UNITED STATES
 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 1934For
      the quarterly period ended June 30, 2009o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period from __________ to
  __________
 
 Commission
File Number: 000-19644
 
 China Broadband, Inc.
 (Exact
name of registrant as specified in its charter)
 
 Nevada
                    
                    20-1778374(State
      or other jurisdiction of
                    
                    (I.R.S.
      Employer Identification No.)incorporation
      or organization)
 
 1900
Ninth Street, 3rd Floor
 Boulder,
Colorado 80302
 (Address
of principal executive offices)
 
 (303)
449-7733
 (Registrant's
telephone number, including area code)
 
  (Former
name, former address and former fiscal year if changed since last
report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed 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 x
    No o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company:
 
 Large
      accelerated filer o
                    Accelerated
      filer oNon-accelerated
      filer o
                    Smaller
      reporting company x
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
     No x
  Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 64,101,059 shares as of August 14,
2009.
  
  QUARTERLY
REPORT ON FORM 10-Q
 OF
CHINA BROADBAND, INC.
 FOR
THE PERIOD ENDED JUNE 30, 2009
 
 TABLE
OF CONTENTS
  PART I
                  -
                  FINANCIAL
      INFORMATION
                  3Item
      1.
                  
                  Financial
      Statements
                  3Item
      2.
                  
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  12Item
      3
                  
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  23Item
      4.
                  
                  Controls
      and Procedures
                  23PART II
                  -
                  OTHER
      INFORMATION
                  25Item
      1.
                  
                  Legal
      Proceedings
                  25Item
      1A.
                  
                  Risk
      Factors
                  25Item
      2.
                  
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  25Item
      3.
                  
                  Defaults
      Upon Senior Securities
                  25Item
      4.
                  
                  Submission
      of Matters to a Vote of Security Holders
                  25Item
      5.
                  
                  Other
      Information
                  25Item
      6.
                  
                  Exhibits
                  25Signatures
                  26
 
 Cautionary
Note Regarding Forward Looking Statements
 
 This
Form 10-Q contains “forward-looking” statements that involve risks and
uncertainties. You can identify these statements by the use of forward-looking
words such as "may", "will", "expect", "anticipate", "estimate", "believe",
"continue", or other similar words. You should read statements that contain
these words carefully because they discuss our future expectations, contain
projections of our future results of operations or financial condition or state
other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, these
forward-looking statements are not guarantees of future performance and actual
results may differ materially from the expectations that are expressed, implied
or forecasted in any such forward-looking statements. There may be events in the
future that we are unable to accurately predict or control, including weather
conditions and other natural disasters which may affect demand for our products,
and the product–development and marketing efforts of our competitors. Examples
of these events are more fully described in the Company’s Annual Report on Form
10-K/A for the year ended December 31, 2008 under Part I. Item 1A. Risk
Factors.
 
 Unless
required by law, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. However, readers should carefully review the reports
and documents the Company files from time to time with the SEC, particularly its
Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on
Form 8-K and all amendments to those reports.
 
 References
 
 References to the “PRC” or “China”
are to the People’s Republic of China. Unless otherwise noted, all currency
figures are in U.S. dollars. All references to U.S. dollar amounts herein which
relate to operations or revenues from the PRC have been converted into U.S.
dollars based on the applicable exchange rates.
 
 References
to "yuan" or "RMB" are to the Chinese yuan, which is also known as the renminbi.
Unless otherwise specified, the words “Company,” “we,” “us,” and “our,” refer
collectively to China Broadband, Inc., its wholly owned subsidiary in the Cayman
Islands, China Broadband Cayman, Ltd., and Beijing China Broadband Network
Technology, a wholly foreign owned entity formed under the laws of the PRC,
which is commonly referred to herein as our Wholly Foreign Owned Entity
“WFOE”.
  2
  PART
I — FINANCIAL INFORMATION
  Item
1. Financial Statements.
  China
Broadband, Inc. and Subsidiaries
 CONSOLIDATED
BALANCE SHEETS
 
 June
      30
                            
                            
                            December
      31,2009
                            
                            
                            2008(Unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                            
                            $
                            1,874,820
                            
                            
                            $
                            4,425,529Marketable
      equity securities
                            
                            
                            108,873
                            
                            
                            
                            254,496Accounts
      receivable
                            
                            
                            234,787
                            
                            
                            
                            136,709Inventory
                            
                            
                            788,336
                            
                            
                            
                            877,309Prepaid
      expense
                            
                            
                            70,520
                            
                            
                            
                            46,380Loan
      receivable
                            
                            
                            280,033
                            
                            
                            
                            -Amounts
      due from shareholders
                            
                            
                            634,687
                            
                            
                            
                            -Other
      current assets
                            
                            
                            123,185
                            
                            
                            
                            153,277Total
      current assets
                            
                            
                            4,115,241
                            
                            
                            
                            5,893,700Property
      and equipment, net
                            
                            
                            8,242,044
                            
                            
                            
                            9,299,473Intangible
      assets, net
                            
                            
                            6,008,332
                            
                            
                            
                            4,218,758Other
      assets
                            
                            
                            377,888
                            
                            
                            
                            692,911Total
      assets
                            
                            $
                            18,743,505
                            
                            
                            $
                            20,104,842LIABILITIES AND EQUITYCurrent
      liabilities:Accounts
      payable
                            
                            $
                            1,090,002
                            
                            
                            $
                            1,237,251Accrued
      expenses
                            
                            
                            1,389,185
                            
                            
                            
                            936,134Deferred
      revenue
                            
                            
                            1,424,869
                            
                            
                            
                            1,382,103Convertible
      notes payable
                            
                            
                            304,853
                            
                            
                            
                            -Loan
      payable
                            
                            
                            398,517
                            
                            
                            
                            -Payable
      to Shandong Media
                            
                            
                            145,679
                            
                            
                            
                            145,679Payable
      to Jinan Parent
                            
                            
                            152,099
                            
                            
                            
                            2,795,472Other
      current liabilities
                            
                            
                            90,650
                            
                            
                            
                            72,013Total
      current liabilities
                            
                            
                            4,995,854
                            
                            
                            
                            6,568,652Convertible
      notes payable
                            
                            
                            4,614,452
                            
                            
                            
                            4,564,427Deferred
      tax liability
                            
                            
                            761,257
                            
                            
                            
                            790,617Total
      liabilities
                            
                            
                            10,371,563
                            
                            
                            
                            11,923,696Shareholders'
      equityCommon
      shares to be issued
                            
                            
                            11,255
                            
                            
                            
                            -Preferred
      stock, $.001 par value; 5,000,000 shares authorized, no shares issued and
      outstanding
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $.001 par value; 95,000,000 shares authorized, 52,846,161 and
      50,585,455 issued and outstanding
                            
                            
                            52,847
                            
                            
                            
                            50,586Additional
      paid-in capital
                            
                            
                            15,507,188
                            
                            
                            
                            13,372,358Accumulated
      deficit
                            
                            
                            (13,759,022
                            )
                            
                            
                            (12,200,287
                            )Accumulated
      other comprehensive income
                            
                            
                            306,289
                            
                            
                            
                            320,858Total
      shareholders' equity
                            
                            
                            2,118,557
                            
                            
                            
                            1,543,515Noncontrolling
      interests
                            
                            
                            6,253,385
                            
                            
                            
                            6,637,631Total
      equity
                            
                            
                            8,371,942
                            
                            
                            
                            8,181,146Total
      liabilities and equity
                            
                            $
                            18,743,505
                            
                            
                            $
                            20,104,842
 
 See notes
to consolidated financial statements.
  3
  China
Broadband, Inc. and Subsidiaries
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three Months Ended
                  
                  
                  Six Months EndedJune 30,
                  
                  
                  June 30,
                  
                  
                  June 30,
                  
                  
                  June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Revenue
                  
                  $
                  1,989,517
                  
                  
                  $
                  1,053,367
                  
                  
                  $
                  3,938,927
                  
                  
                  $
                  2,056,633Cost
      of revenue
                  
                  
                  1,102,915
                  
                  
                  
                  543,857
                  
                  
                  
                  2,276,796
                  
                  
                  
                  896,055Gross
      profit
                  
                  
                  886,602
                  
                  
                  
                  509,510
                  
                  
                  
                  1,662,131
                  
                  
                  
                  1,160,578Selling,
      general and adminstrative expenses
                  
                  
                  740,878
                  
                  
                  
                  310,808
                  
                  
                  
                  1,458,806
                  
                  
                  
                  811,914Professional
      fees
                  
                  
                  189,544
                  
                  
                  
                  168,163
                  
                  
                  
                  300,040
                  
                  
                  
                  305,416Depreciation
      and amortization
                  
                  
                  841,743
                  
                  
                  
                  694,075
                  
                  
                  
                  1,673,050
                  
                  
                  
                  1,441,530Loss
      from operations
                  
                  
                  (885,563
                  )
                  
                  
                  (663,536
                  )
                  
                  
                  (1,769,765
                  )
                  
                  
                  (1,398,282
                  )Interest
      & other income / (expense)Settlement
      gain
                  
                  
                  -
                  
                  
                  
                  1,300,692
                  
                  
                  
                  -
                  
                  
                  
                  1,300,692Interest
      income
                  
                  
                  1,926
                  
                  
                  
                  3,535
                  
                  
                  
                  5,384
                  
                  
                  
                  19,126Interest
      expense
                  
                  
                  (89,664
                  )
                  
                  
                  (88,901
                  )
                  
                  
                  (177,048
                  )
                  
                  
                  (167,443
                  )Gain
      (loss) on sale of securities
                  
                  
                  (10,283
                  )
                  
                  
                  17,498
                  
                  
                  
                  (30,635
                  )
                  
                  
                  17,498Other
                  
                  
                  53
                  
                  
                  
                  389
                  
                  
                  
                  (276
                  )
                  
                  
                  (13,128
                  )Net
      income (loss) before income tax
                  
                  
                  (983,531
                  )
                  
                  
                  569,677
                  
                  
                  
                  (1,972,340
                  )
                  
                  
                  (241,537
                  )Income
      tax benefit
                  
                  
                  14,680
                  
                  
                  
                  6,433
                  
                  
                  
                  29,360
                  
                  
                  
                  12,866Net
      income (loss)
                  
                  
                  (968,851
                  )
                  
                  
                  576,110
                  
                  
                  
                  (1,942,980
                  )
                  
                  
                  (228,671
                  )Net
      loss attributable to noncontrolling interests
                  
                  
                  (138,657
                  )
                  
                  
                  (119,476
                  )
                  
                  
                  (384,246
                  )
                  
                  
                  (287,538
                  )Net
      income (loss) attributable to shareholders
                  
                  $
                  (830,194
                  )
                  
                  $
                  695,586
                  
                  
                  $
                  (1,558,734
                  )
                  
                  $
                  58,867Net
      income (loss) per shareBasic
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.01
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  0.00Diluted
                  
                  $
                  (0.01
                  )
                  
                  $
                  0.01
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  0.00Weighted
      average shares outstandingBasic
                  
                  
                  62,621,651
                  
                  
                  
                  50,297,145
                  
                  
                  
                  56,290,826
                  
                  
                  
                  50,185,120Diluted
                  
                  
                  62,621,651
                  
                  
                  
                  60,635,811
                  
                  
                  
                  56,290,826
                  
                  
                  
                  63,114,715
 
 See notes
to consolidated financial statements.
  4
  China
Broadband, Inc. and Subsidiaries
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Six
      Months EndedJune
      30,
                            
                            
                            June
      30,2009
                            
                            
                            2008Cash
      flows from operatingNet
      loss
                            
                            $
                            (1,942,980
                            )
                            
                            $
                            (228,671
                            )Adjustments
      to reconcile net loss to net cash provided by operating
      activitiesStock
      compensation expense
                            
                            
                            160,111
                            
                            
                            
                            91,250Depreciation
      and amortization
                            
                            
                            1,464,948
                            
                            
                            
                            1,441,530Noncash
      interest expense
                            
                            
                            50,025
                            
                            
                            
                            47,261Deferred
      income tax
                            
                            
                            (29,360
                            )
                            
                            
                            (12,866
                            )Gain
      (loss) on sale of marketable equity securities
                            
                            
                            30,626
                            
                            
                            
                            (17,498
                            )Gain
      on settlement agreement
                            
                            
                            -
                            
                            
                            
                            (1,300,692
                            )Change
      in assets and liabilities, net of amounts assumed in AdNet
      acquisition,Accounts
      receivable
                            
                            
                            (98,078
                            )
                            
                            
                            54,285Inventory
                            
                            
                            88,973
                            
                            
                            
                            (106,300
                            )Prepaid
      expenses and other assets
                            
                            
                            (69,244
                            )
                            
                            
                            (11,408
                            )Accounts
      payable and accrued expenses
                            
                            
                            460,686
                            
                            
                            
