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


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q/A**


**(Amendment
      No.1)**




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




**FOR
      THE QUARTERLY PERIOD ENDED 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.**


(Exact
      name of registrant in its charter)





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




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




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





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




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




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




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




As
      of
      August 1, 2007, there were11,984,072 shares of the issuer’s common stock, par
      value $0.0001 per share, outstanding.









EXPLANATORY
      NOTE:





This
      Quarterly Report on Form 10-Q/A ("Form 10-A") is being filed as Amendment No.
      1
      to our Quarterly Report on Form 10-Q for the period ended June 30, 2007, which
      was originally filed with the Securities and Exchange Commission ("SEC") on
      August 21, 2007.  We are amending and restating the following specific
      items in this Amendment No. 1:





1.
      Part
      I. Item 1. Financial Statements - to restate the financial statements as of,
      and
      for the three and six months ended June 30, 2007, and to restate the balance
      sheet as of December 31, 2006;





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





3.
      Part
      II. Item 6 - to update the officer certifications for this amended
      filing.











**PACIFICNET
      INC.**


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




**TABLE
      OF CONTENTS**





**PART I.**
            **FINANCIAL
                INFORMATION**
            4Item
                1.
            Financial
                Statements (Unaudited)
            4Consolidated
                Balance Sheets
            4Consolidated
                Statements of Operations
            5Consolidated
                Statements of Cash Flows
            6Notes
                to Consolidated Financial Statements
            7Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            27**PART II.**
            **OTHER
                INFORMATION**
            36Item
                6.
            Exhibits
            36Signatures
            
            37








**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**





**PACIFICNET
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


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


**June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****ASSETS**
            
            **Unaudited**
              **Restated**
            
            
            **Audited**
              **Restated***Current
                Assets:*Cash
                and cash equivalents
            
            $
            4,725
            
            
            $
            1,900Restricted
                cash - pledged bank deposit
            
            
            237
            
            
            
            234Accounts
                receivables, net
            
            
            9,649
            
            
            
            8,141Inventories
            
            
            391
            
            
            
            201Loan
                receivable from related parties
            
            
            2,351
            
            
            
            1,706Loan
                receivable from third parties
            
            
            827
            
            
            
            128Marketable
                equity securities - available for sale
            
            
            575
            
            
            
            558Loans
                to employees
            
            
            3,293
            
            
            
            770Other
                receivables, net
            
            
            490
            
            
            
            170Other
                current assets
            
            
            2,251
            
            
            
            3,233Total
                Current Assets
            
            
            24,789
            
            
            
            17,041Property
                and equipment, net
            
            
            6,925
            
            
            
            4,711Investments
                in affiliated companies and subsidiaries
            
            
            34
            
            
            
            1,257Intangible
                assets, net
            
            
            337
            
            
            
            323Goodwill
            
            
            6,258
            
            
            
            5,601Other
                assets
            
            
            45
            
            
            
            471Net
                assets held for disposition
            
            
            2,535
            
            
            
            7,522**TOTAL
                ASSETS**
            
            $
            40,923
            
            
            $
            36,926**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                Liabilities:Bank
                line of Credit
            
            $
            299
            
            
            $
            855Bank
                loans-current portion
            
            
            642
            
            
            
            576Capital
                lease obligations - current portion
            
            
            100
            
            
            
            120Accounts
                payable
            
            
            1,764
            
            
            
            1,266Accrued
                expenses and other payables
            
            
            1,921
            
            
            
            1,828Customer
                deposits
            
            
            352
            
            
            
            352Loans
                payable to related party
            
            
            577
            
            
            
            638Convertible
                debenture
            
            
            6,763
            
            
            
            8,945Warrant
                liability
            
            
            824
            
            
            
            904Liquidated
                damages liability
            
            
            2,697
            
            
            
            2,837Total
                Current Liabilities
            
            
            15,939
            
            
            
            18,321Long-term
                liabilities:Bank
                loans - non current portion
            
            
            2,162
            
            
            
            1,635Capital
                lease obligations - non current portion
            
            
            83
            
            
            
            124Convertible
                Debenture- non current portion
            
            
            4,740
            
            
            -Total
                long-term liabilities
            
            
            6,985
            
            
            
            1,759**Total
                liabilities**
            
            
            22,924
            
            
            
            20,080Minority
                interest in consolidated subsidiaries
            
            
            3,272
            
            
            
            2,869Commitments
                and contingenciesStockholders'
                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: 14,355,041 shares issued, 11,782,072 outstanding December
                  31,
                  2006: 14,155,597 issued, 11,538,664outstanding
            
            
            1
            
            
            
            1Treasury
                stock, at cost (2007 Q2: 2,572,969 shares, 2006: 2,616,933
                shares)
            
            
            (145
            )
            
            
            (272
            )Additional
                paid-in capital
            
            
            67,003
            
            
            
            65,757Cumulative
                other comprehensive income (loss)
            
            
            (139
            )
            
            
            (42
            )Accumulated
                deficit
            
            
            (51,509
            )
            
            
            (51,090
            )Less:
                stock subscription receivable
            
            
            (484
            )
            
            
            (377
            )Total
                Stockholders' Equity
            
            
            14,727
            
            
            
            13,977**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            40,923
            
            
            $
            36,926




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


4




**PACIFICNET
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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




**Three
                month periods ended June 30**
            
            
            **Six
                month periods ended June 30****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Unaudited**
              **Restated**
            
            
            **Unaudited**
              **Restated**
            
            
            **Unaudited**
              **Restated**
            
            
            **Unaudited**
              **Restated**Net
                RevenuesServices
            
            $
            4,299
            
            
            $
            4,300
            
            
            $
            8,864
            
            
            $
            8,035Product
                sales
            
            
            4,722
            
            
            
            8,914
            
            
            
            9,424
            
            
            
            11,851Total
                Net Revenues
            
            
            9,021
            
            
            
            13,214
            
            
            
            18,288
            
            
            
            19,886Cost
                of revenuesServices
            
            
            (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
            
            
            
            3,129Selling,
                general and administrative expenses
            
            
            (1,798
            )
            
            
            (1,416
            )
            
            
            (3,365
            )
            
            
            (2,496
            )Stock-based
                compensation expenses
            
            
            -
            
            
            
            (60
            )
            
            
            -
            
            
            
            (242
            )Depreciation
                and amortization
            
            
            (216
            )
            
            
            (129
            )
            
            
            (388
            )
            
            
            (158
            )Total
                Operating Expenses
            
            
            (2,014
            )
            
            
            (1,605
            )
            
            
            (3,753
            )
            
            
            (2,896
            )**INCOME
                FROM OPERATIONS**
            
            
            347
            
            
            
            172
            
            
            
            1,147
            
            
            
            233Other
                Income (Expenses):Interest
                income (Expenses), net
            
            
            (232
            )
            
            
            (341
            )
            
            
            (432
            )
            
            
            (393
            )Gain
                in change in fair value of derivatives
            
            
            20
            
            
            
            208
            
            
            
            81
            
            
            
            208Sundry
                income, net
            
            
            27
            
            
            
            48
            
            
            
            46
            
            
            
            63Total
                Other Income (Expenses)
            
            
            (185
            )
            
            
            (85
            )
            
            
            (305
            )
            
            
            (122
            )**Income
                before Income Taxes, Minority Interest and Discontinued
                Operations**
            
            
            162
            
            
            
            86
            
            
            
            842
            
            
            
            111Provision
                for income taxes
            
            
            22
            
            
            
            (13
            )
            
            
            (46
            )
            
            
            (30
            )Share
                of earnings of associated companies
            
            
            -
            
            
            
            52
            
            
            
            -
            
            
            
            49Minority
                interests
            
            
            (340
            )
            
            
            (179
            )
            
            
            (874
            )
            
            
            (265
            )**Loss
                from Continued Operations**
            
            
            (156
            )
            
            
            (54
            )
            
            
            (78
            )
            
            
            (135
            )Loss
                on disposal
            
            
            -
            
            
            
            -
            
            
            
            (971
            )
            
            
            -Income
                from discontinued operations
            
            
            400
            
            
            
            850
            
            
            
            630
            
            
            
            1,732**Total
                discontinued operations income ( loss)**
            
            
            400
            
            
            
            850
            
            
            
            (341
            )
            
            
            1,732**Net
                Income (Loss)**
            
            
            244
            
            
            
            796
            
            
            
            (419
            )
            
            
            1,597Other
                comprehensive income/(loss)Foreign
                exchange gain (loss)
            
            
            (126
            )
            
            
            -
            
            
            
            (97
            )
            
            
            (20
            )**Net
                Comprehensive Income (Loss)**
            
            $
            118
            
            
            $
            796
            
            
            $
            (516
            )
            
            $
            1,577Basic
                Earnings (Loss) per share-Continued Operations
            
            $
            (0.01
            )
            
            $
            (0.00
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )Basic
                Earnings (Loss) per share-Discontinued Operations
            
            $
            0.03
            
            
            $
            0.08
            
            
            $
            (0.03
            )
            
            $
            0.16**Basic
                Earnings (Loss) per share**
            
            $
            0.02
            
            
            $
            0.07
            
            
            $
            (0.04
            )
            
            $
            0.15Diluted
                Earnings (Loss) per share-Continued Operations
            
            $
            (0.01
            )
            
            $
            (0.00
            )
            
            $
            (0.01
            )
            
            $
            (0.01
            )Diluted
                Earnings (Loss) per share-Discontinued Operations
            
            $
            0.03
            
            
            $
            0.08
            
            
            $
            (0.03
            )
            
            $
            0.16**Diluted
                Earnings (Loss) per share**
            
            $
            0.02
            
            
            $
            0.07
            
            
            $
            (0.04
            )
            
            $
            0.15**Weighted
                average number of shares-Basic**
            
            
            11,703,376
            
            
            
            11,001,522
            
            
            
            11,742,942
            
            
            
            10,918,372**Weighted
                average number of shares-Diluted**
            
            
            11,979,949
            
            
            
            11,001,522
            
            
            
            12,019,514
            
            
            
            10,918,372




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


5


**PACIFICNET
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(Unaudited.
      In thousands of United States dollars)




FOR
                THE SIX MONTHPERIODS
                ENDED JUNE 302007
            
            
            2006Unaudited
              Restated
            
            
            Unaudited
              Restated**Cash
                Flows from operating activities**Net
                income
            
            $
            (419
            )
            
            $
            1,597*Adjustments
                to reconcile net income/(loss) to net cash provided by (used in)
                operating
                activities:*Equity
                loss of associated companies
            
            
            -
            
            
            
            (49
            )Provision
                for allowance for doubtful accounts
            
            
            (691
            )
            
            
            -Minority
                Interest
            
            
            874
            
            
            
            265Depreciation
                and amortization
            
            
            646
            
            
            
            158Unrealized
                gain on marketable equity securities
            
            
            -
            
            
            
            (2
            )Change
                in fair value of derivatives
            
            
            (81
            )
            
            
            -*Changes
                in current assets and liabilities net of effects from purchase of
                subsidiaries:*Accounts
                receivable and other current assets **
            
            
            (2,043
            )
            
            
            (11,637
            )Inventories
            
            
            (190
            )
            
            
            42Accounts
                payable and other accrued expenses
            
            
            1,650
            
            
            
            1,582**Net
                cash used in operating activities of continued
                operations**
            
            
            (254
            )
            
            
            (8,044
            )**Net
                cash provided by operating activities of discontinued
                operations**
            
            
            2,466
            
            
            
            1,732**Net
                cash provided by  operating activities**
            
            
            2,210
            
            
            
            (6,312
            )**Cash
                flows from investing activities:**Decrease
                in restricted cash
            
            
            (3
            )
            
            
            163Increase
                in purchase of marketable securities
            
            
            (17
            )
            
            
            (24
            )Acquisition
                of property and equipment
            
            
            (1,928
            )
            
            
            (3,124
            )Acquisition
                of subsidiaries and affiliated companies
            
            
            88
            
            
            
            (4
            )**Net
                cash used in investing activities of continued
                operations**
            
            
            (1,860
            )
            
            
            (2,989
            )**Net
                cash provided by investing activities of discontinued
                operations**
            
            
            -
            
            
            
