UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





[X]
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESEXCHANGE
      ACT OF 1934For
      the quarterly period ended March 31, 2009OR[_]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIESEXCHANGE
      ACT OF 1934For
      the transition period from _______ to
_______





Commission
file number 333-134883





CHINA TEL GROUP,
INC.


(Exact
name of Registrant as specified in its charter)





Nevada
            98-0489800(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)







8105 Irvine Center Drive,
Suite 820, Irvine, California  92618


(Address
of principal executive offices) (zip code)




949-585-9268


(Registrant's
telephone number, including area code)




N/A


(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.


[X]
Yes  [_] No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that
registrant was required to submit and post such files.)


[_]
Yes  [_] No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      accelerated filer [_]
            Accelerated
      filer [_]Non-accelerated
      filer [X]
            Smaller
      reporting company [_]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).




[_] Yes
[X] No





APPLICABLE
ONLY TO CORPORATE ISSUERS





Indicate
the number of shares outstanding of each of the issuer’s classes of stock, as of
the latest practicable date:  As of May 14, 2009the registrant had
98,669,604 shares of its Series A common stock outstanding with a par value
of $0.001 and 66,909,088 shares of its Series B common stock outstanding with a
par value of $0.001.









CHINA TEL
GROUP, INC.


(A
DEVELOPMENT STAGE COMPANY)


INDEX TO
QUARTERLY REPORT ON FORM 10-Q


FOR THE
QUARTER ENDED MARCH 31, 2009






PAGEPART
      I.
            FINANCIAL
      INFORMATION
            
            3Item
      1.
            Financial
      Statements
            
            3Condensed
      Consolidated Balance Sheets as of March 31, 2009 (unaudited) and December
      31, 2008
            
            3Condensed
      Consolidated Statements of Loss for the period ending March 31, 2009 and
      April 4, 2008 (date of inception) through March 31, 2009
      (unaudited)
            
            4Condensed
      Consolidated Statements of Stockholders’ Deficit for the period from April
      4, 2008 (date of inception) through March 31, 2009
      (unaudited)
            
            5Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2009 and from April 4, 2008 (date of inception) through March
      31, 2009 (unaudited)
            
            6Notes
      to Condensed Consolidated Financial Statements (unaudited)
            
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            21Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            27Item
      4.
            Controls
      and Procedures
            
            27Item
      4(T).
            Controls
      and Procedures
            
            28PART
      II.
            OTHER
      INFORMATION
            
            28Item
      1.
            Legal
      Proceedings
            
            28Item
      1A.
            Risk
      Factors
            
            28Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            28Item
      3.
            Defaults
      Upon Senior Securities
            
            29Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            29Item
      5.
            Other
      Information
            
            29Item
      6.
            Exhibits
            
            29







2




PART
I – FINANCIAL STATEMENTS




ITEM
      1.
            FINANCIAL
      STATEMENTS




CHINA
      TEL GROUP, INC.(a
      development stage company)CONDENSED
      CONSOLIDATED BALANCE SHEETSMarch
      31,
            
            
            December
      31,2009
            
            
            2008(unaudited)ASSETSCurrent
      assets:Cash
            
            $
            6,787
            
            
            $
            6,578Note
      receivable
            
            
            2,914,723
            
            
            
            3,039,123Deferred
      financing costs, net of accumulated amortization of $1,176,119 and
      $386,188, respectively
            
            
            2,413,677
            
            
            
            3,203,608Total
      current assets
            
            
            5,335,187
            
            
            
            6,249,309Other
      assets:Deposits
            
            
            430,000
            
            
            
            -Investments,
      at cost
            
            
            196,000,000
            
            
            
            5,000,000Total
      assets
            
            $
            201,765,187
            
            
            $
            11,249,309LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            51,911,529
            
            
            $
            42,632,534Note
      payable
            
            
            191,000,000
            
            
            
            -Convertible
      notes, net of unamortized discount of $9,469,270 and $12,568,303,
      respectively
            
            
            24,634,134
            
            
            
            21,535,101Derivative
      liability
            
            
            11,479,081
            
            
            
            26,165,886Total
      current liabilities
            
            
            279,024,744
            
            
            
            90,333,521Long
      term debt:Mandatory
      redeemable Series B common stock
            
            
            66,909
            
            
            
            66,909Stockholders'
      deficit:Preferred
      stock, no par value, 25,000,000 shares authorized, no shares issued and
      outstanding
            
            
            -
            
            
            
            -Common
      stock:Series
      A common stock; $0.001 par value, 500,000,000 shares authorized,
      98,669,605 and 89,458,947 shares issued and outstanding as of March
      31, 2009 and December 31, 2008, respectively
            
            
            98,670
            
            
            
            89,459Additional
      paid in capital
            
            
            35,521,308
            
            
            
            30,079,383Deficit
      accumulated during development stage
            
            
            (112,946,444
            )
            
            
            (109,319,963
            )Total
      stockholders' deficit
            
            
            (77,326,466
            )
            
            
            (79,151,121
            )Total
      liabilities and stockholders' deficit
            
            $
            201,765,187
            
            
            $
            11,249,309


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





3





CHINA
      TEL GROUP, INC.(a
      development stage company)CONDENSED
      CONSOLIDATED STATEMENTS OF LOSS(Unaudited)From
      April 4, 2008Three
      months
            
            
            (date
      of inception)ended
            
            
            ThroughMarch 31, 2009
            
            
            March 31, 2009OPERATING
      EXPENSESSelling,
      general and administrative expenses
            
            $
            4,611,808
            
            
            $
            12,430,137Research
      and development costs
            
            
            9,727,038
            
            
            
            61,555,210Total
      operating expenses
            
            
            14,338,846
            
            
            
            73,985,347Loss
      from operations
            
            
            (14,338,846
            )
            
            
            (73,985,347
            )OTHER
      INCOME (EXPENSES)Loss
      on investments, related party
            
            
            -
            
            
            
            (6,636,410
            )Gain
      on change in fair value of debt derivative
            
            
            14,686,805
            
            
            
            2,604,305Interest
      expense
            
            
            (3,974,440
            )
            
            
            (34,578,921
            )Net
      loss before income taxes
            
            
            (3,626,481
            )
            
            
            (112,596,373
            )Income
      taxes
            
            
            -
            
            
            
            -NET
      LOSS
            
            $
            (3,626,481
            )
            
            $
            (112,596,373
            )Net
      loss, basic and fully diluted per share
            
            $
            (0.04
            )Weighted
      average number of shares outstanding, basic and fully
    diluted
            
            
            92,649,920


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





4




CHINA
      TEL GROUP, INC.(a
      development stage company)CONDENSED
      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICITFOR
      THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH MARCH 31,
      2009(Unaudited)DeficitAccumulatedPreferred stock
            
            
            Common stock
            
            
            Additional
            
            
            DuringSeries A
            
            
            Paid
      in
            
            
            DevelopmentShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Stage
            
            
            TotalBalance,
      April 4, 2008 (date of inception)
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Effect
      of merger with China Tel Group, Inc. (formerly Morlock Ventures, Inc.) and
      assumption of liabilities as of April 4, 2008
            
            
            -
            
            
            
            -
            
            
            
            86,117,088
            
            
            
            86,117
            
            
            
            (153,026
            )
            
            
            (350,071
            )
            
            
            (416,980
            )Beneficial
      conversion feature relating to issuance of convertible
      debentures
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27,060,987
            
            
            
            -
            
            
            
            27,060,987Issuance
      of Series A common stock in exchange for convertible
      debentures
            
            
            -
            
            
            
            -
            
            
            
            1,471,663
            
            
            
            1,472
            
            
            
            1,396,608
            
            
            
            -
            
            
            
            1,398,080Issuance
      of Series A common stock in settlement of debt
            
            
            -
            
            
            
            -
            
            
            
            1,870,196
            
            
            
            1,870
            
            
            
            1,774,814
            
            
            
            -
            
            
            
            1,776,684Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (108,969,892
            )
            
            
            (108,969,892
            )Balance,
      December 31, 2008
            
            
            -
            
            
            
            -
            
            
            
            89,458,947
            
            
            
            89,459
            
            
            
            30,079,383
            
            
            
            (109,319,963
            )
            
            
            (79,151,121
            )Issuance
      of Series A common stock in January 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            479,000
            