                            321,370Deferred
      revenue
                            
                            
                            42,766
                            
                            
                            
                            110,610Other
                            
                            
                            -
                            
                            
                            
                            (747
                            )Net
      cash provided by operating activities
                            
                            
                            158,473
                            
                            
                            
                            388,124Cash
      flows from investing activities:Investment
      in Shandong Newspaper
                            
                            
                            -
                            
                            
                            
                            (1,449,248
                            )Cash
      acquired in AdNet acquisition
                            
                            
                            17,568
                            
                            
                            
                            -Proceeds
      from sale of marketable equity securities
                            
                            
                            78,706
                            
                            
                            
                            339,998Acquisition
      of property and equipment
                            
                            
                            (236,515
                            )
                            
                            
                            (1,115,686
                            )Loan
      to Shandong Media shareholder
                            
                            
                            (552,140
                            )
                            
                            
                            -Net
      cash used in investing activities
                            
                            
                            (692,381
                            )
                            
                            
                            (2,224,936
                            )Cash
      flows from financing activitiesProceeds
      from sale of equity securities
                            
                            
                            300,000
                            
                            
                            
                            -Proceeds
      from issuance of convertible notes payable
                            
                            
                            304,853
                            
                            
                            
                            4,850,000Issuance
      costs associated with private placement and convertible
    notes
                            
                            
                            -
                            
                            
                            
                            (104,500
                            )Payable
      to Jinan Parent
                            
                            
                            (2,643,373
                            )
                            
                            
                            231,864Net
      cash (used in) provided by financing activities
                            
                            
                            (2,038,520
                            )
                            
                            
                            4,977,364Effect
      of exchange rate changes on cash
                            
                            
                            21,721
                            
                            
                            
                            448,260Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            (2,550,707
                            )
                            
                            
                            3,588,812Cash
      and cash equivalents at beginning of period
                            
                            
                            4,425,529
                            
                            
                            
                            472,670Cash
      and cash equivalents at end of period
                            
                            $
                            1,874,820
                            
                            
                            $
                            4,061,482Supplemental Cash Flow
      Information:Value
      assigned to shares issued as penalty for non-registration of 7%
      convertible notes
                            
                            $
                            -
                            
                            
                            $
                            12,125Value
      assigned to shares issued in lieu of cash for interest
    expense
                            
                            $
                            62,141
                            
                            
                            $
                            56,133
  5
  China
Broadband, Inc. and Subsidiaries
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six
      Months EndedJune
      30,
                        
                        
                        June
      30,2009
                        
                        
                        2008Acquisition of AdNet MediaFair
      value of assets acquired
                        
                        $
                        43,489
                        
                        
                        $
                        -Liabilities
      assumed
                        
                        $
                        262,273
                        
                        
                        $
                        -Consideration
      paid:  issuance of 11,254,898 shares of common
    stock
                        
                        $
                        1,907,018
                        
                        
                        $
                        -Convertible Note IssuanceProceeds
      received from issuance of Convertible Notes
                        
                        $
                        304,853
                        
                        
                        $
                        4,850,000Debt
      issuance costs converted to Convertible Notes
                        
                        $
                        -
                        
                        
                        $
                        121,250Debt
      issuance costs not converted to Convertible Notes
                        
                        $
                        -
                        
                        
                        $
                        226,835
 
 See notes
to consolidated financial statements.
  6
 
 CHINA
BROADBAND, INC. AND SUBSIDIARIES
 NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
 1.Basis of
Presentation
 
 China
Broadband, Inc., a Nevada corporation (“China Broadband”, “we,” “us,” or “the
Company”) owns and operates in the media segment through its subsidiaries in the
People’s Republic of China (“PRC” or “China”) (i) a cable broadband business
(Jinan Broadband), (ii) a print based media and television programming guide
publication (Shandong Newspaper) and (iii) a provider of multimedia advertising
content to internet cafés (AdNet Media).
 
 (i)
              The
      principal activities of the Company are to provide cable and wireless
      broadband services, principally internet services, Internet Protocol Point
      wholesale services, related network equipment rental and sales, and fiber
      network construction and maintenance through its indirect Jinan Broadband
      subsidiary based in the Jinan region of
China.
 
 (ii)
              We
      operate a print based media and television programming guide publication
      business through our Shandong Newspaper joint venture based in the
      Shandong Province of China, effective as of July 1, 2008. The results of
      which are included in our financial statements as of July
      2008.
 
 (iii)
              We
      operate a business whose primary focus is the delivery of multimedia
      advertising content to internet cafés in the PRC, effective as of April
      2009. The results of which are included in our financial statements as of
      April 2009.
 
 The
accompanying unaudited consolidated financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the
United States of America for interim financial reporting. These interim
financial statements are unaudited and, in the opinion of management, include
all adjustments, consisting of normal recurring adjustments and accruals,
necessary for a fair presentation of the balance sheet, statements of
operations, changes in equity and cash flows for the periods presented. The
results of operations for the interim period are not necessarily indicative of
the results that may be expected for the full year or for any future
period.
 
 The
financial statements of the Company were filed with the Securities and Exchange
Commission on August 19, 2009. We have evaluated subsequent events up to the
time of the filing.
 
 2.          
Accounting Policy Changes
 
 On
January 1, 2009, the Company adopted SFAS No. 141 (R), Business Combinations,
and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements.
SFAS No. 141 (R) requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at their fair values on the acquisition date, with goodwill being the
excess value over the net identifiable assets acquired. Further, it requires
transaction costs to be expensed. These costs were previously treated as costs
of the acquisition.
 
 SFAS No.
160 requires us to classify noncontrolling interests in a subsidiary as part of
consolidated net income and to include the accumulated amount of noncontrolling
interests as part of total equity. The net loss amounts we have previously
reported are now presented as “Net loss attributable to shareholders”. The
calculation of earnings per share will continue to be based on income amounts
attributable only to shareholders. Similarly, in our presentation of total
equity we distinguish between equity amounts attributable to shareholders and
amounts attributable to the noncontrolling interests (previously classified as
minority interest outside of shareholders’ equity).
 
 3.Going Concern and
Management’s Plans
 
 The
unaudited consolidated financial statements have been prepared assuming that the
Company will continue as a going concern and, accordingly, do not include any
adjustments that might result from the outcome of this uncertainty. The
Company's independent registered public accounting firm's report of the
financial statements included for the year ended December 31, 2008, contained an
explanatory paragraph regarding the Company's ability to continue as a going
concern.
  During
2009, the Company completed (i) a private financing of 5% Convertible Promissory
Notes for gross proceeds of $304,902 and (ii) a private financing of 2,000,000
shares of restricted Common Stock, par value $.001 of the Company (the “Common
Stock”), at a purchase price of $.15 per share, for aggregate gross proceeds of
$300,000. See financial statement note 4 below for a description of the
transactions.
 
 Management
plans to continue its efforts to raise additional funds through debt or equity
offerings. The Company continues to evaluate what type of offering the Company
will use, how much capital the Company will raise and which company it will
merge with or acquire. There is no guarantee that the Company will be able to
raise any capital through any type of offerings or merge with or acquire any
other companies.
  7
  4.           
Acquisition of AdNet
 
 Effective
as of April 7, 2009, China Broadband, through its wholly owned subsidiary China
Broadband, Ltd., a Cayman Islands company (“China Broadband Cayman”) completed
the acquisition (the “AdNet Acquisition”) of Wanshi Wangjing Media Technologies
(Beijing) Co., Ltd., a/k/a Adnet Media Technologies (Beijing) Co., Ltd., a
recently organized PRC based company (“AdNet”) pursuant to a Share Issuance
Agreement (the “AdNet Agreement”) between the Company, China Broadband
Cayman,
  Pursuant
to the terms of the AdNet Agreement, among other provisions, China Broadband was
required to issue 11,254,898 shares of its common stock, par value, $.001 per
share (the “Broadband Shares”) to the AdNet shareholders, in exchange for 100%
of the equity ownership of AdNet (the “AdNet Shares”) and consideration of
$100,000. The acquisition of AdNet resulted in the ownership by AdNet
shareholders of 15% of China Broadband’s common stock on a fully diluted basis
(exclusive of certain notes and warrants).
 
 The
11,254,898 common shares required to be issued in the AdNet Acquisition were
issued subsequent to June 30, 2009. The Company recorded such shares as common
shares to be issued in the accompanying consolidated balance sheet as of June
30, 2009. Based upon an analysis of provisional fair values of assets acquired
in the acquisition, the Company recorded a $1,900,000 intangible asset related
to the acquisition.
 
 The AdNet
Agreement provides for, among other provisions, that in the event that China
Broadband becomes delinquent with its reporting obligations pursuant to the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), such that the
former AdNet shareholders are not able to sell their Broadband Shares under the
exemptions provided under the Securities Act of 1933, as amended (the “Act”) for
greater than 30 days, then China Broadband will be required to issue 67,777
additional shares to the AdNet shareholders for each 30 day period that the
delinquency is not cured, up to an aggregate maximum of 677,777 additional
shares.
 
 As part
of the terms of the AdNet Acquisition, and to facilitate our subsidiary’s
ownership and control over AdNet under PRC law, we loaned AdNet $100,000
pursuant to a Loan Agreement and Equity Option Agreement. All of the shares of
AdNet are held by a trustee/nominee appointed by the Company to act as directed
by the Company pending an exercise or conversion under the Equity Option
Agreement. No assurance can be made that the combined companies will be
successful or will have sufficient capital to grow. The foregoing description is
a summary only of the Share Issuance Agreement between China Broadband, Inc.,
China Broadband, Ltd., Waanshi Wangjing Media Technologies (Beijing) Co., Ltd.
and its shareholders, dated as of April 7, 2009 (“AdNet Agreement”) and is
qualified in its entirety by reference to the full AdNet Agreement.
 
 AdNet
holds an Internet Content Provider (“ICP”) license and is in the business of
providing delivery of multimedia advertising content to internet cafés in China.
AdNet currently services over 24,000 cafés and currently operates and is
licensed to operate in 28 provinces in the PRC. AdNet maintains servers in five
data centers located in the Chinese cities of Wuhan, Wenzhou, Yantai, Yunan,
with a master distribution server in Tongshan. Partnering with a local
advertisement agency, AdNet provides a network for tens of thousands of daily
video advertisement insertions to entertainment content traffic (movies, music,
video, and games).
 
 5.           Private
Financings, June 2009
 
 Issuance
of Convertible Notes, June 2009
 
 During
the six months ended June 30, 2009, the Company completed a private financing of
5% Convertible Promissory Notes (the “Notes) for gross proceeds of $304,902 (the
“Note Offering”). The Note Offering was pursuant to a Note Purchase Agreement
(the “Note Purchase Agreement”) with nine persons who were existing holders (the
“Note Investors”) of Convertible Promissory Notes issued in January of 2008 (the
“January 2008 Notes”), pursuant to which the Company issued $304,902 principal
amount of Notes to the Note Investors at face value. The Notes accrue interest
at 5% per year payable quarterly in cash or stock, are initially convertible at
$.20 per share, and become due and payable in full on May 27, 2010. The Company
did not pay any placement agent or similar fees in connection with the Note
Offering.
 
 Waiver
Letters
 
 In
addition, in connection with the Note Offering and the Equity Financing, the
Company entered into a waiver letter (the “Waiver Letter”) with all the holders
of January 2008 Notes (“Existing Note Holders”), pursuant to which, among other
things, the conversion price of the January 2008 Notes were reduced from $.75
per share to (i) $.20 per share (i.e. the same conversion price as the Notes in
the Note Offering) for the Existing Note Holders that invested in the Notes
(i.e. the Note Investors), and (ii) $.25 per share for those Existing Note
Holders that did not reinvest in the new notes. All of the Existing Note Holders
waived certain anti dilution adjustments in respect of the contemplated Equity
Financing or in respect of their Warrants which were issued to them in
connection with the January 2008 Notes, which warrants remain exercisable at
$.60 per share.
  8
  The
Company also agreed, pursuant to the Waiver Letter, that if it raises capital in
excess of $10,000,000 and up to $20,000,000 it will repay the January 2008
Notes, on a pari pasu
basis based on principal amount outstanding, a minimum of 12.5% of the net
proceeds raised and, that if it is successful in raising over $20,000,000, it
will repay the January 2008 Notes, on a pari pasu basis based on
principal, a minimum aggregate of 15.0% of the net proceeds raised, until repaid
in full.
 
 Exemption
from registration of the Notes issued to the Note Investors is claimed under
Section 4(2) of the Act and Rule 506 promulgated thereunder, based on, among
other things, the representations madeby each of the investors in
the Note Purchase Agreement that include, among other things, a representation
from each such purchaser that it or he is an “accredited investor” within the
meaning of Regulation D promulgated under the Act and that such purchases were
not made as part of a general or public solicitation or with a view towards
distribution or resale of securities acquired in the financing.
 