            -**Net
                cash used in investing activities**
            
            
            (1,860
            )
            
            
            (2,989
            )**Cash
                flows from financing activities:**Decrease
                in loan receivables
            
            
            -
            
            
            
            3,339Loan
                payable to related party
            
            
            (61
            )
            
            
            (2,160
            )Loans
                receivable from third parties
            
            
            (699
            )
            
            
            -Loans
                receivable from related party
            
            
            (1,671
            )
            
            
            (189
            )Stock
                subscription recevables
            
            
            -
            
            
            
            (13
            )Repayments
                under bank line of credit
            
            
            (556
            )
            
            
            (170
            )Repayments
                of amount borrowed under capital lease obligations
            
            
            (61
            )
            
            
            (73
            )(Purchase)
                sale of treasury shares
            
            
            127
            
            
            
            (124
            )Proceeds
                from exercise of stock options and warrants
            
            
            -
            
            
            
            86Net
                proceeds from issuance of convertible debenture
            
            
            5,685
            
            
            
            8,000Advances
                under bank loans
            
            
            (192
            )
            
            
            1,706**Net
                cash provided by financing activities of continued
                operations**
            
            
            2,572
            
            
            
            10,402**Net
                cash provided by financing activities of discontinued
                operations**
            
            
            -
            
            
            
            -**Net
                cash provided by financing activities**
            
            
            2,572
            
            
            
            10,402**Effect
                of exchange rate change on cash and cash
                equivalents**
            
            
            (97
            )
            
            
            -**NET
                INCREASE IN CASH AND CASH EQUIVALENTS**
            
            
            2,825
            
            
            
            1,101**CASH
                AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD**
            
            
            1,900
            
            
            
            3,486**CASH
                AND CASH EQUIVALENTS, END OF THE PERIOD**
            
            $
            4,725
            
            
            $
            4,587**CASH
                PAID FOR:**Interest
            
            $
            221
            
            
            $
            87Income
                taxes
            
            $
            -
            
            
            $
            32**NON-CASH
                INVESTING AND FINANCING ACTIVITIES:**Proceed
                from Option exercised for share receivable
            
            $
            -
            
            
            $
            35Property
                & equipment acquired under banking loan
            
            $
            785
            
            
            $
            -Investments
                in subsidiaries acquired through the issuance of common
                stock
            
            $
            -
            
            
            $
            397





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


6


**PACIFICNET
      INC. AND SUBSIDIARIES**


**NOTES
      TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




(Amounts
      expressed in United States dollars unless otherwise stated)




**1.BASIS
      OF
      PRESENTATION**




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




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




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




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




***Going
      Concern***




As
      shown
      in the accompanying consolidated financial statements, the Company incurred
      accumulated losses of $51.5 million and $51.1 million as of June 30, 2007 and
      December 31, 2006, respectively. These matters raise substantial doubt about
      the
      Company’s ability to continue as a going concern.




In
      view
      of the matters described in the preceding paragraph, recoverability of a major
      portion of the recorded asset amounts shown in the accompanying balance sheet
      is
      dependent upon continued operations of the Company, which in turn is dependent
      upon the Company’s ability to raise additional capital, obtain financing and to
      succeed in its future operations. The financial statements do not include any
      adjustments relating to the recoverability and classification of recorded asset
      amounts or amounts and classification of liabilities that might be necessary
      should the Company be unable to continue as a going concern.




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




7




On
      April
      30, 2007, the Company entered into a sale and purchase agreement to dispose
      of
      its interest in Guangzhou3G for a consideration of US$6 million. The deal was
      subsequently reopened for renegotiation in November 2007 (See note
      12).




On
      May 15
& 20, 2007, the Company entered into various definitive agreements to reduce
      its equity interests in certain unprofitable subsidiaries to 15%, namely:
      Linkhead, Clickcom, PacTelso, PacSo and PacPower (See note 12).




**2.RECENT
      PRONOUNCEMENTS**




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




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




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




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




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




8


**3.EARNINGS
      PER
      SHARE**




Basic
      and
      diluted earnings or loss per share (EPS) amounts in the financial statements
      are
      computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS is
      based on the weighted average number of common shares outstanding. Diluted
      EPS
      is based on the weighted average number of common shares outstanding plus
      dilutive common stock equivalents. Basic EPS is computed by dividing net
      income/loss available to common stockholders (numerator) by the weighted average
      number of common shares outstanding (denominator) during the period Diluted
      EPS
      is calculated by dividing net earnings by the weighted average number of common
      shares outstanding and other dilutive securities. Dilutive earnings per share
      for the period ended June 30, 2007 exclude the potential dilutive effect of
      889,456 warrants because their impact would be anti-dilutive based on current
      market prices. 581,817 convertible debentures are tested by using if-converted
      method. The result shows when convertible debentures are included in the
      computation, diluted EPS increases. According to SFAS No.128, those convertible
      debentures are ignored in the computation of diluted EPS. All per share and
      per
      share information are adjusted retroactively to reflect stock splits and changes
      in par value.




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





(IN
              THOUSANDS OF UNITED STATES DOLLARS, EXCEPT
            
            
            Three
                Months Ended June 30
            
            
            
            Six
                Months Ended June 30WEIGHTED
              SHARES AND PER SHARE AMOUNTS)
            
            
            2007
            
            
            
            2006
            
            
            
            2007
            
            
            
            2006Numerator:
                Earnings/ (Loss)
            
            $
            244
            
            
            $
            796
            
            
            $
            (419
            )
            
            $
            1,597Denominator:Weighted-average
                shares used to compute basic EPS
            
            
            11,703,376
            
            
            
            11,001,522
            
            
            
            11,742,942
            
            
            
            10,918,372Weighted-average
                shares used to compute diluted EPS
            
            
            11,979,949
            
            
            
            11,001,522
            
            
            
            12,019,514
            
            
            
            10,918,372Basic
                earnings (loss) per common share:
            
            $
            0.02
            
            
            $
            0.07
            
            
            $
            (0.04
            )
            
            $
            0.15Diluted
                earnings (loss) per common share:
            
            $
            0.02
            
            
            $
            0.07
            
            
            $
            (0.04
            )
            
            $
            0.15





**4.OTHER
      CURRENT
      ASSETS**




Other
      current assets consist of the following at June 30, 2007(in
      thousands):





June
                30, 2007
            
            
            December
                31, 2006Unaudited
              Restated
            
            
            Audited
              RestatedPrepayment
            
            $
            600
            
            
            $
            1,048Utilities
                deposit
            
            
            1,042
            
            
            
            1,292Receivable
                from Lion Zone Holdings Ltd
            
            
            385
            
            
            
            485Prepaid
                expenses
            
            
            224
            
            
            
            408Total
            
            $
            2,251
            
            
            $
            3,233





**5.GOODWILL
      AND BUSINESS
      ACQUISITIONS**




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




Group
                1.
            
            
            
            Group
                2.
            
            
            
            Group
                3.Outsourcing
            
            
            
            Telecom
                Value-Added
            
            
            
            Products
                (Gaming and
            
            
            
            Total(US$000s)
            
            
            Services
            
            
            
            Services
            
            
            
            Technology)
            
            
            
            RestatedBalance
                as of December 31, 2006
            
            $
            3,964
            
            
            $
            461
            
            
            $
            1,176
            
            
            $
            5,601Goodwill
                acquired during this quarter
            
            
            -
            
            
            
            -
            
            
            
            657
            
            
            
            657Balance
                as of March 31, 2007
            
            
            3,964
            
            
            
            461
            
            
            
            1,833
            
            
            
            6,258Goodwill
                acquired during the second quarter
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance
                as of June 30, 2007
            
            $
            3,964
            
            
            $
            461
            
            
            $
            1,833
            
            
            $
            6,258




9


The
      Company acquired additional 31% interest in Take 1 Technology Ltd on January
      5,
      2007 and recorded additional goodwill amounting to $657,000. Prior to
      acquisition of additional interest, the Company owned 20% interest in Take
      1
      Technology Ltd (See note 13).





**6.ACCRUED
      EXPENSES &
OTHER PAYABLES**





Accrued
      expenses and other payables comprises of the following as of June 30, 2007
      and
      December 31, 2006.




2007
            
            
            
            2006(in
                thousands of US Dollars):
            
            
            Unaudited
              Restated
            
            
            
            Audited
              RestatedProfessional
                fee
            
            $
            692
            
            
            $
            321Director
                fee
            
            
            174
            
            
            
            100Salaries
                and benefit payable
            
            
            243
            
            
            
            792Marketing
                expense
            
            
            627
            
            
            
            389Others
            
            
            185
            
            
            
            226Total
            
            $
            1,921
            
            
            $
            1,828




**7.STOCKHOLDERS'
      EQUITY**




a)     
      COMMON STOCK




For
      the
      six month period ended June 30, 2007, the Company had the following equity
      transactions: (i) 199,444 shares of common stock were issued as the monthly
      principal redemption shares for 8 million convertible debentures from January
      to
      March. Such shares are valued at $ 1,090,914 (ii) 41,426 treasury shares were
      sold to the open market with total consideration $127,000.




b)STOCK
      OPTION
      PLAN




Prior
      to
      January 1, 2006, PacificNet accounted for awards granted under stock-based
      compensation plans following the recognition and measurement principles of
      APB
      25, *Accounting for Stock Issued to Employees*, and related
      interpretations. Accordingly, compensation expense was recognized for awards
      granted at an exercise price less than fair market value of the underlying
      common stock on the date of grant. Effective January 1, 2006, PacificNet adopted
      the fair value recognition provisions of SFAS 123(R). See Note 2 for a
      description of the Company’s adoption of SFAS 123R. The fair value of stock
      options is determined using the Black-Scholes option pricing model, which is
      consistent with the valuation techniques previously utilized for options in
      footnote disclosures required under SFAS 123, as amended by FASB Statement
      No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure.” The determination of the fair value of stock-based compensation
      awards on the date of grant using an option-pricing model is affected by the
      Company’s stock price as well as assumptions regarding a number of complex and
      subjective variables, including the expected volatility of the Company’s stock
      price over the term of the awards, actual and projected employee stock option
      exercise behaviors, risk-free interest rate and expected dividends. The
      valuation provisions of SFAS 123(R) apply to new grants and unvested grants
      that
      were outstanding as of the effective date. For the three months ended June
      30,
      2007, no new options were granted and no options were vested, thus the
      compensation costs is zero. PacificNet elected the modified prospective method
      and therefore has not restated results for prior periods due to
      123R.




The
      status of the Stock Option Plan as of June 30, 2007, is as follows:




OPTIONS
                OUTSTANDING
            
            
            WEIGHTED
                AVERAGE EXERCISE PRICEOUTSTANDING,
                DECEMBER 31, 2005
            
            ****
            **756,100**
            
            
            $
            3.99Granted
            
            
            500,000
            
            
            $
            4.75Cancelled
            
            
            (491,600
            ))
            
            $
            4.75Exercised
            
            
            (394,000
            )
            
            $
            2.12OUTSTANDING,
                DECEMBER 31, 2006
            
            ****
            **370,500**
            
            
            $
            2.00Granted
            
            ****
            **-**
            
            
            
            -Cancelled
            
            ****
            **-**
            
            
            
            -Exercised
            
            ****
            **-**
            
            
            
            -OUTSTANDING
                MARCH 31, 2007
            
            ****
            **370,500**
            
            
            $
            2.00Granted
            
            ****
            **-**
            
            
            
            -Cancelled
            
            ****
            **-**
            
            
            
            -Exercised
            
            ****
            **-**
            
            
            
            -OUTSTANDING
                JUNE 30, 2007
            
            ****
            **370,500**
            
            
            $
            2.00




10




Following
      is a summary of the status of options outstanding at June 30, 2007:


Grant
                Date
            
            
            Total
                Options
              Outstanding
            
            
            Aggregate
              Intrinsic
              Value
            
            
            Weighted
              Average
              Remaining
              Life
                (Years)
            
            
            Total
              Weighted
              Average
              Exercise
                Price
            
            
            Option
              Exercisable
            
            
            Weighted
              Average
              Exercise
                Price2004-7-26
            
            
            
            370,500
            
            
            $
            1,063,335
            
            
            
            0.07
            
            
            $
            2.00
            
            
            
            370,500
            
            
            $
            2.00




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




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




No
      options were granted, cancelled, exercised and vested during the six month
      period ended June 30, 2007.




c)WARRANTS




At
      June
      30, 2007, the Company had outstanding and exercisable warrants to purchase
      an
      aggregate of 1,007,138 shares of common stock. The weighted average remaining
      life is 2.84 years and the weighted average exercise price per share is $10.61
      per share.




