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

** WASHINGTON,      D.C. 20549 **

**FORM      10-Q**

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

**FOR      THE QUARTERLY PERIOD ENDED JUNE 30, 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.**

| **Delaware**                                                                                |   | **91-2118007**                                                       |
|---------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|
| (State                or other jurisdiction ofincorporation                or organization) |   | (I.R.S.                EmployerIdentification                Number) |

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

| Large                  Accelerated Filer o | Accelerated                  Filer o | Non-accelerated                  filer þ |
|--------------------------------------------|--------------------------------------|-----------------------------------------------|

----

**PACIFICNET      INC.**

**Form 10-Q      for the Quarterly Period Ended June 30, 2007**

**TABLE      OF CONTENTS**

| **PART I.**        | **FINANCIAL                INFORMATION**                                                                                  | 3      |
|-------------------------|---------------------------------------------------------------------------------------------------------------------------|--------|
|                    |                                                                                                                      |   |
| Item                1.  | Financial                Statements (Unaudited)                                                                           | 3      |
|                    |                                                                                                                      |   |
|                    | Unaudited                Consolidated Balance Sheets                                                                      | 3      |
|                    |                                                                                                                      |   |
|                    | Unaudited                Consolidated Statements of Operations                                                            | 4      |
|                    |                                                                                                                      |   |
|                    | Unaudited                Consolidated Statements of Cash Flows                                                            | 5      |
|                    |                                                                                                                      |   |
|                    | Notes                to Unaudited Consolidated Financial Statements                                                       | 6      |
|                    |                                                                                                                      |   |
| Item                2.  | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations | 23     |
|                    |                                                                                                                      |   |
| Item                3.  | Quantitative                and Qualitative Disclosures about Market Risk                                                 | 31     |
|                    |                                                                                                                      |   |
| Item                4.  | Controls                and Procedures                                                                                    | 33     |
|                    |                                                                                                                      |   |
| **PART II.**       | **OTHER                INFORMATION**                                                                                      | 33     |
|                    |                                                                                                                      |   |
| Item                1.  | Legal                Proceedings                                                                                          | 33     |
|                    |                                                                                                                      |   |
| Item                1A. | Risk                Factors                                                                                               | 33     |
|                    |                                                                                                                      |   |
| Item                2.  | Unregistered                Sales of Equity Securities and Use of Proceeds                                                | 44     |
|                    |                                                                                                                      |   |
| Item                3.  | Defaults                upon Senior Securities                                                                            | 44     |
|                    |                                                                                                                      |   |
| Item                4.  | Submission                of Matters to a Vote of Security Holders                                                        | 44     |
|                    |                                                                                                                      |   |
| Item                5.  | Other                Information                                                                                          | 44     |
|                    |                                                                                                                      |   |
| Item                6.  | Exhibits                                                                                                                  | 44     |
|                    |                                                                                                                      |   |
| Signatures              |                                                                                                                      | 45     |

----

**PART      I - FINANCIAL INFORMATION**

**ITEM      1. FINANCIAL STATEMENTS**

**PACIFICNET      INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

|                                                                                                                                   |   | **June                    30,**2007(Unaudited) |       | **December                    31,**2006(Audited) |   |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|------------|--------------------------------------------------|--------|
| **ASSETS**                                                                                                                             |   |                                           |       |                                             |   |
| Current                Assets:                                                                                                         |   |                                           |       |                                             |   |
| Cash                and cash equivalents                                                                                               |   | $                                              | 4,725      |                                             | $      | 1,799 |   |
| Accounts                receivables, net of allowances for doubtful accounts of $1,406 and                $2,023                       |   |                                           | 9,649      |                                             |   | 7,297 |   |
| Inventories                                                                                                                            |   |                                           | 391        |                                             |   | 201 |   |
| Loan                receivable from related parties                                                                                    |   |                                           | 2,351      |                                             |   | 1,706 |   |
| Loan                receivable from third parties                                                                                      |   |                                           | 827        |                                             |   | 128 |   |
| Marketable                equity securities - available for sale                                                                       |   |                                           | 575        |                                             |   | 558 |   |
| Other                current assets                                                                                                    |   |                                           | 10,230     |                                             |   | 4,012 |   |
| Total                Current Assets                                                                                                    |   |                                           | 28,748     |                                             |   | 15,701 |   |
|                                                                                                                                   |   |                                           |       |                                             |   |   |   |
| Property                and equipment, net                                                                                             |   |                                           | 6,925      |                                             |   | 4,711 |   |
| Investments                in affiliated companies and subsidiaries                                                                    |   |                                           | 34         |                                             |   | 115 |   |
| Restricted                cash - pledged bank deposit                                                                                  |   |                                           | 237        |                                             |   | 234 |   |
| Intangible                assets, net                                                                                                  |   |                                           | 337        |                                             |   | 323 |   |
| Goodwill                                                                                                                               |   |                                           | 7,400      |                                             |   | 6,552 |   |
| Other                assets                                                                                                            |   |                                           | 45         |                                             |   | 471 |   |
| Net                assets held for disposition                                                                                         |   |                                           | 25         |                                             |   | 12,822 |   |
| **TOTAL                ASSETS**                                                                                                        |   | $                                              | 43,751     |                                             | $      | 40,929 |   |
|                                                                                                                                   |   |                                           |       |                                             |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                          |   |                                           |       |                                             |   |   |   |
| Current                Liabilities:                                                                                                    |   |                                           |       |                                             |   |   |   |
| Bank                line of Credit                                                                                                     |   | $                                              | 299        |                                             | $      | 855 |   |
| Bank                loans-current portion                                                                                              |   |                                           | 642        |                                             |   | 576 |   |
| Capital                lease obligations - current portion                                                                             |   |                                           | 100        |                                             |   | 120 |   |
| Accounts                payable                                                                                                        |   |                                           | 1,764      |                                             |   | 417 |   |
| Accrued                expenses and other payables                                                                                     |   |                                           | 4,906      |                                             |   | 2,059 |   |
| Income                tax payable                                                                                                      |   |                                           | 64         |                                             |   | 17 |   |
| Loans                payable to related party                                                                                          |   |                                           | 577        |                                             |   | 638 |   |
| Convertible                Debenture                                                                                                   |   |                                           | 5,818      |                                             |   | 8,000 |   |
| Liquidated                damages liability                                                                                            |   |                                           | 945        |                                             |   | 2,837 |   |
| Total                Current Liabilities                                                                                               |   |                                           | 15,115     |                                             |   | 15,519 |   |
|                                                                                                                                   |   |                                           |       |                                             |   |   |   |
| Bank                loans - non current portion                                                                                        |   |                                           | 2,162      |                                             |   | 1,635 |   |
| Capital                lease obligations - non current portion                                                                         |   |                                           | 83         |                                             |   | 124 |   |
| Convertible                debenture- non current portion                                                                              |   |                                           | 4,740      |                                             |   | 945 |   |
| Warrant                liabilities                                                                                                     |   |                                           | 824        |                                             |   | 904 |   |
| Total                long-term liabilities                                                                                             |   |                                           | 7,809      |                                             |   | 3,608 |   |
|                                                                                                                                   |   |                                           |       |                                             |   |   |   |
| **TOTAL                LIABILITIES**                                                                                                   |   |                                           | **22,924** |                                             |   | **19,127** |   |
| Commitments                & contingencies                                                                                         |   |                                           |       |                                             |   |   |   |
| Minority                interest in consolidated subsidiaries                                                                          |   |                                           | 3,672      |                                             |   | 6,874 |   |
|                                                                                                                                   |   |                                           |       |                                             |   |   |   |
| Stockholders’                Equity:                                                                                             |   |                                           |       |                                             |   |   |   |
| Preferred                stock, par value $0.0001, Authorized - 5,000,000 shares                                                       |   |                                           |       |                                             |   |   |   |
| Issued                and outstanding - none                                                                                           |   |                                           |       |                                             |   |   |   |
| Common                stock, par value $0.0001, Authorized - 125,000,000 shares; Issued                and                outstanding: |   |                                           |       |                                             |   |   |   |
| June                30, 2007 - 14,355,041shares issued, 11,808,993 Outstanding                                                         |   |                                           |       |                                             |   |   |   |
| December                31, 2006 - 14,155,597 issued, 11,538,664 outstanding                                                           |   |                                           | 1          |                                             |   | 1 |   |
| Treasury                stock, at cost (2007 Q1: 2,546,048 shares, 2006: 2,616,933)                                                    |   |                                           | (130       | )                                                |   | (257 | ) |
| Additional                paid-in capital                                                                                              |   |                                           | 64,560     |                                             |   | 63,124 |   |
| Cumulative                other comprehensive income (loss)                                                                            |   |                                           | 123        |                                             |   | 220 |   |
| Accumulated                deficit                                                                                                     |   |                                           | (47,187    | )                                                |   | (47,739 | ) |
| Less                stock subscription receivable                                                                                      |   |                                           | (212       | )                                                |   | (421 | ) |
| **TOTAL                STOCKHOLDERS’ EQUITY**                                                                                    |   |                                           | **17,155** |                                             |   | **14,928** |   |
|                                                                                                                                   |   |                                           |            |                                             |   |  |   |
| **TOTAL                LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                    |   | $                                              | 43,751     |                                             | $      | 40,929 |   |