 Equity
Financing; Issuance of Common Stock
 
 During
the six months ended June 30, 2009 and pursuant to a Securities Purchase
Agreement with three investors, the Company completed a private financing of
2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the
“Common Stock”), at a purchase price of $.15 per share, for aggregate gross
proceeds of $300,000 (the “Equity Financing”). The company did not pay any
placement agent or similar fees in connection with such financing. As indicated
above, the Existing Note Holders waived, in part, anti dilution rights with
respect to this Equity Financing.
 
 6.
          Convertible Notes, January
2008
 
 On
January 11, 2008 the Company entered into and consummated the Subscription
Agreement with ten accredited investors with respect to the issuance of an
aggregate of $4,971,250 principal amount of Convertible Notes due January 11,
2013, and Class A Warrants to purchase an aggregate of 6,628,333 shares of
common stock of the Company at $.60 per share expiring on June 11,
2013.
 
 As
described in Note 4 above, in connection with the Note Offering and Equity
Financing, the Company entered into a waiver letter with all the holders of
January 2008 Notes (“Existing Note Holders”) pursuant to which, among other
things, the conversion price of the January 2008 Notes were reduced from $.75
per share down to (i) $.20 per share (i.e. the same conversion price as the
Notes in the Note Offering) for the Existing Note Holders that invested in the
Notes (i.e. the Note Investors), and (ii) $.25 per share for those Existing Note
Holders that did not reinvest in the new notes.
 
 7.           Settlement
Agreement
 
 On
January 11, 2008, simultaneously with the closing of the Convertible Notes
described above in Note 5, the Company entered into a Settlement Agreement
(“Settlement Agreement”) which was negotiated by the Company, its advisors and
management and certain shareholders, for purposes of facilitating the Company’s
business plan and expediting and facilitating the Company’s financing activities
and avoiding disputes between management and certain investors and consultants
concerning possible claims that such investors suggested might be brought
against these principals for their activities in forming and operating China
Cablecom and its entry into a merger with a subsidiary of Jaguar as being
violative of their employment agreements with the Company. The Settlement
Agreement provided, subject to the terms thereof, for general mutual releases of
all executives and management and their affiliated entities and also provided
for the modification of employment agreements of both, Mr. Clive Ng, our
Chairman and Mr. Yue Pu, our Vice Chairman and former Chief Financial Officer.
The Settlement Agreement also called for the transfer of certain securities by
Mr. Ng to the Company and to certain of the Company’s shareholders and
consultants in exchange for releases in favor of the Company and management and
their affiliates.
 
 The
following represents the details of the net gain the Company recognized as a
result of the Settlement Agreement during the quarter ended June 30, 2008 which
is recorded in “Interest and other income (expense)” in the accompany Statement
of Operations:
 
 Receipt
      of Cablecom Holding Shares
                    
                    $
                    2,515,500Waiver
      of accrued compensation
                    
                    
                    212,054Warrant
      extensions
                    
                    
                    (1,426,862
                    )Net
      gain
                    
                    $
                    1,300,692
 
 8.           Interest
Expense and Share Issuance
 
 In
connection with the Convertible Notes issued in January 2008 and June 2009 as
described above in Notes 5 and 6, during the three months ended June 30, 2009
and 2008 the Company incurred $89,000 and $89,000 in interest expense related to
these Notes and Warrants, respectively.  During the six months ended
June 30, 2009 and 2008 the Company incurred $176,000 and $167,000 in interest
expense related to these Notes and Warrants, respectively.
  9
  As set
forth in the related documents and with the consent of the Note holders, the
Company issued 260,703 and 159,743 shares to the Note holders in lieu of cash of
approximately $126,000 and $120,000 for interest in the six month periods ended
June 30, 2009 and 2008, respectively.
 
 9.          
Marketable Equity Securities
 
 The
Company holds investments in certain “available-for-sale” marketable equity
securities all of which consist of common stock of China Cablecom Holdings Ltd.
(the “Cablecom Shares”). The Cablecom Shares are classified as
available-for-sale securities and are carried at estimated fair value, based on
available information.
 
 During
the three months ended June 30, 2009, the Company sold 42,651 of its Cablecom
Shares on the open market and received net proceeds of $24,000 and recorded a
net loss on the sales of approximately $10,000. During the six months ended June
30, 2009, the Company sold 136,665 of its Cablecom Shares on the open market and
received net proceeds of $79,000 and recorded a net loss on the sales of
approximately $31,000.
 
 As a
result of a decline in the price of the Cablecom Shares, we recorded an
unrealized net loss of approximately $36,000 on these shares through other
comprehensive income (loss) for the period ended June 30, 2009. The fair value
of the remaining 181,455 Cablecom Shares at June 30, 2009 approximates
$109,000.
 
 10.        
Accumulated Other Comprehensive Income
 
 Comprehensive
income (loss) for the three and six months ended June 30, 2009 and 2008 is as
follows:
 
 Three
      Months Ended
                    
                    
                    Six
      Months EndedJune 30,
                    
                    
                    June 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)
                    
                    
                    (Unaudited)Net
      income (loss) attributable to shareholders
                    
                    $
                    (830,000
                    )
                    
                    $
                    696,000
                    
                    
                    $
                    (1,559,000
                    )
                    
                    $
                    59,000Other
      comprehensive income (loss):Currency
      translation adjustment
                    
                    
                    1,000
                    
                    
                    
                    313,000
                    
                    
                    
                    22,000
                    
                    
                    
                    448,000Unrealized
      gain (loss) on marketable equity securities
                    
                    
                    49,000
                    
                    
                    
                    170,000
                    
                    
                    
                    (36,000
                    )
                    
                    
                    170,000Comprehensive
      income (loss)
                    
                    $
                    (780,000
                    )
                    
                    $
                    1,179,000
                    
                    
                    $
                    (1,573,000
                    )
                    
                    $
                    677,000
 
 Changes
in the components of Accumulated Other Comprehensive Income are attributable to
the currency translation adjustment from the Renminbi to the US dollar and the
unrealized loss on marketable equity securities. For the six months ended June
20, 2009, the change in Accumulated Other Comprehensive Income is as
follows:
 
 AccumulatedOtherComprehensiveIncomeBalance,
      December 31, 2008
                    
                    
                    321,000Change
      for the six months ended June 30, 2009, net of taxes
                    
                    
                    (15,000
                    )Balance,
      June 30, 2009
                    
                    $
                    306,000
 
 11.   
     Stock Based Compensation
 
 In March
2008, the board of directors of the company approved the China Broadband, Inc.
2008 Stock Incentive Plan (the “Plan”), pursuant to which options or other
similar securities may be granted. Qualified or Non-qualified Options to
purchase up to 2,500,000 shares of the Company’s common stock may be issued
under the Plan. The Plan may also be administered by an independent committee of
the board of directors. Through June 30, 2009, 250,000 options have been issued
under the plan.
 
 The
following table provides the details of the total stock based compensation for
the three and six months ended June 30, 2009 and 2008:
 
 Three Months Ended
                    
                    
                    Six Months EndedJune
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Stock
      option amortization
                    
                    $
                    18,000
                    
                    
                    $
                    -
                    
                    
                    $
                    27,000
                    
                    
                    $
                    8,000Warrant
      amortization
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    7,000
                    
                    
                    
                    14,000Stock
      issued in lieu of interest
                    
                    
                    64,000
                    
                    
                    
                    64,000
                    
                    
                    
                    126,000
                    
                    
                    
                    120,000Stock
      issued as non registration penalty
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12,000$
                    82,000
                    
                    
                    $
                    64,000
                    
                    
                    $
                    160,000
                    
                    
                    $
                    154,000
 
 The
Company accounts for its stock option awards pursuant to the provisions of SFAS
123(R). During the three month periods ending June 30, 2009 and 2008, the
Company recorded a charge of $18,000 and $0, respectively. During the six month
periods ending June 30, 2009 and 2008, the Company recorded a charge of $27,000
and $8,000, respectively in connection with the issuance of stock
options.
 
 The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model. The Company recognizes the fair value of
each option as compensation expense ratably using the straight-line attribution
method over the service period, which is generally the vesting period. The
Black-Scholes model incorporates the following assumptions:
  ·
              Expected
      volatility - the Company estimates the volatility of common stock at the
      date of grant using historical
volatility.
 
 ·
              Expected
      term - the Company estimates the expected term of options granted based on
      a combination of vesting schedules, term of the option and historical
      experience.
 
 ·
              Risk-free
      interest rate - the Company estimates the risk-free interest rate using
      the U.S. Treasury yield curve for periods equal to the expected term of
      the options in effect at the time of
grant.
 
 ·
              Dividends
      - the Company uses an expected dividend yield of zero. The Company intends
      to retain any earnings to fund future operations and, therefore, does not
      anticipate paying any cash dividends in the foreseeable
      future.
  10
  The
following table outlines the variables used in the Black-Scholes option-pricing
model for options issued in 2008.
 
 2008Risk
      free interest rate
                      
                      
                      3.53
                      %Volatility
                      
                      
                      188.76
                      %Dividend
      yield
                      
                      
                      —Expected
      option life
                      
                      4
      years
  There
were no stock options issued during the six month period ending June 30, 2009.
As of June 30, 2009, there were 162,500 options exercisable at a weighted
average exercise price of $0.62 with a weighted average remaining life of 6.4
years.
 
 As of
June 30, 2009 the Company had total unrecognized compensation expense related to
options granted of $35,000 which will be recognized over a remaining service
period of 2 years.
 
 In
connection with the Company’s Share Exchange, capital raising efforts in 2007
and the Company’s January 2008 Financing of Convertible Notes and Class A
Warrants, the Company issued warrants to investors and service providers to
purchase common stock of the Company at a fixed exercise price and for a
specified period of time. The following table outlines the warrants outstanding
as of June 30, 2009:
  Number
      ofWarrants
                    
                    
                    Exercise
                    
                    ExpirationName
                    
                    Issued
                    
                    
                    Price
                    
                    DateMaxim
      Financial Corporation
                    
                    
                    3,974,800
                    
                    
                    $
                    0.60
                    
                    1/11/2013WestPark
      Capital, Inc.
                    
                    
                    640,000
                    
                    
                    $
                    0.60
                    
                    1/11/2013BCGU
      LLC
                    
                    
                    500,000
                    
                    
                    $
                    0.60
                    
                    1/11/20132007
      Private Placement Investor Warrants
                    
                    
                    4,000,000
                    
                    
                    $
                    2.00
                    
                    1/11/2013January
      2008 Financing Class A Warrants
                    
                    
                    6,628,333
                    
                    
                    $
                    0.60
                    
                    1/11/2013Chardan
      Capital Broker Warrants
                    
                    
                    1,131,667
                    
                    
                    $
                    0.50
                    
                    6/11/2013Other
      Warrants
                    
                    
                    67,500
                    
                    
                    $
                    0.60
                    
                    3/13/201316,942,300
 
 On
January 11, 2008 the Company issued warrants in connection with the January 2008
Financing of Notes and Class A Warrants to ten accredited investors and Chardan
Capital as broker. The Company recorded the value of the Class A Warrants of
$504,661 as a discount to the Notes issued therewith and is amortizing this
discount over the five year life of the Notes.
 
 On
January 11, 2008 the Company issued the 1,131,667 Broker Warrants expiring June
11, 2013 in connection with the January 2008 Financing to Chardan Capital as
broker. The Company is recognizing the value of the Broker Warrants of $226,835
as debt issuance costs and is expensing the value over the five year life of the
Convertible Notes.
 
 Pursuant
to an agreement entered into in April 2007, the Company also issued warrants to
a consultant for services provided on March 13, 2008, exercisable at $.60 per
share. The Company incurred an expense of $14,198 during 2008 related to the
issuance of these warrants and had total unrecognized compensation expense
related to these warrants of $7,099, which was recognized in March
2009.
 
 12.Income
Taxes
 
 In June
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 is
intended to clarify the accounting for uncertainty in income taxes recognized in
a company’s financial statements and prescribes the recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
 
 Under FIN
48, evaluation of a tax position is a two-step process. The first step is to
determine whether it is more-likely-than-not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likely of being realized upon ultimate settlement.
  11


Tax
positions that previously failed to meet the more-likely-than-not recognition
threshold should be recognized in the first subsequent period in which the
threshold is met. Previously recognized tax positions that no longer meet the
more-likely-than-not criteria should be de-recognized in the first subsequent
financial reporting period in which the threshold is no longer met.





At June
30, 2009, Company’s management considered that the Company had no uncertain tax
positions that affected its consolidated financial position and results of
operations or cash flow, and will continue to evaluate for the uncertain
position in future. There are no estimated interest costs and penalties provided
in the Company’s financial statements for the six months ended June 30,
2009.