Following
      is a summary of the warrant activity:




Warrants
              outstanding
            
            
            WEIGHTED
                AVERAGE
              EXERCISE
              PRICE
            
            
            Aggregate
              Intrinsic
              ValueOUTSTANDING,
                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
            
            
            $
            -





Following
      is a summary of the status of warrants outstanding at June 30,
      2007:


Grant
                Date
            
            
            Total
                warrants
              Outstanding
            
            
            Weighted
              Average
              Remaining
                Life
              (Years)
            
            
            Total
                Weighted
              Average
              Exercise
                Price
            
            
            Warrants
              Exercisable
            
            
            Weighted
              Average
              Exercise
                Price2004-1-15
            
            
            
            123,456
            
            
            
            1.54
            
            
            $
            7.15
            
            
            
            123,456
            
            
            $
            7.152004-11-15
            
            
            
            117,682
            
            
            
            2.38
            
            
            $
            3.89
            
            
            
            117,682
            
            
            $
            3.892004-12-9
            
            
            
            350,000
            
            
            
            2.44
            
            
            $
            12.21
            
            
            
            350,000
            
            
            $
            12.212006-3-13
            
            
            
            416,000
            
            
            
            3.7
            
            
            $
            12.20
            
            
            
            416,000
            
            
            $
            12.20




11




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




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




No
      warrants were granted, cancelled and exercised during the six month period
      ended
      June 30, 2007.




d)TREASURY
      STOCK




The
      following is a summary of the movement of the Company's shares held as treasury
      stock as at June 30, 2007:




Number
                of
              sharesEscrow
                shares returned to treasury in 2003
            
            
            800,000Repurchase
                in the open market
            
            
            40,888Repurchase
                of shares from Take1
            
            
            149,459Cancellation
                of former employee shares
            
            
            45,000Holdback
                shares as contingent consideration due to performance targets not
                yet met
                (1)
            
            
            529,848Termination
                with ChinaGoHi
            
            
            825,000Incomplete
                acquisition of Allink
            
            
            200,000Repurchase
                of shares from Yueshen
            
            
            24,200Shares
                sold to the open market
            
            
            (41,426
            )Balance,
                June 30, 2007
            
            
            2,572,969Shares
                outstanding at June 30, 2007
            
            
            11,782,072Shares
                issued at June 30, 2007
            
            
            14,355,041




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




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




**8.CONVERTIBLE
      DEBENTURES**




8.1Eight
      Million Convertible
      Debentures




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




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




12




In
      February 2007, upon reaching an agreement on the amount and payment of accrued
      liquidated damages, the Company signed a Settlement and Release Agreement with
      each of the investors. Under the terms of the Settlement and Release Agreements,
      the Company paid an aggregate $140,000 in cash as satisfaction in full of
      liquidated damages owed to Basso Fund Ltd., Basso Multi-Strategy Holding Fund
      Ltd., and Basso Private Opportunities Holding Fund Ltd. Partial liquidated
      damages owed to Whalehaven Capital Fund Ltd. were paid in the amount of $35,000
      in cash, with the remaining liquidated damages in the amount of $105,000 paid
      in
      the form of a new convertible debenture due February 2009, on substantially
      the
      same terms as the original debentures, except that interest only is paid on
      the
      new debentures until October 2008 and beginning in November 2008 until February
      2009, when the new debentures are due, the monthly redemption amount under
      the
      new debentures shall be equal to $315,000. The remaining investors also agreed
      to accept the aggregate $840,000 in liquidated damages owed to them in the
      form
      of the new convertible debentures for the amount of their respective portion
      of
      the liquidated damages. The Company also agreed to amend the original debentures
      to shorten the term for payment of the original principal amount to a 22 month
      term. As a result the monthly redemption amount for the original debenture
      increased from $320,000 to $ 363,638. All other terms and conditions of the
      original debenture remain in full force and effect. The outstanding original
      principal amount as at June 30, 2007 is $5,977,273.




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




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




The
      gross
      proceeds of $8,000,000 are recorded as a current debenture liability. In
      addition, fair values attributed to the Investors’ warrants in accordance with
      EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
      and Potentially Settled in a Company’s Own Stock” are recorded as liabilities.
      The initial value related to the Investors’ warrants is $690,642. An aggregate
      gain of $20,071 and $80,765 representing the change in fair value of warrants
      recognized during the three and six months ended June 30, 2007,
      respectively.




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




EVENT
      OF
      DEFAULT




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




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




13




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




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




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




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




Such
      amounts have been recorded as liquidated damages liability as of June 30,
      2007.




Following
      is the summary of convertible debenture:




($,000)
            
            $8
                million convertible
              debenture
            
            
            $945,000
                convertible
              debenture
            
            
            Total
              (unaudited)Balance
                December 31, 2006
            
            $
            8,000
            
            
            $
            945
            
            
            $
            8,945Principal
                payment:Redemption
                through shares
            
            
            1,091
            
            
            
            -
            
            
            
            1,091Cash
                payment
            
            
            1,091
            
            
            
            -
            
            
            
            1,091Balance
                June 30, 2007
            
            $
            5,818
            
            
            $
            945
            
            
            $
            6,763





The
      Company issued 199,444 shares to redeem $1,090,909 of convertible note as of
      June 30, 2007.




8.2Five
      Million Convertible
      Note




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




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




In
      connection with the issuance of the note, PacGames incurred issuance costs
      of
      $204,121, which primarily consisted of investment banker fees, legal and other
      professional fees. These costs have been capitalized and will be amortized
      over
      three years, the life of the note.




14


Following
      is the summary of convertible debenture:


($,000)
            
            
            June
                30, 2007Convertible
                debenture
            
            $
            5,000Unamortized
                financing cost
            
            
            (260
            )$
            4,740




**9.SEGMENT
      INFORMATION**




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




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




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




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




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




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




For
                the three months ended June 30, 2007
            
            Group
                1.
            
            
            Group
                2.
            
            
            Group
                3.
            
            
            Group
                4.(in
                thousands, except percentages)
            
            Outsourcing
                Services
            
            
            Telecom
              Value-Added
                Services
            
            
            Products
                (Telecom & Gaming)
            
            
            Other
              Business
            
            
            Total
              (Restated)($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)Revenues
            
            
            3,767
            
            
            
            432
            
            
            
            4,722
            
            
            
            100
            
            
            
            9,021(%
                of Total Revenues)
            
            
            42
            %
            
            
            5
            %
            
            
            52
            %
            
            
            1
            %
            
            
            100
            %Income
                / (Loss) from Operations
            
            
            241
            
            
            
            353
            
            
            
            378
            
            
            
            (625
            )
            
            
            347(%
                of Total Profit)
            
            
            69
            %
            
            
            102
            %
            
            
            109
            %
            
            
            (180
            )%
            
            
            100
            %Total
                Assets
            
            
            7,985
            
            
            
            4,140
            
            
            
            18,203
            
            
            
            10,595
            
            
            
            40,923(%
                of Total Assets)
            
            
            20
            %
            
            
            10
            %
            
            
            44
            %
            
            
            26
            %
            
            
            100
            %Goodwill
            
            
            3,964
            
            
            
            461
            
            
            
            1,833
            
            
            
            
            
            
            
            6,258Geographic
                Area
            
            HK,
                PRC
            
            
            HK,
                PRC
            
            
            HK,
                PRC, Macau
            
            
            HK,PRC




15




For
                the three months ended June 30, 2006
            
            Group
                1.
            
            
            Group
                2.
            
            
            Group
                3.
            
            
            Group
                4.(in
                thousands, except percentages)
            
            Outsourcing
                Services
            
            
            Telecom
              Value-Added
                Services
            
            
            Products
                (Telecom & Gaming)
            
            
            Other
              Business
            
            
            Total
              (Restated)($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)Revenues
            
            
            3,538
            
            
            
            344
            
            
            
            8,914
            
            
            
            418
            
            
            
            13,214(%
                of Total Revenues)
            
            
            27
            %
            
            
            3
            %
            
            
            67
            %
            
            
            3
            %
            
            
            100
            %Income
                / (Loss) from Operations
            
            
            233
            
            
            
            82
            
            
            
            340
            
            
            
            (483
            )
            
            
            172%
                of Total Profit)
            
            
            135
            %
            
            
            48
            %
            
            
            198
            %
            
            
            (281
            )%
            
            
            100
            %Total
                Assets
            
            
            13,076
            
            
            
            17,173
            
            
            
            8,974
            
            
            
            9,796
            
            
            
            49,019(%
                of Total Assets)
            
            
            27
            %
            
            
            35
            %
            
            
            18
            %
            
            
            20
            %
            
            
            100
            %Goodwill
            
            
            3,964
            
            
            
            1,570
            
            
            
            430
            
            
            
            -
            
            
            
            5,964Geographic
                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.(in
                thousands, except percentages)
            
            Outsourcing
                Services
            
            
            Telecom
              Value-Added
                Services
            
            
            Products
                (Telecom & Gaming)
            
            
            Other
              Business
            
            
            Total
              (Restated)($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)Revenues
            
            
            7,729
            
            
            
            959
            
            
            
            9,424
            
            
            
            176
            
            
            
            18,288(%
                of Total Revenues)
            
            
            42
            %
            
            
            5
            %
            
            
            52
            %
            
            
            1
            %
            
            
            100
            %Income
                / (Loss) from Operations
            
            
            641
            
            
            
            349
            
            
            
            1,623
            
            
            
            (1,466
            )
            
            
            1,147(%
                of Total Profit)
            
            
            56
            %
            
            
            30
            %
            
            
            141
            %
            
            
            (128
            )%
            
            
            100
            %Total
                Assets
            
            
            7,985
            
            
            
            4,140
            
            
            
            18,203
            
            
            
            10,595
            
            
            
            40,923(%
                of Total Assets)
            
            
            20
            %
            
            
            10
            %
            
            
            44
            %
            
            
            26
            %
            
            
            100
            %Goodwill
            
            
            3,964
            
            
            
            461
            
            
            
            1,833
            
            
            
            -
            
            
            
            6,258Geographic
                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.(in
                thousands, except percentages)
            
            Outsourcing
                Services
            
            
            Telecom
              Value-Added
                Services
            
            
            Products
                (Telecom & Gaming)
            
            
            Other
              Business
            
            
            Total
              (Restated)($)
            
            
            ($)
            
            
            ($)
            
            
            ($)
            
            
            ($)Revenues
            
            
            6,560
            
            
            
            639
            
            
            
            11,851
            
            
            
            836
            
            
            
            19,886(%
                of Total Revenues)
            
            
            33
            %
            
            
            3
            %
            
            
            60
            %
            
            
            4
            %
            
            
            100
            %Income
                / (Loss) from operations
            
            
            439
            
            
            
            168
            
            
            
            395
            
            
            
            (768
            )
            
            
            234(%
                of Total Profit)
            
            
            188
            %
            
            
            72
            %
            
            
            169
            %
            
            
            (328
            )%
            
            
            100
            %Total
                Assets
            
            
            13,076
            
            
            
            17,173
            
            
            
            8,974
            
            
            
            9,796
            
            
            
            49,019(%
                of Total Assets)
            
            
            27
            %
            
            
            35
            %
            
            
            18
            %
            
            
            20
            %
            
            
            100
            %Goodwill
            
            
            3,964
            
            
            
            1,570
            
            
            
            430
            
            
            
            
            
            
            
            5,964Geographic
                Area
            
            HK,PRC
            
            
            HK,PRC
            
            
            HK,PRC,
                Macau
            
            
            HK,PRC




16


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


For
                the three months ended June 30, 2007
            
            Hong
                Kong,
              Macau
            
            
            PRC
            
            United
              States
            
            Total
              (Restated)Product
                revenues
            
            
            3,338
            
            
            