----

**PACIFICNET      INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

|                                                                                                                          |   | FOR                THE THREE                MONTH                PERIODS ENDEDJUNE                30 |                 | FOR                THE SIX                MONTH                PERIODS ENDEDJUNE                30 |   |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|----------------------|---------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                          |   | 2007                                                                                                      |                 | 2006                (restated)                                                                          |   | 2007 |   | 2006                ( restated) |   |
| Net                revenues                                                                                                   |   |                                                                                                 |                 |                                                                                               |   |    |   |    |   |
| Services                                                                                                                      |   | $                                                                                                         | 4,299                |                                                                                                    | $      | 4,300 |   | $ | 8,864 |   | $ | 8,035 |   |
| Product                sales                                                                                                  |   |                                                                                                      |  4,722        |                                                                                                    |   |  8,914 |   |   |  9,424 |   |   |  11,851 |   |
| Total                net revenues                                                                                             |   |                                                                                                      | 9,021                |                                                                                                    |   | 13,214 |   |   | 18,288 |   |   | 19,886 |   |
| Cost                of revenues                                                                                               |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Services                                                                                                                      |   |                                                                                                      | (2,832               | )                                                                                                       |   | (2,909 | ) |   | (6,185 | ) |   | (5,486 | ) |
| Product                sales                                                                                                  |   |                                                                                                      |  (3,828       | )                                                                                                       |   |  (8,528 | ) |   |  (7,203 | ) |   |  (11,271 | ) |
| Total                cost of revenues                                                                                         |   |                                                                                                      | (6,660               | )                                                                                                       |   | (11,437 | ) |   | (13,388 | ) |   | (16,757 | ) |
| Gross                Profit                                                                                                   |   |                                                                                                      | 2,361                |                                                                                                    |   | 1,777 |   |   | 4,900 |   |   | 3,129 |   |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Operating                expense:                                                                                             |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Selling,                general and administrative expenses                                                                   |   |                                                                                                      | (1,798               | )                                                                                                       |   | (1,416 | ) |   | (3,365 | ) |   | (2,495 | ) |
| Stock-based                compensation expenses                                                                              |   |                                                                                                      |                 |                                                                                                    |   | (60 | ) |   |   |   |   | (242 | ) |
| Depreciation                and amortization                                                                                  |   |                                                                                                      |  (216         | )                                                                                                       |   |  (129 | ) |   |  (388 | ) |   |  (158 | ) |
| Total                operating expenses                                                                                       |   |                                                                                                      | (2,014               | )                                                                                                       |   | (1,605 | ) |   | (3,753 | ) |   | (2,895 | ) |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| **Income                from continued operations**                                                                           |   |                                                                                                      | 347                  |                                                                                                    |   | 172 |   |   | 1,147 |   |   | 234 |   |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Other                income ( expenses)                                                                                       |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Interest                expense, net                                                                                          |   |                                                                                                      | (232                 | )                                                                                                       |   | (341 | ) |   | (432 | ) |   | (393 | ) |
| Gain/(loss)                in change in fair value of derivatives                                                             |   |                                                                                                      | 20                   |                                                                                                    |   | 208 |   |   | 81 |   |   | 208 |   |
| Sundry                income, net                                                                                             |   |                                                                                                      |  27           |                                                                                                    |   |  48 |   |   |  46 |   |   |  63 |   |
| Total                other expenses                                                                                           |   |                                                                                                      | (185                 | )                                                                                                       |   | (85 | ) |   | (305 | ) |   | (122 | ) |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| **Income                from continued operations before income taxes, minority interests**                                   |   |                                                                                                      |  162          |                                                                                                    |   |  86 |   |   |  842 |   |   |  111 |   |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Provision                for income taxes                                                                                     |   |                                                                                                      | 22                   |                                                                                                    |   | (13 | ) |   | (46 | ) |   | (30 | ) |
| Share                of earnings of associated companies                                                                      |   |                                                                                                      | -                    |                                                                                                    |   | 52 |   |   |   |   |   | 49 |   |
| Minority                interests                                                                                             |   |                                                                                                      |  (340         | )                                                                                                       |   |  (179 | ) |   |  (874 | ) |   |  (265 | ) |
| **Income/(loss)                from continued operations**                                                                    |   |                                                                                                      |  (156         | )                                                                                                       |   |  (53 | ) |   |  (78 | ) |   |  (134 | ) |
| Gain                (loss) from discontinued operations (including income (loss) from                discontinued operations) |   |                                                                                                      |  400          |                                                                                                    |   |  850 |   |   |  630 |   |   |  1,732 |   |
| **Net                income**                                                                                                 |   |                                                                                                      |  244          |                                                                                                    |   |  796 |   |   |  552 |   |   |  1,597 |   |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| **Other                comprehensive income/(loss):**                                                                         |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Foreign                exchange gain/(loss)                                                                                   |   |                                                                                                      |  (126  | )                                                                                                       |   |  0  |   |   |  (97 | ) |   |  (20 | ) |
| **Net                comprehensive income**                                                                                   |   | $                                                                                                         | 118                  |                                                                                                    | $      | 796 |   | $ | 455 |   | $ | 1,577 |   |
| **Basic                earnings per share**                                                                                   |   | $                                                                                                         | 0.02                 |                                                                                                    | $      | 0.07 |   | $ | 0.05 |   | $ | 0.15 |   |
| **Diluted                earnings per share**                                                                                 |   | $                                                                                                         | 0.02                 |                                                                                                    | $      | 0.07 |   | $ | 0.05 |   | $ | 0.13 |   |
|                                                                                                                          |   |                                                                                                      |                 |                                                                                                    |   |   |   |   |   |   |   |   |   |
| Weighted                average number of shares - Basic                                                                      |   |                                                                                                      |  11,808,993   |                                                                                                    |   |  11,022,984 |   |   |  11,764,329 |   |   |  10,939,834 |   |
| Weighted                average number of shares - Diluted                                                                    |   |                                                                                                      |  12,085,566   |                                                                                                    |   |  11,879,697 |   |   |  12,040,902 |   |   |  11,902,019 |   |

