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


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




**[X]
      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT**


**OF
      1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**




**[  
      ] 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 Filero
            Accelerated
                Filer o
            Non-accelerated
                filerþ




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
      October 31, 2007, there were 11,984,072 shares of the issuer’s common stock, par
      value $0.0001 per share, outstanding.









**PACIFICNET
      INC.**




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




**TABLE
      OF CONTENTS**







**PART I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)Unaudited
                Consolidated Balance Sheets
            3Unaudited
                Consolidated Statements of Operations
            4Unaudited
                Consolidated Statements of Cash Flows
            5Notes
                to Unaudited Consolidated Financial Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            23Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            30Item
                4.
            Controls
                and Procedures
            32**PART II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            33Item
                1A.
            Risk
                Factors
            33Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            33Item
                3.
            Defaults
                upon Senior Securities
            33Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            40Item
                5.
            Other
                Information
            33Item
                6.
            Exhibits
            33Signatures
            
            34




2


**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)
 **ASSETS**
                
                **September
                    30,**
                  **2007**
                  **(Unaudited)**
                
                
                **December
                    31,**
                  **2006(Audited)**
                  **Restated***Current
                    Assets:*Cash
                    and cash equivalents
                
                $
                4,889
                
                
                $
                1,900Restricted
                    cash - pledged bank deposit
                
                
                239
                
                
                
                234Accounts
                    receivables
                
                
                6,665
                
                
                
                8,141Inventories
                
                
                553
                
                
                
                201Loan
                    receivable from related parties
                
                
                2,227
                
                
                
                1,706Loan
                    receivable from third parties
                
                
                2,260
                
                
                
                128Marketable
                    equity securities - available for sale
                
                
                1,059
                
                
                
                558Loans
                    to employees
                
                
                1,884
                
                
                
                770Other
                    receivables, net
                
                
                2,900
                
                
                
                170Other
                    current assets
                
                
                6,659
                
                
                
                3,233Total
                    Current Assets
                
                
                29,335
                
                
                
                17,041Property
                    and equipment, net
                
                
                5,794
                
                
                
                4,711Investments
                    in affiliated companies and subsidiaries
                
                
                353
                
                
                
                1,257Intangible
                    assets, net
                
                
                337
                
                
                
                323Goodwill
                
                
                6,258
                
                
                
                5,601Other
                    assets
                
                
                76
                
                
                
                471Net
                    assets held for disposition
                
                
                810
                
                
                
                7,522**TOTAL
                    ASSETS**
                
                
                42,963
                
                
                
                36,926**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    Liabilities:Bank
                    line of Credit
                
                $
                181
                
                
                $
                855Bank
                    loans-current portion
                
                
                768
                
                
                
                576Capital
                    lease obligations - current portion
                
                
                90
                
                
                
                120Accounts
                    payable
                
                
                2,166
                
                
                
                1,266Accrued
                    expenses and other payables
                
                
                2,950
                
                
                
                1,828Customer
                    deposits
                
                
                430
                
                
                
                352Loans
                    payable to related party
                
                
                681
                
                
                
                638Convertible
                    debenture
                
                
                6,218
                
                
                
                8,945Warrant
                    liability
                
                
                761
                
                
                
                904Liquidated
                    damages liability
                
                
                2,697
                
                
                
                2,837Total
                    Current Liabilities
                
                
                16,942
                
                
                
                18,321Long-term
                    liabilities:Bank
                    loans - non current portion
                
                
                2,051
                
                
                
                1,635Capital
                    lease obligations - non current portion
                
                
                62
                
                
                
                124Convertible
                    Debenture- non current portion
                
                
                4,908
                
                
                
                -Total
                    long-term liabilities
                
                
                7,021
                
                
                
                1,759**Total
                    liabilities**
                
                
                23,963
                
                
                
                20,080Minority
                    interest in consolidated subsidiaries
                
                
                4,032
                
                
                
                2,869Commitments
                    and contingenciesStockholders'
                    Equity:Preferred
                    stock, par value $0.0001, Authorized 5,000,000 sharesIssued
                    and outstanding - noneCommon
                    stock, par value $0.0001, Authorized 125,000,000 shares;Issued
                    and outstanding:September
                    30, 2007: 14,557,041 shares issued, 11,984,072 outstandingDecember
                    31, 2006: 14,155,597 issued, 11,538,664 outstanding
                
                
                1
                
                
                
                1Treasury
                    stock, at cost (2007 Q3: 2,572,969 shares, 2006: 2,616,933
                    shares)
                
                
                (145
                )
                
                
                (272
                )Additional
                    paid-in capital
                
                
                67,409
                
                
                
                65,757Cumulative
                    other comprehensive income (loss)
                
                
                (84
                )
                
                
                (42
                )Accumulated
                    deficit
                
                
                (51,729
                )
                
                
                (51,090
                )Less:
                    stock subscription receivable
                
                
                (484
                )
                
                
                (377
                )Total
                    Stockholders' Equity
                
                
                14,968
                
                
                
                13,977**TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY**
                
                $
                42,963
                
                
                $
                36,926
  
 The
        accompanying notes are an integral
        part of these unaudited consolidated financial statements.
  3
 
 **PACIFICNET
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 (Unaudited.
        In thousands of United States dollars, except loss per share and share
        amounts)
 
 **Three
                    months ended**
                  **September
                    30,**
                
                
                **Nine
                    months ended**
                  **September
                    30,****2007**
                  **Unaudited**
                
                
                **2006**
                  **Unaudited**
                  **Restated**
                
                
                **2007**
                  **Unaudited**
                
                
                **2006**
                  **Unaudited**
                  **Restated**Net
                    Revenues
                
                $
                
                
                
                $
                
                
                
                $
                
                
                
                $Services
                
                
                4,497
                
                
                
                3,938
                
                
                
                13,361
                
                
                
                11,420Product
                    sales
                
                
                5,305
                
                
                
                6,587
                
                
                
                14,729
                
                
                
                20,912Total
                    Net Revenues
                
                
                9,802
                
                
                
                10,525
                
                
                
                28,090
                
                
                
                32,332Cost
                    of revenuesServices
                
                
                3,441
                
                
                
                3,076
                
                
                
                9,626
                
                
                
                8,203Product
                    sales
                
                
                3,987
                
                
                
                6,342
                
                
                
                11,190
                
                
                
                19,507Total
                    Cost of Revenues
                
                
                7,428
                
                
                
                9,418
                
                
                
                20,816
                
                
                
                27,710Gross
                    Profit
                
                
                2,374
                
                
                
                1,107
                
                
                
                7,274
                
                
                
                4,622Selling,
                    general and administrative expenses
                
                
                2,030
                
                
                
                1,580
                
                
                
                5,395
                
                
                
                4,067Provision
                    for doubtful accounts
                
                
                
                
                
                
                312
                
                
                
                
                
                
                
                310Depreciation
                    and amortization
                
                
                207
                
                
                
                145
                
                
                
                595
                
                
                
                303Total
                    Operating Expenses
                
                
                2,237
                
                
                
                1,725
                
                
                
                5,990
                
                
                
                4,370**INCOME(LOSS)
                    FROM OPERATIONS**
                
                
                137
                
                
                
                (618
                )
                
                
                1,284
                
                
                
                252Other
                    Income(Expenses):Interest
                    income (Expenses),
                    net
                
                
                (223
                )
                
                
                (252
                )
                
                
                (655
                )
                
                
                (649
                )Gains(Loss)
                    in change in fair value of derivatives
                
                
                62
                
                
                
                1,004
                
                
                
                143
                
                
                
                1,212Liquidated
                    damages expense
                
                
                -
                
                
                
                (800
                )
                
                
                -
                
                
                
                (800
                )Sundry
                    income, net
                
                
                245
                
                
                
                9
                
                
                
                291
                
                
                
                77Total
                    Other Income (Expenses)
                
                
                84
                
                
                
                (39
                )
                
                
                (221
                )
                
                
                (160
                )**Income(Loss)
                    before Income Taxes and Minority Interest**
                
                
                221
                
                
                
                (657
                )
                
                
                1,063
                
                
                
                92Provision
                    for income taxes
                
                
                46
                
                
                
                (40
                )
                
                
                -
                
                
                
                (70
                )Share
                    of earnings of associated companies
                
                
                (23
                )
                
                
                80
                
                
                
                (23
                )
                
                
                129Minority
                    interests
                
                
                (130
                )
                
                
                (12
                )
                
                
                (1,004
                )
                
                
                (527
                ).**Income(Loss)
                    from Continued Operations**
                
                
                114
                
                
                
                (629
                )
                
                
                36
                
                
                
                (376
                )Loss
                    on disposal
                
                
                (356
                )
                
                
                -
                
                
                
                (925
                )
                
                ****
                **-**Income
                    from discontinued operations
                
                
                22
                
                
                
                (486
                )
                
                
                250
                
                
                
                980**Total
                    discontinued operations income (loss)**
                
                
                (334
                )
                
                
                (486
                )
                
                
                (675
                )
                
                
                980**Net
                    Income (Loss)**
                
                
                (220
                )
                
                
                (1,115
                )
                
                
                (639
                )
                
                
                604Unrealized  gain
                    on marketable securities
                
                
                114
                
                
                
                -
                
                
                
                114
                
                
                
                -Foreign
                    exchange gain (loss)
                
                
                (38
                )
                
                
                -
                
                
                
                (135
                )
                
                
                -**Net
                    Comprehensive Loss**
                
                $
                (144
                )
                
                $
                (1,115
                )
                
                $
                (660
                )
                
                $
                604Basic
                    Earnings (Loss) per share-Continued Operations
                
                $
                0.01
                
                
                $
                (0.05
                )
                
                $
                0.00
                
                
                $
                (0.03
                )Basic
                    Earnings (Loss) per share-Discontinued Operations
                
                $
                (0.03
                )
                
                $
                (0.04
                )
                
                $
                (0.06
                )
                
                $
                0.05**Basic
                    Earnings (Loss) per share**
                
                $
                (0.02
                )
                
                $
                (0.09
                )
                
                $
                (0.06
                )
                
                $
                0.02Diluted
                    Earnings (Loss) per share-Continued Operations
                
                $
                0.01
                
                
                $
                (0.05
                )
                