            
            
            -
            
            
            
            480,000Issuance
      of Series A common stock in January 2009 in exchange for previously
      incurred debt
            
            
            -
            
            
            
            -
            
            
            
            1,573,158
            
            
            
            1,573
            
            
            
            1,492,927
            
            
            
            -
            
            
            
            1,494,500Issuance
      of Series A common stock in February 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            986,526
            
            
            
            987
            
            
            
            393,624
            
            
            
            -
            
            
            
            394,611Issuance
      of Series A common stock in February  2009 in exchange for
      previously incurred debt
            
            
            -
            
            
            
            -
            
            
            
            204,861
            
            
            
            205
            
            
            
            194,413
            
            
            
            -
            
            
            
            194,618Issuance
      of Series A common stock in March 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            4,040,000
            
            
            
            4,040
            
            
            
            2,067,560
            
            
            
            -
            
            
            
            2,071,600Issuance
      of Series A common stock in March  2009 in exchange for
      previously incurred debt
            
            
            -
            
            
            
            -
            
            
            
            406,113
            
            
            
            406
            
            
            
            385,401
            
            
            
            
            
            
            
            385,807Issuance
      of Series A common stock in March 2009 as deposit toward purchase of an
      investment
            
            
            -
            
            
            
            -
            
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            429,000
            
            
            
            -
            
            
            
            430,000Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,626,481
            )
            
            
            (3,626,481
            )Balance,
      March 31, 2009
            
            
            -
            
            
            $
            -
            
            
            
            98,669,605
            
            
            $
            98,670
            
            
            $
            35,521,308
            
            
            $
            (112,946,444
            )
            
            $
            (77,326,466
            )


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





5





CHINA
      TEL GROUP, INC.(a
      development stage company)CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)From
      April 4, 2008Three
      months
            
            
            (date
      of inception)Ended
            
            
            ThroughMarch 31, 2009
            
            
            March 31, 2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      loss
            
            $
            (3,626,481
            )
            
            $
            (112,596,373
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Amortization
      of financing costs
            
            
            789,931
            
            
            
            1,176,119Accretion
      of convertible debt
            
            
            3,099,033
            
            
            
            4,614,116Gain
      on change in fair value of debt derivative
            
            
            (14,686,805
            )
            
            
            (2,604,305
            )Common
      stock issued in exchange for services
            
            
            2,946,211
            
            
            
            2,946,211Beneficial
      conversion feature in conjunction with the issuance of convertible
      debentures
            
            
            -
            
            
            
            27,060,987(Increase)
      decrease in:Note
      receivable
            
            
            124,400
            
            
            
            124,400Prepaid
      expenses
            
            
            -
            
            
            
            38Increase
      (decrease) in:Accounts
      payable and accrued liabilities
            
            
            11,353,920
            
            
            
            55,637,219Net
      cash provided by (used in) operating activities
            
            
            209
            
            
            
            (23,641,588
            )CASH
      FLOWS FROM INVESTING ACTIVITIESProceeds
      received in connection with reverse merger
            
            
            -
            
            
            
            55,404Investment
      in Chinacomm
            
            
            -
            
            
            
            (5,000,000
            )Net
      cash used in investing activities
            
            
            -
            
            
            
            (4,944,596
            )CASH
      FLOWS FROM FINANCING ACTIVITIESNet
      proceeds from issuance of convertible debentures
            
            
            -
            
            
            
            28,592,971Net
      cash provided by financing activities
            
            
            -
            
            
            
            28,592,971Net
      increase in cash and cash equivalents
            
            
            209
            
            
            
            6,787Cash
      and cash equivalents, beginning of the period
            
            
            6,578
            
            
            
            -Cash
      and cash equivalents, end of the period
            
            $
            6,787
            
            
            $
            6,787SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during the period for interest
            
            $
            -
            
            
            $
            -Cash
      paid during the period for taxes
            
            $
            -
            
            
            $
            -NON
      CASH INVESTING AND FINANCING ACTIVITIESCommon
      stock issued in settlement of debt
            
            $
            2,074,925
            
            
            $
            3,851,609Common
      stock issued for services rendered
            
            $
            2,946,211
            
            
            $
            2,946,211Common
      stock issued for investment
            
            $
            430,000
            
            
            $
            430,000Acquisition
      of ChinaComm Cayman for promissory note
            
            $
            191,000,000
            
            
            $
            191,000,000


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





6





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





A summary
of the significant accounting policies applied in the presentation of the
accompanying financial statements are as follows:





General





The
accompanying unaudited condensed consolidated financial statements of China Tel
Group, Inc., (“Company”), have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by United States generally
accepted accounting principles for complete financial statements.





In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been
included.  Accordingly, the results from operations for the three
month period ended March 31, 2009 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009.  The
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated December 31, 2008 financial statements and
footnotes thereto included in the Company's Form 10-K filed with the United
States Securities and Exchange Commission (“SEC”) on May 15, 2009.





Basis and Business
Presentation





The
Company (formerly Mortlock Ventures, Inc.) was incorporated under the laws of
the State of Nevada on September 19, 2005 for the purpose of acquiring and
developing mineral properties. On April 8, 2008, the Company changed its name to
China Tel Group, Inc. and began focusing on the telecommunications
industry.





The
Company is in the development stage, as defined by Statement of Financial
Accounting Standards ("SFAS") No. 7 ("SFAS No. 7") and its efforts have been
principally devoted to developing a broadband wireless telecommunications
network in several cities in the Peoples Republic of China (“PRC”). To date, the
Company has not generated sales revenues, has incurred expenses and has
sustained losses.  Consequently, its operations are subject to all the
risks inherent in the establishment of a new business
enterprise.  Since the Company’s inception through March 31, 2009, the
Company has accumulated losses of $112,946,444.  (Reference in this
report to “Since the Company’s inception” refers to April 4, 2008, the date
Trussnet Nevada was formed and the date used for financial activities for
accounting purposes in this report.)





The
consolidated financial statements include the accounts of the Company,
and its wholly-owned subsidiaries Trussnet USA, Inc., a Nevada corporation
(“Trussnet”), and Gulfstream Capital Partners, Ltd.  All significant
intercompany balances and transactions have been eliminated in
consolidation.






7





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





Reverse Merger and Corporate
Restructure
 
 On May
21, 2008, the Company consummated a reverse merger by entering into a
reorganization and merger agreement (“Merger”) with the shareholders of
Trussnet, pursuant to which the shareholders of Trussnet exchanged all
of the issued and outstanding capital stock of Trussnet for 66,909,088 shares ofSeries A common stock of the Company, representing 77.7% of the Company’s
outstanding Series A common stock, and 66,909,088 Series B common stock, after
the return to treasury and retirement of 57,600,000 shares of common stock
(categorized as Series A common stock) of the Company held by certain
shareholders of the Company.  This took place concurrently with the
Merger.





Series B
common stock is non transferable, not participating with voting rights in all
matters in which shareholders have a right to vote at a 10 votes per each share
of Series B common stock.  The Series B common stock is redeemable on
May 23, 2023 at par value of $0.001 per share.





As a
result of the Merger, there was a change in control of the Company. In
accordance with SFAS No. 141, the Company was the acquiring entity. In
substance, the Merger is a recapitalization of the Company’s capital structure,
rather than a business combination.




For
accounting purposes, the Company accounted for the transaction as a reverse
acquisition, with the Company as the surviving entity. The total purchase
price and carrying value of net assets acquired was $-0-.  The
Company did not recognize goodwill or any intangible assets in connection
with the transaction.





The
results of operations of Mortlock Ventures, Inc. until the merger agreement are
included in the Company's condensed consolidated statement of
losses.




All
reference to common stock shares and per share amounts have been retroactively
restated to effect the reverse acquisition, as if the transaction had taken
place as of the beginning of the earliest period presented.