----

**PACIFICNET      INC. AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|                                                                                                                         |   | FOR                THE SIX MONTHPERIOD                ENDEDJune                30, |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|
|                                                                                                                         |   | **2007**                                                                           |   | **2006****(Restated)** |   |
| **Cash                Flows from operating activities**                                                                      |   |                                                                               |   |   |   |   |   |
| Net                income                                                                                                    |   | $                                                                                  | 552    |   | $ | 1,597 |   |
| *Adjustments                to reconcile net income to net cash provided by ( used in) operating                activities:* |   |                                                                               |   |   |   |   |   |
| Equity                income of associated company                                                                           |   |                                                                               | -      |   |   | (49 | ) |
| Provision                for income tax                                                                                      |   |                                                                               | -      |   |   | 33 |   |
| Provision                for doubtful accounts                                                                               |   |                                                                               | (691   | ) |   | 28 |   |
| Minority                Interest                                                                                             |   |                                                                               | 874    |   |   | 265 |   |
| Depreciation                and amortization                                                                                 |   |                                                                               | 646    |   |   | 975 |   |
| (Gain)                loss from discontinued operations                                                                      |   |                                                                               | (630   | ) |   | (1,732 | ) |
| Stock-based                compensation                                                                                      |   |                                                                               | -      |   |   | 242 |   |
| Change                in fair value of derivatives                                                                           |   |                                                                               | (81    | ) |   | (208 | ) |
| Amortization                of interest discount                                                                             |   |                                                                               | -      |   |   | 154 |   |
| *Changes                in current assets and liabilities net of effects from purchase of                subsidiaries:*      |   |                                                                               |   |   |   |   |   |
| Accounts                receivable and other current assets * *                                                         |   |                                                                               | (479   | ) |   | (5,284 | ) |
| Inventories                                                                                                                  |   |                                                                               | (190   | ) |   | (117 | ) |
| Accounts                payable and other accrued expenses                                                                   |   |                                                                               | 994    |   |   | (1,170 | ) |
| ***Net                cash provided by (used in) operating activities***                                                     |   |                                                                               | 995    |   |   | (5,266 | ) |
| **Cash                flows from investing activities**                                                                      |   |                                                                               |   |   |   |   |   |
| Increase                in purchase of marketable securities                                                                 |   |                                                                               | (17    | ) |   | - |   |
| Acquisition                of property and equipment                                                                         |   |                                                                               | (1,343 | ) |   | (3,141 | ) |
| Acquisition                of subsidiaries and affiliated companies                                                          |   |                                                                               | -      |   |   | (836 | ) |
| Proceeds                from disposition of discontinued operations                                                          |   |                                                                               | 740    |   |   | - |   |
| Loans                receivable from third parties                                                                           |   |                                                                               | (446   | ) |   | 562 |   |
| Loans                receivable from related party                                                                           |   |                                                                               | (75    | ) |   | (85 | ) |
| ***Net                cash used in investing activities***                                                                   |   |                                                                               | (1,141 | ) |   | (3,500 | ) |
|                                                                                                                         |   |                                                                               |   |   |   |   |   |
| **CASH                FLOWS FROM FINANCING ACTIVITIES:**                                                                     |   |                                                                               |   |   |   |   |   |
| (Decrease)              increase              in restricted cash                                                             |   |                                                                               | (3     | )  |   | 1,422 |   |
| Loan                payable to related party                                                                                 |   |                                                                               | (61    | ) |   | 201 |   |
| Repayments                under bank line of credit                                                                          |   |                                                                               | (556   | ) |   | (171 | ) |
| Repayments                of amount borrowed under capital lease obligations                                                 |   |                                                                               | (61    | ) |   | (73 | ) |
| (Purchase)                sale of treasury shares                                                                            |   |                                                                               | 282    |   |   | (124 | ) |
| Proceeds                from subscription received, exercise of stock options and warrants                                   |   |                                                                               | 209    |   |   | 86 |   |
| Net                proceeds from issuance of convertible debenture                                                           |   |                                                                               | 2,671  |   |   | 8,000 |   |
| Advances                under bank loans                                                                                     |   |                                                                               | (192   | ) |   | 623 |   |
| ***Net                cash provided by financing activities***                                                               |   |                                                                               | 2,289  |   |   | 9,964 |   |
| **Effect                of exchange rate change on cash and cash                equivalents**                                |   |                                                                               | (97    | ) |   | 54 |   |
| **Net                increase (decrease) in cash from subsidiaries held for                disposition**                     |   |                                                                               | 880    |   |   | (2,121 | ) |
| **NET                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                                      |   |                                                                               | 2,926  |   |   | (869 | ) |
| **CASH                AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD**                                                        |   |                                                                               | 1,799  |   |   | 3,487 |   |
| **CASH                AND CASH EQUIVALENTS, END OF THE PERIOD**                                                              |   | $                                                                                  | 4,725  |   | $ | 2,618 |   |
| **CASH                PAID FOR:**                                                                                            |   |                                                                               |   |   |   |   |   |
| Interest                                                                                                                     |   | $                                                                                  | 221    |   | $ | 292 |   |
| Income                taxes                                                                                                  |   |                                                                               |   |   |   | 463 |   |
| **NON-CASH                INVESTING AND FINANCING ACTIVITIES:**                                                              |   |                                                                               |   |   |   |   |   |
| Property                & equipment acquired under banking loan                                                          |   | $                                                                                  | 785    |   | $ | 1,082 |   |
| Options                exercised for share receivable                                                                        |   |                                                                               |        |   |   | 522 |   |
| Investments                in subsidiaries acquired through the issuance of common stock                                     |   | $                                                                                  | 190    |   | $ | 2,275 |   |

----

**PACIFICNET      INC. AND SUBSIDIARIES**

**NOTES      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**1.  BASIS      OF      PRESENTATION**

***Description      of Operations***

***Consolidated      Interim Financial Statements***

***Use      of Estimates***

***Reclassification***

***Going      Concern***

----

**2.  RECENT      PRONOUNCEMENTS**

**3.  EARNINGS      PER      SHARE**

----

|                                                                                                 |   | Three                Months Ended June 30                                                                                          |       | Six                Months Ended June 30                                                                                            |   |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                 |   | 2007                                                                                                                               |       | 2006                                                                                                                               |   | 2007 |   | 2006 |   |
|                                                                                                 |   | (IN                THOUSANDS OF UNITED STATES DOLLARS, EXCEPT WEIGHTED SHARES AND PER                SHARE                AMOUNTS) |       | (IN                THOUSANDS OF UNITED STATES DOLLARS, EXCEPT WEIGHTED SHARES AND PER                SHARE                AMOUNTS) |   |
| Numerator:                earnings                                                                   |   | $                                                                                                                                  | 244        |                                                                                                                               | $      | 796 |   | $ | 552 |   | $ | 1,597 |   |
| Denominator:                                                                                         |   |                                                                                                                               |       |                                                                                                                               |   |   |   |   |   |   |   |   |   |
| Weighted-average                shares used to compute basic EPS                                     |   |                                                                                                                               | 11,808,993 |                                                                                                                               |   | 11,022,984 |   |   | 11,764,329 |   |   | 10,939,834 |   |
| Dilutive                potential from assumed exercise of stock options and                warrants |   |                                                                                                                               | 276,573    |                                                                                                                               |   | 856,713 |   |   | 276,573 |   |   | 962,185 |   |
| Weighted-average                shares used to compute diluted EPS                                   |   |                                                                                                                               | 12,085,566 |                                                                                                                               |   | 11,879,697 |   |   | 12,040,902 |   |   | 11,902,019 |   |
| Basic                earnings per common share:                                                      |   | $                                                                                                                                  | 0.02       |                                                                                                                               | $      | 0.07 |   | $ | 0.05 |   | $ | 0.15 |   |
| Diluted                earnings per common share:                                                    |   | $                                                                                                                                  | 0.02       |                                                                                                                               | $      | 0.07 |   | $ | 0.05 |   | $ | 0.13 |   |