The
Company is subject to a 5% business tax on the business income of our Jinan
Broadband subsidiary and Shandong Media joint venture.





Deferred
taxes are recognized for the future tax consequences attributable to temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and income tax purposes using enacted rates expected to be in
effect when such amounts are realized or settled.  The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.





Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.





The
following is a discussion and analysis of our results of operations and
should be read in conjunction with our consolidated financial statements and
related notes for the quarter ended June 30, 2009 contained in this Form
10-Q.  The following is also necessarily subject to, and we
incorporate herein, the forward looking statements disclosure provided in the
forepart to this Form 10-Q as well as Risk Factors discussed therein, all of
which should be considered.





Overview





We operate in the media segment,
through our indirect subsidiaries in the PRC, a cable broadband business based
in the Jinan region of China (“Jinan Broadband”) and a television programming
guide publication business joint venture (“Shandong Media”) in the Shandong
Province of China.  Accordingly, our principal activities are
providing cable and wireless broadband and print based media and television
programming guide services in the PRC.  In April 2009 we acquired an
internet café content provider and advertising business in the PRC (AdNet Media)
(See “Recent Developments” below).





Recent
Developments





As
described below, during the six months ended June 30, 2009 we completed (i) a
private financing of 5% Convertible Promissory Notes (the “Notes”) for
gross proceeds of $304,902 (the “Note Offering”) and (ii) a private financing of
2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the
“Common Stock”), at a purchase price of $.15 per share, for aggregate proceeds
of $300,000 (the “Equity Financing”) and simultaneously entered into a waiver
letter agreement with certain note-holders as more fully described
below.  See “Private Financings” in this section below.





Laketune
Non Binding Memorandum of Understanding





China
Broadband, Inc., through its wholly owned subsidiary, China Broadband, Ltd.,
entered into a non binding memorandum of understanding to acquire 51% of
Laketune Technologies, a joint venture partnership company with the State
Administration of Radio Film & Television (SARFT) entity WASU (Hangzhou
Digital) in the People’s Republic of China (the “PRC”).  The
completion of this joint venture is subject to a number of
conditions.  In connection therewith, the Company, through the efforts
of its strategic investment banking consultant, COWEN Latitude Asia, distributed
an information research sheet relating to the Company’s businesses and the
broadband business in the PRC which generally contains certain research and
information relating to the broadband business in the PRC (the “Information
Sheet”).  A copy of this Information Sheet can be found in the
Company’s Current Report on Form 8-K filed on June 26, 2009.





Completion
of Acquisition of AdNet





Effective
as of April 7, 2009, China Broadband, through its wholly owned subsidiary China
Broadband, Ltd., a Cayman Islands company (“China Broadband Cayman”) completed
the acquisition (the “AdNet Acquisition”) of Wanshi Wangjing Media Technologies
(Beijing) Co., Ltd., a/k/a Adnet Media Technologies (Beijing) Co., Ltd., a
recently organized PRC based company (“AdNet”) pursuant to a Share Issuance
Agreement (the “AdNet Agreement”) between  the Company, China
Broadband Cayman, AdNet and its 10 shareholders (inclusive of its two
executives, Priscilla Lu and Mr. Wang Yingqi nee Michael
Wang).  As part of the acquisition, Priscilla Lu was appointed to the
China Broadband board.


12


Issuance
of Restricted Shares to AdNet Shareholders





Pursuant
to the terms of the AdNet Agreement, among other provisions, China Broadband
issued 11,254,898 shares of its common stock, par value, $.001 per share (the
“Broadband Shares”) to the AdNet shareholders, in exchange for 100% of the
equity ownership of AdNet (the “AdNet Shares”) and consideration of
$100,000.  The acquisition of AdNet resulted in the ownership by AdNet
shareholders of 15% of China Broadband’s common stock on a fully diluted basis
(exclusive of certain notes and warrants).





In the
event that China Broadband becomes delinquent with its reporting obligations
pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), such that the former AdNet shareholders are not able to sell their
Broadband Shares under the exemptions provided under the Securities Act of 1933,
as amended (the “Act”) for greater than 30 days, then China Broadband will be
required to issue 67,777 additional shares to the AdNet shareholders for each 30
day period that the delinquency is not cured, up to an aggregate maximum of
677,777 additional shares.





As part
of the terms of the AdNet Acquisition, and to facilitate our subsidiary’s
ownership and control over AdNet under PRC law, we loaned AdNet $100,000
pursuant to a Loan Agreement and Equity Option Agreement. All of the shares of
AdNet are held by a trustee appointed by the Company to act as directed by the
Company.  No assurance can be made that the combined companies will be
successful or will have sufficient capital to grow.  The foregoing
description is a summary only of the Share Issuance Agreement between China
Broadband, Inc., China Broadband, Ltd., Waanshi Wangjing Media Technologies
(Beijing) Co., Ltd. and its shareholders, dated as of April 7, 2009 (“AdNet
Agreement”) and is qualified in its entirety by reference to the full AdNet
Agreement.





AdNet
holds an Internet Content Provider (“ICP”) license and is in the business of
providing delivery of multimedia advertising content to internet cafés in
China.  AdNet currently services over 24,000 cafés and currently
operates and is licensed to operate in 28 provinces in the PRC. AdNet maintains
servers in five data centers located in the Chinese cities of Wuhan, Wenzhou,
Yantai, Yunan, with a master distribution server in
Tongshan.  Partnering with a local advertisement agency, AdNet
provides a network for tens of thousands of daily video advertisement insertions
to entertainment content traffic (movies, music, video, and games).





Results
of Operations





China
Broadband’s operating results reflect the operating results of our indirect
subsidiary, Jinan Broadband, our Shandong Media joint venture and our recently
acquired business of AdNet Media. Through WFOE, we acquired a 51% interest in
Jinan Broadband effective April 1, 2007, a 50% interest in the Shandong
Media joint venture effective July 1, 2008 and 100% interest in AdNet Media
effective April 7, 2009.





The following table presents for the
periods indicated the results of the Company’s operations.





3 Months Ended
                      
                      
                      Amount
                      
                      
                      %June 30,
                      
                      
                      June 30,
                      
                      
                      Increase /
                      
                      
                      Increase /2009
                      
                      
                      2008
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Revenue
                      
                      $
                      1,990,000
                      
                      
                      $
                      1,054,000
                      
                      
                      $
                      936,000
                      
                      
                      
                      89
                      %Cost
      of revenue
                      
                      
                      1,103,000
                      
                      
                      
                      544,000
                      
                      
                      
                      559,000
                      
                      
                      
                      103
                      %Gross
      profit
                      
                      
                      887,000
                      
                      
                      
                      510,000
                      
                      
                      
                      377,000
                      
                      
                      
                      74
                      %Selling,
      general and adminstrative expenses
                      
                      
                      741,000
                      
                      
                      
                      311,000
                      
                      
                      
                      430,000
                      
                      
                      
                      138
                      %Professional
      fees
                      
                      
                      190,000
                      
                      
                      
                      169,000
                      
                      
                      
                      21,000
                      
                      
                      
                      12
                      %Depreciation
      and amortization
                      
                      
                      842,000
                      
                      
                      
                      694,000
                      
                      
                      
                      148,000
                      
                      
                      
                      21
                      %Loss
      from operations
                      
                      
                      (886,000
                      )
                      
                      
                      (664,000
                      )
                      
                      
                      (222,000
                      )
                      
                      
                      33
                      %Interest
      & other income / (expense)Settlement
      gain
                      
                      
                      -
                      
                      
                      
                      1,301,000
                      
                      
                      
                      (1,301,000
                      )
                      
                      
                      -100
                      %Interest
      income
                      
                      
                      2,000
                      
                      
                      
                      3,000
                      
                      
                      
                      (1,000
                      )
                      
                      
                      -33
                      %Interest
      expense
                      
                      
                      (90,000
                      )
                      
                      
                      (89,000
                      )
                      
                      
                      (1,000
                      )
                      
                      
                      1
                      %Gain
      (loss) on sale of securities
                      
                      
                      (10,000
                      )
                      
                      
                      18,000
                      
                      
                      
                      (28,000
                      )
                      
                      
                      -156
                      %Net
      income (loss) before income tax
                      
                      
                      (984,000
                      )
                      
                      
                      569,000
                      
                      
                      
                      (1,553,000
                      )
                      
                      
                      -273
                      %Income
      tax benefit
                      
                      
                      15,000
                      
                      
                      
                      6,000
                      
                      
                      
                      9,000
                      
                      
                      
                      150
                      %Net
      income (loss)
                      
                      
                      (969,000
                      )
                      
                      
                      575,000
                      
                      
                      
                      (1,544,000
                      )
                      
                      
                      -269
                      %Net
      loss attributable to noncontrolling interests
                      
                      
                      (139,000
                      )
                      
                      
                      (120,000
                      )
                      
                      
                      (19,000
                      )
                      
                      
                      16
                      %Net
      income (loss) attributable to shareholders
                      
                      $
                      (830,000
                      )
                      
                      $
                      695,000
                      
                      
                      $
                      (1,525,000
                      )
                      
                      
                      -219
                      %





6 Months Ended
                      
                      
                      Amount
                      
                      
                      %June 30,
                      
                      
                      June 30,
                      
                      
                      Increase /
                      
                      
                      Increase /2009
                      
                      
                      2008
                      
                      
                      (Decrease)
                      
                      
                      (Decrease)Revenue
                      
                      $
                      3,939,000
                      
                      
                      $
                      2,057,000
                      
                      
                      $
                      1,882,000
                      
                      
                      
                      91
                      %Cost
      of revenue
                      
                      
                      2,277,000
                      
                      
                      
                      896,000
                      
                      
                      
                      1,381,000
                      
                      
                      
                      154
                      %Gross
      profit
                      
                      
                      1,662,000
                      
                      
                      
                      1,161,000
                      
                      
                      
                      501,000
                      
                      
                      
                      43
                      %Selling,
      general and adminstrative expenses
                      
                      
                      1,459,000
                      
                      
                      
                      812,000
                      
                      
                      
                      647,000
                      
                      
                      
                      80
                      %Professional
      fees
                      
                      
                      300,000
                      
                      
                      
                      305,000
                      
                      
                      
                      (5,000
                      )
                      
                      
                      -2
                      %Depreciation
      and amortization
                      
                      
                      1,673,000
                      
                      
                      
                      1,442,000
                      
                      
                      
                      231,000
                      
                      
                      
                      16
                      %Loss
      from operations
                      
                      
                      (1,770,000
                      )
                      
                      
                      (1,398,000
                      )
                      
                      
                      (372,000
                      )
                      
                      
                      27
                      %Interest
      & other income / (expense)Settlement
      gain
                      
                      
                      -
                      
                      
                      
                      1,301,000
                      
                      
                      
                      (1,301,000
                      )
                      
                      
                      -100
                      %Interest
      income
                      
                      
                      5,000
                      
                      
                      
                      19,000
                      
                      
                      
                      (14,000
                      )
                      
                      
                      -74
                      %Interest
      expense
                      
                      
                      (176,000
                      )
                      
                      
                      (167,000
                      )
                      
                      
                      (9,000
                      )
                      
                      
                      5
                      %Gain
      (loss) on sale of securities
                      
                      
                      (31,000
                      )
                      
                      
                      17,000
                      
                      
                      
                      (48,000
                      )
                      
                      
                      -282
                      %Other
                      
                      
                      -
                      
                      
                      
                      (14,000
                      )
                      
                      
                      14,000
                      
                      
                      
                      -100
                      %Net
      income (loss) before income tax
                      
                      
                      (1,972,000
                      )
                      
                      
                      (242,000
                      )
                      
                      
                      (1,730,000
                      )
                      
                      
                      715
                      %Income
      tax benefit
                      
                      
                      29,000
                      
                      
                      
                      13,000
                      
                      
                      
                      16,000
                      
                      
                      
                      123
                      %Net
      income (loss)
                      
                      
                      (1,943,000
                      )
                      
                      
                      (229,000
                      )
                      
                      
                      (1,714,000
                      )
                      
                      
                      748
                      %Net
      loss attributable to noncontrolling interests
                      
                      
                      (384,000
                      )
                      
                      
                      (288,000
                      )
                      
                      
                      (96,000
                      )
                      
                      
                      33
                      %Net
      income (loss) attributable to shareholders
                      
                      $
                      (1,559,000
                      )
                      
                      $
                      59,000
                      
                      
                      $
                      (1,618,000
                      )
                      
                      
                      -2742
                      %





Comparison of Three Months
Ended June 30, 2009 and 2008





Revenues





Our
revenues are generated by our operating companies in the PRC.  Our
revenues for the three months ended June 30, 2009 include revenues primarily
from our Jinan Broadband and Shandong Media companies.  By comparison,
our revenues for the three months ended June 30, 2008 include only our Jinan
Broadband business.