                $
                0.00
                
                
                $
                (0.03
                )Diluted
                    Earnings (Loss) per share-Discontinued Operations
                
                $
                (0.03
                )
                
                $
                (0.04
                )
                
                $
                (0.06
                )
                
                $
                0.05**Diluted
                    Earnings (Loss) per share**
                
                $
                (0.02
                )
                
                $
                (0.09
                )
                
                $
                (0.06
                )
                
                $
                0.02**Weighted
                    average number of shares-Basic**
                
                
                11,931,094
                
                
                
                11,619,010
                
                
                
                11,805,686
                
                
                
                11,171,608**Weighted
                    average number of shares-Diluted**
                
                
                12,027,315
                
                
                
                11,619,010
                
                
                
                11,858,870
                
                
                
                11,171,608
 
 
 The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.
  4
 
 **PACIFICNET
        INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 (Unaudited.
        In thousands of United States dollars, except earnings per share and share
        amounts)
 **For
                    the Nine Month Periods Ended September 30,****2005**
                  **(Unaudited)**
                
                
                **2006**
                  **(Unaudited)**
                  **(Restated)****Cash
                    Flows from operating activities**Net
                    income (loss)
                
                $
                (639
                )
                
                $
                604*Adjustment
                    to reconcile net income/(loss) to net cash provided by (used
                    in) operating
                    activities:*Equity
                    earnings of associated companies
                
                
                23
                
                
                
                (129
                )Provision
                    for allowance for doubtful accounts
                
                
                1,391
                
                
                
                310Minority
                    Interest
                
                
                1,004
                
                
                
                527Depreciation
                    and amortization
                
                
                595
                
                
                
                303Stock-based
                    compensation
                
                
                -
                
                
                
                120Change
                    in fair value of derivatives
                
                
                (143
                )
                
                
                (1,212
                )Amortization
                    of interest discount
                
                
                -
                
                
                
                307Liquidated
                    damages expense
                
                
                -
                
                
                
                800*Changes
                    in current assets and liabilities net of effects from purchase
                    of
                    subsidiaries:*Accounts
                    receivable and other current assets **
                
                
                (5,794
                )
                
                
                (2,753
                )Inventories
                
                
                (352
                )
                
                
                (119
                )Accounts
                    payable and other accrued expenses
                
                
                945
                
                
                
                (1,528
                )Loans
                    receivable from third parties
                
                
                (2,132
                )
                
                
                (1,091
                )***Net
                    cash used in operating activities of continued
                    operations***
                
                
                (5,102
                )
                
                
                (3,861
                )***Net
                    cash used in operating activities of discontinued
                    operations***
                
                
                6,712
                
                
                
                (8,283
                )***Net
                    cash provided by (used in) operating
                    activities***
                
                ****
                **1,610**
                
                
                ****
                **(12,144**
                **)**Cash
                    flows from investing activities(Increase)
                    / Decrease in restricted cash
                
                
                (5
                )
                
                
                2Increase
                    in purchase of marketable securities
                
                
                (501
                )
                
                
                13Acquisition
                    of property and equipment
                
                
                (828
                )
                
                
                (1,713
                )Acquisition
                    of subsidiaries and affiliated companies
                
                
                -
                
                
                
                (419
                )***Net
                    cash used in investing activities of continued
                    operations***
                
                
                (1,334
                )
                
                
                (2,117
                )***Net
                    cash used in investing activities of discontinued
                    operations***
                
                
                925
                
                
                
                -***Net
                    cash used in investing activities***
                
                
                (409
                )
                
                
                (2,117
                )**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Loan
                    payable to related party
                
                
                43
                
                
                
                (265
                )Loans
                    receivable from related party
                
                
                (521
                )
                
                
                (889
                )Advances
                    (repayments) under bank line of credit
                
                
                (674
                )
                
                
                22Advances
                    (repayments) of bank loans
                
                
                608
                
                
                
                1,152Increase
                    (repayments) of amount borrowed under capital lease
                    obligations
                
                
                (92
                )
                
                
                77Sale
                    (Repurchase) of treasury shares
                
                
                127
                
                
                
                (124
                )Proceeds
                    from exercise of stock options and warrants
                
                
                96
                
                
                
                174Repayment
                    of convertible debenture
                
                
                (3,672
                )
                
                
                -Net
                    proceeds from issuance of convertible debenture
                
                
                5,853
                
                
                
                7,500***Net
                    cash provided by financing activities of continued
                    operations***
                
                
                1,768
                
                
                
                7,647***Net
                    cash provided by financing activities of discontinued
                    operations***
                
                
                -
                
                
                
                -***Net
                    cash provided by financing activities***
                
                
                1,768
                
                
                
                7,647**Effect
                    of exchange rate change on cash and cash
                    equivalents**
                
                
                20
                
                
                
                282**NET
                    INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**
                
                
                2,989
                
                
                
                (6,332
                )**CASH
                    AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD**
                
                
                1,900
                
                
                
                9,579**CASH
                    AND CASH EQUIVALENTS, END OF THE PERIOD**
                
                $
                4,889
                
                
                $
                3,247CASH
                    PAID FOR:Interest
                
                $
                385
                
                
                $
                744Income
                    taxes
                
                $
                -
                
                
                $
                502**NON-CASH
                    INVESTING AND FINANCING ACTIVITIES:**Fixed
                    assets acquired under banking loan
                
                $
                -
                
                
                $
                1,082Options
                    exercised for shares receivable
                
                $
                484
                
                
                $
                434Investments
                    in subsidiaries acquired through the issuance of common
                    stock
                
                $
                -
                
                
                $
                3,578Redemption
                    of convertible debenture
                
                $
                1,091
                
                
                $
                -
  
 
 The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.
  5
 
 **PACIFICNET
        INC. AND SUBSIDIARIES**
 **NOTES
        TO 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 items in the accompanied consolidated financial
        statements have been re-classed for comparative purposes.
  ***Going
        Concern***
  As
        shown
        in the accompanying consolidated financial statements, the Company incurred
        accumulated losses of $52 million and $51.1 million as of September 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.
  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).
  6
  **2.
        RECENT ACCOUNTING 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 third quarter 2007 financial
        statements.
  The
        new
        Statement allows entities to choose, at specified election dates, to measure
        eligible financial assets and liabilities at fair value that are not otherwise
        required to be measured at fair value. If a company elects the fair value
        option
        for an eligible item, changes in that item's fair value in subsequent reporting
        periods must be recognized in current earnings. FAS 159 also establishes
        presentation and disclosure requirements designed to draw comparison between
        entities that elect different measurement attributes for similar assets and
        liabilities. The management is currently evaluating the effect of this
        pronouncement on financial statements.
  In
        September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
        Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87,
        88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
        employer to recognize the over funded or underfunded status of a defined
        benefit
        postretirement plan (other than a multiemployer plan) as an asset or liability
        in its statement of financial position and to recognize changes in that funded
        status in the year in which the changes occur through comprehensive income
        of a
        business entity or changes in unrestricted net assets of a not-for-profit
        organization. The requirement to measure plan assets and benefit obligations
        as
        of the date of the employer’s fiscal year-end statement of financial position is
        effective for fiscal years ending after December 15, 2008. The Company currently
        does not have any defined benefit plan and so FAS 158 will not affect the
        financial statements.
  In
        September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles (GAAP), and expands disclosures
        about
        fair value measurements. This Statement applies under other accounting
        pronouncements that require or permit fair value measurements, the Board
        having
        previously concluded in those accounting pronouncements that fair value is
        the
        relevant measurement attribute. Accordingly, this Statement does not require
        any
        new fair value measurements. However, for some entities, the application
        of this
        Statement will change current practice. This Statement is effective for
        financial statements issued for fiscal years beginning after November 15,
        2007,
        and interim periods within those fiscal years. The management is currently
        evaluating the effect of this pronouncement on financial
        statements.
  **3.
        EARNINGS PER SHARE**
  Basic
        and
        diluted earnings or loss per share (EPS) amounts in the financial statements
        are
        computed in accordance with SFAS No. 128, "Earnings Per Share." Basic EPS
        is
        based on the weighted average number of common shares outstanding. Diluted
        EPS
        is based on the weighted average number of common shares outstanding plus
        dilutive common stock equivalents. Basic EPS is computed by dividing net
        income/loss available to common stockholders (numerator) by the weighted
        average
        number of common shares outstanding (denominator) during the period Diluted
        EPS
        is calculated by dividing net earnings by the weighted average number of
        common
        shares outstanding and other dilutive securities. Dilutive earnings per share
        for the period ended September 30, 2007 exclude the potential dilutive effect
        of
        889,456 warrants because their impact would be anti-dilutive based on current
        market prices. 472,728 convertible debentures are tested by using if-converted
        method. The result shows when convertible debentures are included in the
        computation, diluted EPS increases. According to SFAS No.128, those convertible
        debentures are ignored in the computation of diluted EPS. All per share and
        per
        share information are adjusted retroactively to reflect stock splits and
        changes
        in par value.
  The
        reconciliation of the numerators and denominators of the basic and diluted
        EPS
        calculations was as follows:
  **Three
                    Months Ended**
                  **September
                    30**
                
                
                **Nine
                    Months Ended**
                  **September
                    30****(IN
                    THOUSANDS OF UNITED STATES DOLLARS, EXCEPT WEIGHTED SHARES AND
                    PER SHARE
                    AMOUNTS)**
                
                **2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006**Numerator:
                    Net Income (Loss)
                
                $
                (220
                )
                
                $
                (1,115
                )
                
                $
                (639
                )
                
                $
                604Denominator:Weighted-average
                    shares used to compute basic EPS
                
                
                11,931,094
                
                
                
                11,619,010
                
                
                
                11,805,686
                
                
                
                11,171,608Weighted-average
                    shares used to compute diluted EPS
                
                
                12,027,315
                
                
                
                11,619,010
                
                
                
                11,858,870
                
                
                
                11,171,608Basic
                    earnings (loss) per common share:
                
                $
                (0.02
                )
                
                $
                (0.09
                )
                
                $
                (0.06
                )
                
                $
                0.02Diluted
                    earnings (loss) per common share:
                
                $
                (0.02
                )
                
                $
                (0.09
                )
                
                $
                (0.06
                )
                
                $
                0.02
   7
  **4.
        OTHER CURRENT ASSETS**
  Other
        current assets consist of the following at September 30, 2007 (in
        thousands):
  **Other
                  current assets**
              
              **September
                  30, 2007**
              
              
              **December
                  31, 2006****Unaudited**
              
              
              **Audited**
                **Restated**Prepayment
              
              $
              832
              
              
              $
              1,048Utilities
                  deposit
              
              
              396
              
              
              
              1,292Receivable
                  from Lion Zone Holdings Ltd & HeySpace (1)
              
              
              5,260
              
              
              
              485Prepaid
                  expenses
              
              
              171
              
              
              
              408Total
              
              $
              6,659
              
              
              $
              3,233
  (1) 
        As of September 30, 2007 receivable from Lion Zone is $132,000 and From HeySpace
        is $5,128,000
  **5.
        GOODWILL AND BUSINESS ACQUISITIONS**
  The
        changes in the carrying amount of goodwill for the following reporting periods
        are summarized below:
 Group
                    1.
                