The total
consideration paid was $-0- and the significant components of the transaction
are as follows:





Mortlock
      Ventures, Inc.
                      Summary
      Statement of Financial Position
                      At
      May 21, 2008Current
      Assets:Cash
                    
                    $
                    55,404Other
      assets:Prepaid
      expenses
                    
                    
                    38Advances
      receivable
                    
                    
                    2,616,105Current
      Liabilities:Accounts
      payable
                    
                    
                    (125,919
                    )Convertible
      debentures
                    
                    
                    (2,395,699
                    )Subscriptions
      received
                    
                    
                    (500,000
                    )Net
      liabilities assumed
                    
                    $
                    (350,071
                    )








8





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





Estimates





The
preparation of the financial statements are in conformity with United States
generally accepted accounting principles, which require management to make
estimates and assumptions that affect certain reported amounts and
disclosures.  Accordingly, actual results could differ from those
estimates.





Revenue
Recognition





The
Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
("SAB") No. 101, “Revenue Recognition in Financial Statements” ("SAB 101"). SAB
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has
occurred; (3) the selling price is fixed and determinable; and (4)
collectability is reasonably assured. Determination of criteria (3) and (4) are
based on management's judgments regarding the fixed nature of the selling prices
of the products delivered and the collectability of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances, and
other adjustments are provided for in the same period the related sales are
recorded.





On
December 17, 2003, the SEC staff released SAB No. 104, Revenue Recognition.
The staff updated and revised the existing revenue recognition in Topic 13,
Revenue Recognition, to make its interpretive guidance consistent with current
accounting guidance, principally EITF Issue No. 00-21, "Revenue Arrangements
with Multiple Deliverables." Also, SAB 104 incorporates portions of the Revenue
Recognition in Financial Statements - Frequently Asked Questions and Answers
document that the SEC staff considered relevant and rescinds the remainder. The
Company's revenue recognition policies are consistent with this guidance;
therefore, this guidance will not have an immediate impact on the Company's
condensed consolidated financial statements.





Cash and Cash
Equivalents





For
purposes of the Statements of Cash Flows, the Company considers all highly
liquid debt instruments purchased with a maturity date of three months or less
to be cash equivalents.




Fair
Values





In the
first quarter of fiscal year 2008, the Company adopted SFAS No. 157, “Fair
Value Measurements” (“SFAS No. 157”), as amended, by FASB Statement of
Position (“FSP”) FAS No. 157-1 and FSP FAS No. 157-2. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value, and enhances fair
value measurement disclosure. FSP FAS No. 157-2 delays, until the first quarter
of fiscal year 2009, the effective date for SFAS No. 157 for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). The adoption of SFAS No. 157 did not have a material
impact on the Company’s financial position or operations. Refer to Note 12
for further discussion regarding fair valuation.





Long-Lived
Assets





The
Company has adopted SFAS No. 144.  SFAS No. 144 requires that
long-lived assets and certain identifiable intangibles held and used by the
Company be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying
amount of an asset may not be recoverable. Events relating to recoverability may
include significant unfavorable changes in business conditions, recurring
losses, or a forecasted inability to achieve break-even operating results over
an extended period. The Company evaluates the recoverability of long-lived
assets based upon forecasted undiscounted cash flows. Should impairment in value
be indicated, the carrying value of intangible assets will be adjusted, based on
estimates of future discounted cash flows resulting from the use and ultimate
disposition of the asset. SFAS No. 144 also requires assets to be disposed of be
reported at the lower of the carrying amount or the fair value less costs to
sell.







9





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009







Income
Taxes





The
Company has adopted SFAS No. 109 which requires the recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statement or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.  Temporary differences between taxable income reported for
financial reporting purposes and income tax purposes are
insignificant.





Comprehensive
Income





The
Company does not have any items of comprehensive income in any of the periods
presented.





Net Loss Per
Share





The
Company has adopted SFAS No. 128, "Earnings Per Share," specifying the
computation, presentation and disclosure requirements of earnings per share
information. Basic earnings per share have been calculated based upon the
weighted average number of common shares outstanding. Stock options and warrants
have been excluded as common stock equivalents in the diluted earnings per
share, because they are either anti-dilutive or their effect is not
material.





Stock Based
Compensation





On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB
Statement No. 123R (revised 2004) (“Statement No. 123R”), “Share-Based Payment”
which is a revision of FASB Statement No. 123, “Accounting for Stock-Based
Compensation” (“Statement No 123”).  Statement No. 123R supersedes APB
opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FASB
Statement No. 95, "Statement of Cash Flows.” Generally, the approach in
Statement 123R is similar to the approach described in Statement No.
123.  However, Statement No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values.  Pro-forma disclosure is
no longer an alternative. This statement does not change the accounting guidance
for share based payment transactions with parties other than employees provided
in Statement No. 123R. This statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of Position
93-6, “Employers’ Accounting for Employee Stock Ownership Plans.” On April 14,
2005, the SEC amended the effective date of the provisions of this
statement.  The effect of this amendment by the SEC is that the
Company had to comply with Statement 123R and use the Fair Value based method of
accounting no later than the first quarter of 2006. The Company implemented
No. 123R on January 1, 2006, using the modified prospective
method.







10





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





As of
March 31, 2009, there were no outstanding employee stock options.





Concentrations of Credit
Risk





Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash, cash equivalents and
trade receivables. The Company places its cash and temporary cash investments
with high credit quality institutions.  At times, such investments may
be in excess of the FDIC insurance limit.





Research and
Development





The
Company accounts for research and development costs in accordance with the
FASB’s Statement of Financial Accounting Standards No. 2 ("SFAS No. 2"),
"Accounting for Research and Development Costs. Under SFAS No. 2, all research
and development costs must be charged to expense as incurred. Accordingly,
internal research and development costs are expensed as
incurred.  Third-party research and development costs are expensed
when the contracted work has been performed or as milestone results have been
achieved. Company-sponsored research and development costs related to both
present and future products and services are expensed in the period
incurred.  The Company incurred research and development expenses of
$9,727,038 and $61,555,210 for the three month period ended March 31, 2009 and
from April 4, 2008 (date of inception) through March 31, 2009,
respectively.





Fair Value of Financial
Instruments





SFAS No.
107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of the fair value of certain financial instruments. The carrying
value of cash and cash equivalents, accounts payable and short-term borrowings,
as reflected in the balance sheets, approximate fair value because of the
short-term maturity of these instruments. The carrying amount for the Series A
convertible preferred stock approximate fair value.





Investments





The
Company entered into a Framework Agreement whereby the Company, through its
subsidiary, Gulfstream Capital Partners, Ltd., agreed to acquire 49% interest in
ChinaComm Cayman for a total purchase price of $196 million.  At
December 31, 2008, pursuant to the agreement, the Company has paid $5,000,000
toward the purchase, and on March 9, 2009, issued a promissory note for
$191,000,000.  See Note 5 for complete discussion.





The
Company did not evaluate for impairment, and the fair value of the cost-method
investment is not estimated since there is no identified events or changes in
circumstances that may have a significant adverse effect on the fair value and
the Company determined in accordance with SFAS No. 107 that it was not
practicable to estimate the fair value of the investment.








11





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





Liquidity





As shown
in the accompanying financial statements, the Company incurred loss from
operations of $14,338,846 for the three month period ended March 31, 2009 and
$112,596,373 since the Company’s date of inception through March 31,
2009.





New Accounting Pronouncements
Effective January 1, 2009




SFAS
No.161




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133
(“SFAS No. 161”).The
new standard is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity’s financial position,
results of operations and cash flows. The new standard also improves
transparency about how and why a company uses derivative instruments and how
derivative instruments and related hedged items are accounted for under
Statement No. 133. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Company adopted SFAS No. 161 effective
January 1, 2009, and the adoption had no material effect on our financial
position or results of operations.




SFAS
No. 160




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No.
160”). In SFAS No. 160, the FASB established accounting and reporting standards
that require non-controlling interests to be reported as a component of equity,
changes in a parent’s ownership interest while the parent retains its
controlling interest to be accounted for as equity transactions, and any
retained non-controlling equity investment upon the deconsolidation of a
subsidiary to be initially measured at fair value. SFAS No. 160 is effective for
annual periods beginning on or after December 15, 2008. Retroactive
application of SFAS No. 160 is prohibited. The Company adopted SFAS No. 160
effective January 1, 2009, and the adoption had no material effect on our
financial position or results of operations.