**4.  GOODWILL      AND BUSINESS      ACQUISITIONS**

|                                                       |   | Group                1.               |   | Group                2.                        |   | Group                3.                        |   |                                                                                       |   |                                                                                                                                          |   |
|------------------------------------------------------------|--------|---------------------------------------|--------|------------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| (US$000s)                                                  |   | Outsourcing                  Services |   | TelecomValue-Added                    Services |   | Products(Gaming                and Technology) |   | Total                    goodwillon                    thebalance                    sheet |   | Goodwill                      reclassifiedto                      net assetsfor                      disposal/to                      be sold |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |
| Balance                as of December 31, 2005             |   | $                                     | 3,936  |                                           | $      | -                                              |   | $                                                                                          | 979    |                                                                                                                                          | $      | 4,915 |   | $ | 9,909 |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |   |   |   |   |   |
| Goodwill                acquired during the year           |   |                                  | --     |                                           |   | 461                                            |   |                                                                                       | 1,176  |                                                                                                                                          |   | 1,637 |   |   |  |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |   |   |   |   |   |
| Balance                as of December 31, 2006             |   | $                                     | 3,936  |                                           | $      | 461                                            |   | $                                                                                          | 2,155  |                                                                                                                                          | $      | 6,552 |   | $ | 3,655 |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |   |   |   |   |   |
| Goodwill                acquired during the first quarter  |   |                                  |        |                                           |   |                                                |   |                                                                                       | 848    |                                                                                                                                          |   |  |   |   |  |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |   |   |   |   |   |
| Balance                as of March 31, 2007                |   | $                                     | 3,936  |                                           | $      | 461                                            |   | $                                                                                          | 3,003  |                                                                                                                                          | $      | 7,400 |   | $ | 3,655 |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |   |   |   |   |   |
| Goodwill                acquired during the second quarter |   |                                  |        |                                           |   |                                                |   |                                                                                       |        |                                                                                                                                          |   |  |   |   |  |   |
|                                                       |   |                                  |   |                                           |   |                                           |   |                                                                                       |   |                                                                                                                                          |   |   |   |   |   |   |
| Balance                as of June 30, 2007                 |   | $                                     | 3,936  |                                           | $      | 461                                            |   | $                                                                                          | 3,003  |                                                                                                                                          | $      | 7,400 |   | $ | 0 |   |

----

**5.  STOCKHOLDERS'      EQUITY**

*Accounting      for Stock Issued to Employees*

|                                          |   | OPTIONS                OUTSTANDING |          | WEIGHTED                AVERAGE EXERCISE PRICE |   |
|-----------------------------------------------|--------|------------------------------------|---------------|------------------------------------------------|--------|
| OUTSTANDING,                DECEMBER 31, 2005 |   |                               | **1,444,500** |                                           | $      | 4.29 |   |
| Granted                                       |   |                               | 500,000       |                                           | $      | 4.75 |   |
| Cancelled                                     |   |                               | (1,180,000    | )                                              | $      | 5.80 |   |
| Exercised                                     |   |                               | (394,000      | )                                              | $      | 2.12 |   |
| OUTSTANDING,                DECEMBER 31, 2006 |   |                               | **370,500**   |                                           | $      | 2.00 |   |
| Granted                                       |   |                               | **-**         |                                           |   | - |   |
| Cancelled                                     |   |                               | **-**         |                                           |   | - |   |
| Exercised                                     |   |                               | **-**         |                                           |   | - |   |
| OUTSTANDING                MARCH 31, 2007     |   |                               | **370,500**   |                                           | $      | 2.00 |   |
| Granted                                       |   |                               | **-**         |                                           |   | - |   |
| Cancelled                                     |   |                               | **-**         |                                           |   | - |   |
| Exercised                                     |   |                               | **-**         |                                           |   | - |   |
| OUTSTANDING                JUNE 30, 2007      |   |                               | **370,500**   |                                           | $      | 2.00 |   |

| Grant                  Date | Total                  Options Outstanding | Aggregate                  Intrinsic                  Value | Weighted                  Average Remaining Life                  (Years) | Total                  Weighted Average                  Exercise                  Price | Option                  Exercisable | Weighted                  Average                  Exercise                  Price |
|-----------------------------|--------------------------------------------|-------------------------------------------------------------|---------------------------------------------------------------------------|------------------------------------------------------------------------------------------|-------------------------------------|------------------------------------------------------------------------------------|
| 2004-7-26                   | 370,500                                    | $1,063,335                                                  | 0.07                                                                      | $2.00                                                                                    | 370,500                             | $2.00                                                                              |

----

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

|                                          |   | Warrantsoutstanding |          | WEIGHTED                AVERAGEEXERCISE                PRICE |   | AggregateIntrinsic                  Value |   |
|-----------------------------------------------|--------|---------------------|---------------|--------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                          |   |                |          |                                                         |   |                                      |   |   |   |   |
| OUTSTANDING,                DECEMBER 31, 2005 |   |                | **591,138**   |                                                         | $      | 9.5                                       |   | $ | - |   |
| 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                                     |   | $ | - |   |
| Granted                                       |   |                | **-**         |                                                         |   | **-**                                     |   |   | **-** |   |
| Forfeited                                     |   |                | **-**         |                                                         |   | **-**                                     |   |   | **-** |   |
| Exercised                                     |   |                | **-**         |                                                         |   | **-**                                     |   |   | **-** |   |
| OUTSTANDING,                JUNE 30, 2007     |   |                | **1,007,138** |                                                         | $      | 10.61                                     |   | $ | - |   |

| Grant                Date | Total                warrants Outstanding | Weighted                Average Remaining                Life (Years) | Total                Weighted Average                Exercise                Price | Warrants                Exercisable | Weighted                Average                Exercise                Price |
|---------------------------|-------------------------------------------|-----------------------------------------------------------------------|------------------------------------------------------------------------------------|-------------------------------------|------------------------------------------------------------------------------|
| 2004-1-15                 | 123,456                                   | 1.54                                                                  | $7.15                                                                              | 123,456                             | $7.15                                                                        |
| 2004-11-15                | 117,682                                   | 2.38                                                                  | $3.89                                                                              | 117,682                             | $3.89                                                                        |
| 2004-12-9                 | 350,000                                   | 2.44                                                                  | $12.21                                                                             | 350,000                             | $12.21                                                                       |
| 2006-3-13                 | 416,000                                   | 3.7                                                                   | $12.20                                                                             | 416,000                             | $12.20                                                                       |

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

----

|                                                                                                                                                                                                                                                                                                |   | **Number                of****shares** |          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------------|
| Escrowed                shares returned to treasury in 2003                                                                                                                                                                                                                                         |   |                                   | 800,000       |   |
| Shares                purchased in the open market                                                                                                                                                                                                                                                  |   |                                   | 2,000         |   |
| Repurchase                of shares from Yueshen                                                                                                                                                                                                                                                    |   |                                   | 24,200        |   |
| Cancellation                of former employee shares                                                                                                                                                                                                                                               |   |                                   | 45,000        |   |
| Termination                with ChinaGoHi - Returned shares plus Escrow shares                                                                                                                                                                                                                      |   |                                   | 825,000       |   |
| Incomplete                acquisition of Allink                                                                                                                                                                                                                                                     |   |                                   | 200,000       |   |
| Holdback                shares as contingent consideration due to performance targets not                yet met                - Includes shares related to Clickcom (78,000); Guangzhou Wanrong                (138,348); iMobile (153,500); Games (160,000); and Take 1                (120,000) |   |                                   | 649,848       |   |
| Balance,                June 30, 2007                                                                                                                                                                                                                                                               |   |                                   | **2,546,048** |   |
| Shares                outstanding at June 30, 2007                                                                                                                                                                                                                                                  |   |                                   | 11,808,993    |   |
| Shares                issued at June 30, 2007                                                                                                                                                                                                                                                       |   |                                   | 14,355,041    |   |

**6.  CONVERTIBLE      DEBENTURES**

----

----

|   | 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." |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ($,000)                           |   | June                30, 2007 |   |
|--------|-----------------------------------|--------|------------------------------|--------|
|   | Liquidated                damages |   |                         | 2%     |   | $ | 450 |   |
|   | Mandatory                default  |   |                         | 30%    |   |   | 2,247 |   |
|   | Total                             |   |                         |   |   | $ | 2,697 |   |