                
                Group
                    2.
                
                
                Group
                    3.(US$000s)
                
                Outsourcing
                  Services
                
                
                Telecom
                  Value-Added
                  Services
                
                
                Products
                  (Gaming
                    and
                  Technology)
                
                
                Total
                  (Unaudited)Balance
                    as of December 31, 2006
                
                $3,964
                
                
                $461
                
                
                $1,176
                
                
                $5,601Goodwill
                    acquired during the first quarter
                
                
                -
                
                
                
                -
                
                
                
                657
                
                
                
                657Balance
                    as of September 30, 2007
                
                $3,964
                
                
                $461
                
                
                $1,833
                
                
                $6,258
 
 The
        Company acquired additional 31% interest in Take 1 Technology Ltd on January
        5,
        2007 and recorded additional goodwill amounting to $657,000. Prior to
        acquisition of additional interest, the Company owned 20% interest in Take
        1
        Technology Ltd (See note 13).
 
 **6.
        ACCRUED EXPENSES & OTHER PAYABLES**
  Accrued
        expenses and other payables comprises of the following as of September 30,
        2007
        and December 31, 2006.
 (in
                    thousands of US Dollars):
                
                2007
                  Unaudited
                
                
                2006
                  Audited
                  RestatedProfessional
                    fee
                
                $
                1,534
                
                
                $
                321Director
                    fee
                
                
                233
                
                
                
                100Salaries
                    and benefit payable
                
                
                281
                
                
                
                792Marketing
                    expense
                
                
                838
                
                
                
                389Income
                    tax payable
                
                
                7
                
                
                
                -Others
                
                
                57
                
                
                
                226Total
                
                $
                2,950
                
                
                $
                1,828
  8
  **7.
        STOCKHOLDERS' EQUITY**
  a)
        COMMON
        STOCK
  For
        the
        nine months period ended September 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; (iii)
        202,000 shares as a results of exercise of stock options with cash consideration
        of $406,000.  As of September 30, 2007, the Company received $196,000 from
        exercise of stock options.
  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 nine months ended September
        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 September 30, 2007, is as
        follows:
  OPTIONS
                  OUTSTANDING
                
                
                WEIGHTED
                  AVERAGE
                  EXERCISE
                  PRICE**OUTSTANDING,
                    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
                
                
                $
                2.00Granted
                
                
                788,000
                
                
                $
                4.31Cancelled
                
                
                168,500
                
                
                $
                2.00Expired
                    without exercising
                
                
                68,500
                
                
                $
                2.00Exercised
                
                202,000
                
                
                $2.00**OUTSTANDING,
                    SEPTEMBER 30, 2007**
                
                **788,000**
                
                
                **$4.31**
  9
  Following
        is a summary of the status of options outstanding at September 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
                  Price2007-8-13
              788,000
              $441,280
              5.86
              $4.31
              -
              $4.31
  The
        788,000 outstanding options, which were granted on August 11, 2007, will
        be
        vested from August 8, 2008 with a 5% per quarter vesting schedule, and the
        corresponding compensation costs will be recorded within the vesting period.
        The
        weighted-average fair value of such options was $2.75.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
              4.51%Expected
                  life of the options
              5.86
                  yearsExpected
                  volatility
              67.44%Expected
                  dividend yield
              0%
  788,000
        options were granted and 202,000 were exercised during the nine month period
        ended September 30, 2007. No options were vested during the nine month period
        ended September 30, 2007.
  c)
        WARRANTS
  At
        September 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 2.59 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
                
                
                $
                -Granted
                
                ****
                **-**
                
                
                ****
                **-**Forfeited
                
                ****
                **-**
                
                
                ****
                **-**Exercised
                
                ****
                **-**
                
                
                ****
                **-**OUTSTANDING,
                    SEPTEMBER 30, 2007
                
                ****
                **1,007,138**
                
                
                $
                10.61
                
                
                $
                -
  10
 
 Following
        is a summary of the status of
        warrants outstanding at September 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
              1.29
              $7.15
              123,456
              $7.152004-11-15
              117,682
              2.13
              $3.89
              117,682
              $3.892004-12-9
              350,000
              2.19
              $12.21
              350,000
              $12.212006-3-13
              416,000
              3.45
              $12.20
              416,000
              $12.20
  On
        March
        13, 2006, we issued 400,000 warrants to several institutional investors in
        connection with a private placement of $8 million in convertible debentures.
        On
        the same day we issued another 16,000 warrants to our placement agent for
        the
        transaction. Those warrants have a term of 5 years and immediately vesting.
        The
        assumptions used in calculating the fair value of such warrants granted using
        the Black-Scholes option- pricing model are as follows:
  Risk-free
                  interest rate
              4.78%Expected
                  life of the options
              5.00
                  yearsExpected
                  volatility
              37.08%Expected
                  dividend yield
              0%
  No
        warrants were granted, cancelled and exercised during the nine months period
        ended September 30, 2007.
  d)
        TREASURY STOCK
  The
        following is a summary of the movement of the Company's shares held as treasury
        stock for the quarterly ended September 30 of 2007:
 
 Number
                  of shares
              
              MarkEscrow
                  shares returned to treasury on
              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
              529,848
              
              (1)Termination
                  with ChinaGoHi
              825,000Incomplete
                  acquisition of Allink
              200,000Repurchase
                  of shares from Yueshen
              24,200Shares
                  sold to the open market
              (41,426)Balance,
                  September 30, 2007
              2,572,969Shares
                  outstanding at September 30, 2007
              11,984,072Shares
                  issued at September 30, 2007
              14,557,041
 
 (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.
  11
  **8.
        CONVERTIBLE DEBENTURES**
  **8.1
        Eight Million Convertible Debentures**
  On
        March
        13, 2006, we completed a private placement in which we sold $8,000,000 in
        convertible debentures and issued warrants to purchase up to an aggregate
        of
        400,000 shares of common stock. The debentures are convertible at any time
        into
        shares of our common stock at an initial fixed conversion price of $10.00
        per
        share, subject to adjustments for certain dilutive events. The debentures
        are
        due March 13, 2009. The warrants are exercisable for a period of five years
        at
        an exercise price of $12.20 per share. At the closing of the private placement,
        we prepaid the first year's interest on debentures equal to 5% of the aggregate
        principal amount of debentures. We will pay interest in cash or shares, provided
        that certain conditions are met, at the rate of 6% for the second year the
        debentures are outstanding and then 7% for the third. Beginning January 1,
        2007,
        we are obligated to redeem up to $320,000 every month, plus accrued, but
        unpaid
        interest, liquidated damages and penalties. We also have the option to prepay
        the debentures at any time, provided that certain conditions have been met,
        after the 12 month anniversary of the effective date of the registration
        statement that has been filed with the Securities and Exchange Commission
        with
        respect to the common stock issuable upon conversion of the debentures, some
        or
        all of the outstanding debentures for cash in an amount equal to 120% of
        the
        principal amount outstanding, plus accrued, but unpaid interest, liquidated
        damages and penalties outstanding. At any time after the nine months anniversary
        of the effective date of the registration statement, we may force the holders
        to
        convert up to 50% of the then outstanding principal amount of the debentures,
        subject to certain trading conditions being met. If any event of default
        occurs
        under the debentures or other related documents, the holders may elect to
        accelerate the payment of the outstanding principal amount of the debenture,
        plus accrued, but unpaid interest, liquidated damages and penalties, which
        shall
        become immediately due and payable.
  Under
        the
        terms of a registration rights agreement entered into at the time of the
        private
        placement, the Company was obligated to file a registration statement with
        respect to the shares issuable under the debenture and the warrants by April
        30,
        2006, and have the registration statement declared effective by the SEC no
        later
        than June 28, 2006. Due to various factors, the Company did not file the
        registration statement until May 15, 2006, and it was not declared effective
        until December 8, 2006. Therefore, under the terms of the registration rights
        agreement, the Company was obligated to pay liquidated damages to
        the investors at the rate of 2% of the principal amount of the debenture
        each month beginning on June 28, 2006 until the effectiveness of the
        registration statement, which was equal to $1,120,000, in the
        aggregate.
  In
        February 2007, upon reaching an agreement on the amount and payment of accrued
        liquidated damages, the Company signed a Settlement and Release Agreement
        with
        each of the investors. Under the terms of the Settlement and Release Agreements,
        the Company paid an aggregate $140,000 in cash as satisfaction in full of
        liquidated damages owed to Basso Fund Ltd., Basso Multi-Strategy Holding
        Fund
        Ltd., and Basso Private Opportunities Holding Fund Ltd. Partial liquidated
        damages owed to Whalehaven Capital Fund Ltd. were paid in the amount of $35,000
        in cash, with the remaining liquidated damages in the amount of $105,000
        paid in
        the form of a new convertible debenture due February 2009, on substantially
        the
        same terms as the original debentures, except that interest only is paid
        on the
        new debentures until October 2008 and beginning in November 2008 until February
        2009, when the new debentures are due, the monthly redemption amount under
        the
        new debentures shall be equal to $315,000. The remaining investors also agreed
        to accept the aggregate $840,000 in liquidated damages owed to them in the
        form
        of the new convertible debentures for the amount of their respective portion
        of
        the liquidated damages. The Company also agreed to amend the original debentures
        to shorten the term for payment of the original principal amount to a 22
        month
        term. As a result the monthly redemption amount for the original debenture
        increased from $320,000 to $ 363,638. All other terms and conditions of the
        original debenture remain in full force and effect. The outstanding original
        principal amount as at September 30, 2007 is $6,217,718.
  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 $61,954 and $142,718 representing the change in fair value of warrants
        recognized during the three and nine months ended September 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.
  12
  EVENT
        OF
        DEFAULT
  On
        March
        16, 2007 our predecessor auditor withdrew their opinion on our previously
        filed
        financial statements for the years ended December 31, 2005, December 31,
        2004
        and December 31, 2003. As a result, on March 27, 2007, we notified the holders
        of the outstanding convertible debenture that we suspended use of the prospectus
        contained in our Registration Statement on Form S-1 (File No. 333-134127)
        that
        was declared effective on December 8, 2006, due to the lack of fiscal year
        end
        2005 and 2004 audited financial statements and that they must cease selling
        under the prospectus. The suspension of the use of the prospectus after April
        17, 2007, triggered an event of default under the registration rights agreement
        and the convertible debentures, and if any of the holders so elect, they
        could
        accelerate and demand payment under the debentures, in accordance with the
        registration rights agreement based on the following provisions.
  a)
              "If,
                  during the Effectiveness Period, either the effectiveness of the
                  Registration Statement lapses for any reason or the Holder shall
                  not be
                  permitted to resell Registrable Securities under the Registration
                  Statement for a period of more than 20 consecutive Trading Days
                  or 60
                  non-consecutive Trading Days during any 12 month period, the Company
                  has
                  to pay ‘Mandatory Default Amount’ as the sum of (i) the greater of (A)
                  130% of the outstanding principal amount of this Debenture, plus
                  all
                  accrued and unpaid interest hereon, or (B) the outstanding principal
                  amount of this Debenture, plus all accrued and unpaid interest
                  hereon,
                  divided by the Conversion Price on the date the Mandatory Default
                  Amount
                  is either (a) demanded (if demand or notice is required to create
                  an Event
                  of Default) or otherwise due or (b) paid in full, whichever has
                  a lower
                  Conversion Price, multiplied by the VWAP on the date the Mandatory
                  Default
                  Amount is either (x) demanded or otherwise due or (y) paid in full,
                  whichever has a higher VWAP, and (ii) all other amounts, costs,
                  expenses
                  and liquidated damages due in respect of this
                  Debenture."
  b)
              "If
                  any Event of Default occurs, the outstanding principal amount of
                  this
                  Debenture plus accrued but unpaid interest, liquidated damages
                  and other
                  amounts owing in respect thereof through the date of acceleration,
                  shall
                  become, at the Holder’s selection, immediately due and payable in cash at
                  the Mandatory Default Amount. Commencing 5 days after the occurrence
                  of
                  any Event of Default that results in the eventual acceleration
                  of this
                  Debenture, the interest rate on this Debenture shall accrue at
                  an interest
                  rate equal to the lesser of 18% per annum or the maximum rate permitted
                  under applicable law."
  Due
        to
        the provisions mentioned above and as per the terms of the Debenture, the
        Company has reclassified the principal amount of the Debenture of $8,000,000
        and
        the principal amount of the new Debenture of $945,000 and the interest accrued
        thereon to current liabilities.
  The
        Company accrued 2% as liquidated damages and 30% as mandatory default amount
        from the date of ineffectiveness of registration statement as
        follows:
  ($,000)
              