EITF
No. 07-1




In
December 2007, the FASB issued EITF No. 07-1, “Accounting for Collaborative
Arrangements” (“EITF No. 07-1”). EITF No. 07-1 prescribes the accounting for
parties of a collaborative arrangement to present the results of activities for
the party acting as the principal on a gross basis and report any payments
received from/made to other collaborators based on other applicable United
States generally accepted accounting principles or, in the absence of other such
applicable accounting standards, based on analogy to authoritative accounting
literature or a reasonable, rational, and consistently applied accounting policy
election. Further, EITF No. 07-1 clarified the determination of whether
transactions within a collaborative arrangement are part of a vendor-customer or
analogous relationship subject to Issue No. 01-9, “Accounting for Consideration
Given by a Vendor to a Customer.” EITF No. 07-1 is effective for collaborative
arrangements that exist on January 1, 2009 and application is
retrospective.  The Company adopted EITF No. 07-1 effective January 1,
2009, and the adoption had no material effect on our financial position or
results of operations.







12





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





EITF
No. 07-5




In June
2008, the FASB ratified EITF No. 07-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF No. 07-5”).
EITF No. 07-5 provides that an entity should use a two-step approach to evaluate
whether an equity-linked financial instrument (or Embedded Feature) is indexed
to its own stock, including evaluating the instrument’s contingent exercise and
settlement provisions. It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF No. 07-5 is effective for fiscal years
beginning after December 15, 2008. The Company adopted EITF No. 07-5
effective January 1, 2009, and the adoption resulted in the Company's
warrants with anti-dilutive provisions being classified as derivatives in
accordance with FASB Statement No. 133.





Recently
Issued Accounting Standards





In April
2009, the FASB issued the following new accounting standards:





FASB
Staff Position FAS No. 157-4, Determining Whether a Market Is Not
Active and a Transaction Is Not Distressed,(“FSP FAS No. 157-4”)
provides guidelines for making fair value measurements more consistent with the
principles presented in SFAS No. 157.  FSP FAS No. 157-4 provides
additional authoritative guidance in determining whether a market is active or
inactive and whether a transaction is distressed. It is applicable to all assets
and liabilities (i.e., financial and non-financial) and will require enhanced
disclosures.





FASB
Staff Positions FAS No. 115-2, FAS 124-2, and EITF No. 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance to
provide greater clarity about the credit and noncredit component of an
other-than-temporary impairment event and to more effectively communicate when
an other-than-temporary impairment event has occurred. This FSP applies to debt
securities.





FASB
Staff Position FAS No. 107-1 and APB No. 28-1, Interim Disclosures about Fair Value
of Financial Instruments, amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments in interim as well as in annual financial statements. This
FSP also amends APB Opinion No. 28, Interim Financial Reporting,
to require those disclosures in all interim financial statements.





These
standards are effective for periods ending after June 15, 2009. We are
evaluating the impact that these standards will have on our condensed
consolidated financial statements.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not, or are not believed by
management to, have a material impact on the Company’s present or future
condensed consolidated financial statements.





NOTE
2 - GOING CONCERN MATTERS




The
accompanying condensed consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
accompanying condensed consolidated financial statements, the Company incurred
a net loss of $112,596,373 since the Company’s date of inception through March
31, 2009. Additionally, the Company has negative working capital of $273,689,557
as of March 31, 2009. These factors, among others, may indicate that the Company
will be unable to continue as a going concern for a reasonable period of
time.







13





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009




The
Company’s continued existence is dependent upon management’s ability to develop
profitable operations and resolve its liquidity problems. The accompanying
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.




NOTE
3 – NOTE RECEIVABLE





In
conjunction with the sale of convertible debentures, the Company’s broker/dealer
issued a promissory note for $3,039,123 representing non forwarded proceeds
received from convertible note subscribers.  The Company has entered
into an agreement pursuant to which the Company’s broker/dealer will provide to
the Company Series A common stock of the Company held by the broker/dealer.
During the three months ended March 31, 2009, the Company collected $124,400
towards the note.





NOTE
4 – DEFERRED FINANCING COSTS





Deferred
financing costs are amortized ratably over a 13.5 month period in conjunction
with the related convertible notes.  The Company charged $789,931 and
$1,176,119 to operations for the three month period ended March 31, 2009 and
since the Company’s date of inception through March 31, 2009,
respectively.




NOTE
5 - DEPOSITS AND INVESTMENTS





On March
24, 2009, the Company issued 1 million shares of Series A common stock as a
deposit on the acquisition of Perusat N.A. shares valued at
$430,000.


The
Company, on March 9, 2009, acquired 49% of the authorized shares of ChinaComm
Cayman through its wholly owned subsidiary Gulfstream Capital Partners, Ltd. for
a purchase price of $196 million from Trussnet Capital Partners (HK)
Ltd.  Trussnet Capital Partners (HK) Ltd., of which Tay Yong Lee is
the sole shareholder, provided bridge financing for this
transaction.  The Company paid $5 million of the purchase price in
cash and paid the balance of the $191 million by delivering a promissory note
secured by the ChinaComm Cayman shares acquired in the
transaction.  The promissory note bears interest of 8% per annum,
payable quarterly, has a due date of March 9, 2010 and is non-recourse, except
for the pledged collateral.  Upon payment of this note, Trussnet
Capital Partners (HK) Ltd. will deliver the funds to ChinaComm Cayman, which
will in turn capitalize Yunji and Trussnet Dalian. The Company accounts for the
investment under the equity method of accounting.








14





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





A summary
of the investment activity is as follows:





Fair
value of the investment:





March
      31, 2009Fair
      value of the investment
            $196,000,000





Details
of the Company’s equity method investment as of March 31, 2009 are as
follows:





Name
      of business:
            
            ChinaComm
      CaymanPlace
      of incorporation:
            
            Cayman
      IslandsPrincipal
      Activity:
            
            Wireless
      communication in the PRCPercentage
      Ownership Interest:
            
            49%





As of
March 31, 2009, ChinaComm Cayman was an inactive entity with no assets,
liabilities or operating activities except for contractual rights in the
operation of the Chinacomm Network.





The
Company did not evaluate for impairment, and the fair value of the equity-method
investment is not estimated, since there were no identified events or changes in
circumstances that may have a significant adverse effect on the fair value and
the Company determined, in accordance with SFAS No. 107, that it is not
practicable to estimate the fair value of the investment.





NOTE
6 – CONVERTIBLE NOTES





Convertible
notes as of March 31, 2009 are comprised of the following:





Gross
              Principal
              Amount
            
            
            Less:
              Unamortized
              Discount
            
            
            Net10%
      convertible notes payable, unsecured are due December 31, 2008; accrued
      and unpaid interest due at maturity; convertible note holder has the
      option to convert note principal together with accrued and unpaid interest
      to the Company’s common stock at a rate of $0.95 per share. The Company is
      currently in default.
            
            $
            13,123,832
            
            
            $
            -
            
            
            $
            13,123,83210%
      amended and restated convertible notes payable are due December 31, 2009,
      with interest payable at maturity. The amended and restated convertible
      notes are convertible into the Company’s common stock at the lower of (a)
      $0.95 or (b) 80% of weighted average bid price for the common stock on a
      principal market for ten (10) days before, but not including, conversion
      date.
            
            $
            20,979,572
            
            
            
            9,469,270
            
            
            $
            11,510,302Total
            
            
            34,103,404
            
            
            
            9,469,270
            
            
            
            24,634,134Less
      current maturities
            
            
            (34,103,404
            )
            
            
            (9,469,270
            )
            
            
            24,634,134
            )Long
      term portion
            
            $
            -
            
            
            $
            -
            
            
            $
            -








15





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





NOTE
6 – CONVERTIBLE NOTES (continued)




The Company entered into a
Convertible Note Purchase Agreement and an Amended and Restated Convertible Note
Purchase Agreement with accredited investors during the year ended December 31,
2008 for the issuance of an aggregate of $35,501,482 of convertible notes. The
convertible notes accrue interest at 10% per annum, payable at maturity and were
due on December 31, 2008. The convertible note holder has the option to convert
any unpaid note principal to the Company’s common stock at a rate of $0.95 per
share of common stock. The effective interest rate at the date of inception was
420.61% per annum.