            1,384
            
            
            
            
            4,722Service
                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
            
            
            
            
            8,914Service
                revenues
            
            
            3,490
            
            
            
            810
            
            
            
            
            4,300For
                the six months ended June 30, 2007
            
            Hong
                Kong,
              Macau
            
            
            PRC
            
            United
              States
            
            Total
              (Restated)Product
                revenues
            
            
            6,489
            
            
            
            2,935
            
            
            
            
            9,424Service
                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
            
            
            
            
            11,851Service
                revenues
            
            
            6,516
            
            
            
            1,519
            
            
            
            
            8,035




**10.RELATED
      PARTY
      TRANSACTIONS**




LEASE
      AGREEMENT




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




LOAN
      DUE FROM RELATED PARTIES




At
      June
      30, 2007, there was a total loan receivable of approximately $2,351,000 due
      from
      related parties. Included in which were $325,000 from MOABC, $845,000 due from
      PACT Power , $150,000 due from PACT Solutions and $600,000 due from PACT
      Linkhead, which affiliated companies are 15% owned by PacificNet, and $431,000
      from shareholders and directors of certain of the Company’s subsidiaries in
      connection with the acquisition of those subsidiaries. The amounts due from
      shareholders and directors of subsidiaries are comprised of $251,000 due from
      a
      shareholder of Yueshen, $64,000 due from a director of Soluteck and $116,000
      due
      from a director of PACT Communications. Terms of these related parties loan
      receivables and payables are summarized below:




LOAN
      TO
      MOABC




MOABC
      is
      an affiliated company, 15% owned by PacificNet, as of June 30, 2007. A
      convertible loan of $325,000 is outstanding from MOABC as of June 30, 2007.
      Terms of the convertible loan provide PacificNet an option at any time during
      the term of the loan to convert in part or in whole of the then outstanding
      loan
      principle into equity interest of MOABC, at $23,160 for each 1% of MOABC
      shares.




LOAN
      TO POWER




PacPower
      is an affiliated company, 15% owned by PacificNet, as of June 30, 2007. A
      convertible loan of $845,000 is outstanding from PacPower as of June 30, 2007.
      The loan is interest bearing, ranging from 6% to 8% per annum.




LOAN
      TO SOLUTION




PacSo
      is
      an affiliated company, 15% owned by PacificNet, as of June 30, 2007. A
      convertible loan of $150,000 is outstanding from PacSo as of June 30,
      2007.  The loan bears an annual interest of 8% per annum.




17




LOAN
      TO LINKHEAD




Linkhead
      is an affiliated company, 15% owned by PacificNet, as of June 30, 2007. An
      aggregate of $600,000 is due from Linkhead as of June 30, 2007. The loan is
      interest bearing, ranging from 5% to 7% per annum, and is secured by personal
      guarantee of the company founder.




LOAN
      TO YUESHEN’S SHAREHOLDER




As
      of
      June 30, 2007, there was an aggregate of $251,000 due from the shareholder
      of
      Yueshen. This loan is secured by 106,240 PacificNet shares. The loan is interest
      bearing, ranging from 5% to 6% per annum.




LOAN
      TO SOLUTECK’S DIRECTOR




As
      of
      June 30, 2007, there was a loan outstanding of $64,000 receivable from a
      director of Soluteck, due on December 14 for three consecutive years ending
      2007. The interest rate for the loan is 8% per annum plus 5% penalty interest
      in
      case it has not been timely paid. The loan is collateralized with 100,000
      PacificNet’s shares owned by the borrowing director and Ms Iris Lo, and the
      remaining assets of Smartime Holding Ltd.




LOAN
      TO COMMUNICATIONS' DIRECTOR




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




LOAN
      DUE TO RELATED PARTIES




As
      of
      June 30, 2007, there was an outstanding loan payable of $577,000 due to
      related parties. Included in which was a loan payable of $288,000 to a
      shareholder of EPRO. The loan was advanced to Epro by a shareholder of EPRO
      on
      behalf of the Company for working capital purposes. The loan is due on August
      4,
      2010. Interest is charged at Hong Kong prime lending rate.




As
      of
      June 30, 2007, a loan of $289,000 was payable to a shareholder of Smartime.
      The
      loan was advanced to Smartime by a shareholder of Smartime on behalf of the
      Company for working capital purposes.




**11****.COMMITMENTS
      AND
      CONTINGENCIES**




OPERATING
      LEASES - The Company leases warehouse and office space under operating leases
      with fixed monthly rentals. None of the leases included contingent rentals.
      Lease expense charged to operations for 2007 Q2 amounted to $341,000 (2006
      Q2:
      $255,000). Future minimum lease payments under non-cancelable operating leases
      are $610,000 for the period from July 2007 to June 2008, and $244,000 for the
      period from July 2008 to June 2011, respectively.




RESTRICTED
      CASH - Term deposit of $237,000 has been pledged to certain financial
      institutions for bank line overdraft protection of Epro.




18




BANK
      LINE
      OF CREDIT - As of June 30, 2007, the Company’s outstanding bank line of credit
      were as follows:




(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.




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




June
                30,
            
            
            December
                31,2007
              Unaudited/Restated
            
            
            2006
                Audited/RestatedSecured
                [1]
            
            $
            865
            
            
            $
            1,668Unsecured
            
            $
            1,939
            
            
            $
            543Current
                portion
            
            $
            (642
            )
            
            $
            (576
            )Noncurrent
                portion
            
            $
            2,162
            
            
            $
            1,635




[1]
      The
      loans were secured by the following: joint and several personal guarantees
      executed by certain directors of the subsidiary of the Company; corporate
      guarantee executed by a subsidiary of the Company; second legal charge over
      a
      property owned by a subsidiary of the Company; and pledged bank deposits of
      $237,000 (2006: $234,000) of a subsidiary of the Company.




Aggregate
      future maturities of borrowing for the next five years are as
      follows:


**(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
            
            
            $
            1,049Shenzhen
                PACT office mortgage (2)
            
            
            22
            
            
            
            24
            
            
            
            25
            
            
            
            27
            
            
            
            29
            
            
            
            639
            
            
            
            766Sub-total
            
            $
            75
            
            
            $
            79
            
            
            $
            83
            
            
            $
            89
            
            
            $
            94
            
            
            $
            1,396
            
            
            $
            1,816Bank
                loans (3)
            
            $
            444
            
            
            $
            374
            
            
            $
            47
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            865AR
                factoring loans (3)
            
            
            123
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            123Sub-total
            
            $
            567
            
            
            $
            374
            
            
            $
            47
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            988**TOTAL**
            
            $
            642
            
            
            $
            453
            
            
            $
            130
            
            
            $
            89
            
            
            $
            94
            
            
            $
            1,396
            
            
            $
            2,804




(As
      at
      December 31, 2006, the aggregate future maturities of borrowing for the next
      five years were as follows: 2007: $576,000, 2008: $477,000, 2009: $268,000,
      2010: $59,000, 2011: $62,000, thereafter: $769,000)




(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%.




19


CAPITAL
      LEASE OBLIGATIONS - The Company leases various equipments under capital leases
      expiring in 2009. Aggregate minimum future lease payments under capital leases
      for each of the next three years are as follows: 2007: $100,000; 2008: $77,000,
      and 2009: $6,000.




Aggregate
                future lease payments2007
            
            $
            100,0002008
            
            
            77,0002009
            
            
            6,000ThereafterTotal
            
            
            183,000Current
                portion
            
            
            (100,000
            )Non-current
                portion
            
            $
            83,000




**12.NET
      ASSETS HELD FOR
      DISPOSITION**




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




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




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




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




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




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




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




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




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





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




20




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





On
      May
      15, 2007, the Company entered into a definitive agreement to sell its 36% entire
      interest in PacificNet Clickcom Limited. ("Clickcom"), a leading Value-Added
      Services (VAS) company in China, to Mr. Ou Zhenbin, a Chinese residence.
      Consideration for the 36% interest of Clickcom was RMB10,000, to be paid in
      cash
      within 90 days after the agreement signing.  The Company’s interest in
      Clickcom decreased from 51% to 15% after the transaction. On November 22, 2007,
      the said agreement was revoked by the Seller as a result of non-payment by
      the
      Buyer, Mr. Ou. The Company’s  plan to dispose of its interest in
      Clickcom remained unchanged and continued as held for disposal as of September
      30, 2007. Since the S&P agreements was terminated in the subsequent period
      proforma information is presented as if the Clickcom is held for disposal as
      of
      September 30, 2007 (See note 17)





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




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




Information
      relating to the operations of the subsidiaries up to the periods of disposal
      during the three month period ended June 30, 2007 is as follows (in thousands
      of
      US Dollars):


(In
                US$ thousands)
            
            Linkhead
            
            
            Clickcom
            
            
            Power
            
            PacTelso
            
            Solutions
            
            
            MOABC
            
            
            3G
            
            
            TotalIncome
                (loss) from discontinued operations
            
            $
            241
            
            
            $
            (3
            )
            
            $
            336
            
            -
            
            $
            79
            
            
            $
            (23
            )
            
            -
            
            
            $
            630Gain
                (loss) from discontinued operations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            -
            
            
            -
            
            
            
            -
            
            
            $
            (971
            )
            
            $
            (971
            )Net
                assets held for disposition (remaining interest)
            
            $
            1,375
            
            
            $
            809
            
            
            $
            336
            
            -
            
            $
            80
            
            
            $
            (65
            )
            
            
            -
            
            
            $
            2,535





**13.ACQUISITION**





TAKE
      1
      TECHNOLOGIES GROUP LIMITED





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




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




21


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


(In
      thousands of US Dollars)





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





At
      June
      30, 2007, goodwill of $657,413 represents the excess of the purchase price
      over
      the fair value of the net tangible and identifiable intangible assets acquired
      and is not deductible for tax purposes and the total amount of goodwill is
      reported under reportable segment for Products (Telecom &
Gaming).




In
      accordance with SFAS 142, goodwill is not amortized but is tested for impairment
      at least annually. The purchase price allocation for Take 1 acquisition is
      based
      on a management's estimates and overall industry experience. Immediately after
      the signing of the definitive agreement, the Company obtained effective control
      over Take 1. Accordingly, the operating results of Take 1 have been consolidated
      with those of the Company starting January 05, 2007. Pursuant to SFAS 141
      "Business Combinations", the earn-out consideration is considered contingent
      consideration, which will not become certain unless the audited combined
      after-tax profit of US$552,000 for the six months ended June 30, 2007.
      Accordingly, the contingent consideration of 149,459 shares has not been
      reflected in the consolidated financial statements of the Company as of June
      30,
      2007.




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




The
      following is an un-audited pro forma consolidated financial information for
      the
      six month ended June 30, 2006 and 2007, as presented below, reflects the
      results of operations of the Company assuming the acquisition occurred on
      January 1, 2006 and 2007, respectively, and after giving effect to the
      purchase accounting adjustments. These pro forma results have been prepared
      for
      information purposes only and do not purport to be indicative of what operating
      results would have been had the acquisitions actually taken place on January
      1, 2006 and 2007, respectively, and may not be indicative of future
      operating results.




Six
                months ended June 30(un-audited and in thousands of U.S. dollars)
            
            2007
            
            
            2006Revenue
            
            $
            18,288
            
            
            $
            20,459Operating
                income
            
            
            1,147
            
            
            
            479Net
                profit
            
            $
            (419
            )
            
            $
            1,673Earnings
                per share – basic
            
            $
            (0.04
            )
            
            $
            0.15Earnings
                per share – diluted
            
            $
            (0.03
            )
            
            $
            0.14




22




**14.INVESTMENTS
        IN AFFILIATED
        COMPANIES**
  Investments
        in affiliated companies consists of the following as of June 30,
        2007:
  (US$
                  thousands)
              
              COLLATERAL/OWNERSHIP
                  %
                AND
                  BUSINESS DESCRIPTIONAMOUNT
              
              DESCRIPTIONINVESTMENTS
                  IN AFFILIATED COMPANIES:Glad
                  Smart
              
              $
              30
              
              15%
                  ownership interestCommunity
                  media co.
              