**7.  SEGMENT      INFORMATION**

----

| For                the three months ended June 30, 2007 |   | Group                1.             |                   | Group                2.                    |   | Group                3.                        |   | Group                4. |                          | Total  |   |
|---------------------------------------------------------|--------|-------------------------------------|------------------------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------|-------------------------------|--------|--------|
| (in                thousands, except percentages)       |   | Outsourcing                Services |                   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | OtherBusiness           |                          |   |   |
|                                                    |   | ($)                                 |                   | ($)                                        |   | ($)                                            |   | ($)                     |                          | ($)    |   |
| Revenues                                                |   |                                | 3,767                  |                                       |   | 432                                            |   |                    | 4,722                         |   |   | 100 |   |   | 9,021 |   |
| (%                of Total Revenues)                    |   |                                | 42                     | %                                          |   | 5                                              | %      |                    | 52                            | %      |   | 1 | % |   | 100 | % |
| Earnings                / (Loss) from                   |   |                                | 241                    |                                       |   | 353                                            |   |                    | 378                           |   |   | (625 | ) |   | 347 |   |
| Operations                                              |   |                                |                   |                                       |   |                                           |   |                    |                          |   |   |   |   |   |   |   |
| (%                of Total Profit)                      |   |                                | 69                     | %                                          |   | 102                                            | %      |                    | 109                           | %      |   | (180 | %) |   | 100 | % |
| Total                Assets                             |   |                                | 7,851                  |                                       |   | 2,189                                          |   |                    | 19,373                        |   |   | 14,338 |   |   | 43,751 |   |
| (%                of Total Assets)                      |   |                                | 18                     | %                                          |   | 5                                              | %      |                    | 44                            | %      |   | 33 | % |   | 100 | % |
| Goodwill                                                |   |                                | 3,936                  |                                       |   | 461                                            |   |                    | 3,003                         |   |   | - |   |   | 7,400 |   |
| Geographic                Area                          |   |                                | HK,                PRC |                                       |   | HK,                PRC                         |   |                    | HK,                PRC, Macau |   |   | HK,PRC |   |   |  |   |

| For                  the three months ended June 30, 2006 |   | Group                  1.             |   | Group                  2.                    |   | Group                  3.                        |   | Group                  4.       |                           | Total  |   |
|-----------------------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------|--------|--------------------------------------------------|--------|---------------------------------|--------------------------------|--------|--------|
| (in                  thousands, except percentages)       |   | Outsourcing                  Services |   | TelecomValue-Added                  Services |   | Products                  (Telecom & Gaming) |   | Other                  Business |                           |   |   |
|                                                      |   | ($)                                   |   | ($)                                          |   | ($)                                              |   | ($)                             |                           | ($)    |   |
| Revenues                                                  |   |                                  | 3,538  |                                         |   | 344                                              |   |                            | 8,914                          |   |   | 418 |   |   | 13,214 |   |
| (%                  of Total Revenues)                    |   |                                  | 27     | %                                            |   | 3                                                | %      |                            | 67                             | %      |   | 3 | % |   | 100 | % |
| Earnings                  / (Loss) from Operations        |   |                                  | 233    |                                         |   | 82                                               |   |                            | 340                            |   |   | (483 | ) |   | 172 |   |
| %                  of Total Profit)                       |   |                                  | 135    | %                                            |   | 48                                               | %      |                            | 198                            | %      |   | (281 | %) |   | 100 | % |
| Total                  Assets                             |   |                                  | 9,112  |                                         |   | 12,819                                           |   |                            | 11,954                         |   |   | 28,245 |   |   | 62,130 |   |
| (%                  of Total Assets)                      |   |                                  | 15     | %                                            |   | 21                                               | %      |                            | 19                             | %      |   | 45 | % |   | 100 | % |
| Goodwill                                                  |   |                                  | 3,704  |                                         |   | 2,102                                            |   |                            | -                              |   |   | - |   |   | 5,806 |   |
| Geographic                  Area                          |   |                                  | HK,PRC |                                         |   | HK,PRC                                           |   |                            | HK,PRC,                  Macau |   |   | HK,PRC |   |   |  |   |

----

| For                the six months ended June 30, 2007 |   | Group                1.             |                   | Group                2.                    |   | Group                3.                        |   | Group                4.       |                          | Total  |   |
|-------------------------------------------------------|--------|-------------------------------------|------------------------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------------|-------------------------------|--------|--------|
| (in                thousands, except percentages)     |   | Outsourcing                Services |                   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | Other                Business |                          |   |   |
|                                                  |   | ($)                                 |                   | ($)                                        |   | ($)                                            |   | ($)                           |                          | ($)    |   |
| Revenues                                              |   |                                | 7,729                  |                                       |   | 959                                            |   |                          | 9,424                         |   |   | 176 |   |   | 18,288 |   |
| (%                of Total Revenues)                  |   |                                | 42                     | %                                          |   | 5                                              | %      |                          | 52                            | %      |   | 1 | % |   | 100 | % |
| Earnings                / (Loss) from Operations      |   |                                | 641                    |                                       |   | 349                                            |   |                          | 1,623                         |   |   | (1,466 | ) |   | 1,147 |   |
| (%                of Total Profit)                    |   |                                | 56                     | %                                          |   | 30                                             | %      |                          | 141                           | %      |   | (128 | %) |   | 100 | % |
| Total                Assets                           |   |                                | 7,851                  |                                       |   | 2,189                                          |   |                          | 19,373                        |   |   | 14,338 |   |   | 43,751 |   |
| (%                of Total Assets)                    |   |                                | 18                     | %                                          |   | 5                                              | %      |                          | 44                            | %      |   | 33 | % |   | 100 | % |
| Goodwill                                              |   |                                | 3,936                  |                                       |   | 461                                            |   |                          | 3,003                         |   |   | - |   |   | 7,400 |   |
| Geographic                Area                        |   |                                | HK,                PRC |                                       |   | HK,                PRC                         |   |                          | HK,                PRC, Macau |   |   | HK,PRC |   |   |  |   |

| For                the six months ended June 30, 2006 |   | Group                1.             |   | Group                2.                    |   | Group                3.                        |   | Group                4.       |                         | Total  |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------------|------------------------------|--------|--------|
| (in                thousands, except percentages)     |   | Outsourcing                Services |   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | Other                Business |                         |   |   |
|                                                  |   | ($)                                 |   | ($)                                        |   | ($)                                            |   | ($)                           |                         | ($)    |   |
| Revenues                                              |   |                                | 6,560  |                                       |   | 639                                            |   |                          | 11,851                       |   |   | 836 |   |   | 19,886 |   |
| (%                of Total Revenues)                  |   |                                | 33     | %                                          |   | 3                                              | %      |                          | 60                           | %      |   | 4 | % |   | 100 | % |
| Earnings                / (Loss) from operations      |   |                                | 439    |                                       |   | 168                                            |   |                          | 395                          |   |   | (768 | ) |   | 234 |   |
| (%                of Total Profit)                    |   |                                | 188    | %                                          |   | 72                                             | %      |                          | 169                          | %      |   | (328 | %) |   | 100 | % |
| Total                Assets                           |   |                                | 9,112  |                                       |   | 12,819                                         |   |                          | 11,954                       |   |   | 28,245 |   |   | 62,130 |   |
| (%                of Total Assets)                    |   |                                | 15     | %                                          |   | 21                                             | %      |                          | 19                           | %      |   | 45 | % |   | 100 | % |
| Goodwill                                              |   |                                | 3,704  |                                       |   | 2,102                                          |   |                          | -                            |   |   | - |   |   | 5,806 |   |
| Geographic                Area                        |   |                                | HK,PRC |                                       |   | HK,PRC                                         |   |                          | HK,PRC,                Macau |   |   | HK,PRC |   |   |  |   |

| For                  the three months ended June 30, 2007 | Hong                  Kong, Macau | PRC   | United                  States | Total |
|-----------------------------------------------------------|-----------------------------------|-------|--------------------------------|-------|
| Product                  revenues                         | 3,338                             | 1,384 |                         | 4,722 |
| Service                  revenues                         | 3,371                             | 928   |                         | 4,299 |

| For                  the three months ended June 30, 2006 | Hong                  Kong, Macau | PRC   | United                  States | Total                  (Restated) |
|-----------------------------------------------------------|-----------------------------------|-------|--------------------------------|-----------------------------------|
| Product                  revenues                         | 7,684                             | 1,230 |                         | 8,914                             |
| Service                  revenues                         | 3,490                             | 810   |                         | 4,300                             |

| For                  the six months ended June 30, 2007 | Hong                  Kong, Macau | PRC   | United                  States | Total |
|---------------------------------------------------------|-----------------------------------|-------|--------------------------------|-------|
| Product                  revenues                       | 6,489                             | 2,395 |                         | 9,424 |
| Service                  revenues                       | 6,863                             | 2,001 |                         | 8,864 |

| For                  the six months ended June 30, 2006 | Hong                  Kong, Macau | PRC   | United                  States | Total                  (Restated) |
|---------------------------------------------------------|-----------------------------------|-------|--------------------------------|-----------------------------------|
| Product                  revenues                       | 9,620                             | 2,231 |                         | 11,851                            |
| Service                  revenues                       | 6,516                             | 1,519 |                         | 8,035                             |