In
accordance with Emerging Issues
Task Force Issue 98-5, Accounting for Convertible Securities with a Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios (“EITF
98-5”), the Company recognized an imbedded beneficial conversion feature
present in the Convertible Notes. The Company allocated a portion of the
proceeds equal to the intrinsic value of that feature to additional paid-in
capital. The Company recognized and measured an aggregate of $27,060,987 of the
proceeds, which is equal to the intrinsic value of the imbedded beneficial
conversion feature, to additional paid-in capital and a discount against the
convertible notes. The debt discount attributed to the beneficial conversion
feature is amortized ratably to operations as interest expense over the term of
the convertible notes.




Since the
Company’s date of inception through March 31, 2009, the Company amortized
$27,060,987 as interest expense.




On
November 17, 2008, the Company also entered into an Amended and Restated Note
Purchase agreement with certain convertible note holders for the modification of
certain terms and conditions contained in the previously issued Convertible Note
Purchase Agreement.  The Company issued an aggregate of $20,979,572 in
amended and restated convertible notes in exchange for $17,389,776 of previously
issued convertible notes, a 20% inducement premium and accrued
interest.  The amended and restated convertible notes accrue interest
at 10% per annum, payable at maturity and are due on December 31,
2009.  The amended and restated convertible note holders have an
option to convert any unpaid note principal to the Company’s common stock at the
lower of (a) $0.95 or (b) 80% of the weighted average bid price of the previous
ten (10) days, excluding date of conversion.  The effective interest
rate at the date of inception was 304.22%.




The Company's identified embedded derivatives related to
the Amended and Restated Note Purchase Agreement entered into on November 17,
2008. These embedded derivatives included certain conversion features. The
accounting treatment of derivative financial instruments requires that the
Company record fair value of the derivatives as of the inception date of the
Amended and Restated Note Purchase Agreement up to the proceeds amount and to
fair value as of each subsequent balance sheet date. At the inception
of the Amended and Restated Note Purchase Agreement, the Company determined a
fair value $14,083,386 of the embedded derivative.  The fair value of
the embedded derivative was determined using the Black Scholes Option Pricing
Model based on the following assumptions:  dividend yield: -0-%,
volatility 144.76%, risk free rate: 1.08%, expected term: 409
days.







16





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009







NOTE
7-PROMISSORY NOTE PAYABLE





On March
9, 2008, the Company issued a promissory note for $191,000,000 as partial
payment for 49% interest in ChinaComm Cayman (Note 5).  The promissory
note is due on March 9, 2010; bears an interest rate of 8% per annum with
quarterly payments due June 9, 2008, September 9, 2009, January 9, 2010 and
March 9, 2010.  The promissory note is secured with the Company’s
acquired interest in ChinaComm Cayman.




NOTE
8 – DERIVATIVE FINANCIAL INSTRUMENTS





The
Company's derivative financial instruments consisted of embedded derivatives
related to the 10% amended and restated convertible notes issued November 17,
2008.  The embedded derivatives included certain conversion features.
The accounting treatment of derivative financial instruments required that the
Company record the derivatives at their fair values as of the inception date of
the amended and restated convertible notes (estimated at $14,083,386) and at
fair value as of each subsequent balance sheet date.    Any
change in fair value was recorded as non-operating, non-cash income or expense
at each reporting date. If the fair value of the derivatives is higher at the
subsequent balance sheet date, the Company recorded a non-operating, non-cash
charge. If the fair value of the derivatives is lower at the subsequent balance
sheet date, the Company recorded non-operating, non-cash income. At March 31,
2009, the conversion-related derivatives were valued using the Black Scholes
Option Pricing Model with the following assumptions: dividend yield of 0%;
annual volatility of 161.94%; and risk free interest rate of 0.43% and recorded
non-operating income of $14,686,805 representing the change in fair value from
December 31, 2008.  The derivatives were classified as short-term
liabilities.




NOTE
9 – MANDATORY REDEEMABLE SERIES B COMMON STOCK




The
Company is authorized to issue 66,909,000, $0.001 par value Series B common
stock.  The general attributes are:




Voting
Rights




Each
share of Series B common stock is entitled to ten (10) votes in all matters for
any action that the Series A common stockholders are entitled to
vote.




Non
Participatory




The
Series B common stock does not participate in any declared dividends for any
class of stock.




Liquidation
Preference




The
Series B common stockholders have the same liquidation rights as the Series A
common stockholders.








17





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009




Transferability




The
Series B common stock is non transferable.




Mandatory
Redemption




The
Series B common stock will be redeemed in 2023 at par value ($0.001) per
share.




NOTE
10 – STOCKHOLDERS EQUITY




The
Company is authorized to issue 500,000,000 shares of Series A common
stock.  As of December 31, 2008, there were 89,458,947 shares issued
and outstanding.




During
the year ended December 31, 2008, the Company issued 1,471,663 shares of common
stock in exchange for convertible debentures.




During
the year ended December 31, 2008, the Company issued 1,870,196 shares of common
stock in settlement of outstanding accounts payable.





During
the three month period ended March 31, 2009, the Company issued an aggregate of
6,026,526 shares of common stock for services rendered.  The value of
common stock issued for services was based upon the value of the services
rendered, which did not differ materially from the fair value of the Company's
common stock during the period the services were rendered.




During
the three month period ended March 31, 2009, the Company issued an aggregate of
2,184,132 shares of common stock in exchange of outstanding accounts
payable.




During
the three month period ended March 31, 2009, the Company issued 1,000,000 shares
of Series A common stock as a deposit toward the purchase of a future
investment.





NOTE
11- RELATED PARTY TRANSACTIONS





The
Company has the following material related party transactions:


Directors
and Officers of the Company were previously equity owners of Trussnet USA, Inc.,
a Delaware corporation (“Trussnet Delaware”). Trussnet Delaware or its
affiliates have performed approximately $61.5 million in contract services,
representing substantially all of the Company’s operations, including the
deployment services provided to Chinacomm.




The
Company has not paid Trussnet Delaware for a significant portion of the services
provided. As of March 31, 2009, that amount is approximately $41.5 million.
Trussnet Delaware has also advanced funds for the Company’s operations in
anticipation of the Company’s funding. Except for that implied extension of
credit,
the Company believes that all such services were provided at prices and on terms
and conditions that are the same as those that would result from arm’s-length
negotiations with unrelated parties. As the Company has no employees, the
Company believes there is only a de minimis value to the Company’s shared use of
Trussnet DE office space.







18





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009








NOTE
12 – FAIR VALUE MEASUREMENT





The
Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” on
January 1, 2008. SFAS No. 157 defines fair value as the price that would be
received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, the Company considers the principal or
most advantageous market in which it would transact and considers assumptions
that market participants would use when pricing the asset or liability, such as
inherent risk, transfer restrictions, and risk of nonperformance. SFAS
No. 157 establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. SFAS No. 157 establishes three levels of
inputs that may be used to measure fair value:





Level 1 -
Quoted prices in active markets for identical assets or
liabilities.





Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets with insufficient volume or
infrequent transactions (less active markets); or model-derived valuations in
which all significant inputs are observable or can be derived principally from
or corroborated by observable market data for substantially the full term of the
assets or liabilities.





Level 3 -
Unobservable inputs to the valuation methodology that are significant to the
measurement of fair value of assets or liabilities.





To the
extent that valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure
purposes, the level in the fair value hierarchy within which the fair value
measurement is disclosed and is determined based on the lowest level input that
is significant to the fair value measurement.





Upon
adoption of SFAS No. 157, there was no cumulative effect adjustment to
beginning retained earnings and no impact on the consolidated financial
statements.





The
carrying value of the Company’s cash and cash equivalents, accounts receivable,
accounts payable, short-term borrowings (including convertible notes payable),
and other current assets and liabilities approximate fair value because of their
short-term maturity.