              
              4
              
              5%
                  ownership interestTotal
              
              $
              34
  **15.LEGAL
        PROCEEDINGS.**
  **1.
        Lawsuit between PacificNet Power Limited and Johnson Controls Hong Kong Limited
        (JCHKL), a subsidiary of Johnson Controls Inc. (NYSE:JCI) (www.jci.com
        )**
  On
        January 19, 2007, Johnson Controls Hong Kong Limited filed a claim against
        PacificNet Power Limited (a 51% owned subsidiary of PacificNet) in the High
        Court of the Hong Kong Special Administrative Region seeking HK$4,800,000
        as
        payment for services rendered to replace 3 sets of rane water-cooled chillers,
        together with energy saving performance (the "Chiller System"), at the Fortress
        Tower in Hong Kong.
  In
        connection with the claim, PacificNet Power reviewed a letter from its client,
        China Weal Property Management Ltd., dated January 22, 2007 stating that
        the
        construction work by JCHKL had not been completed as of the date of the letter,
        and that certain violations itemized in a letter issued by the Hong Kong
        Environment Protection Department (EPD) (Noise Abatement Notice No. N806030)
        addressed to JCHKL with respect to acoustic problems with JCHKL’s equipment had
        not been abated.
  The
        board
        of directors of PacificNet Power Limited has reviewed the case with its client,
        China Weal Property Management Ltd., and our Hong Kong legal counsel and
        it is
        our belief that the project work undertaken JCHKL is defective in numerous
        aspects, as evidenced by the letter from government letter issued by
        EPD.  As a result, we believe the construction work was not been
        completed by JCHKL, and therefore, JCHKL is not entitled to payment for its
        services.
  On
        February 13, 2007, we instructed our Hong Kong legal counsel to issue a Defense
        and Counterclaim to JCHKL to counter-claim that ( i) JCHKL's construction
        work
        has not complied with the applicable rules and regulations of various government
        authorities in Hong Kong; (ii) the Chiller System provided by JCHKL was
        defective and merchantable unfit and JCHKL has failed and/or refused to rectify
        such defective works; and (iii) JCHKL shall return the work deposit in the
        amount of  HK$1,500,000 to PacificNet Power Limited and shall
        compensate and keep PacificNet Power Limited indemnified against all the
        loss
        and damages suffered as a result of any claims from the China Weal Property
        Management Ltd.
  The
        case
        is now in the discovery stage before proceeding to the stage of fixing a
        date
        for trial in the High Court of Hong Kong and we intend to vigorously defend
        ourselves against the allegations. We are unable to predict the outcome of
        these
        actions, or a reasonable estimate of the range of possible loss, if
        any.
  **2.
        Lawsuit between PacificNet Power Limited and Johnson Controls Hong Kong Limited
        (JCHKL), a subsidiary of Johnson Controls Inc. (NYSE:JCI) (www.jci.com
        )**
  On
        or
        about December, 2005, Johnson Controls Hong Kong Limited approached PacificNet
        Power Limited (a 51% owned subsidiary of PacificNet) and made a representation
        that they had submitted a tender to “The Incorporated Owners of Nan Fung Centre,
        Tsuen Wan (“the Employer”) for the “construction and replacement works of
        existing air-cooled chiller plant by new water-cooled chiller plant for Tsuen
        Wan Nan Fung Centre and energy saving performance contract” (“the Contract”).
        JCHKL invited and induced PacificNet Power Limited to act as the main contractor
        for the Contract and it would then act as a sub-contractor.
  23
  PacificNet
        Power also expressly made known to JCHKL that the said construction and
        replacement works and the guaranteed energy saving should meet all the tender
        requirements if PacificNet Power accepted the invitation to act as the main
        contractor for the Contract, and PacificNet Power further said that if there
        should be any quality defects with the system and/ or the construction work,
        the
        Employer and/ or their prospective tenants would claim against JCHKL and
        JCHKL
        should compensate.
  PacificNet
        Power however received some correspondences and complaints from the Employer
        about the poor and/ or sub-standard works done by JCHKL. PacificNet Power,
        after
        separate investigation, discovered the poor workmanship and sub-standard
        works
        done by JCHKL. PacificNet Power, after separate investigation, discovered
        the
        poor workmanship and sub-standard works done by JCHKL. Accordingly, the Employer
        and/ or their representatives have delayed the monthly installments payment
        to
        PacificNet Power.
  On
        April
        23, 2007, we instructed our lawyers issued a letter to the Defendant requesting
        and demanding them, being the sub-contractor of the Construction and Replacement
        Works Contract, to take immediate rectification action within seven days
        from
        the date of the said letter to (i) rectify and complete all outstanding
        defective works of the Construction and Replacement Works Contract; (ii)
        replace
        the water-cooled chiller plant and/or equipments which are not conformed
        with
        the requirements of the tender documents previously submitted by the Defendant
        to the Employer; and (iii) improve the poor performance of energy saving
        of the
        new water-cooled chiller plant.
  Despite
        the said letter, JCHKL had failed and/ or refused to rectify and complete
        all
        outstanding works and/ or replace the defective system. And therefore PacificNet
        Power claims against JCHKL for: (i) refund HK$6,414,300.00, being the Contract
        Price paid by PacificNet Power to JCHKL; (ii) costs and expenses incurred
        by
        Power to rectify all defective works of the Contract; (iii) all damage and
        loss
        suffered by PacificNet Power, and further and other relief.
  On
        July
        25, 2007, JCHKL issued a Defense and Counterclaim to PacificNet Power to
        argue
        that: (i) they had carried out the works according to the Contract terms;
        (ii)
        the works had been approved by PKL Consultants Limited, the consultant
        representative of the Employer; and (iii) a sum of HK$30,000 is still due
        and
        owing by PacificNet Power to JCHKL.
  The
        case
        is now in the discovery stage before proceeding to the stage of fixing a
        date
        for trial in the High Court of Hong Kong. We are unable to predict the outcome
        of these actions, or a reasonable estimate of the range of possible loss,
        if
        any.
  **16.RESTATEMENT**
  On
        March
        19, 2007 our predecessor auditor withdrew their opinion on our previously
        filed
        financial statements for the years ended December 31, 2005 and 2004 due to
        uncertainties around certain option grants during the said period. An
        independent investigation in this connection has been performed by our Audit
        Committee to address this matter.
  In
        its
        May 3, 2007 Report, the Audit Committee concluded that, “...the Audit Committee
        did indeed find that, although the number and terms of option grants were
        being
        fixed by the Compensation Committee who deferred to the Board merely for
        a
        secondary review approval; whereby the Board of Directors still maintained
        the
        authority to cancel a prerequisite grant consummated by the Compensation
        Committee, therefore that Grant could likely be interpreted only as final
        at the
        date of approval of the company’s Board of Directors. Hence, with this approach
        which seems to be more aligned with the SEC interpretation, financial
        restatement would be required to account for the granting of options that
        were
“in the money” due to procedural administrative delay and the difference in the
        Compensation Committee grant date and the Board of Directors approval date.
        Accordingly, the Audit Committee recommended to the Board of Directors of
        Pacificnet, Inc. to charge additional stock based compensation expense to
        the
        company’s financial statements for the fiscal years ended December 31, 2003,
        2004 and 2005 respectively...”
  Based
        on
        the Audit Committee Recommendations, extra stock-based compensation charges
        of
        approximately $0.3 million, $1.2 million and $0.1 million were charged to
        each
        of the years ended December 31, 2005, 2004 and 2003, respectively. the Company
        determined that its allowance for bad debts on the accounts receivable was
        understated by $3.5 Million and $0.28 million in the years ended December
        31,
        2005 and 2006, respectively. The Company also restated impairment of goodwill
        for certain subsidiaries ($3.7 million and $2.6 million in the years ended
        December 31, 2005 and 2004, respectively) and accrued certain 2005 bonus
        payable
        in 2006 amounting to $600,000. Also, the Company concluded that the
        consolidation of certain entity (Yueshen) was wrongly reflected as the Company
        did not have control over the management of the entity.
  Following
        the reaudit of its financial statements for
        the years ended December 31, 2005 and 2004, the Company restated its financials
        statements for the year ended December 31, 2006.
  In
        the course of the financial statements restatement
        for the year ended December 31, 2006, management has decreased total non-current
        assets by $1 million worth of goodwill as a result of the re-audit restatement
        to the ending goodwill balances as at December 31, 2005. Further, management
        has
        also decreased total selling, general and administrative expenses by an
        aggregate of $6.3 million. Said decrease comprises of extra goodwill impairment
        amounting to approximately $3.7 million and $2.6 million, respectively, already
        charged to the restated Selling, General and Administrative expenses for
        the
        years ended December 31, 2005 and 2004. An impairment of investment of $1.2
        million was also recorded for the year ended December 31, 2006 for an entity
        disposed in 2006.
  24
  Following
        the restatements of its financials statements for the years ended December
        31,
        2006, December 31, 2005, December 31, 2004 and first quarter review for the
        period ended March 31, 2007 the Company is now restating its second quarter
        review for the period ended June 30, 2007,  to account for the effects
        of its prior periods restatements.
 
 Following
        are the effects of the restatement on the period ended June 30, 2007 and
        the
        year ended December 31, 2006:
  Six
                  Months ended June 30,2007
              Year
                  ended December 31,2006**Consolidated
                  Balance Sheets:**
              
              As
                  reported
              
              As
                  restated
              
              As
                  reported
              
              As
                  restatedASSETS:Current
                  assets
              
              $
              28,748
              
              $
              24,789
              
              $
              17,041
              
              $
              17,041Non-current
                  assets
              
              
              15,003
              
              
              16,134
              
              
              24,841
              
              
              19,885Total
                  assets
              
              $
              43,751
              
              $
              40,923
              
              $
              41,882
              
              $
              36,926LIABILITIESCurrent
                  liabilities
              
              $
              15,115
              
              $
              15,939
              
              $
              17,376
              
              $
              18,321Non-current
                  liabilities
              
              
              7,809
              
              
              6,985
              
              
              2,704
              
              
              1,759Total
                  liabilities
              
              
              22,924
              
              
              22,924
              
              
              20,080
              
              
              20,080Minority
                  interest
              
              
              3,672
              
              
              3,272
              
              
              6,874
              
              
              2,869STOCKHOLDERS'   EQUITYCommon
                  stock
              
              
              1
              
              
              1
              
              
              1
              
              
              1Treasury
                  stock
              
              
              (130
              )
              
              (145
              )
              
              (257
              )
              
              (272
              )Additional
                  paid-in capital
              
              
              64,560
              
              
              67,003
              
              
              63,124
              
              
              65,757Cumulative
                  other comprehensive income (loss)
              
              
              123
              
              
              (139
              )
              
              220
              
              
              (42
              )Accumulated
                  deficit
              
              
              (47,187
              )
              
              (51,509
              )
              
              (47,739
              )
              
              (51,090
              )Stock
                  subscription receivable
              
              
              (212
              )
              
              (484
              )
              
              (421
              )
              
              (377
              )TOTAL
                  STOCKHOLDERS' EQUITY
              
              
              17,155
              
              
              14,727
              
              
              14,928
              
              
              13,977TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              43,751
              
              $
              40,923
              
              $
              41,882
              
              $
              36,926
  Six
                  Months ended June 30,2007
              
              Six
                  Months ended June 30,2006As
                  reported
              
              As
                  restated
              
              As
                  reported
              
              As
                  restated**Consolidated
                  Statements of Operations:**Net
                  revenue
              
              $
              18,288
              
              $
              18,288
              
              $
              19,886
              
              $
              19,886Cost
                  of sales
              
              
              (13,388
              )
              
              (13,388
              )
              
              (16,757
              )
              
              (16,757
              )Gross
                  profit
              
              
              4,900
              
              
              4,900
              
              
              3,129
              
              
              3,129Selling,
                  General and Administrative expenses
              
              
              (3,365
              )
              
              (3,365
              )
              
              (2,496
              )
              
              (2,496
              )Stock-based
                  compensation expenses
              
              
              -
              
              
              -
              
              
              (242
              )
              
              (242
              )Income/(loss)
                  from operations
              
              
              1,147
              
              
              1,147
              
              
              233
              
              
              233Income/(loss)
                  before income taxes, minority interest and discontinued
                  operations
              
