease of 62% as compared to $801,000 for the same
      quarter of prior year. This was solely due to diminishing income from
      discontinued operations as a result of the Company shifting from VAS businesses
      that are highly susceptible to adverse billing policy changes administered
      by
      China Mobile.




**CASH**




Net
      cash
      and cash equivalents at March 31, 2007 were approximately $4.04 million, an
      increase of approximately $2.14 million compared to December 31, 2006. This
      was primarily due to successful collection of certain doubtful debts of
      approximately $300,000 and 50% net proceeds ($2.3 million) from issuance of
      convertible debenture for the Company’s gaming technology business, net of
      acquisition of property and equipment of approximately $900,000.




29




**CONTRACTUAL
      OBLIGATIONS**




Contractual
      obligations as of March 31, 2007 are detailed below (in thousands of US
      Dollars):




**Payments
      Due by Period**




Contractual
                Obligations
            
            Total
            
            
            Less
                than 1 year
            
            
            1-5
                years
            
            
            After
                5 yearsLine
                of credit
            
            $
            404
            
            
            $
            404Bank
                Loans
            
            $
            3,213
            
            
            $
            933
            
            
            $
            870
            
            
            $
            1,410Operating
                leases
            
            $
            1,339
            
            
            $
            655
            
            
            $
            684
            
            
            $Capital
                leases
            
            $
            214
            
            
            $
            110
            
            
            $
            104
            
            
            $Total
                cash contractual obligations
            
            $
            5,170
            
            
            $
            2,102
            
            
            $
            1,658
            
            
            $
            1,410





In
      addition to above, as previously disclosed in the paragraph under the
      sub-heading of PROBABLE EVENT OF DEFAULT under Item 7 - CONVERTIBLE DEBENTURES,
      the terms of the convertible note obligate the Company to pay monthly 2% of
      outstanding principal as liquidated damages and 30% of the outstanding principal
      as mandatory default amount from the date of ineffectiveness of registration
      statement. As of March 31, 2007, the Company has accrued three months of
      liquidated damages and mandatory amount or approximately $2,697,000, although
      the Company may not have to pay the full amount of liquidated damages The amount
      has been reflected in the consolidated financial statements as a separate line
      item on the consolidated balance sheet as “liquidated damages
      liability”.




OFF-BALANCE
      SHEET ARRANGEMENTS




There
      were no off-balance sheet guarantees, interest rate swap transactions, foreign
      currency forward contracts or long term purchase commitments outstanding as
      of
      March 31, 2007. Further, the Company had not engaged in any non-exchange trading
      activities during first quarter of 2007.




**PART
      II - OTHER INFORMATION**




**ITEM
      6.   EXHIBITS**




The
      following exhibits are filed as part of this report:




EXHIBIT


NUMBER
            DESCRIPTION31.1
            Rule
                13a-14(a) Certification of Chief Executive Officer (Principal Executive
                Officer)31.2
            Rule
                13a-14(a) Certification of Chief Financial Officer (Principal Financial
                Officer)32.1
            18
                U.S.C. Section 1350 Certifications









30




SIGNATURES






In
      accordance with the requirements of the Securities Exchange Act of 1934, as
      amended, the Registrant has duly caused this report to be signed on its behalf
      by the undersigned, thereunto duly authorized.







PACIFICNET
                INC.
            PACIFICNET
                INC.Date: December
                11, 2007
            By:
            /s/ TONY
                TONGTony
                Tong
              Chief
                Executive Officer
              (Principal
                Executive Officer)Date:
                December 11, 2007
            By:
            /s/ DANIEL
                LUIDaniel
                Lui
              Chief
                Financial Officer
              (Principal
                Financial Officer)












31