19





CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2009





Items
recorded or measured at fair value on a recurring basis in the accompanying
consolidated financial statements consisted of the following items as of March
31, 2009:





The
following table sets forth the Company’s short and long-term investments as of
March 31, 2009, which are measured at fair value on a recurring basis by level
within the fair value hierarchy.  As required by SFAS No. 157, these
are classified based on the lowest level of input that is significant to the
fair value measurement:





Quoted
      Prices in Active Markets for Identical Instruments Level
    1
                  
                  
                  Significant
      Other Observable Inputs Level 2
                  
                  
                  Significant
      Unobservable InputsLevel 3
                  
                  
                  TotalAssets:Cash
                  
                  $
                  6,787
                  
                  
                  $
                  -
                  
                  
                  $                                  -
                  
                  
                  $
                  6,787Equity
      based investments
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  196,000,000
                  
                  
                  $
                  196,000,000Total
      assets
                  
                  $
                  6,787
                  
                  
                  $
                  -
                  
                  
                  
                  196,000,000
                  
                  
                  $
                  196,006,787Liabilities:Debt
      Derivative
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (11,479,081
                  )
                  
                  $
                  (11,479,081
                  )





The
Company’s cash instrument consists primarily of checking and money market
securities and is classified within Level 1 of the fair value hierarchy because
it is valued using quoted market prices.  The cash instrument is
included in current assets in the accompanying condensed consolidated balance
sheets.




The
Company's derivative liability was valued using pricing models, and the Company
generally uses similar models to value similar instruments. Where possible, the
Company verifies the values produced by its pricing models to market prices.
Valuation models require a variety of inputs, including contractual terms,
market prices, yield curves, credit spreads, measures of volatility, and
correlations of such inputs. These financial liabilities do not trade in liquid
markets, and, as such, model inputs cannot generally be verified and do involve
significant management judgment. Such instruments are typically classified
within Level 3 of the fair value hierarchy.  The change in fair value
of the derivative liability is included as a component of other income in the
condensed consolidated statements of loss.




At March
31, 2009, the carrying amounts of the convertible notes payable approximate fair
value because the entire convertible notes have been classified to current
maturity.







20





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





Forward-Looking
Statements




This
following information specifies certain forward-looking statements of our
management.  Forward-looking statements are statements that estimate
the happening of future events and are not based on historical
fact.  Forward-looking statements may be identified by the use of
forward-looking terminology, such as “may”, “shall”, “could”, “expect”,
“estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”,
“continue”, or similar terms, variations of those terms or the negative of those
terms.  The forward-looking statements specified in the following
information have been compiled by our management on the basis of assumptions
made by management and considered by management to be reasonable.  Our
future operating results, however, are impossible to predict, and no
representation, guaranty, or warranty is to be inferred from those
forward-looking statements.




Forward-looking
statements include, but are not limited to, the following:




●
            Statements relating to our
      future business and financial
  performance;




●
            Our competitive
      position;




●
            Growth of the
      telecommunications industry in China;
and




●
            Other material future
      developments that you may take into
  consideration.




We
believe it is important to communicate our expectations to our
shareholders.  However, there may be events in the future that we are
not able to accurately predict or over which we have no control.  The
risk factors and cautionary language discussed in this report provide examples
of risks, uncertainties and events that may cause actual results to differ
materially from the expectations we described in our forward-looking statements,
including among other things:




●
            Competition in the industry in
      which we do business;




●
            Legislation or regulatory
      environments;




●
            Requirements or changes
      adversely affecting the businesses in which we are engaged;
      and




●
            General economic
      conditions.




You
are cautioned not to place undue reliance on these forward-looking
statements.  The assumptions used for purposes of the forward-looking
statements represent estimates of future events and are subject to uncertainty
as to possible changes in economic, legislative, industry, and other
circumstances.  As a result, the identification and interpretation of
data and other information and their use in developing and selecting assumptions
from and among reasonable alternatives require the exercise of
judgment.  To the extent that the assumed events do not occur, the
outcome may vary substantially from anticipated or projected results;
accordingly, no opinion is expressed on the achievability of those
forward-looking statements.  We cannot guaranty that any of the
assumptions relating to the forward-looking statements specified in the
following information are accurate, and we assume no obligation to update any
such forward-looking statements.




The
following discussion should be read in conjunction with the information
contained in the financial statements and the notes thereto, which form an
integral part of the financial statements.  The financial statements
begin on page 3 above.







21





Overview
and Business Operations




The
present operations of China Tel Group, Inc. (“Company”), all of which are
conducted through our wholly-owned subsidiary Trussnet USA, Inc., a Nevada
corporation ("Trussnet"), consist of providing engineering and deployment
services related to the build-out of a broadband wireless telecommunications
network in several cities in the Peoples Republic of China (“PRC”) for
CECT-Chinacomm Communications Co, Ltd., a PRC company (together with its
subsidiaries and affiliates, “Chinacomm”).  Through our wholly owned
subsidiaries, we hold a 49% equity interest in ChinaComm, Limited, a Cayman
Island corporation (“ChinaComm Cayman”).  The remaining 51% equity
interest in ChinaComm Cayman is held by affiliates of Chinacomm.




Chinacomm
holds licenses and permits from the PRC to build and operate a 3.5 GHz broadband
wireless telecommunications network ("Chinacomm Network") in 29 cities in the
PRC.  These licenses currently run through February
2013.  Chinacomm has commenced the build-out of the Chinacomm Network
in Beijing, Shanghai,  Shenzhen, Qindao, and
Nanjing.   Portions of the network are operational in Beijing and
Shanghai.




Pursuant
to an Exclusive Technical and Management Consulting Services Agreement dated May
23, 2008, Yunji Communications Technology (China) Co., Ltd. (“Yunji”), a PRC
wholly-owned foreign enterprise of a subsidiary of ChinaComm Cayman, will
operate and service the Chinacomm Network in exchange for a portion of the
revenue generated by Chinacomm from the Chinacomm Network.  Trussnet
Gulfstream (Dalian) Co. Ltd. (“Trussnet Dalian”), a PRC wholly owned foreign
enterprise of Trussnet, has entered into agreements with Yunji pursuant to which
it will lease to Yunji equipment required in the deployment of the Chinacomm
Network (“Equipment”) and provide technical and management services to Yunji for
the procurement, installation and optimization of the
Equipment.  Yunji and Trussnet Dalian will become operational only
when we provide in excess of $50 million in cash in repayment of the
$191 million owing on the promissory note for our acquisition of 49% of
ChinaComm Cayman.  The funds in repayment of $191 million promissory
note will be used to acquire Equipment and capitalize Yunji and Trussnet
Dalian.  Until we provide this capital, Chinacomm will continue to
operate the network and retain any revenue it generates from the
network.




Substantially
all of our business is conducted in the PRC and relates to the build-out of the
Chinacomm Network.  We are dependent upon Chinacomm's ability to
maintain the necessary licenses for the operation of the Chinacomm
Network.  As the Chinacomm Network becomes operable, we will be
dependent upon Yunji's ability to attract and retain subscribers on behalf of
Chinacomm.




We have
contracted with Trussnet USA, Inc., a Delaware corporation (“Trussnet Delaware”)
(under separate control from our subsidiary of the same name) engineering and
deployment services for the Chinacomm Network.  These services, which
Trussnet Delaware generally performs itself or through subcontracts with vendors
holding requisite local licenses, include radio frequency engineering, site
acquisition, preparation and approval of architectural and engineering drawings,
installations of the Equipment and network architecture and
engineering.  We continued to provide these services through the
period of this report.




Since our
inception we have incurred accumulated losses of $112.6 million.  As
of March 31, 2009 we had cash of $6,787 and had current liabilities of $279
million (Reference in this report to “Since our inception” refers to April 4,
2008, the date Trussnet was formed and the date used for financial activities
for accounting purpose in this report.)  We have expressed substantial
doubt about our ability to continue as a going concern as described in Note
2.  In order to continue to operate our business, we will need to
raise substantial amounts of additional capital.




The
Company is actively pursuing additional equity financing through discussions
with investment bankers and private investors. There can be no assurance that
the Company will be successful in its effort to secure additional equity
financing.







22




Agreement
with Olotoa Investments, LLC




On March
10, 2009, we entered into an agreement to sell 49% of our Series A common stock,
on a fully diluted basis, to Olotoa Investments, LLC (“Olotoa”), a private
investment group, for a purchase price of $300 million.  Pursuant to
the terms of the agreement, Olotoa has agreed to pay the purchase price between
March 9, 2009 and September 9, 2010 in amounts and on dates as requested by our
Board of Directors.  On May 1, 2009, we requested Olotoa to pay $50
million of the purchase price.  Olotoa has not yet made the requested
payment.