              September
                  30, 2007
                (unaudited)Liquidated
                  damages
              
              
              2%
              
              $
              450Mandatory
                  default
              
              
              30%
              
              
              2,247Total
              
              
              
              
              $
              2,697
  Such
        amounts have been recorded as liquidated damages liability as of September
        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
              
              
              1,636
              
              
              
              -
              
              
              
              1,636Balance
                  September 30, 2007
              
              $
              5,273
              
              
              $
              945
              
              
              $
              6,218
  The
        Company issued 199,444 shares to redeem $1,090,909 of convertible note as
        of
        September 30, 2007.
  8**.2
        Five Million Convertible Note**
  On
        February 7, 2007, PacificNet Games Limited (PacGames), a 51% owned subsidiary
        of
        the Company, entered into a definitive $5 million convertible secured note
        financing agreement with Pope Asset Management, LLC (Pope), an institutional
        investor. Proceeds of the financing are to provide PacGames with additional
        working capital to expand its gaming technology operations, to make further
        synergistic acquisitions in China and for general corporate
        purposes.
  13
  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.
  In
        connection with the issuance of the note, PacGames incurred issuance costs
        of
        $204,121, which primarily consisted of investment banker fees, legal and
        other
        professional fees. These costs have been capitalized and will be amortized
        over
        three years, the life of the note. Interest accrual as of September 30, 2007
        amounted to $212,603.
  Following
        is the summary of convertible debenture:
  ($,000)/(unaudited)Convertible
                  debenture
              
              $
              5000Accrued
                  interest
              
              
              218Unamortized
                  financing cost
              
              
              (310
              )Balance
                  September 30, 2007
              
              $
              4,908
  **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 AD, 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, Poly, 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.
 
 Group
                    1.
                Group
                    2.
                Group
                    3.
                Group
                    4.
                TotalFor
                    The Three Months Ended
                  September
                    30, 2007
                Outsourcing
                  Services
                Telecom
                  Value-Added
                  Services
                Products
                  (Telecom
                    & Gaming)
                Other
                  Business
                (unaudited)($)
                ($)
                ($)
                ($)
                ($)Net
                    Revenues
                3,971
                470
                5,305
                56
                9,802(%
                    of Total Revenues)
                41%
                5%
                54%
                1%
                100%Income
                    / (Loss) from Operations
                189
                444
                201
                (697)
                137(%
                    of Total Income)
                138%
                324%
                147%
                (509)%
                100%Total
                    Assets
                8,090
                9,029
                19,178
                6,667
                42,963(%
                    of Total Assets)
                19%
                21%
                45%
                16%
                100%Goodwill
                3,964
                461
                1,833
                -
                6,258Geographic
                    Area
                HK,
                    PRC
                PRC
                Macau,
                    HK, PRC
                HK,
                    PRC, USA
   14
  Group
                    1.
                Group
                    2.
                Group
                    3.
                Group
                    4.
                TotalFor
                    The Three Months Ended
                  September
                    30, 2006
                Outsourcing
                  Services
                Telecom
                    Value-
                  Added
                    Services
                Products
                  (Telecom
                    & Gaming)
                Other
                    Business
                (unaudited)($)
                ($)
                ($)
                ($)
                ($)Net
                    Revenues
                3,733
                40
                6,411
                341
                10,525(%
                    of Total Revenues)
                35%
                
                61%
                3%
                100%Income
                    / (Loss) from Operations
                188
                1
                (191)
                (616)
                (618)(%
                    of Total Income)
                (30)%
                1%
                31%
                100%
                100%Total
                    Assets
                9,159
                19,011
                12,813
                22,954
                63,937(%
                    of Total Assets)
                14%
                30%
                20%
                36%
                100%Goodwill
                3,936
                12,920
                1,529
                
                18,385Geographic
                    Area
                HK,
                    PRC
                PRC
                Macau,
                    HK, PRC
                HK,
                    PRC, USA
   Group
                    1.
                Group
                    2.
                Group
                    3.
                Group
                    4.
                TotalFor
                    The Nine Months Ended
                  September
                    30, 2007
                Outsourcing
                  Services
                Telecom
                    Value-
                  Added
                    Services
                Products
                  (Telecom
                    & Gaming)
                Other
                    Business
                (unaudited)($)
                ($)
                ($)
                ($)
                ($)Net
                    Revenues
                11,700
                1,429
                14,729
                232
                28,090(%
                    of Total Revenues)
                42%
                5%
                52%
                1%
                100%Income
                    / (Loss) from Operations
                830
                793
                1,824
                (2,163)
                1,284(%
                    of Total Income)
                65%
                62%
                142%
                (168)%
                100%Total
                    Assets
                8,090
                9,029
                19,178
                6,667
                42,963(%
                    of Total Assets)
                19%
                21%
                45%
                16%
                100%Goodwill
                3,964
                461
                1,833
                -
                6,258Geographic
                    Area
                HK,
                    PRC
                PRC
                Macau,
                    HK, PRC
                HK,
                    PRC, USA
  Group
                    1.
                Group
                    2.
                Group
                    3.
                Group
                    4.
                TotalFor
                    The Nine Months Ended
                  September
                    30, 2006
                Outsourcing
                  Services
                Telecom
                    Value-
                  Added
                    Services
                Products
                  (Telecom
                    & Gaming)
                Other
                    Business
                (unaudited)($)
                ($)
                ($)
                ($)
                ($)Net
                    Revenues
                10,312
                106
                18,262
                3,652
                32,332(%
                    of Total Revenues)
                32%
                
                56%
                11%
                100%Income
                    / (Loss) from Operations
                734
                4
                98
                (584)
                252(%
                    of Total Income)
                291%
                2%
                39%
                (232%)
                100%Total
                    Assets
                9,159
                19,011
                12,813
                22,954
                63,937(%
                    of Total Assets)
                14%
                30%
                20%
                36%
                100%Goodwill
                3,936
                12,920
                1,529
                
                18,385Geographic
                    Area
                HK,
                    PRC
                PRC
                Macau,
                    HK, PRC
                HK,
                    PRC, USA
 
 Product
        and service revenues classified by major geographic areas are as follows
        (in
        US$):
 For
                    the three months ended September 30, 2007
                Hong
                    Kong, Macau
                PRC
                United
                    States
                Total
                    (unaudited)Product
                    revenues
                2,731
                2,574
                --
                5,305Service
                    revenues
                3,609
                888
                --
                4,497
 
 For
                    the three months ended September 30, 2006
                Hong
                    Kong, Macau
                PRC
                United
                    States
                Total
                    (unaudited)Product
                    revenues
                3,435
                503
                --
                3,938Service
                    revenues
                5,261
                1,326
                --
                6,587
 
