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 SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2009OR[_]
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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  November 9, 2009 the
registrant had 170,863,298 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 SEPTEMBER 30, 2009







PAGEPART
      I.
            FINANCIAL
      INFORMATION
            
            3Item
      1.
            Financial
      Statements
            
            3Condensed
      Consolidated Balance Sheets as of September 30, 2009 (unaudited) and
      December 31, 2008
            
            3Condensed
      Consolidated Statements of Loss for the three and nine months ended
      September 30, 2009, three months ended September 30, 2008, April 4, 2008
      (date of inception) through September 30, 2008 and from April 4, 2008
      (date of inception) through September 30, 2009 (unaudited)
            
            4Condensed
      Consolidated Statement of Stockholders’ Deficit for the period from April
      4, 2008 (date of inception) through September 30, 2009
      (unaudited)
            
            5Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2009, April 4, 2008 (date of inception) through September 30, 2008 and
      from April 4, 2008 (date of inception) through September 30, 2009
      (unaudited)
            
            7Notes
      to Condensed Consolidated Financial Statements (unaudited)
            
            8Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            27Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            35Item
      4.
            Controls
      and Procedures
            
            35Item
      4(T).
            Controls
      and Procedures
            
            36PART
      II.
            OTHER
      INFORMATION
            
            36Item
      1.
            Legal
      Proceedings
            
            36Item
      1A.
            Risk
      Factors
            
            37Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            37Item
      3.
            Defaults
      Upon Senior Securities
            
            37Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            37Item
      5.
            Other
      Information
            
            37Item
      6.
            Exhibits
            
            38





2


PART
I – FINANCIAL STATEMENTS





CHINA
TEL GROUP, INC.


(a
development stage company)


CONDENSED
CONSOLIDATED BALANCE SHEETS





September
      30,
            
            
            December
      31,2009
            
            
            2008ASSETS
            
            (unaudited)Current
      assets:Cash
            
            $
            18,121
            
            
            $
            6,578Accounts
      receivable, net of
      provision for bad debts of $4,695
            
            
            89,179
            
            
            
            -Accounts
      receivable, other
            
            
            8,742
            
            
            
            -Inventory
            
            
            7,693
            
            
            
            -Note
      receivable
            
            
            2,915,016
            
            
            
            3,039,123Prepaid
      expenses
            
            
            163,946
            
            
            
            -Deferred
      financing costs, net of accumulated amortization of $3,000,883 and
      $386,188, respectively
            
            
            870,919
            
            
            
            3,203,608Total
      current assets
            
            
            4,073,616
            
            
            
            6,249,309Property,
      plant and equipment, net of accumulated depreciation of
      $1,278,598
            
            
            591,112
            
            
            
            -Other
      assets:Intangible
      assets, net of accumulated amortization of $142,536
            
            
            119,214
            
            
            
            -Goodwill
            
            
            797,156
            
            
            
            -Investments,
      at cost
            
            
            196,000,000
            
            
            
            5,000,000Total
      other assets
            
            
            196,916,370
            
            
            
            5,000,000Total
      assets
            
            $
            201,581,098
            
            
            $
            11,249,309LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            61,026,093
            
            
            $
            42,632,534Unearned
      revenue
            
            
            23,040
            
            
            
            -Line
      of credit
            
            
            141,593
            
            
            
            -Advances
      from shareholders
            
            
            231,471
            
            
            
            -Notes
      payable, related party
            
            
            1,050,000Notes
      payable
            
            
            191,245,463
            
            
            
            -Convertible
      debentures, net of unamortized discount of $1,570,128 and $12,568,303,
      respectively
            
            
            22,549,557
            
            
            
            21,535,101Derivative
      liability
            
            
            4,144,550
            
            
            
            26,165,886Total
      current liabilities
            
            
            280,411,767
            
            
            
            90,333,521Long
      term debtMandatory
      redeemable Series B common stock
            
            
            66,909
            
            
            
            66,909Total
      liabilities
            
            $
            280,478,676
            
            
            $
            90,400,430Stockholders'
      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,
      163,497,600 and 89,458,947 shares issued and outstanding as of September
      30, 2009 and December 31, 2008, respectively
            