Acquisition
of Interest in ChinaComm Cayman




Trussnet
was formed in April 2008 and had no operations prior to our acquisition of
Trussnet in May 2008.  Trussnet’s principal asset was a Framework
Agreement dated April 7, 2008 with Chinacomm pursuant to which Trussnet had the
contractual right to acquire a forty-nine percent (49%) interest in ChinaComm
Cayman and provide services for the build-out of the Chinacomm
Network.




On March
9, 2009, we acquired 49% of the authorized shares of ChinaComm Cayman for a
purchase price of $196 million from Trussnet Capital Partners (HK)
Ltd.  Trussnet Capital Partners (HK) Ltd., of which our President, Tay
Yong Lee is the sole shareholder, provided bridge financing for this transaction
due to our lack of funds.  We paid $5 million of the purchase price in
cash and paid the balance of $191 million by delivering a promissory note
secured by the ChinaComm Cayman shares acquired in the
transaction.  The promissory note bears interest of 8% per annum,
payable quarterly, has a due date of March 9, 2010 and is non-recourse, except
for the pledged collateral.  Upon our payment of this note, Trussnet
Capital Partners (HK) Ltd. will deliver the funds to ChinaComm Cayman which will
in turn capitalize Yunji and Trussnet Dalian.




Pending
Strategic Transactions




The
Company has entered into, but not closed, the following strategic
transactions:




Agreement with Runcom
Technologies, Inc.




On
October 6, 2008, we entered into a Strategic Frame Agreement with Runcom
Technologies, Inc.(“Runcom”).  The agreement sets forth the terms and
conditions under which Runcom was to design, manufacture and sell product to us
and was to be our preferred provider of such products.  Runcom agreed
to invest a total of $100 million into the Company, in exchange for
approximately 28% of the Company's issued and outstanding Series A common stock
on a fully diluted basis according to the terms to be mutually agreed upon under
a stock purchase agreement.  The investment amount was to be paid in
two equal payments; the first fifty percent (50%) was to occur within ninety
days of the signing of the Stock Purchase Agreement, and the remaining fifty
percent (50%) within six months thereof.




We have
not entered into the contemplated stock purchase agreement with Runcom, but
Runcom has expressed a continued interest in making an investment in the Company
in the future.  Discussions in that regard are ongoing.




Acquisition of Perusat
S.A.




On
February 22, 2009, through a wholly owned subsidiary of Trussnet, we entered
into a stock purchase agreement, as amended, to acquire a 95% interest in the
common stock of Perusat S.A. for a purchase price of $2,775,000.  The
purchase price is to be paid by the Company issuing 1,000,000 shares of China
Tel Group, Inc. Series A Common Stock, valued at $2.50 per share, and cash in
the amount of $275,000.  We have delivered the share consideration for
the acquisition of the Perusat shares.  The $275,000 is payable as
follows: (i) $50,000 at the closing of the transaction (“Closing”); (ii) $50,000
at June 30, 2009; (iii) $50,000 at the end of each of the three following
quarters; and (iv) the balance of the purchase price due at the end of the next
quarter.  We have not yet paid the initial $50,000 due at the
Closing.







23





Perusat
provides local and international long distance telephone services, including
fixed line service (voice over IP) to approximately 6,500 customers in nine
cities in Peru (Lima, Arequipa, Chiclayo, Trujillo, Piura, Santa, Cusco, Ica and
Huanuco).  Based on its status as a licensed telephone operator,
Perusat has recently been granted a license in the 2.5 GHz spectrum covering
these cities other than Lima and its surrounding metropolitan
area.  We believe this license is suitable to deploy a broadband
wireless telecommunications network in the licensed area.




Critical
Accounting Policies and Estimates




Our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations discusses our condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States.  The preparation of these condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period.  On an on-going basis,
management evaluates its estimates and judgments, including those related to
revenue recognition, accrued expenses, financing operations, and contingencies
and litigation.  Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources.  Actual results may differ from
these estimates under different assumptions or conditions.  The most
significant accounting estimates inherent in the preparation of our condensed
consolidated financial statements include estimates as to the appropriate
carrying value of certain assets and liabilities which are not readily apparent
from other sources.




These
accounting policies are described at relevant sections in this discussion and
analysis and in the notes to the consolidated financial statements included
herein for the period ended March 31, 2009.




Development Stage
Company.We are a
development stage company, as defined in Statement of Financial Accounting
Standards No. 7, “Accounting and Reporting by Development Stage
Enterprises”.




Loss Per Share. In accordance with SFAS
No. 128, “Earnings Per Share”, basic loss per common share is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding.  Diluted loss per common share is
computed similar to basic loss per common share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive.  As of March 31, 2009, we had
approximately 97.7 million shares of Series A common stock related to the
issuance of debt instruments that could be converted into shares of the
Company’s Series A common stock.  Diluted loss per share is not
presented, because the issuance of these additional common shares would be
anti-dilutive.




Convertible
Instruments.When we issue
convertible debt with detachable instruments, we allocate the proceeds received
on a relative fair value basis pursuant to EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios".  Then, we apply the amount allocated to
the convertible instrument, and an effective conversion price is calculated and
used to measure the intrinsic value, if any, of the embedded conversion
option.  The intrinsic value of the embedded conversion option and the
relative fair value of the detachable instruments are recorded as discounts to
the convertible debt and amortized over the term of the debt.




When we
issue convertible debt with non-detachable instruments, we compute the intrinsic
value of the conversion option based on a comparison of the proceeds of the
convertible instrument allocated to the common stock portion of the conversion
option and the fair value at the commitment date of the common stock to be
received by the holder upon conversion pursuant to EITF Issue No. 0027,
"Application of Issue No. 98-5 to Certain Convertible
Instruments".  The excess of the fair value of the common stock at the
commitment date over proceeds is the intrinsic value of the embedded conversion
option that we recognize at the issuance date for the convertible
debt.  We record the intrinsic value of the embedded conversion option
as a beneficial conversion feature to the convertible debt and amortize it over
the term of the debt.







24





Goodwill and Identifiable
Intangible Assets.In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”,
goodwill and intangible assets with indefinite lives are not amortized, but
instead are measured for impairment at least annually in the fourth quarter, or
when events indicate that impairment exists.  As required by SFAS 142,
in the impairment tests for indefinite-lived intangible assets, we compare the
estimated fair value of the indefinite-lived intangible assets, using a
combination of discounted cash flow analysis and market value
comparisons.  If the carrying value exceeds the estimate of fair
value, we calculate the impairment as the excess of the carrying value over the
estimate of fair value and, accordingly, record the loss.




Intangible
assets that are determined to have definite lives are amortized over their
useful lives and are measured for impairment, only when events or circumstances
indicate the carrying value may be impaired in accordance with SFAS 144
discussed below.




Impairment of Long-Lived
Assets.In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (SFAS 144), we estimate the future undiscounted cash flows to
be derived from the asset to assess whether or not a potential impairment exists
when events or circumstances indicate the carrying value of a long-lived asset
may be impaired.  If the carrying value exceeds our estimate of future
undiscounted cash flows, we then calculate the impairment as the excess of the
carrying value of the asset over our estimate of its fair value.




The
following discussion and analysis summarizes the significant factors affecting
our consolidated results of operations, financial conditions and liquidity
position for the three months ended March 31, 2008 and should be read in
conjunction with our consolidated financial statements and related notes
included elsewhere in this filing.




Liquidity
and Capital Resources




As of
March 31, 2009, we had cash of $6,787 and had liabilities of $279.1 million, of
which $279 million are deemed to be current liabilities.  We expect to
continue to incur net losses for the foreseeable future.  There is
substantial doubt about our ability to continue as a going
concern.  In order to continue to operate our business, we will need
to raise substantial amounts of additional capital.




Since our
inception through March 31, 2009, we raised approximately $32 million related to
our offering of our convertible notes.  The notes bear interest of 10%
per annum and are either past due or due ninety days after our receipt of a
notice of redemption.




To avoid
forfeiture of our interest in ChinaComm Cayman, which is pledged to secure
payment of our $191 million promissory note to Trussnet Capital Partners (HK)
Ltd., we must make quarterly interest payments of $3.8 million on June 9, 2009,
September 9, 2009 and December 9, 2009, and make the final quarterly interest
payment and repay the entire $191 million principal amount on March 9,
2010.  The payment of the $191 million principal amount also is
necessary to maintain our rights to participate in the operation of the
Chinacomm Network.