              
              842
              
              
              842
              
              
              111
              
              
              111Income/(loss)
                  before discontinued operations
              
              
              (78
              )
              
              (78
              )
              
              (135
              )
              
              (135
              )Loss
                  on disposal
              
              
              
              
              
              971Income/(loss)
                  from discontinued operations
              
              
              630
              
              
              630
              
              
              1,732
              
              
              1,732Net
                  income available to common stockholders
              
              $
              552
              
              $
              (419
              )
              $
              1,597
              
              $
              1,597Earnings/(loss)
                  per common share:Basic
              
              $
              0.05
              
              $
              (0.04
              )
              $
              0.15
              
              $
              0.15Diluted
              
              $
              0.05
              
              $
              0.04
              
              $
              0.13
              
              $
              0.15Shares
                  used in computing earnings per share:Basic
              
              
              11,764,329
              
              
              11,001,522
              
              
              10,939,834
              
              
              10,918,372Diluted
              
              
              12,040,902
              
              
              11,001,522
              
              
              11,902,019
              
              
              10,918,372**Consolidated
                  Statements of Cash Flows:**Net
                  income (loss)
              
              $
              552
              
              $
              (419
              )
              $
              1,597
              
              $
              1,597Stock-based
                  compensation
              
              
              -
              
              
              -
              
              
              242
              
              
              -Net
                  cash provided by (used in) operating activities
              
              
              995
              
              
              2,210
              
              
              (5,266
              )
              
              (6,312
              )Net
                  cash used in investing activities
              
              
              (1,141
              )
              
              (1,860
              )
              
              (3,500
              )
              
              (2,989
              )Net
                  cash provided by (used in) financing activities
              
              
              2,289
              
              
              2,572
              
              
              9,964
              
              
              10,402Effect
                  of exchange rate on cash & cash equivalent
              
              
              (97
              )
              
              (97
              )
              
              54
              
              
              -NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              $
              2,926
              
              $
              2,825
              
              $
              (869
              )
              $
              1,101
 
 25
  **17.CURRENT
        VULNERABILITY DUE
        TO CERTAIN CONCENTRATIONS**
  The
        Company's operations are carried out in the PRC. Accordingly, the Company's
        business, financial condition and results of operations may be influenced
        by the
        political, economic and legal environments in the PRC, by the general state
        of
        the PRC's economy. The Company's business may be influenced by changes in
        governmental policies with respect to laws and regulations, anti-inflationary
        measures, currency conversion and remittance abroad, and rates and methods
        of
        taxation, among other things.
  **18.SUBSEQUENT
        EVENTS**
  **Revocation
        of Sale &
Purchase Agreement of PacificNet Clickcom Limited
        ("Clickcom")**
  On
          May
          15, 2007, the Company entered into a definitive agreement to sell its 36%
          entire
          interest in PacificNet Clickcom Limited. ("Clickcom"), a leading Value-Added
          Services (VAS) company in China, to Mr. Ou Zhenbin, a Chinese residence.
          Consideration for the 36% interest of Clickcom was RMB10,000 to be paid
          in cash
          within 90 days after the agreement signing.  The Company’s interest in
          Clickcom decreased from 51% to 15% after the transaction.  On November
          22, 2007, the said agreement was revoked by the Seller as a result of
          non-payment by the Buyer,
 **Acquisition
          Of Guangdong Poly Blue Express Communications Co.Ltd (Guangdong
          Poly)**
 On
          September 5, 2007, the company entered into an agreement to acquire (subject
          to
          meeting of certain conditions) an aggregate of 51% equity interest in Guangdong
          Poly Blue Express Communications Co., Ltd. (Guangdong
          Poly).  Guangdong Poly is a leading operator approved by China's
          Welfare Lottery Center to develop and operate real-time electronic paperless
          lottery services in China, in accordance to the rules and regulations set
          by
          China's Welfare Lottery Center. Total consideration payable for the purchase
          of
          Guangdong Poly was US$2 million, in which US$1 million payable in PACT
          restricted shares and US$1 million payable in
          cash.
  Due
          to
          outstanding closing conditions, the acquisition was not closed until October
          25,
          2007.
  **Lawsuit
          between PacificNet Inc. and HLB Hodgson Impey Cheng (HLB or Defendant),
          a firm
          of Chartered Accountants and Certified Public Accountants in Hong
          Kong**
  On
          September 20, 2007, PacificNet Inc. filed a claim against its former auditors
          HLB Hodgson Impey Cheng (HLB), a firm of Chartered Accountants and Certified
          Public Accountants, in the High Court of the Hong Kong Special Administrative
          Region seeking refund of the professional fees, compensation of professional
          fees and expenses for Company to engage and deploy new auditors to take
          over the
          incomplete audit works from the Defendant and returning and/or providing
          all
          relevant accounting records, vouchers, audit program and working papers
          retained
          by the Defendant and losses and damages incurred.
  The
        case
        is now in the pleadings stage. We are unable to predict the outcome of these
        actions, or a reasonable estimate of the range of possible loss, if
        any.
  **Pacificnet
        Inc. vs Iroquois Master Fund, Ltd.**
  On
        October 3, 2007 Iroquois Master Fund, Ltd. filed a complaint in the Supreme
        Court of the State of New York against PacificNet Inc., claiming that the
        Company is in default for failure to pay principal and interest under the
        Amended and Restated Convertible Debenture due March 2009 (the Amended
        Debenture) in the principal amount of $3,000,000 and interest on the Convertible
        Debenture due February 2009 (the ‘‘New Debenture’’) in the principal amount of
        $420,000.
  As
        of
        October 2, 2007, Iroquois claims that the outstanding principal amount of
        the
        Amended Debenture was $2,045,452, and accrued but unpaid interest amount
        was
        $30,682.  Iroquois claims that, as of October 2, 2007, the mandatory
        default amount, as calculated under the terms of the Amended Debenture due
        and
        owing is $2,698,974.
  As
        of
        October 2, 2007, Iroquois claims that the outstanding principal amount of
        the
        New Debenture was $420,000, and accrued but unpaid interest amount was $6,300.
        Iroquois claims that, as of October 2, 2007, the mandatory default amount,
        as
        calculated under the terms of the New Debenture, due and owing is
        $554,190.
  As
        of the
        date of the complaint, Iroquois Master Fund, Ltd. was seeking damages of
        $3,253,163.80 in the aggregate, together with any accrued but unpaid interest
        through the date of judgment.  Iroquois Master Fund, Ltd. also
        demanded for the reimbursement of its attorney fees and other costs and expenses
        incurred together with costs and disbursements of this action and such other
        and
        further relief as to the court seems just and proper.
  26
  **ITEM
        2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS**
  THE
        FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE INFORMATION
        CONTAINED IN THE FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
        APPEARING ELSEWHERE HEREIN AND IN CONJUNCTION WITH THE MANAGEMENT'S DISCUSSION
        AND ANALYSIS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
        YEAR
        ENDED DECEMBER 31, 2006, AS AMENDED.
  **PRELIMINARY
        NOTE REGARDING FORWARD-LOOKING STATEMENTS**
  The
        statements contained in this Form 10-Q that are not purely historical are
        forward-looking statements within the meaning of Section 27A of the Securities
        Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
        1934,
        as amended. These include statements about the Company's expectations, beliefs,
        intentions or strategies for the future, which are indicated by words or
        phrases
        such as "anticipate," "expect," "intend," "plan," "will," "the Company
        believes," "management believes" and similar words or phrases. The
        forward-looking statements are based on the Company's current expectations
        and
        are subject to certain risks, uncertainties and assumptions, including those
        set
        forth in the discussion under "Description of Business," including the "Risk
        Factors" described in that section, and "Management's Discussion and Analysis
        or
        Plan of Operation." The Company's actual results could differ materially
        from
        results anticipated in these forward-looking statements. All forward-looking
        statements included in this document are based on information available to
        the
        Company on the date hereof, and the Company assumes no obligation to update
        any
        such forward-looking statements.
  **FACTORS
        THAT COULD AFFECT FUTURE RESULTS**
  Factors
        that might cause actual results, performance or achievements to differ
        materially from those projected or implied in such forward-looking statements
        include, among other things:
  —
              the
                  impact of competitive products;—
              changes
                  in laws and regulations;—
              adequacy
                  and availability of insurance coverage;—
              limitations
                  on future financing;
 —
              increases
                  in the cost of borrowings and unavailability of debt or equity
                  capital;—
              the
                  inability of the Company to gain and/or hold market
                  share;—
              exposure
                  to and expense of resolving and defending liability claims and
                  other
                  litigation;—
              consumer
                  acceptance of the Company's
                  products;
 —
              managing
                  and maintaining growth;—
              customer
                  demands;—
              market
                  and industry conditions,—
              the
                  success of product development and new product introductions into
                  the
                  marketplace;
 —
              the
                  departure of key members of management, and—
              the
                  effect of the United States War on Terrorism, as well as other
                  risks and
                  uncertainties that are described from time to time in the Company's
                  filings with the Securities and Exchange
                  Commission.
  Regarding
          one of our subsidiaries, for example, Epro is engaged in the business of
          providing outsourced call center services with over 15 years of field experience
          in Hong Kong and China. The factors that could affect current and future
          results
          are as follows:
  —
              insufficient
                  sales forces for business development & account
                  servicing;—
              lack
                  of PRC management team in operation;—
              less
                  familiarity on partners' product knowledge;—
              deployment
                  costs of a new HR application and the costs to upgrade the call
                  center
                  computer system;
 —
              increasing
                  operations costs (cost of salaries, rent, interest rates & inflation)
                  under rising economy in Hong Kong;—
              insufficient
                  brand awareness initiatives in the market;—
              salary
                  increases due to an active labor market in Hong Kong and GuangZhou;
                  and—
              increasing
                  competition of call center solutions in the Hong Kong and PRC
                  markets.
  27
  **CRITICAL
        ACCOUNTING POLICIES AND ESTIMATES**
  Our
        discussion and analysis or plan of operations is based upon our consolidated
        financial statements, which have been prepared in accordance with accounting
        principles generally accepted in the United States. The preparation of these
        financial statements requires us to make estimates and judgments that affect
        the
        reported amounts of assets, liabilities, revenues and expenses, and related
        disclosure of contingent assets and liabilities.
  On
        an
        on-going basis, we evaluate our estimates, including those related to accounts
        receivable reserves, provisions for impairment losses of affiliated companies
        and other intangible assets, income taxes and contingencies. We base our
        estimates on historical experience and on various other assumptions that
        are
        believed to be reasonable under the circumstances, the results of which form
        the
        basis for making judgments about the carrying values of assets and liabilities
        that are not readily apparent from other sources. Actual results may differ
        from
        these estimates under different assumptions or conditions.
  Management
        believes the following critical accounting policies reflect our more significant
        estimates and assumptions used in the preparation of our consolidated financial
        statements:
  *Allowance
        For Doubtful Accounts*
  We
        evaluate the collectibility of our trade receivables based on a combination
        of
        factors. We regularly analyze our significant customer accounts, and, when
        we
        become aware of a specific customer's inability to meet its financial
        obligations to us, such as in the case of bankruptcy filings or deterioration
        in
        the customer's operating results or financial position, we record a specific
        reserve for bad debt to reduce the related receivable to the amount we
        reasonably believe is collectible. We also record reserves for bad debt for
        all
        other customers based on a variety of factors including the length of time
        the
        receivables are past due, the financial health of the customer, macroeconomic
        considerations and historical experience. If circumstances related to specific
        customers change, our estimates of the recoverability of receivables could
        be
        further adjusted. In the event that our trade receivables become uncollectible,
        we would be forced to record additional adjustments to receivables to reflect
        the amounts at net realizable value. The accounting effect of this entry
        would
        be a charge to earnings, thereby reducing our net earnings. Although we consider
        the likelihood of this occurrence to be remote based on past history and
        the
        current status of our accounts, there is a possibility of this
        occurrence.
  In
        the
        beginning of the third quarter of 2006, the Chinese government announced
        that it
        would implement several new policies regarding mobile phone value-added service
        providers effective from July 10, 2006. These policies include a “double
        confirmation” policy and the requirement that value-added service providers
        provide one-month trial subscriptions. By requiring that mobile phone customers
        “double-confirm” their intention to purchase services, and by requiring free
        subscriptions, the Chinese government has negatively affected value-added
        service providers.
  *Inventory*
  Our
        inventory purchases and commitments are made in order to build inventory
        to meet
        forecasted demand for our products. We perform a detailed assessment of
        inventory for each period, which includes a review of, among other factors,
        demand requirements, product life cycle and development plans, component
        cost
        trends, product pricing and quality issues. Based on this analysis, we record
        adjustments to inventory for excess, obsolescence or impairment, when
        appropriate, to reflect inventory at net realizable value. Revisions to our
        inventory adjustments may be required if actual demand, component costs or
        product life cycles differ from our estimates. In the event we were unable
        to
        sell our products, the demand for our products diminished, and/or other
        competitors offered similar or better products, we would be forced to record
        an
        adjustment to inventory for impairment or obsolescence to reflect inventory
        at
        net realizable value. The accounting effect of this entry would be a charge
        to
        earnings, thereby reducing our net earnings.
  28
  *Income
        Taxes*
  We
        record
        a valuation allowance to reduce our deferred tax assets to the amount that
        is
        more likely than not to be realized. We have considered future market growth,
        forecasted earnings, future taxable income, and the mix of earnings in the
        jurisdictions in which we operate and prudent and feasible tax planning
        strategies in determining the need for a valuation allowance. We currently
        have
        recorded a full valuation allowance against net deferred tax assets as we
        currently believe it is more likely than not that the deferred tax assets
        will
        not be realized. In the event we determine that we would not be able to realize
        all or part of our net deferred tax assets in the future, an adjustment to
        the
        deferred tax assets would be charged to earnings in the period such
        determination is made. Likewise, if we later determine that it is more likely
        than not that the net deferred tax assets would be realized, the previously
        provided valuation allowance would be reversed.
  *Contingencies*
  We
        may be
        subject to certain asserted and unasserted claims encountered in the normal
        course of business. It is our belief that the resolution of these matters
        will
        not have a material adverse effect on our financial position or results of
        operations, however, we cannot provide assurance that damages that result
        in a
        material adverse effect on our financial position or results of operations
        will
        not be imposed in these matters. We account for contingent liabilities when
        it
        is probable that future expenditures will be made and such expenditures can
        be
        reasonably estimated.
  *Valuation
        of Long-Lived Assets Including Goodwill and Purchased Intangible
        Assets*
  We
        review
        property, plant and equipment, goodwill and purchased intangible assets for
        impairment whenever events or changes in circumstances indicate the carrying
        value of an asset may not be recoverable. Our asset impairment review assesses
        the fair value of the assets based on the future cash flows the assets are
        expected to generate. An impairment loss is recognized when estimated
        undiscounted future cash flows expected to result from the use of the asset
        plus
        net proceeds expected from disposition of the asset (if any) are less than
        the
        carrying value of the asset. This approach uses our estimates of future market
        growth, forecasted revenue and costs, expected periods the assets will be
        utilized and appropriate discount rates. Such evaluations of impairment of
        long-lived assets including goodwill arising on a business combination and
        purchased intangible assets are an integral part of, but not limited to,
        our
        strategic reviews of our business and operations performed in conjunction
        with
        restructuring actions. When an impairment is identified, the carrying amount
        of
        the asset is reduced to its estimated fair value. Deterioration of our business
        in a geographic region or within a business segment in the future could also
        lead to impairment adjustments as such issues are identified. The accounting
        effect of an impairment loss would be a charge to earnings, thereby reducing
        our
        net earnings.
  *Convertible
        Debt*
  In
        accordance with recent FASB accounting guidance, due to certain factors,
        including a liquidated damages provision in the registration rights agreement
        and an indeterminate amount of shares to be issued upon conversion of the
        debentures, the Company values and accounts for the embedded conversion feature
        related to the Debentures, the Investors’ warrants, and the registration rights
        as derivative liabilities. Accordingly, these derivative liabilities are
        measured at fair value with changes in fair value reported in earnings as
        long
        as they remain classified as liabilities. The Company reassesses the
        classification at each balance sheet date. If the classification required
        under
        EITF No. 00-19 changes as a result of events during the period, the contract
        should be reclassified as of the date of the event that caused the
        reclassification.
  The
        fair
        value of these derivative instruments, as determined by applying the
        Black-Scholes valuation model, is adjusted quarterly. The Black-Scholes
        valuation model requires the input of highly subjective assumptions, including
        the expected stock price volatility. Additionally, although the Black-Scholes
        model meets the requirements of SFAS 133, the fair values generated by the
        model may not be indicative of the actual fair values as our derivative
        instruments have characteristics significantly different from traded options.
        Accordingly, the results obtained could be significantly different if other
        assumptions were used. The effect of this entry would be a charge to net
        earnings, thereby either increasing or reducing our net earnings based upon
        the
        assumptions used and the results obtained.
  29
  **NATURE
        OF THE OPERATIONS OF THE COMPANY**
  **NATURE
        OF BUSINESS**
  PacificNet
        Inc. (http://www.PacificNet.com) is a leading provider of gaming technology,
        e-commerce, and Customer Relationship Management (CRM) in China. Our gaming
        products are specially designed for the Chinese and Asian gamers, and we
        focus
        on integrating localized Chinese and Asian themes and content, advanced
        graphics, digital sound effects and popular domestic music, with secondary
        bonus
        games and jackpots. Our gaming products include: Multi-player Electronic
        Table
        Games - Baccarat, Sicbo, Fish-Prawn-Crab, and Roulette machines, server based
        games (SBG) with multiple client betting stations, slot and bingo machines,
        video lottery terminals (VLTs), amusement with prices (AWP) machines, gaming
        cabinet and client/server system designs, online i-gaming software design,
        and
        multimedia entertainment kiosks. PacificNet's gaming clients include the
        leading
        hotels, casinos, and gaming operators in Macau, Asia, and Europe, and our
        ecommerce and CRM clients include the leading telecom companies, banks,
        insurance, travel, marketing and business services companies and telecom
        consumers in Greater China such as China Telecom, China Mobile, Unicom, PCCW,
        Hutchison Telecom, Bell24, Motorola, Nokia, SONY, TCL, Huawei, American Express,
        Citibank, HSBC, Bank of China, Bank of East Asia, DBS, TNT, China and Hong
        Kong
        government. PacificNet employs about 1,200 staff in its various subsidiaries
        throughout China with offices in Hong Kong, Beijing, Shanghai, Shenzhen,
        Guangzhou, Macau and Zhuhai China, USA, and the Philippines.
  **PacificNet's
        Gaming Products:**
  Our
        gaming products are specially designed for the Chinese and Asian gamers,
        and we
        focus on integrating localized Chinese and Asian themes and content, advanced
        graphics, digital sound effects and popular domestic music, with secondary
        bonus
        games and jackpots. Our gaming products include:
  •
        Multi-player Electronic Table Games: Baccarat, Sicbo, Fish-Prawn-Crab, and
        Roulette Machines, server based games (SBG) with multiple client betting
        stations.
 •
Slot
        Machines
 •
Bingo
        and Keno Machines
 •
Video
        Lottery Terminals (VLTs)
 •
        Server-Based Gaming Machines (SBG)
 •
        Amusement With Prices (AWP) Machines
 •
Online
        iGaming Software Development
 •
        Client-Server Gaming Systems
 •
CMM
        Level 3 Certified Gaming Software Development Center in China with 200
        Professional Software Developers
 •
Gaming
        Systems, Cabinet Design and Sales, Parts Sales, OEM Games. We design and
        sell
        gaming machine cabinets, replacement parts.
  **PacificNet's
        Business Units:**
  1.
        Gaming
        Technology: Electronic Gaming Machines, Mobile Games, i-Gaming
        Software.
  2.
        Legacy
        Business: CRM, E-commerce and Telecom Products
  Our
        goal
        is to take a leading role in providing customer relationship management (CRM)
        and gaming technology, which are rapidly expanding business sectors in
        Asia.
  **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.
  30
  —
              Pacific
                  Solutions Technology, is a CMM Level 3 certified software development
                  center with over 200 software programmers located in Shenzhen,
                  China, and
                  specializes in the development of client-server systems, internet
                  e-commerce software, online and casino gaming systems and slot
                  machines,
                  banking and telecom applications using Microsoft Visual C++, Java,
                  and
                  other rapid application development tools.—
              PacificNet
                  Epro (www.EproTel.com.hk): CRM Call Center and Customer Services
                  Outsourcing
 —
              PacificNet
                  Clickcom (www.clickcom.com.cn), MOABC.com : VAS,SP,( SMS,
                  WAP)—
              Guangzhou
                  Wanrong (www.my2388.com) : VAS, SP, (SMS,MMS,IVR,WAP, Java
                  Games)
 —
              PacificNet
                  Communications Limited,—
              iMobile,
                  (www.imobile.com.cn, www.18900.com,
                  wap.17wap.com)
 