 For
                    the nine months ended September 30, 2007
                Hong
                    Kong, Macau
                PRC
                United
                    States
                Total
                    (unaudited)Product
                    revenues
                9,221
                5,508
                --
                14,729Service
                    revenues
                10,471
                2,890
                --
                13,361
 
 For
                    the nine months ended September 30, 2006
                Hong
                    Kong, Macau
                PRC
                United
                    States
                Total
                    (unaudited)Product
                    revenues
                17,355
                3,557
                --
                20,912Service
                    revenues
                9,970
                1,450
                --
                11,420
 15
  **10.
        RELATED PARTY TRANSACTIONS**
  LOAN
        DUE FROM RELATED PARTIES
  At
        September 30, 2007, there was a total loan receivable of approximately
        $2,227,000 due from related parties. Included in which were $845,000 due
        from
        PACT Power, $150,000 due from PACT Solutions, $604,000 due from PACT Linkhead
        and $628,000 due 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
        $449,000 due from a shareholder of Yueshen, $64,000 due from a director of
        Smartime and $115,000 from a director of PACT Communications. Terms of these
        related parties loan receivables and payables are summarized below:
  LOAN
        TO POWER
  PacPower
        is an affiliated company, 15% owned by PacificNet, as of September 30, 2007.
        A
        convertible loan of $845,000 is outstanding from PacPower. The maturity date
        of
        loan was September 9, 2007. The loan is currently due on demand, non-interest
        bearing and unsecured.
  LOAN
        TO SOLUTION
  PacSo
        is
        an affiliated company, 15% owned by PacificNet, as of September 30, 2007.
        A
        convertible loan of $150,000 is outstanding from PacSo. The maturity date
        of
        loan was January 6,2007.
        The loan
        is currently due on demand, non-interest bearing and unsecured.
  LOAN
        TO LINKHEAD
  Linkhead
        is an affiliated company, 15% owned by PacificNet, as of September 30, 2007.
        A
        convertible loan of $604,000 is outstanding from Linkhead. The maturity date
        of
        loan is January 1, 2008.
  LOAN
        TO YUESHEN’S SHAREHOLDER
  As
        of
        September 30, 2007, there was a loan outstanding of $449,000 receivable from
        the
        shareholder of Yueshen. This loan is secured by 106,240 PacificNet shares.
        The
        maturity date of loan was February 16,2006.
        The loan
        is currently due on demand and non-interest bearing.
  LOAN
        TO SOLUTECK’S DIRECTOR
  As
        of
        September 30, 2007, there was a loan outstanding of $64,000 receivable from
        a
        director of Soluteck, due on January 17 for three consecutive years ending
        2008.
        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
        September 30, 2007, there was a loan outstanding of $115,000 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. The loan is currently in
        default.
  LOAN
        DUE TO RELATED PARTIES
  As
        of
        September 30, 2007, there was an outstanding loan payable of $681,000 due
        to related parties. Included in which was a loan payable of $187,000 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
        September 30, 2007, a loan of $201,000 was payable to a shareholder of Yueshen.
        The loan was advanced to Yueshen by a shareholder of Yueshen on behalf of
        the
        Company for working capital purposes.
  MOABC
        is
        an affiliated company, 15% owned by PacificNet. As of September 30, 2007,
        there
        was an outstanding balance of $293,000 due to MOABC. The loan is unsecured,
        non-interest bearing and due on demand.
  16
  **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 Q3 amounted to $562,000 (2006
        Q3:
        $332,000). Future minimum lease payments under non-cancelable operating leases
        are $603,000 for the period from October 2007 to September 2008, and $155,000
        for the period from October 2008 to September 2011, respectively.
  RESTRICTED
        CASH - Term deposit of $239,000 has been pledged to certain financial
        institutions for bank line overdraft protection of Epro.
  BANK
        LINE
        OF CREDIT - As of September 30, 2007, the Company’s outstanding bank line of
        credit were as follows:
  (i)
              Epro
                  has an overdraft banking facility of up to $50,000 with certain
                  banking
                  institutions, which is secured by a pledge of its fixed deposits
                  of
                  $239,000. 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 $131,000 with a Hong
                  Kong
                  banking institution. This overdraft facility is secured by a personal
                  deposit account of a director of
                  Smartime.
  BANK
        LOANS*-*Bank loans represent the following at September 30,
        2007:
  **September
                    30,**
                  **2007**
                  **Unaudited**
                
                
                **December
                    31,**
                  **2006**
                  **Audited**
                  **Restated**Secured
                    [1]
                
                $
                757
                
                
                $
                1,668Unsecured
                
                
                2,062
                
                
                
                543Less:
                    current portion
                
                
                768
                
                
                
                576Non
                    current portion
                
                $
                2,051
                
                
                $
                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; third legal charge over
        a
        property owned by a subsidiary of the Company; and pledged bank deposits
        of
        $239,000 (2006: $234,000) of a subsidiary of the Company.
  Aggregate
        future maturities of borrowing for the next five years are as
        follows:
  (US$000s)
              October
                  2007 to September 2008
              
              October
                  2008 to September 2009
              
              October
                  2009 to September 2010
              
              October
                  2010 to September 2011
              
              October
                  2011 to September 2012
              
              Thereafter
              
              TOTAL
                (unaudited)Beijing
                  PACT office mortgage (1)
              54
              
              57
              
              60
              
              64
              
              67
              
              746
              
              1,048Shenzhen
                  PACT office mortgage (2)
              23
              
              25
              
              26
              
              28
              
              29
              
              635
              
              766Sub-total
              77
              
              82
              
              86
              
              92
              
              96
              
              1,381
              
              1,814Bank
                      loan of Epro (3)
              443
              
              298
              
              16
              
              -
              
              -
              
              -
              
              757AR
                  factoring loans (3)
              248
              
              -
              
              -
              
              -
              
              -
              
              -
              
              248Sub-total
              691
              
              298
              
              16
              
              -
              
              -
              
              -
              
              1,005TOTAL
              768
              
              380
              
              102
              
              92
              
              96
              
              1,381
              
              2,819
  (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%.
  17
  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 two years are as follows: 2008: $90,000, 2009: $62,000,
        and
        thereafter: none.
  Aggregate
                future
                lease
                payments
                (unaudited)2008
              
              $
              90,0002009
              
              $
              62,000Total
              
              $
              152,000Current
                  portion
              
              $
              90,000Non-current
                  portion
              
              $
              62,000
  **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, thedisposal 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, thedisposal 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, thedisposal
        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, thedisposal 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.
  **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)
  18
  **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$5.5 million consideration which was paid partially in
        cash
        and mostly in PACT stock. The Company’s interest in Guangzhou 3G decreased from
        51% to 0% after the transaction. Absent any explicit closing conditions
        contained in the said agreement, thedisposal was completed
        upon title
        transfer during the second quarter of 2007.
  Information
        relating to the operations of the subsidiaries up to the periods of disposal
        during the nine month period ended September 30, 2007 is as
        follows:
  (In
                  US$ thousands)
              Linkhead
              Clickcom
              Power
              PacTelso
              Solutions
              MOABC
              3G
              Total
                  (unaudited)Income
                  (loss) from discontinued operations
              (8)
              (3)
              -
              -
              -
              -
              262
              250Gain
                  (loss) from discontinued operations
              (300)
              -
              340
              1
              (0)
              5
              (971)
              (925)Net
                  assets held for disposition (remaining interest)
              
              810
              -
              -
              -
              -
              -
              810
 
 
 **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.
 
 Summarized
        below were the assets acquired and liabilities assumed for Take 1 in the
        acquisition:
 
 Estimated
                  fair values/(unaudited):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
        September 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 until the audited combined
        after-tax loss of US$640,000 for the nine months ended September 30, 2007
        is
        available. Accordingly, the contingent consideration of 120,000 shares has
        not
        been reflected in the consolidated financial statements of the Company as
        of
        September 30, 2007.
  19
 
 **UNAUDITED
        PRO FORMA CONSOLIDATED FINANCIAL INFORMATION DISCLOSURE FOR THE QUARTER ENDED
        September 30, 2007 AND 2006**
  The
        following is an un-audited pro forma consolidated financial information for
        the
        nine month ended September 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.
  (un-audited and in thousands of U.S. dollars)
              
              Nine
                  months ended September 302007
              
              
              2006Revenue
              
              
              28,090
              
              
              
              33,568Operating
                  income
              
              
              1,284
              
              
              
              (1,260
              )Net
                  profit
              
              $
              (639
              )
              
              $
              503Earnings
                  per share – basic
              
              $
              (0.05
              )
              
              $
              0.05Earnings
                  per share – diluted
              
              $
              (0.05
              )
              
              $
              0.05
 
 Accordingly,
        PacificNet included the financial results of Take 1 in its consolidated 2007
        financial results from January 5, 2007 through September 30, 2007.
  **14.
        INVESTMENTS IN AFFILIATED COMPANIES**
  Investments
        in affiliated companies are consisted of the following as of September 30,
        2007:
  (US$
                  thousands)/(unaudited)
              COLLATERAL/OWNERSHIP
                  % AND BUSINESS DESCRIPTIONINVESTMENTS  IN
                  AFFILIATED COMPANIES:
              AMOUNT
              DESCRIPTIONGlad
                  Smart
              $30
              15%
                  ownership interestMOABC
              $(14)
              15%
                  ownership interestCommunity
                  Media Co.
              $4
              5%
                  ownership interestSolutions
              –
              15%
                  ownership interest (1)Linkhead
              $333
              15%
                  ownership interestPower
              –
              15%
                  ownership interest (1)Total
              $353
  (1) 
        Amounts less than one thousand dollars are excluded.
  **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.  Further, JCHKL was to pay penalties between
        HK$100,000 and HK$200,000 assessed by the JCHKL for failing to fix the noise
        problem on the roof of Fortress Tower.
  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 7, 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 employer and the potential tenants of Fortress
        Tower.
  The
        case
        is now 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.
  20
  **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 Construction
        and Replacement Works Contract”). JCHKL invited and induced PacificNet Power
        Limited to act as the main contractor for the Contract and it would then
        act as
        a sub-contractor.
  PacificNet
        Power also expressly made known to JCHKL that the said construction and
        replacement works and the guaranteed energy saving should meet all the tender
        requirements if PacificNet Power accepted the invitation to act as the main
        contractor for the Contract, and PacificNet Power further said that if there
        should be any quality defects with the system and/ or the construction work,
        the
        Employer and/ or their prospective tenants would claim against JCHKL and
        JCHKL
        should compensate.
  PacificNet
        Power however received some correspondences and complaints from the Employer
        about the poor and/ or sub-standard works done by JCHKL. PacificNet Power,
        after
        separate investigation, discovered the poor workmanship and sub-standard
        works
        done by JCHKL. 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 so that it would conform with their guarantee
        made on 21 December, 2005 to PKL and the employer.
  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
        counter-claim that: (i) a concrete base was discovered after the existing
        dismantled radiators was not indicated in tender drawings nor could it be
        revealed by site visit; (ii) JCHKL could not have carried out the works under
        the Contract without first demolishing the said concrete base; (iii) by a
        letter
        from JCHKL to PacificNet Power dated 22 May, 2007, PacificNet Power was informed
        additional works had been carried out by JCHKL; (iv) a sum of HK$30,000 is
        still
        due and owing by PacificNet Power to JCHKL.
  The
        case
        is now 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.
 **3.
          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 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.
        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.
  21
  **17.****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.
 Following
          is the unaudited proforma consolidated financial information as if the
          Guangzhou
          3G was not disposed of as of May 15, 2007 and held for disposal as of September
          30, 2007.
 (un-audited and in thousands of U.S. dollars)
                