On March
10, 2009, we entered into an agreement to sell 49% of our Series A common stock,
on a fully diluted basis as defined in the agreement, to Olotoa for a purchase
price of $300 million.  Pursuant to the terms of the agreement, Olotoa
will pay the purchase price between March 9, 2009 and September 9, 2010 in
amounts and on dates as request by our Board of Directors.  We expect
the cash proceeds from this investment to be used primarily to capitalize Yunji
and Trussnet Dalian, repay our $191 million promissory note to Trussnet Capital
Partners (HK) Ltd. and to provide operating capital for the deployment of the
Chinacomm Network.  On May 1, 2009, we requested Olotoa Investments to
pay $50 million of the purchase price.  To date, Olotoa has not made
the requested payment.







25





Sources
and Uses of Cash




The
following table presents a summary of our sources and uses of cash for the three
months ended March 31, 2009:




Net
      cash provided by operating activities:
              
              $      
       209Net
      cash used in investing activities
              
              --Net
      cash provided by financing activities
              
              --Increase
      (decrease) in cash and cash equivalents
              
              $      
       209




Operating
Activities.Cash provided by
operating activities of $209 was net of a loss for the three months ended March
31, 2009 of $3,626,481 and gain on change in fair value of debt derivative of
$14,686,805, net with amortization of financing costs of $789,931, accretion of
debt discount $3,099,033, common stock issued for services rendered of
$2,946,211, collection of note receivable of $124,400 and increase of our
accounts payable and other accrued liabilities of $11,353,920.




Investing
Activities.No activity in the three month period ending March 31, 2009.




Financing
Activities.No activity in the three month period ending March 31, 2009.




Results
of Operations




Revenues.  We
had no revenues during the three months ending March 31, 2009.




Operating
Expenses.  We had operating expenses of $14.3 million during
the three months ending March 31, 2009.  These expenses were
attributable to selling, general and administrative expenses of approximately
$4.6 million and research and development cost of $9.7 million.




Selling, General and
Administrative Expenses.  The $4.6 million in selling, general
and administrative expenses are due to consulting fees, marketing fees, and
legal and professional fees.




Research and Development
Expenses.  For the three month period ending March 31, 2009 we
incurred $9.7 million in costs relating to the design and development of the
broadband wireless telecommunications network in the PRC.  These costs
are charged to expense in the period incurred.




Other Income and
Expenses.  We incurred other income and expenses of $10.7
million.  This consists of a gain on changes in the fair value of the
debt derivative of $14.7 million offset by interest expense of $4.0
million.




Gain on
changes in fair value of the debt derivative relates to the amended and restated
convertible notes that have an embedded derivative.  The derivative is
calculated at the fair value as of the inception date of the
notes.  The fair value of the derivative liability as of December 31,
2008 was $26.2 million.  The liability as of March 31, 2009 is $11.5
million.  The net derivative reduction is $14.7 million which is
presented as other income.  Interest expense consists of the
amortization of the debt discount (accretion) of $3.1 million and accrued
interest on the convertible notes of approximately $1.0 million.







26





Loss from
Operations.  For the three months ended March 31, 2009, our
loss from operations was $14.3 million.  We expect to continue to
incur losses for the foreseeable future related to the design, development,
installation and operation of the Chinacomm Network and the broadband wireless
telecommunications network we will be deploying in Peru (“Peru
Network”).  Until we capitalize Yunji and Trussnet Dalian, we do not
anticipate generating any significant revenues from the Chinacomm
Network.  In Peru, we do not anticipate generating any significant
revenue within the next twelve months.




ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




As of
March 31, 2009, we did not hold any market risk sensitive
instruments.




If we are
successful at generating revenue relating to the Chinacomm Network, those
revenues will be denominated in RMB.  As more particularly set forth
in the risk factors discussed in Part I,, Item 1A. “Risk Factors” in our Annual
Report on Form 10-K of the United States Securities and Exchange Commission
(“SEC”) for the year ended December 31, 2008, we will then have exposure to
changes in dollar/RMB exchange rates which could be material to our
business.




ITEM
      4.
            CONTROLS
      AND PROCEDURES




Evaluation
of Controls and Procedures




Section
404 of the Sarbanes-Oxley Act of 2002 requires that management document and test
the Company's internal control over financial reporting and include in its
Annual Report on Form 10-K a report on management's assessment of the
effectiveness of our internal control over financial
reporting.  Nothing has changed in that regard from what is set forth
in the Company’s Form 10-K that was filed for the period ended December 31,
2008.




Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f).  Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with United States generally accepted accounting
principles.  A company's internal control over financial reporting
includes those policies and procedures that: (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with United States generally
accepted accounting principles and that receipts and expenditures of the Company
are being made only in accordance with authorization of management and directors
of the Company; and (iii) provide reasonable assurance regarding the prevention
or timely detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the Company's consolidated
financial statements.




In
connection with the preparation of this report, to evaluate the effectiveness of
the design and operation of our disclosure controls and procedures as of March
31, 2009, our management did not complete the assessment of the effectiveness of
our internal control over financial reporting, implementing the criteria set
forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission in "Internal Control-Integrated Framework".  Management has
concluded, as a result, that its disclosure controls and procedures may not be
effective at the reasonable assurance level as of March 31,
2009.  Specifically, its control environment possibly may not
sufficiently promote effective internal control over financial reporting through
the management structure to prevent a material misstatement.







27





We are
required to complete implementing the internal controls based on the criteria
established in Internal Control -- Integrated Framework issued by the
COSO.  Our management is fully committed to implement internal
controls based on these criteria in 2009 and believes that it is taking the
steps that will properly address any issue.




While we
are taking immediate steps and dedicating substantial resources to implement the
internal controls based on the criteria established in Internal Control -
Integrated Framework issued by the COSO, they will not be considered fully
implemented until the new and improved internal controls operate for a period of
time, are tested and are found to be operating effectively.




Our
registered public accountant has not conducted an audit of our controls and
procedures regarding internal control over financial
reporting.  Consequently, the registered public accounting firm
expressed no opinion in our audited financial statements including in our Form
10-K report with regards to the effectiveness or implementation of our
controls and procedures with regards to internal control over financial
reporting.




ITEM
    4(T).
            CONTROLS AND
      PROCEDURES.




There are
no changes in our internal controls over financial reporting that occurred
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.




PART
II – OTHER INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS.




On March
19, 2009, we received a subpoena from the SEC related to Westmoore Securities,
Inc.  Westmoore Securities, Inc. acted as the placement agent for our
convertible notes, and a principal of Westmoore Securities, Inc. was a member of
our Board of Directors until March 7, 2009.  We have provided
documents to the SEC in response to the subpoena.




ITEM 1A.
            RISK
      FACTORS.




In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial position and results of
operations.  There are no material changes from the risk factors set
forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for
the year ended December 31, 2008.




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




In March
2009 the Company issued 1,000,000 Series A common shares under the stock
purchase agreement with Perusat to the shareholders of
Perusat.  981,100 Series A common shares were issued to Mario Octavio
Navarro Alvarez, and 18,900 Series A common shares were issued to Rafael Isaias
Samanez Zacarias for the purchase of their collective 95% equity interest in
Perusat.  There is no family relationship between Mario Octavio Navarro
Alvarez and our directors and officers, George Alvarez and Mario
Alvarez.




In March
2009 the Company also issued 1,000,000 Series A common shares to Strategic
Partners Consulting, LLC under a consulting agreement dated March 11,
2009.  The 1,000,000 Series A common shares are a portion of
consideration to be delivered by the Company to Strategic Consulting Partners,
LLC for financial consulting services to rendered under the Consulting
Agreement.







28




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.




We
      are in default on the payment of principal and interest on approximately
      $13.1 million of our convertible notes due December 31,
    2008.




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




None.




ITEM
      5.
            OTHER
      INFORMATION.




None.




ITEM
      6.
            EXHIBITS.


10.1
              Consulting Agreement
      dated March 11, 2009 between Company and Strategic Consulting Partners,
      LLC31.1
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1
              Certification
      of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2
              Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002






SIGNATURES




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





Dated:
      May 20, 2008
            CHINA
      TEL GROUP, INC.By:
      /s/ George AlvarezGeorge
      Alvarez,Chief
      Executive Officer










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