Revenues for the three months ended
June 30, 2009 totaled $1,990,000, as compared to $1,054,000 for the three months
ended June 30, 2008.  The increase in revenue of approximately
$936,000, or 89% is primarily attributable to including the revenues from our
Shandong Media joint venture of which by comparison were not included in our
2008 operating results.





Jinan
Broadband’s revenue consists primarily of sales to our PRC based Internet
consumers, cable modem consumers, business customers and other internet and
cable services of $1,138,000, an increase of $85,000, or 8% as compared to
revenues of $1,053,000 for the three months ended 2008. The increase is
attributable to increases in our internet sales and our value-added
services.





Shandong
Media’s revenue consists primarily of sales of publications and advertising
revenues.  For the three months ended June 30, 2009, revenues from the
Shandong Media joint venture totaled $849,000.  By comparison,
Shandong Media’s revenues were not included in our operating results during the
second quarter of 2008 (For a description of the Shandong Media joint venture,
see “Shandong Media Joint
Venture and Shandong Newspaper Cooperation Agreement”, below).





AdNet
Media is an early stage company that started operations during the first quarter
of 2009.  AdNet Media’s revenue will consist primarily of advertising
revenue and video service fees.  Advertising revenues will be
generated from advertisers who participate in  an ad platform
developed by AdNet which is accessed through internet
cafés.   Video service fees will be generated from the internet
café or agent who uses our online video services which includes movies, music,
videos and games.  For the three months ended June 30, 2009, revenues
totaled $2,000.  By comparison, AdNet Media’s revenues were not
included in our operating results during the second quarter of 2008 (For a
description of the AdNet Media acquisition, see “Completion of Acquisition of
AdNet”, above).


13


Gross
Profit





Our gross profit for the three months
ended June 30, 2009 was $887,000, as compared to $510,000 for the three months
ended June 30, 2008.The increase in
gross profit of approximately $377,000 or 74% is comprised of $308,000 from the
inclusion of our Shandong Media joint venture, $79,000 increase attributable to
our Jinan Broadband operations offset by $10,000 from the inclusion of our AdNet
Media acquisition.  The increase in gross profit attributable to Jinan
Broadband was primarily due to increased sales while cost of sales remained
relatively constant.





Gross profit as a percentage of revenue
was 45% for the three months ended June 30, 2009, as compared to 48% for the
three months ended June 30, 2008.




Selling,
General and Administrative Expenses





Our
selling, general and administrative expenses for the three months ended June 30,
2009 increased approximately $430,000 to $741,000, as compared to $311,000 for
the three months ended June 30, 2008.  The increase is primarily
attributable to the inclusion of our Shandong Media joint venture in mid 2008
and our AdNet Media acquisition in April 2009.





Salaries and personnel costs are the
major component of selling, general and administrative expenses.  For
the three months ended June 30, 2009, salaries and personnel costs accounted for
57% of our selling, general and administrative expenses.  During the
2009 period, salaries and personnel costs totaled $421,000, an increase of
$237,000 or 129% as compared to $184,000 for the 2008 period.  The
increase in salaries and personnel costs is primarily attributable to the
inclusion of our Shandong Media joint venture entered into mid 2008 and our
AdNet Media acquisition in April 2009.





We expect our selling, general and
administrative expenses will increase as we continue to grow our
business.





Professional
Fees





The following is a list of our
professional fees accrued for the three months ended June 30, 2009 and
2008.





2009
                  
                  
                  2008Accounting
                  
                  $
                  102,000
                  
                  
                  $
                  63,000Consulting
                  
                  $
                  21,000
                  
                  
                  $
                  16,000Legal
                  
                  $
                  67,000
                  
                  
                  $
                  89,000Total
                  
                  $
                  190,000
                  
                  
                  $
                  168,000





The professional fees are generally
related to public company reporting and governance expenses as well as costs
related to our acquisitions.  We expect our costs for professional
services for public company reporting and corporate governance expenses to
remain significant, but to decrease as a percentage of our overall revenues if
we continue to acquire new entities and enter into strategic
partnerships.





Depreciation
and Amortization





2009
                  
                  
                  2008Depreciation
                  
                  $
                  760,000
                  
                  
                  $
                  646,000Amortization
                  
                  $
                  82,000
                  
                  
                  $
                  48,000Total
                  
                  $
                  842,000
                  
                  
                  $
                  694,000





Depreciation expense during 2009
relates to the depreciation on the approximately $14.4 million of property,
plant and equipment, at our Jinan Broadband subsidiary.  The increase
in amortization of $34,000 is primarily attributable to the amortization related
to our Shandong Media intangible assets acquired in 2008.


14


Interest
and Other Income (Expense), net





Interest
and other income (expense), net, of approximately $(98,000) during the three
months ended June 30, 2009 consisted primarily of:


·
            interest
      expense related to the 5% Convertible Notes and Warrants issued in January
      2008 and June 2009 in the amount of approximately
  $90,000,


·
            the
      loss on the sale of marketable equity securities in the amount of
      $10,000.





During
the three months ended June 30, 2008, interest and other income (expense), net,
of approximately $1,233,000, a decrease of $1,331,000 compared to the second
quarter of 2009 was primarily due to the net gain of $1,301,000 recognized from
a Settlement Agreement entered into on January 11, 2008.





We expect our interest expense to
increase due to additional convertible notes issued in June 2009 in the amount
of $304,902.  Interest on the Notes compounds monthly at the annual
rate of five percent (5%).  The June 2009 Notes mature on May 27,
2010.  The outstanding principal amount on the June 2009 Notes as of
June 30, 2009 is $304,902.  The January 2008 Notes mature on January
11, 2013.  The outstanding principal amount of the January 2008 Notes
as of June 30, 2009 was $4,971,250.





Net
Loss Attributable to Noncontrolling Interest





49% of the operating loss of our Jinan
Broadband subsidiary is allocated to Jinan Parent, the 49% co-owner of this
business.  During the three months ended June 30, 2009, $142,000 of
our operating loss from Jinan Broadband was allocated to Jinan Parent, as
compared to $119,000 during the second quarter of 2008.





50% of the operating profit of our
Shandong Media joint venture is allocated to our 50% Shandong Newspaper joint
venture partner.  During the three months ended June 30, 2009, $3,000
of our operating profit from Shandong Media was allocated to Shandong
Newspaper.  We consolidated the results of Shandong Media effective
July 1, 2008.  Accordingly, there was no allocation for the three
months ended June 30, 2008.





Net
Loss Attributable to Shareholders





Net loss
attributable to shareholders for the three months ended June 30, 2009 was
$830,000.  For the 2008 period, the company had net income
attributable to shareholders of $695,000, a decrease of $1,525,000, or
219%.  The decrease in net income attributable to shareholders is
primarily due to the recognition of a net gain of $1,301,000 from a Settlement
Agreement entered into on January 11, 2008.  Other changes
include:





·
            an
      increase in the net loss from Jinan Broadband of $45,000 as compared to
      the second quarter of 2008


·
            a
      net profit of $6,000 from the inclusion of our Shandong Media joint
      venture


·
            a
      net loss of $132,000 from the inclusion of our AdNet Media
      acquisition


·
            general
      increases in corporate costs





The following table breaks down the
results of operations for the three months ended June 30, 2009 and 2008 between
our operating companies and our non-operating companies.





Ø
            The
      operating companies include Jinan Broadband, Shandong Media and AdNet
      Media.


Ø
            2009
      includes operations of our Shandong Media and AdNet Media companies as
      compared to no inclusion in 2008.





3 Months Ended
                                  
                                  
                                  3 Months EndedJune 30, 2009
                                  
                                  
                                  June 30, 2008% of
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  % ofTotal
                                  
                                  
                                  Non-
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  Total
                                  
                                  
                                  Non-Operating
                                  
                                  
                                  Revenue
                                  
                                  
                                  Operating
                                  
                                  
                                  Total
                                  
                                  
                                  Operating
                                  
                                  
                                  Revenue
                                  
                                  
                                  Operating
                                  
                                  
                                  TotalRevenue
                                  
                                  $
                                  1,990,000
                                  
                                  
                                  
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,990,000
                                  
                                  
                                  $
                                  1,054,000
                                  
                                  
                                  
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,054,000Cost
      of revenue
                                  
                                  
                                  1,103,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,103,000
                                  
                                  
                                  
                                  544,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  544,000Gross
      profit
                                  
                                  
                                  887,000
                                  
                                  
                                  
                                  45
                                  %
                                  
                                  
                                  -
                                  
                                  
                                  
                                  887,000
                                  
                                  
                                  
                                  510,000
                                  
                                  
                                  
                                  48
                                  %
                                  
                                  
                                  -
                                  
                                  
                                  
                                  510,000Selling,
      general and adminstrative expenses
                                  
                                  
                                  531,000
                                  
                                  
                                  
                                  27
                                  %
                                  
                                  
                                  210,000
                                  
                                  
                                  
                                  741,000
                                  
                                  
                                  
                                  106,000
                                  
                                  
                                  
                                  10
                                  %
                                  
                                  
                                  205,000
                                  
                                  
                                  
                                  311,000Professional
      fees
                                  
                                  
                                  12,000
                                  
                                  
                                  
                                  1
                                  %
                                  
                                  
                                  178,000
                                  
                                  
                                  
                                  190,000
                                  
                                  
                                  
                                  3,000
                                  
                                  
                                  
                                  0
                                  %
                                  
                                  
                                  166,000
                                  
                                  
                                  
                                  169,000Depreciation
      and amortization
                                  
                                  
                                  760,000
                                  
                                  
                                  
                                  38
                                  %
                                  
                                  
                                  82,000
                                  
                                  
                                  
                                  842,000
                                  
                                  
                                  
                                  646,000
                                  
                                  
                                  
                                  61
                                  %
                                  
                                  
                                  48,000
                                  
                                  
                                  
                                  694,000Loss
      from operations
                                  
                                  
                                  (416,000
                                  )
                                  
                                  
                                  -11
                                  %
                                  
                                  
                                  (470,000
                                  )
                                  
                                  
                                  (886,000
                                  )
                                  
                                  
                                  (245,000
                                  )
                                  
                                  
                                  -23
                                  %
                                  
                                  
                                  (419,000
                                  )
                                  
                                  
                                  (664,000
                                  )Interest
      & other income / (expense)Settlement
      gain
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,301,000
                                  
                                  
                                  
                                  1,301,000Interest
      income
                                  
                                  
                                  2,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,000
                                  
                                  
                                  
                                  2,000
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  1,000
                                  
                                  
                                  
                                  3,000Interest
      expense
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (90,000
                                  )
                                  
                                  
                                  (90,000
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (89,000
                                  )
                                  
                                  
                                  (89,000
                                  )Loss
      on sale of securities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (10,000
                                  )
                                  
                                  
                                  (10,000
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  18,000
                                  
                                  
                                  
                                  18,000Income
      (loss) before income tax
                                  
                                  
                                  (414,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (570,000
                                  )
                                  
                                  
                                  (984,000
                                  )
                                  
                                  
                                  (243,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  812,000
                                  
                                  
                                  
                                  569,000Income
      tax benefit
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  15,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  6,000
                                  
                                  
                                  
                                  6,000Net
      income (loss)
                                  
                                  
                                  (414,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (555,000
                                  )
                                  
                                  
                                  (969,000
                                  )
                                  
                                  
                                  (243,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  818,000
                                  
                                  
                                  
                                  575,000Net
      loss attributable to noncontrolling interest
                                  
                                  
                                  (139,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (139,000
                                  )
                                  
                                  
                                  (120,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (120,000
                                  )Net
      income (loss) attributable to shareholders
                                  
                                  $
                                  (275,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  (555,000
                                  )
                                  
                                  $
                                  (830,000
                                  )
                                  
                                  $
                                  (123,000
                                  )
                                  
                                  
                                  
                                  
                                  
                                  $
                                  818,000
                                  
                                  
                                  $
                                  695,000





Comparison of Six Months
Ended June 30, 2009 and 2008





Revenues





Our
revenues are generated by our operating companies in the PRC.  Our
revenues for the six months ended June 30, 2009 include revenues primarily from
our Jinan Broadband and Shandong Media companies.  By comparison, our
revenues for the six months ended June 30, 2008 include only our Jinan Broadband
business.





Revenues for the six months ended June
30, 2009 totaled $3,939,000, as compared to $2,057,000 for the six months ended
June 30, 2008.  The increase in revenue of approximately $1,882,000,
or 91% is primarily attributable to including the revenues of our Shandong Media
joint venture which by comparison were not included in our 2008 operating
results.