                Nine
                    months ended September 302007
                
                
                2006Income
                    (loss) from continued operations
                
                
                17
                
                
                
                (111
                )Income
                    (loss) from discontinued operations
                
                
                250
                
                
                
                980Net
                    income (loss)
                
                
                (645
                )
                
                
                394Earnings
                    per share – basic
                
                
                (0.05
                )
                
                
                0.04Earnings
                    per share – diluted
                
                
                (0.05
                )
                
                
                0.04
 **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.
 IROQUOIS
          MASTER FUND, LTD. vs. PACIFICNET INC.
 
 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.
  22
  **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
        OPERATION**
  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.
  **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.
  23
  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.
  *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.
  24
  *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.
  **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.
  25
  **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.
 —
              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.
  26
  **RESULTS
        OF OPERATIONS**
  **REVENUES**
  Revenues
        for the three and nine months ended
        September 30, 2007 amounted to $9,802,000 and $28,090,000, a year-over-year
        decline of 7% and 13% as compared to $10,525,000 and $32,332,000 for the
        same
        periods of prior year, respectively. The year-over-year decrease in revenues
        was
        mainly due to contraction of the Company’s low margin Mobile phone wholesaling
        businesses in Greater China. Segmented financial information of the three
        business operating groups is set out below followed by a brief discussion
        of
        each business group.
  THREE
        AND
        NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THREE AND NINE MONTHS ENDED
        SEPTEMBER 30, 2006
 
 For
                  The Three Months Ended
                September
                  30, 2007
              Group
                  1
              Group
                  2.
              Group
                  3
              Group
                  4
              TOTALOutsourcing
              Telecom
                  Value-Added
              Products
              OtherIn
                  thousands of US Dollars
              Services
              Services
              (Telecom
                  & Gaming)
              Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              3,971
              470
              5,305
              56
              9,802Earnings
                  / (Loss) from Operations
              189
              444
              201
              (697)
              137
 
 For
                  The Three Months Ended
                September
                  30, 2006
              Group
                  1
              Group
                  2.
              Group
                  3
              Group
                  4
              TOTALOutsourcing
              Telecom
                  Value-Added
              Products
              OtherIn
                  thousands of US Dollars
              Services
              Services
              (Telecom
                  & Gaming)
              Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              3,733
              40
              6,411
              341
              10,525Earnings
                  / (Loss) from Operations
              188
              1
              (191)
              (616)
              (618)
 
 For
                  The Nine Months Ended
                September
                  30, 2007
              Group
                  1
              Group
                  2.
              Group
                  3
              Group
                  4
              TOTALOutsourcing
              Telecom
                  Value-Added
              Products
              OtherIn
                  thousands of US Dollars
              Services
              Services
              (Telecom
                  & Gaming)
              Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              6,937
              9,243
              11,700
              210
              28,090Earnings
                  / (Loss) from Operations
              830
              793
              1,824
              (2,163)
              1,284
 
 For
                  The Nine Months Ended
                September
                  30, 2006
              Group
                  1
              Group
                  2.
              Group
                  3
              Group
                  4
              TOTALOutsourcing
              Telecom
                  Value-Added
              Products
              OtherIn
                  thousands of US Dollars
              Services
              Services
              (Telecom
                  & Gaming)
              Business($)
              ($)
              ($)
              ($)
              ($)Revenues
              10,312
              106
              18,262
              3,758
              32,332Earnings
                  / (Loss) from Operations
              734
              4
              98
              (584)
              252
 (1)
              Outsourcing
                  services: Revenues for the three and nine months ended September 30,
                  2007 were $3,971,000 and $11,700,000, representing a year-over-year
                  increase of 6% and 13% as compared to $3,733,000 and $10,312,000
                  for the
                  same periods of last year.  The increase was mainly derived from
                  the inbound service, in-sourcing operations and telemarketing management,
                  from which the sales revenues amounted to $635,000, $1,136,000
                  and
                  $651,000 for the third quarter of this year, a quarter-over-quarter
                  increase of 32%, 2% and 43%, respectively as compared to the same
                  period
                  of prior year.  On the other hand, sales revenues from software
                  business decreased to $518,000, a decrease of 24% as compared to
                  $667,000
                  for the same period of prior year. Revenue from outsourcing services
                  accounted for 41% of the Company's total revenues for the third
                  quarter of
                  FY2007.
 (2)
              Telecom
                  Value-added Services (VAS): Revenues for the three and nine months
                  ended
                  September 30, 2007 was $470,000 and $1,429,000 respectively, a
                  significant
                  year-over-year increase of 1,075% and 1,248% as compared to $40,000
                  and
                  $106,000 for the same periods of last year. The increase was mainly
                  due to
                  the sales revenues from WAP based mobile phone games and traditional
                  SP
                  businesses, which accounted for 77% of the Company's total VAS
                  revenues
                  for the third quarter of FY2007.
 
 (3)
              Products
                  (Telecom & Gaming): Revenues for the three and nine months ended
                  September 30, 2007 were $5,326,000, and $14,751,000, representing
                  a
                  year-over-year decrease of 17% and 19% as compared to $6,411,000
                  and
                  $18,262,000 for the same periods of 2006, respectively. Decrease
                  in
                  Products revenues, which accounted for 54% of the Company's total
                  revenues
                  for the third quarter of FY2007, is largely due to contraction
                  of the
                  Company’s mobile phone wholesaling businesses in Greater
                  China.
  27
 
 Gaming
        technology revenues derived from selling Multi-player Electronic Gaming Machine
        to casino operators amounted to $977,000, and accounted for 18% of total
        Products revenues for the third quarter of FY2007.  With the internet
        gaming license granted by First Cagavan and Cagavan Economic Zone Authority
        (CEZA) of the Philippines, the company is widely recognized as a well positioned
        emerging gaming technology provider, both online and land-based. Moreover,
        successful penetration of the Cambodia gaming market brought some initial
        orders
        of 150 betting stations for the fourth quarter of 2007, plus further orders
        of
        500-2000 betting stations in 2008.
  Revenues
        from sales of Electronic Slot Machines amounted to $456,000, and accounted
        for
        9% of the total Products Revenues for the third quarter of FY 2007, a sequential
        decrease of 64% as compared to the second quarter of FY2007.  Decrease
        was largely due to allocation of precious technical resources to after-sale
        service of the deliveries made during the second quarter and work in progress
        of
        backlog orders from operators in Europe.  The company continued to
        take advantage of the Italy’s new Comma 6A gaming legislation in entering the
        largest European slot market, Italy, as an exclusive supplier of electronic
        slot
        machines to various leading gaming operators in Europe.  Besides, our
        subsidiary, Take 1, has unveiled a new line of gaming machine products,
        Electronic Bingo Machines, at the Global Gaming Expo (G2E) Las Vegas, and
        received TST Certification for Gaming Accreditation.
  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 for the three and nine months ended September 30, 2007,
        amounted to $3,893,00 and $9,903,000, a decline of 39% and 46% as compared
        to
        $6,411,000 and $18,262,000 for the same periods of 2006.
  During
        the third quarter, the company’s subsidiary - iMobile had signed a new agreement
        with Mototola (China) to become the latter’s authorized distributor of MOTO
        accessory products for the MOTO Customer Service Network, MOTO Branded Stores
        and distribution channels in Southern China.
  **COST
        OF REVENUES**
  Cost
        of
        revenues for the three and nine months ended September 30, 2007 were $7,428,000
        and $20,816,000, representing a decrease of 21% and 25% from $9,418,000 and
        $27,710,000 for the same periods last year, respectively. Cost of revenues
        as a percentage of the corresponding revenues was approximately 76% for the
        third quarter of FY2007 as compared to 89% for the same period of prior
        year.
  (1)
              Outsourcing
                  services: Cost of revenues from outsourcing services for the three
                  and
                  nine months ended September 30, 2007 amounted to $3,270,000 and
                  $9,128,000, an increase of 9% and 14% respectively as compared
                  with
                  2006.  Increase in cost of revenues was largely due to headcount
                  increase at service staff level.
 
 (2)
              Telecom
                  Value-added Services (VAS): Cost of revenues from VAS for the three
                  and
                  nine months ended September 30, 2007 was $161,000 and $475,000,
                  an
                  increase of 437% and 533% as compared with 2006.  Increase is in
                  line with sales growth of WAP-based mobile phone
                  games.
 
 (3)
              Products
                  (Telecom & Gaming): Cost of revenues derived from Products for the
                  three months ended September 30, 2007 amounted to $3,987,000 and
                  $11,190,000, a reduction of 36% and 36% respectively, compared
                  with the
                  same periods of 2006.  Approximately 92% of the cost of revenues
                  related to Products for the third quarter of FY2007 was derived
                  from the
                  sales of mobile phones, and 8% was derived from the sales of electronic
                  gaming machines.
 