----

**8.  RELATED      PARTY      TRANSACTIONS**

----

**9.  COMMITMENTS      AND      CONTINGENCIES**
|   | (i)  | Epro                  has an overdraft banking facility of up to $170,000 with certain                  banking                  institutions, which is secured by a pledge of its fixed deposits                  of                  $237,000. 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 $129,000 with a Hong                  Kong                  banking institution. This overdraft facility is secured by a personal                  deposit account of a director of                  Smartime.                                                                                                                                                                             |

----

|                                 |   | June                  30, 2007 (Unaudited) |   | December                31, 2006 |   |
|--------------------------------------|--------|--------------------------------------------|--------|----------------------------------|--------|
| Secured                [1]           |   | $                                          | 865    |                             | $      | 1,668 |   |
| Unsecured                            |   | $                                          | 1,939  |                             | $      | 543 |   |
| Less:                Current portion |   | $                                          | (642   | )                                | $      | (576 | ) |
| Noncurrent                portion    |   | $                                          | 2,162  |                             | $      | 1,635 |   |

| **(US$000s)**                                    | **July                2007 to****June                2008** | **July                2008 to****June                2009** | **July                2009 to****June                2010** | **July                2010 to****June                2011** | **July                2011 to****June                2012** | **Thereafter** | **TOTAL** |
|--------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------|----------------|-----------|
| Beijing                PACT office mortgage (1)  | 53                                                          | 55                                                          | 58                                                          | 62                                                          | 65                                                          | 757            | 1,049     |
| Shenzhen                PACT office mortgage (2) | 22                                                          | 24                                                          | 25                                                          | 27                                                          | 29                                                          | 639            | 766       |
| Sub-total                                        | 75                                                          | 79                                                          | 83                                                          | 89                                                          | 94                                                          | 1,396          | 1,816     |
|                                           |                                                      |                                                      |                                                      |                                                      |                                                      |         |    |
| Bank                loan of Epro (3)             | 444                                                         | 374                                                         | 47                                                          | 0                                                           | 0                                                           | 0              | 865       |
| AR                factoring loans (3)            | 123                                                         | 0                                                           | 0                                                           | 0                                                           | 0                                                           | 0              | 123       |
| Sub-total                                        | 567                                                         | 374                                                         | 47                                                          | 0                                                           | 0                                                           | 0              | 988       |
|                                           |                                                      |                                                      |                                                      |                                                      |                                                      |         |    |
| **TOTAL**                                        | 642                                                         | 453                                                         | 130                                                         | 89                                                          | 94                                                          | 1,396          | 2,804     |

|   | (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%. |
|--------|-----|-------------------------------------------------------------------------------------------------------------|

**10.  OTHER        CURRENT ASSETS**

|                                                        |   | June                    30, 2007 (Unaudited) |   | December                    31, 2006 |   |
|-------------------------------------------------------------|--------|----------------------------------------------|--------|--------------------------------------|--------|
| Loans                    to employees                       |   | $                                            | 8,141  |                                 | $      | 411 |   |
| Advances                    to sales representatives        |   |                                         | 510    |                                 |   | 358 |   |
| Receivable                    from Lion Zone Holdings       |   |                                         | 480    |                                 |   | 485 |   |
| provision                    for bad debt-other receivables |   |                                         | (1,203 | )                                    |   |  |   |
| Prepayment                                                  |   |                                         | 690    |                                 |   | 887 |   |
| Deposit-utilities                                           |   |                                         | 1,042  |                                 |   | 1,292 |   |
| Prepaid                    expense                          |   |                                         | 225    |                                 |   | 408 |   |
| Others                                                      |   |                                         | 345    |                                 |   | 171 |   |
| Total                                                       |   | $                                            | 10,230 |                                 | $      | 4,012 |   |

----

**11.  INCOME      TAXES**

**12.  NET      ASSETS HELD FOR      DISPOSITION**

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

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

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

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

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

----

| (In                  US$ thousands)                                                                                               | Linkhead | Clickcom | Power | Solutions | MOABC | T otal |
|-----------------------------------------------------------------------------------------------------------------------------------|----------|----------|-------|-----------|-------|-------------|
| Gain                  (loss) from discontinued operations (including income (loss) from                  discontinued operations) | 241      | (3)      | 336   | 79        | (23)  | 630         |
| Net                  assets held for disposition (remaining interest)                                                             | 104      | 129      | (140) | (26)      | (42)  | 25          |

**13.  ACQUISITION**

|   | Estimated                  fair values:                        |   |    |      |
|--------|----------------------------------------------------------------|--------|--------------|-----------|
|   | Current                  Assets                                |   | $            | 106,422   |   |
|   | Intangible                  asset                              |   | $            | 64,665    |   |
|   | Total                  Assets Acquired                         |   | $            | 171,087   |   |
|   | Liabilities                  assumed                           |   |         | ($728,156 | ) |
|   | Net                  assets acquired                           |   |         | ($557,069 | ) |
|   | Investment                  on equity method (20%)             |   | $            | 385,604   |   |
|   | Loss                  from Investment                          |   | $            | (285,260  | ) |
|   | Additional                  Consideration (31%)-partially paid |   | $            | 190,305   |   |
|   | Goodwill                                                       |   | $            | 847,718   |   |

----

**UNAUDITED      PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE QUARTER ENDED      June 30, 2007 AND 2006**

|                                          |   | Six                  months ended June 30                                                                     |   |
|-----------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|
|                                          |   | 2007                                                                                                          |   | 2006 |   |
|                                          |   | (un-audited                  and in thousands of U.S. dollars except for earnings per                  share) |   |
| Revenue                                       |   | $                                                                                                             | 18,288 |   | $ | 20,459 |   |
| Operating                  income             |   | $                                                                                                             | 1,147  |   | $ | 480 |   |
| Net                  profit                   |   | $                                                                                                             | 552    |   | $ | 1,673 |   |
| Earnings                  per share - basic   |   | $                                                                                                             | 0.05   |   | $ | 0.15 |   |
| Earnings                  per share - diluted |   | $                                                                                                             | 0.05   |   | $ | 0.14 |   |

**14.  INVESTMENTS      IN AFFILIATED      COMPANIES**

| (US$                thousands)                      |   | COLLATERAL/OWNERSHIP                % AND BUSINESS DESCRIPTION |   |
|-----------------------------------------------------|--------|----------------------------------------------------------------|--------|
| INVESTMENTS                IN AFFILIATED COMPANIES: |   | AMOUNT                                                         |   | DESCRIPTION |   |
|                                                |   |                                                           |   |   |   |
| Glad                Smart                           |   | $                                                              | 30     |   | 15%                ownership interest |   |
| Community                Media Co.                  |   | $                                                              | 4      |   | 5%                ownership interest |   |
| Total                                               |   | $                                                              | 34     |   |   |   |   |

**15.  LEGAL      PROCEEDINGS. **

----

**16.  CURRENT          VULNERABILITY DUE          TO CERTAIN CONCENTRATIONS**

----

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

**PRELIMINARY      NOTE REGARDING FORWARD-LOOKING STATEMENTS **

**FACTORS      THAT COULD AFFECT FUTURE RESULTS**

| — | 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. |

| — | 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 **

*Allowance      For Doubtful Accounts *

*Inventory*

*Income      Taxes*

----

*Contingencies*

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

*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.