15


Jinan
Broadband’s revenue consists primarily of sales to our PRC based Internet
consumers, cable modem consumers, business customers and other internet and
cable services of $2,223,000, an increase of $167,000, or 8% as compared to
revenues of $2,057,000 for the six months ended 2008. The increase is
attributable to increases in our internet sales, network leasing sales and
value-added services.





Shandong
Media’s revenue consists primarily of sales of publications and advertising
revenues.  For the six months ended June 30, 2009, revenues from the
Shandong Media joint venture totaled $1,714,000.  By comparison,
Shandong Media’s revenues were not included in our operating results for the
2008 period.  (For a description of the Shandong Media joint venture,
see “Shandong Media Joint
Venture and Shandong Newspaper Cooperation
Agreement”, below).





AdNet
Media is an early stage company that started operations during the first quarter
of 2009.  AdNet Media’s revenue will consist primarily of advertising
revenue and video service fees.  Advertising revenues will be
generated from advertisers who participate in an ad platform developed by AdNet
which is accessed through internet cafés.   Video service fees
will be generated from the internet café or agent who uses our online video
services which includes movies, music, videos and games.  For the six
months ended June 30, 2009, revenues totaled $2,000.  By comparison,
AdNet Media’s revenues were not included in our operating results for the 2008
period.   (For a description of the AdNet Media acquisition, see
“Completion of Acquisition of
AdNet”, above).





Gross
Profit





Our gross profit for the six months
ended June 30, 2009 was $1,662,000, as compared to $1,161,000 for the six months
ended June 30, 2008.The increase in
gross profit of approximately $501,000, or 43%, is comprised of $609,000 from
the inclusion of our Shandong Media joint venture offset by $10,000 from the
inclusion of our AdNet Media acquisition and by a $98,000 decrease attributable
to our Jinan Broadband operations.  The decrease in gross profit
attributable to Jinan Broadband was primarily due to increase costs of revenue,
particularly costs of telecom bandwidth.





Gross profit as a percentage of revenue
was 42% for the six months ended June 30, 2009, as compared to 56% for the six
months ended June 30, 2008.




Selling,
General and Administrative Expenses





Our
selling, general and administrative expenses for the six months ended June 30,
2009 increased approximately $647,000 to $1,459,000, as compared to $812,000 for
the six months ended June 30, 2008.  The increase is primarily
attributable to the inclusion of our Shandong Media joint venture in mid 2008
and our AdNet Media acquisition in April 2009.





Salaries and personnel costs are the
major component of selling, general and administrative expenses.  For
the six months ended June 30, 2009, salaries and personnel costs accounted for
58% of our selling, general and administrative expenses.  During the
2009 period, salaries and personnel costs totaled $851,000, an increase of
$372,000 or 78% as compared to $479,000 for 2008 period. The increase in
salaries and personnel costs is primarily attributable to the inclusion of our
Shandong Media joint venture entered into mid 2008 and our AdNet Media
acquisition in April 2009.





We expect our selling, general and
administrative expenses will increase as we continue to grow our
business.





Professional
Fees





The following is a list of our
professional fees accrued for the six months ended June 30, 2009 and
2008.





2009
                  
                  
                  2008Accounting
                  
                  $
                  167,000
                  
                  
                  $
                  115,000Consulting
                  
                  $
                  32,000
                  
                  
                  $
                  64,000Legal
                  
                  $
                  101,000
                  
                  
                  $
                  126,000Total
                  
                  $
                  300,000
                  
                  
                  $
                  305,000





The professional fees are generally
related to public company reporting and governance expenses as well as costs
related to our acquisitions.  We expect our costs for professional
services for public company reporting and corporate governance expenses to
remain significant, but to decrease as a percentage of our overall revenues if
we continue to acquire new entities and enter into strategic
partnerships.


16


Depreciation
and Amortization





2009
                  
                  
                  2008Depreciation
                  
                  $
                  1,509,000
                  
                  
                  $
                  1,348,000Amortization
                  
                  $
                  164,000
                  
                  
                  $
                  94,000Total
                  
                  $
                  1,673,000
                  
                  
                  $
                  1,442,000





Depreciation expense during 2009
relates to the depreciation on the approximately $14.4 million of property,
plant and equipment, at our Jinan Broadband subsidiary.  The increase
in amortization of $70,000 is primarily attributable to the amortization related
to our Shandong Media intangible assets acquired in 2008.





Interest
and Other Income (Expense), net





Interest and other income (expense),
net, of approximately $(203,000) during the six months ended June 30, 2009
consisted primarily of:


·
            interest
      expense related to the 5% Convertible Notes and Warrants issued in January
      2008 and June 2009 in the amount of approximately
  $176,000,


·
            the
      loss on the sale of marketable equity securities in the amount of
      $31,000.





During
the six months ended June 30, 2008, interest and other income (expense), net, of
approximately $1,157,000, a decrease of $1,360,000 compared to the six month
period ended June 30, 2009 was primarily due to the net gain of $1,301,000
recognized from a Settlement Agreement entered into on January 11,
2008.





We expect our interest expense to
increase due to additional convertible notes issued in June 2009 in the amount
of $304,902.  Interest on the Notes compounds monthly at the annual
rate of five percent (5%).  The January 2008 Notes mature on January
11, 2013.  The outstanding principal amount of the January 2008 Notes
as of June 30, 2009 was $4,971,250.  The June 2009 Notes mature on May
27, 2010.  The outstanding principal amount on the June 2009 Notes as
of June 30, 2009 is $304,902.





Net
Loss Attributable to Noncontrolling Interest





49% of the operating loss of our Jinan
Broadband subsidiary is allocated to Jinan Parent, the 49% co-owner of this
business.  During the six months ended June 30, 2009, $366,000 of our
operating loss from Jinan Broadband was allocated to Jinan Parent, as compared
to $288,000 during the 2008 period.





50% of the operating loss of our
Shandong Media joint venture is allocated to our 50% Shandong Newspaper joint
venture partner.  During the six months ended June 30, 2009, $18,000
of our operating loss from Shandong Media was allocated to Shandong
Newspaper.  We consolidated the results of Shandong Media effective
July 1, 2008.  Accordingly, there was no allocation for the six months
ended June 30, 2008.





Net
Income (Loss) Attributable to Shareholders





Net loss
attributable to shareholders for the six months ended June 30, 2009 was
$1,559,000.  For the 2008 period, the company had net income
attributable to shareholders of $59,000, a decrease of $1,618,000, or
2744%.  The decrease in net income attributable to shareholders is
primarily due to the recognition of a net gain of $1,301,000 from a Settlement
Agreement entered into on January 11, 2008.  Other changes
include:





·
            an
      increase in the net loss from Jinan Broadband of $160,000 as compared to
      the six month period of 2008


·
            a
      net loss of $32,000 from the inclusion of our Shandong Media joint
      venture


·
            a
      net loss of $132,000 from the inclusion of our AdNet Media
      acquisition


·
            general
      increases in corporate costs





The following table breaks down the
results of operations for the six months ended June 30, 2009 and 2008 between
our operating companies and our non-operating companies.





Ø
            The
      operating companies include Jinan Broadband, Shandong Media and AdNet
      Media.


Ø
            2009
      includes six months of operations from our Shandong Media company and
      three months of operations from our AdNet Media company as compared to no
      inclusion for either company in
2008.





6 Months Ended
                        
                        
                        6 Months EndedJune 30, 2009
                        
                        
                        June 30, 2008% of
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        % ofTotal
                        
                        
                        Non-
                        
                        
                        
                        
                        
                        
                        
                        
                        Total
                        
                        
                        Non-Operating
                        
                        
                        Revenue
                        
                        
                        Operating
                        
                        
                        Total
                        
                        
                        Operating
                        
                        
                        Revenue
                        
                        
                        Operating
                        
                        
                        TotalRevenue
                        
                        $
                        3,939,000
                        
                        
                        
                        
                        
                        $
                        -
                        
                        
                        $
                        3,939,000
                        
                        
                        $
                        2,057,000
                        
                        
                        
                        
                        
                        $
                        -
                        
                        
                        $
                        2,057,000Cost
      of revenue
                        
                        
                        2,277,000
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        2,277,000
                        
                        
                        
                        896,000
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        896,000Gross
      profit
                        
                        
                        1,662,000
                        
                        
                        
                        42
                        %
                        
                        
                        -
                        
                        
                        
                        1,662,000
                        
                        
                        
                        1,161,000
                        
                        
                        
                        56
                        %
                        
                        
                        -
                        
                        
                        
                        1,161,000Selling,
      general and adminstrative expenses
                        
                        
                        1,056,000
                        
                        
                        
                        27
                        %
                        
                        
                        403,000
                        
                        
                        
                        1,459,000
                        
                        
                        
                        397,000
                        
                        
                        
                        19
                        %
                        
                        
                        415,000
                        
                        
                        
                        812,000Professional
      fees
                        
                        
                        16,000
                        
                        
                        
                        0
                        %
                        
                        
                        284,000
                        
                        
                        
                        300,000
                        
                        
                        
                        3,000
                        
                        
                        
                        0
                        %
                        
                        
                        302,000
                        
                        
                        
                        305,000Depreciation
      and amortization
                        
                        
                        1,510,000
                        
                        
                        
                        38
                        %
                        
                        
                        163,000
                        
                        
                        
                        1,673,000
                        
                        
                        
                        1,348,000
                        
                        
                        
                        66
                        %
                        
                        
                        94,000
                        
                        
                        
                        1,442,000Loss
      from operations
                        
                        
                        (920,000
                        )
                        
                        
                        -0.2336
                        
                        
                        
                        (850,000
                        )
                        
                        
                        (1,770,000
                        )
                        
                        
                        (587,000
                        )
                        
                        
                        -29
                        %
                        
                        
                        (811,000
                        )
                        
                        
                        (1,398,000
                        )Interest
      & other income / (expense)Settlement
      gain
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        1,301,000
                        
                        
                        
                        1,301,000Interest
      income
                        
                        
                        5,000
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        5,000
                        
                        
                        
                        4,000
                        
                        
                        
                        
                        
                        
                        
                        15,000
                        
                        
                        
                        19,000Interest
      expense
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        (176,000
                        )
                        
                        
                        (176,000
                        )
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        (167,000
                        )
                        
                        
                        (167,000
                        )Loss
      on sale of securities
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        (31,000
                        )
                        
                        
                        (31,000
                        )
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        17,000
                        
                        
                        
                        17,000Other
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (4,000
                        )
                        
                        
                        
                        
                        
                        
                        (10,000
                        )
                        
                        
                        (14,000
                        )Income
      (loss) before income tax
                        
                        
                        (915,000
                        )
                        
                        
                        
                        
                        
                        
                        (1,057,000
                        )
                        
                        
                        (1,972,000
                        )
                        
                        
                        (587,000
                        )
                        
                        
                        
                        
                        
                        
                        345,000
                        
                        
                        
                        (242,000
                        )Income
      tax benefit
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        29,000
                        
                        
                        
                        29,000
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        
                        13,000
                        
                        
                        
                        13,000Net
      income (loss)
                        
                        
                        (915,000
                        )
                        
                        
                        
                        
                        
                        
                        (1,028,000
                        )
                        
                        
                        (1,943,000
                        )
                        
                        
                        (587,000
                        )
                        
                        
                        
                        
                        
                        
                        358,000
                        
                        
                        
                        (229,000
                        )Net
      loss attributable to noncontrolling interest
                        
                        
                        (384,000
                        )
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (384,000
                        )
                        
                        
                        (288,000
                        )
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        (288,000
                        )Net
      income (loss) attributable to shareholders
                        
                        $
                        (531,000
                        )
                        
                        
                        
                        
                        
                        $
                        (1,028,000
                        )
                        
                        $
                        (1,559,000
                        )
                        
                        $
                        (299,000
                        )
                        
                        
                        
                        
                        
                        $
                        358,000
                        
                        
                        $
                        59,000


17


Liquidity
and Capital Resources





As of June 30, 2009 we had $1,875,000
of cash on hand and a working capital deficit of $881,000.  As of June
30, 2009, we had total current liabilities of $4,996,000.  Given our
current commitments and working capital, we cannot support our operations for
the next 12 months without additional capital (See “Need for Additional
Capital”, below).





Private
Financings, June 2009





As
described below, during the six months ended June 30, 2009 we completed (i) a
private financing of 5% Convertible Promissory Notes (the “Notes”) for gross
proceeds of $304,902 (the “Note Offering”) and (ii) a private financing of
2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the
“Common Stock”), at a purchase price of $.15 per share, for aggregate proceeds
of $300,000 (the “Equity Financing”).