 **GROSS
        PROFIT**
  Gross
        profit for the three and nine months ended September 30, 2007 was $2,374,000
        and
        $7,274,000, a year-over-year increase of 114 % and 57%, respectively, as
        compared to $1,107,000 and $4,622,000 for the same periods of prior year.
        Gross
        margin was 24% and 26% for the three and nine months ended September 30,
        2007 as
        compared to 11% and 12% for the same period of prior year, respectively. 
Quarterly improvement in gross margin was attributed to higher margin for
        Multiplayer Gaming Machines (57%) and Electronic Slot Machines
        (70%).
  **SELLING,
        GENERAL AND ADMINISTRATIVE EXPENSES**
  Selling,
        general and administrative expenses (SG&A) totaled $2,030,000 and $5,395,000
        for the three and nine months ended September 30, 2007, an increase of 28%
        and
        an increase of 33% respectively as compared to $1,580,000 and $4,067,000
        for the
        same periods of prior year.  SG&A consists primarily of indirect
        staff salaries, office rental, insurance, advertising expenditures and
        traveling costs.
  (1)
              Outsourcing
                  services: SG&A attributed to outsourcing services for the three and
                  nine months ended September 30, 2007 amounted to $480,000 and $1,671,000,
                  a decrease of 5% and an increase of 13% as compared to $506,000
                  and
                  $1,479,000 for the same periods of prior
                  year.
  (2)
              Telecom
                  Value-added Services (VAS): SG&A attributed to VAS for the three and
                  nine months ended September 30, 2007 amounted to negative $154,000
                  and
                  $68,000, as compared to $9,000 and $27,000 for the same periods
                  of prior
                  year.
 
 (3)
              Products
                  (Telecom & Gaming): SG&A attributed to Products for the three and
                  nine months ended September 30, 2007 amounted to $1,018,000 and
                  $1,419,000, an increase of 422% and 191% as compared to $195,000
                  and
                  $487,000 for the same periods of prior year.  Increase in
                  SG&A was primarily due to additional headcount and office expenses
                  incurred by newly opened Zhuhai R&D center and Macau sales center, for
                  sustained development of the gaming technology business
                  growth.
 
 28
 
 SELLING,
                  GENERAL AND ADMINISTRATIVE EXPENSES
              Three
                  months ended September 30, 2007
              Three
                  months ended September 30, 2006
              Percentage
                  Change(in
                  thousands, except percentages)
              ($)
              ($)
              (%)Remuneration
              1,004
              690
              45Office
              370
              246
              50Travel
              95
              88
              7Entertainment
              66
              35
              89Professional
                  (legal and consultant)
              139
              71
              96Audit
              583
              16
              3,578Selling
              110
              51
              117Recovery
                  of provisions for doubtful accounts from subsequent
                  collections
              (424)
              (28)
              1,440Other
              88
              98
              (12)Total
              2,030
              1,268
              60
 
 SELLING,
                  GENERAL AND ADMINISTRATIVE EXPENSES
              Nine
                  months ended September 30, 2007
              Nine
                  months ended September 30, 2006
              Percentage
                  Change(in
                  thousands, except percentages)
              ($)
              ($)
              (%)Remuneration
              3,222
              1,908
              69Office
              1,015
              685
              48Travel
              358
              211
              70Entertainment
              165
              90
              84Professional
                  (legal and consultant)
              499
              273
              83Audit
              720
              154
              369Selling
              295
              187
              58Recovery
                  of doubtful accounts from subsequent collections
              (1,115)
              -
              n/aOther
              236
              251
              -6Total
              5,395
              3,757
              44
 
 **INCOME
        / (LOSS) FROM OPERATIONS**
  On
        a
        year-over-year basis, income from operations amounted to $137,000 and $1,284,000
        for the three and nine months ended September 30, 2007, as compared to
        ($618,000) and $252,000 for the same periods of prior year
        respectively.
  Significant
        increase in operating income was mainly derived due to higher margin gaming
        revenues, which accounted for 7% of the total operating income for the third
        quarter of FY2007.
  **INCOME
        TAXES**
  The
        income tax provisions for the three and nine months ended September 30, 2007
        were $46,000 and $0 as compared to ($40,000) and ($70,000) for the same periods
        of prior year. Interim income tax provisions are based upon management’s
        estimate of taxable income and the resulting consolidated effective income
        tax
        rate for the full year.  As a result, such interim estimates are
        subject to change as the year progresses and more information becomes
        available.  We, 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 nine months ended September 30, 2007 totaled
        $130,000 and $1,004,000 respectively as compared with $12,000 and $527,000
        for
        the same period of prior year, representing minority ownership interests
        in
        subsidiaries consolidated in the Company’s consolidated financial
        statement.
  **NET
        INCOME**
  On
        a
        year-over-year basis, Net Income amounted to ($220,000) and ($639,000) for
        the
        three and nine months ended September 30, 2007 respectively, as compared
        to
        ($1,115,000) and $604,000 for the same period of prior
        year.   Quarterly Net Loss was directly associated with Loss on
        disposal, which amounted to $356,000 for the third quarter of FY 2007. However,
        as the company focused on the high-margin Gaming Technology Business, this
        year,
        Net Income from sales of Electronic Gaming Machines reached $35,000 and $190,000
        respectively for the three and nine months ended September 30,
        2007.
  29
  **CASH**
  Net
        cash
        and cash equivalents at September 30, 2007 were approximately $4.9 million,
        an
        increase of approximately $3.0 million as compared to December 31, 2006.
        This was primarily due to successful collection of certain doubtful
        debts.
  **CONTRACTUAL
        OBLIGATIONS**
  Contractual
        obligations as of September 30, 2007 are detailed below:
  **Payments
        Due by Period**
  Contractual
                    Obligations
                
                Total
                
                
                Less
                    than 1 year
                
                
                1-5
                    years
                
                
                After
                    5 yearsLine
                    of credit
                
                $
                181
                
                
                $
                181
                
                
                $
                
                
                
                $Bank
                    Loans
                
                
                2,819
                
                
                
                768
                
                
                
                670
                
                
                
                1,381Operating
                    leases
                
                
                758
                
                
                
                603
                
                
                
                155
                
                
                
                -Capital
                    leases
                
                
                152
                
                
                
                90
                
                
                
                62
                
                
                