 **PacificNet
        Gaming Technology**
  **1.
        Participation games**: company-owned gaming machines that we lease based
        upon any of the following payment methods are referred to as participation
        games: (1) a percentage of the net win of the gaming machines, (2) fixed
        daily
        fees, or (3) in the case of wide-area progressive gaming machines, a percentage
        of the amount wagered or a combination of a fixed daily fee and a percentage
        of
        the amount wagered.
  **2.
        Wide Area Game Network, Community Gaming**: electronically link gaming
        machines that are located across multiple casinos within a gaming jurisdiction.
        The linked gaming machines contribute to and compete for large, system-wide
        progressive jackpots and are designed to increase gaming machine play for
        participating casinos by giving the players the opportunity to win a larger
        jackpot than on a stand-alone gaming machine.
  **3.
        Local Area Progressive Jackpots (LAP) participation games**:
        electronically links gaming machines that are located within a single casino
        to
        a progressive jackpot for that specific casino.
  **4.
        Video Lottery Terminals**: video gaming machines featured with localized
        Chinese and Asian themes and contents, advanced graphics, digital sound effects
        and music and incorporate many of the same features from our other gaming
        machines.
  **5.
        Server-based Gaming**: a gaming system in which game content and
        peripherals are configured, maintained and refreshed over a network that
        links
        groups of gaming machines to a remote server that also enables custom
        configuration by operators and central determination of game
        outcomes.
  **Gaming
        Market Overview on Macau, China**
  As
        of the
        end of 2006, Macau (a Special Administrative Region of the People's Republic
        of
        China) has become the largest and fastest-growing gaming market in the world,
        and surpassed the Las Vegas Strip in total revenues. According to statistics
        provided by Macau government, in 2006, Macau's gaming revenues exceeded US$7
        billion (MOP 56.2 billion patacas), surpassing the Las Vegas Strip gaming
        revenues of US$6.6 billion. Macau borders Zhuhai City of Guangdong Province
        of
        China, one of the country's wealthiest and most developed regions and is
        an hour
        away from Hong Kong via ferry. In 2006, the number of tourists visiting Macau
        reached an all-time record of 22 million, an increase of 17 percent compared
        with 2005, of which 55% or 12 million visitors were from mainland China.
        At the
        end of 2006, there were 22 casinos, 83 hotels and similar establishments
        in
        Macau with close to 13,000 rooms. By 2010, the number of tourists is expected
        to
        nearly double to nearly 30 million visitors per year. Approximately one billion
        people live within a three-hour flight of Macau. Numerous hotel, gaming,
        and
        other projects are in the works in Macau which are expected to add over 10,000
        guest rooms and over 20,000 live entertainment seats in eight separate venues.
        The number of hotel-casinos in operation and in development in Macau continues
        to grow, including well-known Chinese names such as Galaxy and Melco, and
        famous
        Las Vegas names such as the Sands, the Venetian, Wynn Resort and Crown Macau.
        With the disposable income of the average Chinese on the rise, Macau's gaming
        and entertainment market is expected to grow for years to come. Macau is
        the
        only area in China where gambling is legal.
  31
  **RESULTS
        OF OPERATIONS**
  **REVENUES**
  Revenues
        for the three and six months ended June 30, 2007 were amounted to $9,021,000
        and
        $18,288,000, which represented a year-over-year decline of 32% and 8% as
        compared to $13,214,000 and $19,886,000 for the three and six months ended
        June
        30, 2006, respectively. The year-over-year decrease in revenues was mainly
        due
        to the Company’s Mobile phone wholesaling businesses in Greater China, which
        posted a year-over-year decrease of 21% and 79% for the second quarter and
        first
        half of the year, respectively. Segmented financial information of the three
        business operating groups is set out below followed by a brief discussion
        of
        each business group.
  THREE
        AND
        SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE AND SIX MONTHS ENDED JUNE
        30,
        2006
  For
                  the three months ended June 30, 2007
              Group
                  1.
              Group
                  2.
              Group
                  3.
              Group
                  4.
              Total(in
                  thousands, except percentages)
              Outsourcing
                Services
              Telecom
                  Value-Added Services
              Products
                (Telecom
                  & Gaming)
              Other
                Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              3,767
              432
              4,722
              100
              9,021Earnings
                  / (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
              Telecom
                  Value-Added Services
              Products
                (Telecom
                  & Gaming)
              Other
                Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              3,538
              344
              8,914
              418
              13,214Earnings
                  / (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
              Telecom
                  Value-Added Services
              Products
                (Telecom
                  & Gaming)
              Other
                Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              7,729
              959
              9,424
              176
              18,288Earnings
                  / (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
              Telecom
                  Value-Added Services
              Products
                (Telecom
                  & Gaming)
              Other
                Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              6,560
              639
              11,851
              836
              19,886Earnings
                  / (Loss) from operations
              439
              168
              395
              (768)
              233
 