Issuance
of Convertible Notes, June 2009





During
the six months ended June 30, 2009, the Company completed a private financing of
5% Convertible Promissory Notes (the “Notes) for gross proceeds of $304,902 (the
“Note Offering”).  The Note Offering was pursuant to a Note Purchase
Agreement (the “Note Purchase Agreement”) with nine persons who were existing
holders (the “Note Investors”) of Convertible Promissory Notes issued in January
of 2008 (the “January 2008 Notes”), pursuant to which the Company issued
$304,902 principal amount of Notes to the Note Investors at face
value.  The Notes accrue interest at 5% per year payable quarterly in
cash or stock, are initially convertible at $.20 per share, and become due and
payable in full on May 27, 2010.  The Company did not pay any
placement agent or similar fees in connection with the Note
Offering.





Waiver
Letters





In
addition, in connection with the Note Offering and the Equity Financing, the
Company entered into a waiver letter (the “Waiver Letter”) with all the holders
of January 2008 Notes (“Existing Note Holders”), pursuant to which, among other
things, the conversion price of the January 2008 Notes were reduced from $.75
per share to (i) $.20 per share (i.e. the same conversion price as the Notes in
the Note Offering) for the Existing Note Holders that invested in the Notes
(i.e. the Note Investors), and (ii) $.25 per share for those Existing Note
Holders that did not reinvest in the new notes.  All of the Existing
Note Holders waived certain anti dilution adjustments in respect of the
contemplated Equity Financing or in respect of their Warrants which were issued
to them in connection with the January 2008 Notes, which warrants remain
exercisable at $.60 per share.





The
Company also agreed, pursuant to the Waiver Letter, that if it raises capital in
excess of $10,000,000 and up to $20,000,000 it will repay the January 2008
Notes, on a pari pasu
basis based on principal amount outstanding, a minimum of 12.5% of the net
proceeds raised and, that if it is successful in raising over $20,000,000, it
will repay the January 2008 Notes, on a pari pasu basis based on
principal, a minimum aggregate of 15.0% of the net proceeds raised, until repaid
in full.





Exemption
from registration of the Notes issued to the Note Investors is claimed under
Section 4(2) of the Act and Rule 506 promulgated thereunder, based on, among
other things, the representations madeby each of the investors
in the Note Purchase Agreement that include, among other things, a
representation from each such purchaser that it or he is an “accredited
investor” within the meaning of Regulation D promulgated under the Act and that
such purchases were not made as part of a general or public solicitation or with
a view towards distribution or resale of securities acquired in the
financing.





Equity
Financing; Issuance of Common Stock





During
the six months ended June 30, 2009 and pursuant to a Securities Purchase
Agreement with three investors, the Company completed a private financing of
2,000,000 shares of restricted Common Stock, par value $.001 of the Company (the
“Common Stock”), at a purchase price of $.15 per share, for aggregate gross
proceeds of $300,000 (the “Equity Financing”).  The company did not
pay any placement agent or similar fees in connection with such
financing.  As indicated above, the Existing Note Holders waived, in
part, anti dilution rights with respect to this Equity Financing.





The
foregoing are summaries only of the Note Offering, Note Purchase Agreement,
Waiver Letters and Equity Financing which are filed as exhibits to our Current
Report on Form 8-K,dated June 30, 2009, the provisions of which are incorporated
herein.





Loan
Receivable





The Company has a loan receivable for
$280,000 as of June 30, 2009 from a related party, Music
Magazine.  The loan is unsecured, interest free and has no fixed
repayment terms.





Amounts
due from Shareholders





Amounts due from shareholders include
$91,000 from Shandong Broadcast & TV Weekly Press and $543,000 from Modern
Movie & TV Biweekly Press as of June 30, 2009.  The amount due
from Shandong Broadcast & TV Weekly Press is unsecured, interest free and
has no fixed repayment terms.  The amount due from Modern Movie &
TV Biweekly Press is unsecured, interest free and the due date for repayment has
been extended from June 30, 2009 to December 31, 2009. During the period ended
June 30, 2009 the Company advanced approximately $552,000 to the
shareholders.




18


Payable
to Jinan Parent





During the six months ended June 30,
2009, Jinan Broadand paid $2,643,000 to Jinan Parent.  The current
balance due is $152,000.  The advance is unsecured, interest free and
has no fixed repayment terms.





2008
Convertible Note Financing





On January 11, 2008 we entered into a
subscription agreement with ten accredited investors with respect to the
issuance of an aggregate of $4,971,250 principal amount of Notes due January 11,
2013, and Class A Warrants to purchase an aggregate of 6,628,333 shares of
common stock of the Company at $.60 per share expiring on June 11,
2013.





Convertible
Notes and Warrants Interest





During the six months ended June
30, 2009 the Company incurred $176,000 in interest expense related to the
notes and warrants issued in January 2008 and June 2009.  Based on a
predetermined initial presumed value of $.75 per share and effective May 27,
2009 reduced conversion values of $.25 per share and $.20 per share as set forth
in the related documents as described above and with the consent of the Note
holders, the Company issued 260,703 shares to the Note holders in lieu of cash
of approximately $126,000 for interest accrued.  Additional interest
expense of $50,000 was recorded for the warrants.





Settlement
Agreement





In
April 2008, we received 390,000 shares of Cablecom Holdings, Ltd. (the “Cablecom
Holdings Shares”) from Mr. Clive Ng, the Chairman of our board of directors,
pursuant to a settlement agreement by and among the Company and its
subsidiaries, Stephen P. Cherner, Maxim Financial Corporation, Mark L. Baum,
BCGU, LLC, Mark I. Lev, Wellfleet Partners, Inc., Pu Yue, Clive Ng, Chardan
Capital Markets, LLC, Jaguar Acquisition Corporation, and China Cablecom
Holdings, Ltd (“Cablecom Holdings”).  The value of the Cablecom
Holdings shares has since declined substantially, and may continue to fluctuate
and decline further.  During the six months ended June 30 2009, we
sold 136,665 of the Cablecom Holdings shares for total net proceeds of $79,000
and recorded a net loss on the sales of approximately $31,000.  As of
June 30, 2009, we have 181,455 shares remaining.





As a result of a significant decline in
the price of the Cablecom Holdings Shares we recorded an unrealized loss of
approximately $36,000 on these shares through other comprehensive income (loss)
for the period ended June 30, 2009.  The fair value of the remaining
181,455 Cablecom shares at June 30, 2009 approximates $109,000.





Cash
Flows





The
following sets forth a summary of the Company’s cash flows for the six months
ended June 30, 2009 and 2008:





Six Months EndedJune 30,
                  
                  
                  June 30,2009
                  
                  
                  2008Net
      cash provided by operating activities
                  
                  $
                  158,000
                  
                  
                  $
                  388,000Net
      cash used in investing activities
                  
                  $
                  (692,000
                  )
                  
                  $
                  (2,225,000
                  )Net
      cash (used in) provided by financing activities
                  
                  $
                  (2,039,000
                  )
                  
                  $
                  4,977,000Effect
      of exchange rate changes on cash
                  
                  $
                  22,000
                  
                  
                  $
                  448,000





Operating activities for the six months
ended June 30, 2009 and 2008, after adding back non-cash items, (used) provided
cash of approximately $(267,000) and $20,000, respectively.  During such
period other changes in working capital provided cash of approximately $425,000
and $368,000, respectively, resulting in cash being provided by operating
activities of $158,000 and $388,000, respectively.





Investing activities for the six months
ended June 30, 2009 and 2008 used cash of $692,000 and $2,225,000,
respectively.  For 2009, this amount consisted of cash acquired in our
AdNet acquisition of $18,000 and proceeds of $79,000 from the sale of our
Cablecom Shares, offset by (i) $237,000 for additions to property and equipment
and (ii) $552,000 loan to our Shandong Media shareholder.  For 2008
this amount consisted of additions to property and equipment in the amount of
$1,116,000 and the down payment for the acquisition of Shandong Newspaper in the
amount of $1,449,000 partially offset by the proceeds from the sale of 50,000
Cablecom Holding Shares in the amount of $340,000.




Financing activities for the six months
ended June 30, 2009 and 2008 (used) provided cash of $(2,039,000) and
$4,977,000, respectively.  For 2009, the amount consisted of proceeds
from the sale of equity securities of $300,000 and proceeds from the issuance of
convertible notes of $305,000 offset by payment to Jinan Parent of
$2,644,000.  For 2008, this amount consisted of proceeds from the
issuance of convertible notes of $4,850,000, offset by $105,000 of payments
related to issuance costs associated with the convertible notes and an increase
in the payable to Jinan Parent in the amount of $232,000.


19


Foreign
Currency Translation





Our WOFE,
Jinan Broadband subsidiary, Shandong Media joint venture and our AdNet Media
acquisition are located in China.  All of their operations are
conducted in the local currency of the Chinese Yuan, also known as Renminbi or
RMB.  The favorable effect of exchange rates on cash between the
Chinese Yuan and the United States dollar, provided cash of $22,000 and $448,000
during the six months ended June 30, 2009 and 2008, respectively.





Shandong
Media Joint Venture and Shandong Newspaper Cooperation Agreement





On March 7, 2008, through our WFOE in
the PRC, we entered into a Cooperation Agreement (the “Shandong Newspaper
Cooperation Agreement”) by and among our WFOE subsidiary, Shandong Broadcast
& TV Weekly Press and Modern Movie & TV Biweekly Press, each PRC
companies (collectively “Shandong Newspaper”).  The Shandong Newspaper
Cooperation Agreement provided for, among other terms, the creation of a joint
venture entity in the PRC, Shandong Lushi Media Co., Ltd. ("Shandong Media")
that would own and operate Shandong Newspaper's television program guide,
newspaper and magazine publishing business in the Shandong region of the PRC
(the "Shandong Newspaper Business") which businesses were previously owned and
operated by the Shandong Newspaper entities pursuant to exclusive
licenses.




Under the terms of the Shandong
Newspaper Cooperation Agreement and related pledge and trust documents, the
Shandong Newspaper entities mentioned above contributed their entire Shandong
Newspaper Business and transferred certain employees, to Shandong Media in
exchange for a 50% stake in Shandong Media, with the other 50% of Shandong Media
to be owned by our WFOE in the PRC in the second quarter of 2008 with the joint
venture becoming operational in July of 2008.  In exchange therefore,
the Cooperation Agreement provided for total initial consideration from us of
approximately $1.5 million (approximately 10 million RMB) which was contributed
to Shandong Media as working and acquisition capital. As part of the
transaction, and to facilitate our subsidiary’s ownership and control over
Shandong Newspaper under PRC law, through our WFOE in the PRC, we loaned
Shandong Media said funds pursuant to a loan agreement and equity option
agreement, and a majority of the shares of Shandong Newspaper are held by Pu
Yue, our CFO, as trustee on behalf of the Company pursuant to a pledge agreement
and trustee agreement.  The results of the Shandong Newspaper Business
have been consolidated with the Company’s consolidated financial statements as
of July 1, 2008.




During 2009, we will be required to
make additional payments pursuant to the Shandong Newspaper Cooperation
Agreement.  In addition to the initial purchase price of $1.5 million
(10 million RMB), the Shandong Newspaper Cooperation Agreement provides for
additional consideration of approximately US $730,000 (as adjusted for current
rates as of March 2009) and US $2,900,000 (between 5 million RMB and 20 million
RMB, respectively) to be paid as a capital contribution to Shandong Media in the
event that certain performance thresholds are met during the first 12 months of
operations after closing the transaction.




Specifically, in the event that audited
annual net profits during the first fiscal year (i.e. calendar 2009) after
closing of the transaction relating to the Shandong Newspaper Cooperation
Agreement:




·
            equals
      or exceeds 16 million RMB, then we will be required to contribute an
      additional 20 million RMB (or, approximately $3,000,000 presuming current
      exchange rates are in effect at such time) to the Shandong Media joint
      venture;




·
            equals
      or exceeds 4 million RMB but less than 16 million RMB, then we will be
      required to contribute 125% of such net profits to the Shandong Media
      joint venture, and




·
            is
      less then 4 million RMB, then we will be required to contribute only an
      additional 5 million RMB (approximately US $730,000 presuming current
      exchange rates are in effect at such
time).


The Shandong Newspaper Cooperation
Agreement resulted in the creation of a Variable Interest Entity (“VIE”) as
defined under Financial Accounting Standards Board (“FASB”) Interpretation No.
46R, Consolidation of Variable Interest Entities (“FIN-46R”). The intended
result of the contractual arrangements is that, as of December 31, 2008 the
economic risks and benefits of the Shandong Newspaper Business operations are
being primarily borne by the Company.  The Company has contributed
more capital to date and may be required to make further capital contributions
if Shandong Newspaper meets certain performance targets.  The contractual
arrangements in addition to the service agreements the Company has with the
Shandong Newspaper parent companies, provide under the relevant principles of
United States Generally Accepted Accounting Principles (“US GAAP”) for the
consolidation of the results of operations of Shandong Newspaper, with 50% of
the Shandong Newspaper net income included in the accompanying financial
statements of the Company.