                -Total
                    cash contractual obligations
                
                $
                3,910
                
                
                $
                1,642
                
                
                $
                887
                
                
                $
                1,381
  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 September 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**
  We
        had no
        off-balance sheet guarantees, interest rate swap transactions or foreign
        currency forward contracts. We did not engage in trading activities involving
        non-exchange traded contracts during the third quarter of 2006.
  There
        were no off-balance sheet guarantees, interest rate swap transactions, foreign
        currency forward contracts or long term purchase commitments outstanding
        as of
        September 30, 2007. Further, the Company had not engaged in any non-exchange
        trading activities during third quarter of 2007.
  **INFLATION**
  Inflation
        has not had a material impact on the Company's business in recent
        years.
  **CURRENCY
        EXCHANGE FLUCTUATIONS**
  All
        of
        the Company's revenues are denominated either in U.S. dollars or Hong Kong
        dollars, while its expenses are denominated primarily in Hong Kong dollars
        and
        Renminbi ("RMB"), the currency of the People's Republic of China. The value
        of
        the RMB-to-U.S. dollar or Hong Kong dollar-to-United States dollar and other
        currencies may fluctuate and is affected by, among other things, changes
        in
        political and economic conditions. Since 1994, the conversion of Renminbi
        into
        foreign currencies, including U.S. dollars, has been based on rates set by
        the
        People's Bank of China, which are set daily based on the previous day's
        interbank foreign exchange market rates and current exchange rates on the
        world
        financial markets. Since 1994, the official exchange rate generally has been
        stable. Recently there has been increased political pressure on the Chinese
        government to decouple the RMB from the United States dollar. Although a
        devaluation of the Hong Kong dollar or RMB relative to the United States
        dollar
        would likely reduce the Company's expenses (as expressed in United States
        dollars), any material increase in the value of the Hong Kong dollar or RMB
        relative to the United States dollar would increase the Company's expenses,
        and
        could have a material adverse effect on the Company's business, financial
        condition and results of operations. The Company has never engaged in currency
        hedging operations and has no present intention to do so.
  **ITEM
        3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
  We
        are
        exposed to various market risks arising from adverse changes in market rates
        and
        prices, such as foreign exchange fluctuations and interest rates, which could
        impact our results of operations and financial position. We do not currently
        engage in any hedging or other market risk management tools, and we do not
        enter
        into derivatives or other financial instruments for trading or speculative
        purposes.
  30
  ***Foreign
        Currency Exchange Rate Risk***
  Fluctuations
        in the rate of exchange between the U.S. dollar and foreign currencies,
        primarily the Hong Dollar and the Chinese Renminbi, could adversely affect
        our
        financial results. During the quarter ended September 30, 2006, approximately
        all of our sales are denominated in foreign currencies. We expect that foreign
        currencies will continue to represent a similarly significant percentage
        of our
        sales in the future. Selling, marketing and administrative costs related
        to
        these sales are largely denominated in the same respective currency, thereby
        mitigating our transaction risk exposure. We therefore believe that the risk
        of
        a significant impact on our operating income from foreign currency fluctuations
        is not substantial. However, for sales not denominated in U.S. dollars, if
        there
        is an increase in the rate at which a foreign currency is exchanged for U.S.
        dollars, it will require more of the foreign currency to equal a specified
        amount of U.S. dollars than before the rate increase. In such cases and if
        we
        price our products in the foreign currency, we will receive less in US. dollars
        than we did before the rate increase went into effect. If we price our products
        in U.S. dollars and competitors price their products in local currency, an
        increase in the relative strength of the U.S. dollar could result in our
        price
        not being competitive in a market where business is transacted in the local
        currency. All of our sales denominated in foreign currencies are denominated
        in
        the Hong Dollar and the Chinese Renminbi. Our principal exchange rate risk
        therefore exists between the U.S. dollar and these two currencies. Fluctuations
        from the beginning to the end of any given reporting period result in the
        re-measurement of our foreign currency-denominated receivables and payables,
        generating currency transaction gains or losses that impact our non-operating
        income/expense levels in the respective period and are reported in other
        (income) expense, net in our combined consolidated financial statements.
        We do
        not currently hedge our exposure to foreign currency exchange rate fluctuations.
        We may, however, hedge such exposure to foreign currency exchange rate
        fluctuations in the future.
  All
        of
        our sales denominated in foreign currencies are denominated in the Hong Dollar
        and the Chinese Renminbi. Our principal exchange rate risk therefore exists
        between the U.S. dollar and these two currencies. Fluctuations from the
        beginning to the end of any given reporting period result in the re-measurement
        of our foreign currency-denominated receivables and payables, generating
        currency transaction gains or losses that impact our non-operating
        income/expense levels in the respective period and are reported in other
        (income) expense, net in our combined consolidated financial statements.
        We do
        not currently hedge our exposure to foreign currency exchange rate fluctuations.
        We may, however, hedge such exposure to foreign currency exchange rate
        fluctuations in the future.
  ***Interest
        Rate Risk***
  Changes
        in interest rates may affect the interest paid (or earned) and therefore
        affect
        our cash flows and results of operations. We are exposed to interest rate
        change
        risk with respect to Epros' (one of our subsidiaries) credit facility with
        a
        commercial lender. However, we do not believe that this interest rate change
        risk is significant.
  ***Inflation***
  Inflation
        has not had a material impact on the Company's business in recent
        years.
  ***Currency
        Exchange Fluctuations***
  All
        of
        the Company's revenues are denominated either in U.S. dollars or Hong Kong
        dollars, while its expenses are denominated primarily in Hong Kong dollars
        and
        Chinese renminbi ("RMB"). The value of the RMB-to-U.S. dollar or Hong Kong
        dollar-to-United States dollar and other currencies may fluctuate and is
        affected by, among other things, changes in political and economic conditions.
        Since 1994, the conversion of renminbi into foreign currencies, including
        U.S.
        dollars, has been based on rates set by the People's Bank of China, which
        are
        set daily based on the previous day's inter-bank foreign exchange market
        rates
        and current exchange rates on the world financial markets. Since 1994, the
        official exchange rate for the conversion of renminbi to U.S. dollars had
        generally been stable and the renminbi had appreciated slightly against the
        U.S.
        dollar. However, on July 21, 2005, the Chinese government changed its policy
        of
        pegging the value of Chinese renminbi to the U.S. dollar. Under the new policy,
        Chinese renminbi may fluctuate within a narrow and managed band against a
        basket
        of certain foreign currencies. Recently there has been increased political
        pressure on the Chinese government to decouple the renminbi from the United
        States dollar. At the recent quarterly regular meeting of People's Bank of
        China, its Currency Policy Committee affirmed the effects of the reform on
        Chinese renminbi exchange rate. Since February 2006, the new currency rate
        system has been operated; the currency rate of renminbi has become more flexible
        while basically maintaining stable and the expectation for a larger appreciation
        range is shrinking. Although a devaluation of the Hong Kong dollar or renminbi
        relative to the United States dollar would likely reduce the Company's expenses
        (as expressed in United States dollars), any material increase in the value
        of
        the Hong Kong dollar or renminbi relative to the United States dollar would
        increase the Company's expenses, and could have a material adverse effect
        on the
        Company's business, financial condition and results of operations. For
        fluctuations in period to period exchange rates, the translation adjustment
        is
        required to translate from local functional currency to the USD reporting
        currency (not RMB to HKD to USD). The Company has never engaged in currency
        hedging operations and has no present intention to do so.
  31
  ***Concentration
        of Credit Risk***
  Credit
        risk represents the accounting loss that would be recognized at the reporting
        date if counterparties failed completely to perform as contracted.
        Concentrations of credit risk (whether on or off balance sheet) that arise
        from
        financial instruments exist for groups of customers or counterparties when
        they
        have similar economic characteristics that would cause their ability to meet
        contractual obligations to be similarly affected by changes in economic or
        other
        conditions as described below:
  ·
              The
                  Company's business is characterized by rapid technological change,
                  new
                  product and service development, and evolving industry standards
                  and
                  regulations. Inherent in the Company's business are various risks
                  and
                  uncertainties, including the impact from the volatility of the
                  stock
                  market, limited operating history, uncertain profitability and
                  the ability
                  to raise additional capital.
  ·
              All
                  of the Company's revenue is derived from Asia and Greater China.
                  Changes
                  in laws and regulations, or their interpretation, or the imposition
                  of
                  confiscatory taxation, restrictions on currency conversion, devaluations
                  of currency or the nationalization or other expropriation of private
                  enterprises could have a material adverse effect on our business,
                  results
                  of operations and financial
                  condition.
  ·
              If
                  the Company is unable to derive any revenues from Greater China,
                  it would
                  have a significant, financially disruptive effect on the normal
                  operations
                  of the Company.
  *
        A
        substantial portion of the operations of business operations depend on mobile
        telecommunications operators (operators) in China and any loss or deterioration
        of such relationship may result in severe disruptions to their business
        operations and the loss of a significant portion of the Company's revenue.
        The
        VIEs rely entirely on the networks and gateways of these operators to provide
        its wireless value-added services. Specifically these operators are the only
        entities in China that have platforms for wireless value-added services.
        The
        Company's agreements with these operators are generally for a period of less
        than one year and generally do not have automatic renewal provisions. If
        neither
        of them is willing to continue to cooperate with the Company, it would severely
        affect the Company's ability to conduct its existing wireless value-added
        services business.
  ***Seasonality
        and Quarterly Fluctuations***
  Several
        of our businesses experience fluctuations in quarterly performance.
        Traditionally, the first quarter from January to March is a low season for
        our
        call center business due to the long Lunar New Year holidays in China Revenues
        and income from gaming products, call center and telecom value-added services
        tend to be higher in the fourth quarter due to special holiday promotions.
        Internet/Direct Commerce revenues also tend to be higher in the fourth quarter
        due to increased consumer spending during that period. Revenues from the
        gaming
        and VAS can vary from quarter to quarter due to new product launches and
        the
        seasonality of certain product lines
  Sales
        of
        our gaming machines to Macau and other Asian casinos and gaming operators
        are
        generally strongest in Q3 and Q4 and slowest in the Chinese New Year holiday
        season in Q1. In addition, quarterly revenues and net income may increase
        when
        we receive a larger number of approvals for new games from regulators and
        gaming
        operators than in other quarters, when a game or platform that achieves
        significant player appeal is introduced or if gaming is permitted in a
        significant new jurisdiction. In addition, as further technology advancements
        become available for the gaming industry, replacement or conversion of gaming
        machines will be impacted once any such advanced technology is approved by
        regulators.
  **ITEM
        4. CONTROLS AND PROCEDURES**
  We
        maintain controls and procedures designed to ensure that information required
        to
        be disclosed in the reports that we file or submit under the Securities Exchange
        Act of 1934 is recorded, processed, summarized and reported within the time
        periods specified in the rules and forms of the Securities and Exchange
        Commission. Certain internal audit tests performed at the fiscal year-end
        of
        2006 revealed that there were weaknesses inherent in the Company’s internal
        control system. Among which it was noted that there were insufficient checks
        and
        balances in place for controlling the company’s non-routine transactions,
        namely: accuracy and completeness of stock option expense calculation. Such
        weaknesses in our controls eventually led to prior period option expense
        restatements being charged to the Company’s financial statements for the years
        ended December 31, 2003, 2004, and 2005 respectively. As a result, our chief
        executive officer and our former chief financial officer concluded that
        there was a material weakness in our disclosure controls and
        procedures.
  As
        of the
        end of the quarter covered by this report, the company had taken various
        steps
        to maintain the accuracy of our financial disclosures, and improve company
        internal control. An internal control SOX implementation team led by senior
        managers had been set up to uncover potential significant deficiencies inherent
        in the internal control systems of the company, including but not limited
        to
        risk identification, control procedure setup, staff training, segregation
        of
        incompatible job duties, design of management reporting system, definition
        and
        delegation of signing authority, establishment of documentation system and
        implementation of a company-wide SOX compliant ERP system. Based on the current
        schedule, the Company is expected to be substantially SOX compliant by the
        end
        of FY2007.
  32
  **PART
        II - OTHER INFORMATION**
  **ITEM
        1. LEGAL PROCEEDINGS**
  None
  **ITEM
        1A. RISK FACTORS**
  In
        addition to the other information set forth in this report, you should carefully
        consider the factors discussed in “Risk Factors” in our Annual Report on Form
        10-K for the year ended December 31, 2006, which could materially affect
        our
        business, financial condition or future results. The risks described in our
        Annual Report on Form 10-K are not the only risks facing us Additional
        risks and uncertainties not currently known to us or that we currently deem
        to
        be immaterial also may materially adversely affect our business, financial
        condition and/or operating results.
  **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
  None
  **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
  In
        July
        2007, the Company failed to timely make scheduled principal payments under
        an
        Amended and Restated Variable Rate Convertible Debenture due March 2009 (the
        “Amended Debenture”) in the aggregate amount of $8,000,000. Pursuant to the
        terms of the Amended Debenture, the Company was obligated to make monthly
        redemption payments commencing on January 1, 2007, until the Amended Debenture
        was redeemed in full. On August 1, 2007, the Company made the July monthly
        redemption and interest payments to all of the debenture holders.
  **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  None.
  **ITEM
        5. OTHER INFORMATION**
  None
  **ITEM
        6. EXHIBITS**
  The
        following exhibits are filed as part of this report:
  EXHIBIT
  NUMBER
              DESCRIPTION
  31.1
              Rule
                  13a-14(a) Certification of Chief Executive Officer (Principal Executive
                  Officer)
  31.2
              Rule
                  13a-14(a) Certification of Chief Financial Officer (Principal Financial
                  Officer)
  32.1
              18
                  U.S.C. Section 1350 Certifications
  
 
 33
  **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: November
                    27, 2007
                By:
                /s/ Tony
                    TongTony
                    Tong
                  Chief
                    Executive Officer
                  (Principal
                    Executive Officer)Date: November
                    27, 2007
                By:
                /s/ Daniel
                    LuiDaniel
                    Lui
                  Chief
                    Financial Officer
                  (Principal
                    Financial Officer)
   34