 (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.
  32
  (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.
  **COST
        OF REVENUES**
  Cost
        of
        revenues for the three and six months ended June 30, 2007 were $6,660,000
        and
        $13,388,000, representing a decrease of 42% and 20% from $11,437,000 and
        $16,757,000 as compared to the same periods of 2006, respectively. Cost of
        revenues as a percentage of the corresponding revenues was approximately
        74% and
        73% for the second quarter and first half of FY2007, respectively.
  (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.
 
 (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.
  33
  **GROSS
        PROFIT**
  Gross
        profit for the three and six months ended June 30, 2007 was $2,361,000 and
        $4,900,000, a year-over-year increase of 33% and 57%, respectively, as compared
        to the comparable period of 2006. Gross margin was 26% and 27% for the three
        and
        six months ended June 30, 2007, as compared to 13% and 16% for the same period
        of prior year, respectively.  Quarterly improvement in gross margin, as
        well as the first half year, was attributed to higher margin gaming technology
        and electronic slot machine businesses.
  Gross
        profit contribution, averaged approximately 59% and 54% respectively, from
        the
        Company’s gaming technology business represented 12% and 17% of the total gross
        profit for the three and six months ended June 30, 2007 for the periods.
        Gross
        profit, averaged approximately 29% and 41% respectively, contribution from
        the
        Company’s electronic slot machine business represented 15% and 16% of the total
        gross profit for three and six months ended June 30, 2007. Although rather
        insignificant, gross margin contribution from providing internet connection,
        maintenance and building website services reached 91% for the second
        quarter.
  **SELLING,
        GENERAL AND ADMINISTRATIVE EXPENSES**
  Selling,
        general and administrative expenses totaled $1,798,000 and $3,365,000 for
        the
        three and six months ended June 30, 2007, which represented year-over-year
        increases of 27% and 35%, respectively, for the same period of prior year;
        or a
        year-over-year increase from 11% to 20% as a percentage of revenue for the
        three
        months ended June 30, 2007. Selling, general and administrative expenses
        consist
        primarily of staff salaries, office rent, insurance, sales
        commissions, advertising expenditures and traveling costs.
  (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, 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.
 
 (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
                  months ended
                June
                  30, 2007
              
              
              Three
                  months ended
                June
                  30, 2006
              
              
              Percentage
                ChangeRemuneration
                  and related
              
              $
              1,178
              
              
              $
              637
              
              
              %
              85Office
              
              
              345
              
              
              
              226
              
              
              
              53Travel
              
              
              172
              
              
              
              83
              
              
              
              107Entertainment
              
              
              58
              
              
              
              39
              
              
              
              49Professional
                  (legal and consultant)
              
              
              70
              
              
              
              137
              
              
              
              (49
              )Audit
              
              
              116
              
              
              
              119
              
              
              
              (3
              )Selling
              
              
              75
              
              
              
              84
              
              
              
              (11
              )Other
              
              
              97
              
              
              
              63
              
              
              
              54Recovery
                  of provisions for doubtful accounts from subsequent
                  collections
              
              
              (313
              )
              
              
              28
              
              
              
              (1,218
              )Total
              
              $
              1,798
              
              
              $
              1,416
              
              
              %
              27
 
 34
  SELLING,
                  GENERAL AND
                ADMINISTRATIVE
                EXPENSES(in
                  US$ thousands, except percentages)
              
              Six
                  months
                ended
                June
                  30, 2007
              
              
              Six
                  months
                ended
                June
                  30, 2006
              
              
              Percentage
                Change
                (%)Remuneration
                  and related
              
              $
              2,218
              
              
              $
              1,218
              
              
              %
              82Office
              
              
              645
              
              
              
              440
              
              
              
              47Travel
              
              
              264
              
              
              
              122
              
              
              
              116Entertainment
              
              
              98
              
              
              
              55
              
              
              
              79Professional
                  (legal and consultant)
              
              
              360
              
              
              
              201
              
              
              
              79Audit
              
              
              136
              
              
              
              138
              
              
              
              (1
              )Selling
              
              
              185
              
              
              
              136
              
              
              
              36Other
              
              
              149
              
              
              
              158
              
              
              
              (5
              )Recovery
                  of provisions for doubtful accounts from subsequent
                  collections
              
              
              (691
              )
              
              
              28
              
              
              
              (2,568
              )Total
              
              $
              3,365
              
              
              $
              2,496
              
              
              %
              35
 
 I**NCOME
        / (LOSS) FROM OPERATIONS**
  On
        a
        quarter-over-quarter basis, income from operations amounted to $347,000 and
        $1,147,000 for the three and six months ended June 30, 2007 respectively,
        an
        increase of 102% and 393% as compared to the same periods of 2006 respectively.
        Segmented operating income of $241,000, $353,000 and $378,000 for the three
        months ended June 30, 2007 were generated from the Company's three business
        groups: (1) Outsourcing Services, (2) Telecom Value-Added Services, and (3)
        Products (Telecom & Gaming) Services, respectively. This compared to
        operating income of $233,000, $82,000 and $340,000 from the same
        groups for the same period last year, respectively. Segmented operating incomes
        of $641,000, $349,000 and $1,623,000 for the six months ended June 30, 2007
        were
        generated from the Company's three business groups, which increased 46%,
        108%
        and 311% as compared to operating incomes of $439,000, $168,000 and
        $395,000 from the same groups for the same period of the prior year,
        respectively. Significant increase in high quality operating income derived
        from
        gaming related operations provides a clear confirmation to the company’s newly
        adopted gaming technology strategy. Operating income from the gaming technology
        business accounted for 14% and 28% of the total operating income for the
        second
        quarter and first half of the year, respectively. Likewise, operating income
        from sale of electronic slot machines accounted for 53% and 50% of the total
        operating income for the respective period of the year.
  **INCOME
        TAXES**
  Management
        has made an income tax provision adjustment of $22,000 in the second quarter
        of
        FY2007, thus $46,000 for the six months ended June 30, 2007, as compared
        to
        $30,000 for the six months ended June 30, 2006. Interim income tax provisions
        are based upon management’s estimate of taxable income and the resulting
        consolidated effective income tax rate for the full year. As a result, such
        interim estimates are subject to change as the year progresses and more
        information becomes available. We, however, expect our income taxes to increase
        as our net income increases and the tax holidays we have benefited from in
        Hong
        Kong and the PRC expire.
  **MINORITY
        INTERESTS**
  Minority
        interests for the three and six months ended June 30, 2007 totaled $340,000
        and
        $874,000 compared with $179,000 and $265,000 for the same period of the prior
        year, respectively, representing minority ownership interests in subsidiaries
        consolidated in the Company’s consolidated financial statements.
  **NET
        INCOME**
  On
          a
          year-over-year basis, net income for the three and six months ended June
          30,
          2007 recorded $244,000 and $(419,000) respectively. Net Loss is primarily
          due to
          the loss on disposal of discontinued operations of ($971,000), which is
          a
          one-time, non-cash charge caused by the disposal of our telecom assets
          related
          to Guangzhou 3G.  The loss is also the result of higher accounting expenses
          due to the re-audit process.
 **CASH**
  Net
        cash
        and cash equivalents at June 30, 2007 were approximately $4.73 million, an
        increase of approximately $2.83 million compared to December 31, 2006. This
        was primarily due to successful collection of certain doubtful debts of
        approximately $0.69 million and $5.7 million for the net proceeds from issuance
        of convertible debenture for the Company’s gaming technology business, net of
        acquisition of property and equipment of approximately $1.93
        million.
  35
  **CONTRACTUAL
        OBLIGATIONS**
  Contractual
        obligations as of June 30, 2007 are detailed below:
  **Payments
        Due by Period**
  Contractual
                  Obligations
              
              Total
              
              
              Less
                  than 1 year
              
              
              1-5
                  years
              
              
              After
                  5 yearsLine
                  of credit (in thousands)
              
              $
              299
              
              
              $
              299
              
              
              $
              
              
              
              $Bank
                  Loans
              
              $
              2,804
              
              
              $
              642
              
              
              $
              766
              
              
              $
              1,396Operating
                  leases
              
              $
              854
              
              
              $
              610
              
              
              $
              244
              
              
              $Capital
                  leases
              
              $
              183
              
              
              $
              100
              
              
              $
              83
              
              
              $Total
                  cash contractual obligations
              
              $
              4,140
              
              
              $
              1,651
              
              
              $
              1,093
              
              
              $
              1,396
  In
        addition to above, as previously disclosed in the paragraph under the
        sub-heading of PROBABLE EVENT OF DEFAULT under Item 1 - CONVERTIBLE DEBENTURES,
        the terms of the convertible note obligate the Company to pay monthly 2%
        of
        outstanding principal as liquidated damages and 30% of the outstanding principal
        as mandatory default amount from the date of ineffectiveness of registration
        statement. As of June 30, 2007, the Company has accrued three months of
        liquidated damages and mandatory default amount or approximately $2,697,000,
        although the Company may not have to pay the full amount of liquidated damages.
        The amount has been reflected in the consolidated financial statements as
        a
        separate line item on the consolidated balance sheet as “liquidated damages
        liability”.
  OFF-BALANCE
        SHEET ARRANGEMENTS
  There
        were no off-balance sheet guarantees, interest rate swap transactions, foreign
        currency forward contracts or long term purchase commitments outstanding
        as of
        June 30, 2007. Further, the Company had not engaged in any non-exchange trading
        activities during second quarter of 2007.
  **PART
        II - OTHER INFORMATION**
  **ITEM
        6. EXHIBITS**
  The
        following exhibits are filed as part of this report:
  EXHIBIT
  NUMBER
              
              DESCRIPTION31.1
              
              Rule
                  13a-14(a) Certification of Chief Executive Officer (Principal Executive
                  Officer)31.2
              
              Rule
                  13a-14(a) Certification of Chief Financial Officer (Principal Financial
                  Officer)32.1
              
              18
                  U.S.C. Section 1350 Certifications
  36
 
 **SIGNATURES**
  In
        accordance with the requirements of the Securities Exchange Act of 1934,
        as
        amended, the Registrant has duly caused this report to be signed on its behalf
        by the undersigned, thereunto duly authorized.
  PACIFICNET
                  INC.Date: December
                  17, 2007
              By:
                  /s/ Tony TongName:
                  Tony Tong
                Chief
                  Executive Officer
                (Principal
                  Executive Officer)Date: December
                  17, 2007
              By:
                  /s/ Daniel LuiName:
                  Daniel Lui
                Chief
                  Financial Officer
                (Principal
                  Financial Officer)




37