Need
for Additional Capital





As
indicated above, management does not believe that the Company has sufficient
capital to sustain its operations beyond 12 months without raising additional
capital.  We presently do not have any available credit, bank
financing or other external sources of liquidity.  Accordingly, we
expect that we will require additional funding through additional equity and/or
debt financings.  However, there can be no assurance that any
additional financing will become available to us, and if available, on terms
acceptable to us.





The
conversion of our outstanding notes and exercise of our outstanding warrants
into shares of common stock would have a dilutive effect on our common stock,
which would in turn reduce our ability to raise additional funds on favorable
terms.  In addition, the subsequent sale on the open market of any
shares of common stock issued upon conversion of our outstanding notes and
exercise of our outstanding warrants could impact our stock price which would in
turn reduce our ability to raise additional funds on favorable
terms.


20


Any
financing, if available, may involve restrictive covenants that may impact our
ability to conduct our business or raise additional funds on acceptable
terms.  If we are unable to raise additional capital when required or
on acceptable terms, we may have to delay, scale back or discontinue our
expansion plans.





In the
event we are unable to raise additional capital we will not be able to sustain
any growth or continue to operate.





Critical
Accounting Policies





Our
discussion and analysis of financial condition and results of operations is
based on 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 and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires our management to make judgments, assumptions and estimates
that affect the amounts reported in the consolidated financial statements and
accompanying notes.  Our management evaluates its estimates on an
on-going basis based on historical experience and on various other assumptions
it believes are 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.





Through
WFOE, we acquired a 51% interest in Jinan Broadband effective April 1,
2007, and a 50% interest in the Shandong Media joint venture effective July
1, 2008.  Accordingly, our historical experience with operations in
China is limited and may change in the future as we continue to operate the
companies.  Actual results may differ from these estimates under
different assumptions or conditions.





We
believe the following critical accounting policies affect our significant
judgments and estimates used in the preparation of its financial
statements.





Revenue
Recognition





Revenue
is recorded as services are provided to customers.  The Company
generally recognizes all revenue in the period in which the service is rendered,
provided that persuasive evidence of an arrangement exists, delivery has
occurred, the sales price is fixed or determinable, and collection is reasonably
assured.  The Company records deferred revenue for payments received
from customers for the performance of future services and recognizes the
associated revenue in the period that the services are
performed.  Provision for discounts and rebates to customers and other
adjustments, if any, are provided for in the same period the related sales are
recorded.





Accounts
Receivable





Accounts
receivable are recorded at the invoiced amount after deduction of trade
discounts, business tax and allowances.  The Company considers
accounts receivable to be fully collectible; accordingly, no allowance for
doubtful accounts has been established.  If accounts become
uncollectible, they will be charged to statements of operations when that
determination is made.  Collections on accounts previously written
off, if any, are included in other income as received.





Inventories





Inventories,
consisting of cables, fiber, connecting material, power supplies and spare parts
are stated at the lower of cost or market value.  Cost is determined
using the first-in, first-out (FIFO) method.





Property
and Equipment





Property
and equipment are stated at cost less accumulated
depreciation.  Expenditures for major renewals and betterments, which
extend the original estimated economic useful lives or applicable assets, are
capitalized.  Expenditures for normal repairs and maintenance are
charged to expense as incurred.  The costs and related accumulated
depreciation of assets sold or retired are removed from the accounts, any gain
or loss thereon is reflected in operations.





Depreciation
is provided for on the straight line basis over the estimated useful lives of
the respective assets over a period of five years.





Intangible
Assets





We
perform indefinite life intangible asset impairment tests on an annual basis and
between annual tests in certain circumstances.  To determine the fair
value of these intangible assets, there are many assumptions and estimates used
that directly impact the results of the testing.  In making these
assumptions and estimates, the Company must make various assumptions regarding
estimated future cash flows and other factors in determining the fair values of
the respective assets.  We will use set criteria that are reviewed and
approved by various levels of management, and we will estimate the fair value of
our reporting units by using discounted cash flow analyses.  If these
estimates or their related assumptions change in the future, the Company may be
required to record impairment charges for these assets in future
periods.  Any such resulting impairment charges could be material to
the Company’s results of operations.


21


Income
Taxes





Deferred
taxes are recognized for the future tax consequences attributable to temporary
differences between the carrying amounts of assets and liabilities for financial
statement purposes and income tax purposes using enacted rates expected to be in
effect when such amounts are realized or settled. The effect on deferred taxes
of a change in tax rates is recognized in income in the period that includes the
enactment date.





Foreign
Currency Translation





The
businesses of the Company’s operating subsidiaries are currently conducted in
and from China in Renminbi. In this report, all references to “Renminbi” and
“RMB” are to the legal currency of China and all references to U.S. dollars,
dollars, $ and US$ are to the legal currency of the United States. The Company
makes no representation that any Renminbi or U.S. dollar amounts could have
been, or could be, converted into U.S. dollars or Renminbi, as the case may be,
at any particular rate, the rates stated below, or at all. The Chinese
government imposes control over its foreign currency reserves in part through
direct regulation of the conversion of Renminbi into foreign exchange and
through restrictions on foreign trade. The Company uses the U.S. dollar as its
reporting and functional currency.




Translation
adjustments are reported as other comprehensive income or expenses and
accumulated as other comprehensive income in the equity section of the balance
sheet. Financial information is translated into U.S. dollars at prevailing or
current rates respectively, except for revenues and expenses which are
translated at average current rates during the reporting period. Exchange gains
and losses resulting from retained profits are reported as a separate component
of stockholders’ equity.




Recent
Accounting Pronouncements








In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1
applies to an employer that is subject to the disclosure requirements of SFAS
No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits” (“SFAS 132R”) and amends SFAS 132R to provide guidance
on an employer’s disclosures about plan assets of a defined benefit pension or
other postretirement plan. The disclosures about plan assets required by FSP FAS
132(R)-1 shall be provided for fiscal years ending after December 15, 2009.
Earlier application is permitted. We do not expect the adoption of FSP FAS
132(R)-1 to have a material impact on our consolidated financial
statements.




In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets” (“EITF 08-7”). EITF 08-7 applies to all acquired intangible
assets in situations in which the acquirer does not intend to actively use the
asset but intends to hold the asset to prevent its competitors from obtaining
access to the asset (a defensive intangible asset). Defensive intangible assets
could include assets that the acquirer will never actively use, as well as
assets that will be used by the acquirer during a transition period when the
intention of the acquirer is to discontinue the use of those assets. EITF 08-7
concluded that a defensive intangible asset should be accounted for as a
separate unit of accounting and should be amortized over the period that the
defensive intangible asset directly or indirectly contributes to the future cash
flows of the entity. EITF 08-7 is effective prospectively for intangible assets
acquired on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Earlier application is not
permitted.




In June
2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This FSP provides that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Company does not
currently have any share-based awards that would qualify as participating
securities. Therefore, application of this FSP is not expected to have an effect
on the Company's financial reporting.





In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt That
May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)("FSP 14-1"). FSP 14-1 will be effective for financial statements issued
for fiscal years beginning after December 15, 2008. The FSP includes guidance
that convertible debt instruments that may be settled in cash upon conversion
should be separated between the liability and equity components, with each
component being accounted for in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest costs are recognized in
subsequent periods. The Company is currently assessing the potential effect of
the FSP on its financial statements.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchyof Generally Accepted Accounting
Principles(“FAS 162"). This Standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. FAS 162
directs thehierarchy
to the entity, rather than the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that
are presented in conformity with generally accepted accounting principles. The
Standard is effective 60 days following SEC approval of the Public Company
Accounting Oversight Board amendments to remove the hierarchy of generally
accepted accounting principles from the auditing standards. FAS 162 is not
expected to have an impact on the financial statements


22


In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchyof Generally Accepted Accounting
Principles(“FAS 162"). This Standard identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. FAS 162
directs thehierarchy
to the entity, rather than the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that
are presented in conformity with generally accepted accounting principles. The
Standard is effective 60 days following SEC approval of the Public Company
Accounting Oversight Board amendments to remove the hierarchy of generally
accepted accounting principles from the auditing standards. FAS 162 is not
expected to have an impact on the financial statements.





In April
2008, the FASB issued FASB Staff Position FAS 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), and requires
additional disclosures. The objective of FSP FAS 142-3 is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141 (R), “Business Combinations” (“SFAS 141(R)”), and other
accounting principles generally accepted in the United States of America. FSP
FAS 142-3 applies to all intangible assets, whether acquired in a business
combination or otherwise and shall be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The guidance for determining the useful life of intangible
assets shall be applied prospectively to intangible assets acquired after the
effective date. The disclosure requirements apply prospectively to all
intangible assets recognized as of, and subsequent to, the effective date. Early
adoption is prohibited. The Company does not expect the adoption of FSP FAS
142-3 to have a material impact on its consolidated financial
statements.





In March
2008, the FASB issued Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activities (“SFAS 161”), which is effective January 1,
2009. SFAS 161 requires enhanced disclosures about derivative instruments and
hedging activities to allow for a better understanding of their effects on an
entity’s financial position, financial performance, and cash flows. Among other
things, SFAS 161 requires disclosures of the fair values of derivative
instruments and associated gains and losses in a tabular formant. SFAS 161 is
not currently applicable to the Company since the Company does not have
derivative instruments or hedging activities





In
February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of
FASB Statement No. 157 ("FSP 157-2"), which delays the effective date of SFAS
157 for nonfinancial assets and nonfinancial liabilities. Therefore, the Company
has delayed application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities, which include assets and liabilities acquired in connection with a
business combination, goodwill, intangible assets and asset retirement
obligations recognized in connection with final capping, closure and
post-closure landfill obligations, until January 1, 2009. The Company is
currently evaluating the impact of SFAS 157 for nonfinancial assets and
liabilities on the Company's financial position and results of
operations.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to
measure many financial instruments and certain other items at fair value. SFAS
No. 159 is effective for financial statements issued for fiscal years beginning
after November 15, 2007. The adoption of SFAS No. 159 did not have a material
impact on our consolidated financial statements.





Management
does not believe that any recently issued, but not yet effective, accounting
standards, if currently adopted, would have a material effect on the
accompanying financial statements.





Off-Balance Sheet
Arrangements





We do not
have any off balance sheet arrangements that are reasonably likely to have a
current or future effect on our financial condition, revenues, results of
operations, liquidity or capital expenditures.





Item
3. Quantitative and Qualitative Disclosures about Market Risk





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide the information under this
item.





Item
4. Controls and Procedures





a.
Evaluation of Disclosure Controls and Procedures





Based on
an evaluation under the supervision and with the participation of the Company's
management, the Company's principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended ("Exchange Act") were effective as of June 30, 2009 to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is (i) recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission rules and forms and (ii) accumulated and communicated to the
Company's management, including its principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required
disclosure.


23





b.
Changes in Internal Control over Financial Reporting





There
were no changes in the Company’s internal controls over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 or Rule 15d-15 under the Exchange Act that occurred during the period
ended June 30, 2009 that have materially affected or are reasonably likely to
materially affect the Company’s internal controls over financial
reporting.


24




PART
II - OTHER INFORMATION




Item
1. Legal Proceedings.





There are
no material pending legal proceedings to which we are a party or to which any of
our property is subject. To the best of our knowledge, no such actions against
us are contemplated or threatened.





Item
1A. Risk Factors


The
discussion of our business and operations should be read together with the risk
factors contained in Part I, Item 1A of our Annual Report on Form 10-K/A for the
year ended December 31, 2008, which describes the various risks and
uncertainties to which we are or may become subject to.





There
have been no material changes to the risk factors set forth in our Annual Report
on Form 10-K/A for the year ended December 31, 2008.





Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.





See “Issuance of Restricted Shares to
AdNet Shareholders” under Item 2, above.





Item
3. Defaults Upon Senior Securities.





None.





Item
4. Submission of Matters to a Vote of Security Holders.




None.




Item
5. Other Information.




None.





Item 6. Exhibits.




EXHIBIT
INDEX




Exhibit No.
                    
                    Description31.1
                    
                    Certification
      by Chief Executive Officer pursuant to Sarbanes Oxley Section
      302.31.2
                    
                    Certification
      by Chief Financial Officer pursuant to Sarbanes Oxley Section
      302.32.1
                    
                    Certification
      by Chief Executive Officer pursuant to 18 U.S.C. Section
    1350.32.2
                    
                    Certification
      by Chief Financial Officer pursuant to 18 U.S.C. Section
    1350.


25




SIGNATURES





In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 19, 2009.





CHINA
      BROADBAND, INCBy:Name:
      Marc UrbachTitle: President (Principal
      Executive Officer)By:Name:
      Yue PuTitle:
      Vice Chairman (Principal Accounting Officer, Principal Financial
      Officer)


26