**NATURE      OF THE OPERATIONS OF THE COMPANY **

**NATURE      OF BUSINESS. **

----

**PacificNet's      Gaming Products:**

**PacificNet's      Business Units:**

**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**

**2.      Wide Area Game Network, Community Gaming**

**3.      Local Area Progressive Jackpots (LAP) participation games**

**4.      Video Lottery Terminals**

**5.      Server-based Gaming**

----

**Gaming      Market Overview on Macau, China**

**RESULTS      OF OPERATIONS **

THREE      AND      SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE AND SIX MONTHS ENDEDJUNE      30,      2006

| For                the three months ended June 30, 2007 |   | Group                1.             |   | Group                2.                    |   | Group                3.                        |   | Group                4.       |   | Total  |   |
|---------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------------|--------|--------|--------|
| (in                thousands, except percentages)       |   | Outsourcing                Services |   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | Other                Business |   |   |   |
|                                                    |   | ($)                                 |   | ($)                                        |   | ($)                                            |   | ($)                           |   | ($)    |   |
| Revenues                                                |   |                                | 3,767  |                                       |   | 432                                            |   |                          | 4,722  |   |   | 100 |   |   | 9,021 |   |
| Earnings                / (Loss) from Operations        |   |                                | 241    |                                       |   | 353                                            |   |                          | 378    |   |   | (625 | ) |   | 347 |   |

| For                the three months ended June 30, 2006 |   | Group                1.             |   | Group                2.                    |   | Group                3.                        |   | Group                4.       |   | Total  |   |
|---------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------------|--------|--------|--------|
| (in                thousands, except percentages)       |   | Outsourcing                Services |   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | Other                Business |   |   |   |
|                                                    |   | ($)                                 |   | ($)                                        |   | ($)                                            |   | ($)                           |   | ($)    |   |
| Revenues                                                |   |                                | 3,538  |                                       |   | 344                                            |   |                          | 8,914  |   |   | 418 |   |   | 13,214 |   |
| Earnings                / (Loss) from Operations        |   |                                | 233    |                                       |   | 82                                             |   |                          | 340    |   |   | (483 | ) |   | 172 |   |

| For                the six months ended June 30, 2007 |   | Group                1.             |   | Group                2.                    |   | Group                3.                        |   | Group                4.       |   | Total  |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------------|--------|--------|--------|
| (in                thousands, except percentages)     |   | Outsourcing                Services |   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | Other                Business |   |   |   |
|                                                  |   | ($)                                 |   | ($)                                        |   | ($)                                            |   | ($)                           |   | ($)    |   |
| Revenues                                              |   |                                | 7,729  |                                       |   | 959                                            |   |                          | 9,424  |   |   | 176 |   |   | 18,288 |   |
| Earnings                / (Loss) from Operations      |   |                                | 641    |                                       |   | 349                                            |   |                          | 1,623  |   |   | (1,466 | ) |   | 1,147 |   |

| For                the six months ended June 30, 2006 |   | Group                1.             |   | Group                2.                    |   | Group                3.                        |   | Group                4.       |   | Total  |   |
|-------------------------------------------------------|--------|-------------------------------------|--------|--------------------------------------------|--------|------------------------------------------------|--------|-------------------------------|--------|--------|--------|
| (in                thousands, except percentages)     |   | Outsourcing                Services |   | TelecomValue-Added                Services |   | Products                (Telecom & Gaming) |   | Other                Business |   |   |   |
|                                                  |   | ($)                                 |   | ($)                                        |   | ($)                                            |   | ($)                           |   | ($)    |   |
| Revenues                                              |   |                                | 6,560  |                                       |   | 639                                            |   |                          | 11,851 |   |   | 836 |   |   | 19,886 |   |
| Earnings                / (Loss) from operations      |   |                                | 439    |                                       |   | 168                                            |   |                          | 395    |   |   | (768 | ) |   | 234 |   |

----

|   | (1)    | Outsourcing                services: Revenues for the three and six months ended June 30, 2007                were $3,767,000 and $7,729,000, which represent a year-over-year                increase                of 7% and 18% as compared to the same period of 2006. The increase                was                primarily due to the growth in outsourcing call center in Hong Kong.                In                spite of call volume growth (of 14%, 6%, 54% and 18%, respectively)                in                inbound and outbound calling lists, in-sourcing operators and sub-contract                American Express and MetLife call centers, real revenue growth from                outsourcing call center is held back by competitive pricing. Revenue                from                outsourcing software largely remained steady from prior periods.                Outsourcing revenues accounted for 42% and 42% of the Company's total                revenues for the second quarter and first half of                FY2007. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | (2)    | Telecom                Value-added Services (VAS): Revenues for the three months and six                months                ended June 30, 2007 were $432,000 and $959,000 which represented                a                year-over-year increase of 26% and 50% as compared to the same periods                of                2006. VAS revenues, mainly comprised of WAP based mobile phone games,                accounted for 5% and 6% of the Company's total revenues for the second                quarter and first half of FY2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

|   | (3) | Products                (Telecom & Gaming): Revenues for the three and six months ended June                30, 2007 were $4,722,000, and $9,424,000 which represented a                year-over-year decrease of 47% and 20% as compared to the same periods                of                2006, respectively. Products revenues accounted for 52% and 52% of                the                Company's total revenues for the second quarter and first half of                FY2007.                 Gaming                technology revenues from selling to casino operators amounted to                $491,000                and $1,506,000 for the three and six months ended June 30, 2007,                representing 10% and 16% of product revenues. In light of the internet                gaming license granted by First Cagavan and Cagavan Economic Zone                Authority (CEZA) of the Philippines, the company is well positioned                to                emerge as a leading technology provider of the gaming industry, both                online and land-based, in foreseeable future. Significant resources                have                been, and will continually be, invested in moving our highly successful                land-based games online and negotiation of profit sharing model to                make                such gaming vision possible. Revenues                from sales of electronic slot machines amounted to $1,189,000 and                $1,908,000 for the three and six months ended June 30, 2007, which                accounted for 25% and 20% of the total product revenues. The company                continued to take advantage of the new “amusement with prize” regulation                change in entering the largest European slot market, Italy, as an                exclusive supplier of electronic slot machines to various leading                gaming                operators’ slot halls. As                planned, the company continues to scale down its low-margin mobile                phone                wholesaling business and distribution business in Greater China.                Revenues                from sales of mobile phone in Hong Kong for the three and six months                ended                Jun 30, 2007, amounted to $1,658,000 and $3,077,000, a decline of                75% and                $68% as compared to $6,683,000 and $9,619,000 for the same periods                of                2006. Nevertheless, accessory revenue derived from becoming the approved                maintenance and delivery services provider for mobile phone accessories                of                Motorola in China posted an increase of 42% to $260,000 for the quarter                ended June 30, 2007 as compared to $ 183,000 for the same period                of 2006. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (1) | Outsourcing                services: Cost of revenues from outsourcing services for the three                and six                months ended June 30, 2007 amounted to $2,880,000 and $5,859,000,                an                increase of 8% and 17% respectively, in each case compared with 2006;                mainly due to increase of $40,000 in rental fees for two call centers                in                Hong Kong, increase of $225,000 for additional 110 headcounts and                increased of $29,000 in depreciation of newly acquired computers                during                the quarter; |
|--|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (2) | Telecom                Value-added Services (VAS): Cost of revenues from VAS for the three                and                six months ended June 30, 2007 posted a reduction of 74% and 26%                respectively, in each case compared with 2006. The decrease was mainly                due                to new WAP-based mobile phone games completed in Q1 for sales in                Q2;                and |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|  | (3) | Products                (Telecom & Gaming): Cost of revenues from Products for the three                months ended June 30, 2007 amounted to $3,827,000 and $7,202,000,                a                reduction of 55% and 36% respectively, in each case compared with                2006.                Decrease in cost of revenues, approximately 71% of the total product                cost                of revenues was mobile phone wholesaling related, was commensurate                with                smaller mobile phone wholesale                revenue. |
|--|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| (1)     | Outsourcing                services: Selling, general and administrative expenses attributed                to                outsourcing services for the three and six months ended June 30,                2007                amounted to $623,000 and $1,191,000, an increase of 19% and 21% as                compared to the same period of prior year. During the quarter, the                increases were primarily due to $57,000 for traveling and entertainment                fees driven by the increasing insourcing services, and $43,000 for                labor                cost including benefits and its traveling fees driven by the additional                10                headcounts working on market research for sub-contract software                project; |
|-----------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)     | Telecom                Value-added Services (VAS): Selling, general and administrative expenses                attributed to VAS for the three and six months ended June 30, 2007                amounted to $96,000 and $219,000 from an increase of 268 % and 1,117%                as                compared to the same periods of prior year. Significant increase                of                labor                costs were primarily derived from traveling,                entertainment and other expenses relating to business development                of                WAP-based mobile phone games; and |
|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)     | Products                (Telecom & Gaming): Selling, general and administrative expenses                attributed to Products for the three and six months ended June 30,                2007                amounted to $417,000 and $401,000, an increase of 154% and 37% as                compared                to the same periods of prior year. Included                in the increase were remuneration of                $143,000 for additional headcount dedicated to sustain our gaming                technology growth, the salaries                of $116,000 for                the                headcounts related to the sales of electronic slot machine, as well                as the                rental and utilities expenses of $44,000 and $3,000 for the new sales                center in Macau and expansion of our gaming design center in Zhuhai.                Expenses related to gaming                technology,                electronic slot machines and mobile phone products amounted to $340,000,                $180,000 and $277,000 for the second quarter of FY2007, representing                19%,                10% and 15%, respectively of the total selling, general and administrative                expenses for the second quarter of                FY2007. |
|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| SELLING,                  GENERAL AND ADMINISTRATIVE EXPENSES(in                  US$ thousands, except                  percentages) |   | Three                monthsendedJune                30, 2007 |   | Three                monthsendedJune                30, 2006 |   | PercentageChange(%) |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------|--------|---------------------|--------|
| Remuneration                                                                                                                          |   |                                                         | 1,178  |                                                         |   | 637                 |   |   | 85 |   |
| Office                                                                                                                                |   |                                                         | 345    |                                                         |   | 226                 |   |   | 53 |   |
| Travel                                                                                                                                |   |                                                         | 172    |                                                         |   | 83                  |   |   | 107 |   |
| Entertainment                                                                                                                         |   |                                                         | 58     |                                                         |   | 39                  |   |   | 49 |   |
| Professional                (legal and consultant)                                                                                    |   |                                                         | 70     |                                                         |   | 137                 |   |   | (49 | ) |
| Audit                                                                                                                                 |   |                                                         | 116    |                                                         |   | 119                 |   |   | (3 | ) |
| Selling                                                                                                                               |   |                                                         | 75     |                                                         |   | 84                  |   |   | (11 | ) |
| Other                                                                                                                                 |   |                                                         | 97     |                                                         |   | 63                  |   |   | 54 |   |
| Recovery                of provisions for doubtful accounts from subsequent                collections                                |   |                                                         | (313   | )                                                            |   | 28                  |   |   |  (1,218 | ) |
| Total                                                                                                                                 |   |                                                         | 1,798  |                                                         |   | 1,416               |   |   |  27 |   |

----

| SELLING,                  GENERAL AND ADMINISTRATIVE EXPENSES(in                  US$ thousands, except                  percentages) |   | Six                monthsendedJune                30, 2007 |          | Six                monthsendedJune                30, 2006 |   | PercentageChange(%) |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|---------------|------------------------------------------------------------|--------|---------------------|--------|
| Remuneration                                                                                                                          |   |                                                       | 2,218         |                                                       |   | 1,218               |   |   | 82 |   |
| Office                                                                                                                                |   |                                                       | 645           |                                                       |   | 440                 |   |   | 47 |   |
| Travel                                                                                                                                |   |                                                       | 264           |                                                       |   | 122                 |   |   | 116 |   |
| Entertainment                                                                                                                         |   |                                                       | 98            |                                                       |   | 55                  |   |   | 79 |   |
| Professional                (legal and consultant)                                                                                    |   |                                                       | 360           |                                                       |   | 201                 |   |   | 79 |   |
| Audit                                                                                                                                 |   |                                                       | 136           |                                                       |   | 138                 |   |   | (1 | ) |
| Selling                                                                                                                               |   |                                                       | 185           |                                                       |   | 136                 |   |   | 36 |   |
| Other                                                                                                                                 |   |                                                       | 149           |                                                       |   | 157                 |   |   | (5 | ) |
| Recovery                of provisions for doubtful accounts from subsequent                collections                                |   |                                                       |  (691  | )                                                          |   |  28          |   |   |  (2,568 | ) |
| Total                                                                                                                                 |   |                                                       |  3,365 |                                                       |   |  2,495       |   |   |  35 |   |

**CASH**

**CONTRACTUAL      OBLIGATIONS **

----

**Payments      Due by Period**

| Contractual                Obligations            |   | Total |   | Less                than 1 year |   | 1-5                years |   | After                5 years |   |
|---------------------------------------------------|--------|-------|--------|---------------------------------|--------|--------------------------|--------|------------------------------|--------|
| Line                of credit (in thousands)      |   | $     | 299    |                            | $      | 299                      |   |                         |   |   | $ | $ |   |
| Bank                Loans                         |   | $     | 2,804  |                            | $      | 642                      |   | $                            | 766    |   | $ | 1,396 |   |
| Operating                leases                   |   | $     | 854    |                            | $      | 610                      |   | $                            | 244    |   | $ |   |   |
| Capital                leases                     |   | $     | 183    |                            | $      | 100                      |   | $                            | 83     |   | $ |   |   |
| Total                cash contractual obligations |   | $     | 4,140  |                            | $      | 1,651                    |   | $                            | 1,093  |   | $ | 1,396 |   |

**ITEM      3.  QUANTITATIVE AND      QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

***Foreign      Currency Exchange Rate Risk.***

----

***Interest      Rate Risk.***

***Inflation.***

***Currency      Exchange Fluctuations.***

***Concentration      of Credit Risk.***

|   | · | The                Company's business is characterized by rapid technological change,                new                product and service development, and evolving industry standards                and                regulations. Inherent in the Company's business are various risks                and                uncertainties, including the impact from the volatility of the stock                market, limited operating history, uncertain profitability and the                ability                to raise additional capital. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | All                of the Company's revenue is derived from Asia and Greater China.                Changes                in laws and regulations, or their interpretation, or the imposition                of                confiscatory taxation, restrictions on currency conversion, devaluations                of currency or the nationalization or other expropriation of private                enterprises could have a material adverse effect on our business,                results                of operations and financial                condition. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | If                the Company is unable to derive any revenues from Greater China,                it would                have a significant, financially disruptive effect on the normal operations                of the Company. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

***Seasonality      and Quarterly Fluctuations.***

----

**ITEM      4.  CONTROLS AND      PROCEDURES **

**PART      II - OTHER INFORMATION **

**ITEM      1.  LEGAL      PROCEEDINGS. **

**ITEM      1A.   RISK FACTORS.**

----

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

**ITEM      3.  DEFAULTS UPON      SENIOR SECURITIES. **

**ITEM      4.  SUBMISSION OF      MATTERS TO A VOTE OF SECURITY HOLDERS. **

**ITEM      5.  OTHER      INFORMATION. **

**ITEM      6.  EXHIBITS**

| NUMBER | DESCRIPTION |
|--------|-------------|

| 31.1 | 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 |
|------|------------------------------------------------------|

----

|                                      |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------------------------------------|-------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PACIFICNET                INC.            |                                                                                                        |
|                                 |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| Date: August                21, 2007 | By:                                                                                               | /s/ TONY                TONG                                                                                                  |
|                                      | Tony                TongChief                Executive Officer(Principal                Executive Officer)  |
|                                      |                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                 |                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                        |
| Date: August                21, 2007 | By:                                                                                               | /s/ Daniel                Lui                                                              |
|                                      | Daniel                LuiChief                Financial Officer(Principal                Financial Officer) |