            
            163,498
            
            
            
            89,459Additional
      paid in capital
            
            
            65,099,150
            
            
            
            30,079,383Accumulated
      deficit
            
            
            (144,190,270
            )
            
            
            (109,319,963
            )Accumulated
      other comprehensive income
            
            
            30,044
            
            
            
            -Total
      China Tel Group, Inc.'s stockholders' deficit
            
            
            (78,897,578
            )
            
            
            (79,151,121
            )Non
      controlling interest
            
            
            -
            
            
            
            -Total
      stockholder's deficit
            
            
            (78,897,578
            )
            
            
            (79,151,121
            )Total
      liabilities and stockholders' deficit
            
            $
            201,581,098
            
            
            $
            11,249,309


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


3


CHINA TEL GROUP, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF LOSS


(a
development stage company)


(Unaudited)


From
      April 4, 2008
              
              
              From
      April 4, 2008Three
      months
              
              
              Three
      months
              
              
              Nine
      months
              
              
              (date
      of inception)
              
              
              (date
      of inception)ended
              
              
              ended
              
              
              ended
              
              
              Through
              
              
              ThroughSeptember 30, 2009
              
              
              September 30, 2008
              
              
              September 30, 2009
              
              
              September 30, 2008
              
              
              September 30, 2009(restated)
              
              
              
              
              
              (restated)
              
              
              (restated)REVENUE
              
              $
              258,528
              
              
              $
              -
              
              
              $
              457,766
              
              
              $
              -
              
              
              $
              457,766Cost
      of sales
              
              
              235,816
              
              
              
              -
              
              
              
              364,247
              
              
              
              -
              
              
              
              364,247Gross
      profit
              
              
              22,712
              
              
              
              -
              
              
              
              93,519
              
              
              
              -
              
              
              
              93,519OPERATING
      EXPENSES:Selling,
      general and administrative expenses
              
              
              18,801,147
              
              
              
              1,943,302
              
              
              
              25,205,098
              
              
              
              5,027,872
              
              
              
              33,023,427Depreciation
      and amortization
              
              
              41,476
              
              
              
              -
              
              
              
              58,880
              
              
              
              -
              
              
              
              58,880Research
      and development costs
              
              
              30,000
              
              
              
              11,016,074
              
              
              
              9,757,038
              
              
              
              44,012,899
              
              
              
              61,585,210Total
      operating expenses
              
              
              18,872,623
              
              
              
              12,959,376
              
              
              
              35,021,016
              
              
              
              49,040,771
              
              
              
              94,667,517Net
      loss from operations
              
              
              (18,849,911
              )
              
              
              (12,959,376
              )
              
              
              (34,927,497
              )
              
              
              (49,040,771
              )
              
              
              (94,573,998
              )OTHER
      INCOME (EXPENSES):Other
      income (expenses)
              
              
              (36,120
              )
              
              
              -
              
              
              
              (36,907
              )
              
              
              -
              
              
              
              (36,907
              )Gain
      (loss) on foreign currency transactions
              
              
              25,967
              
              
              
              
              
              
              
              25,967
              
              
              
              
              
              
              
              25,967Loss
      on investments, related party
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,636,410
              )(Loss)
      gain on change in fair value of debt derivative
              
              
              11,997,895
              
              
              
              -
              
              
              
              22,021,336
              
              
              
              -
              
              
              
              9,938,836Interest
      expense
              
              
              (9,256,200
              )
              
              
              (2,213,106
              )
              
              
              (21,953,206
              )
              
              
              (28,279,301
              )
              
              
              (52,557,687
              )Net
      loss before provision for income taxes
              
              
              (16,118,369
              )
              
              
              (15,172,482
              )
              
              
              (34,870,307
              )
              
              
              (77,320,072
              )
              
              
              (143,840,199
              )Income
      taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      (Loss)
              
              
              (16,118,369
              )
              
              
              (15,172,482
              )
              
              
              (34,870,307
              )
              
              
              (77,320,072
              )
              
              
              (143,840,199
              )Non
      controlling interest
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -NET
      LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.
              
              $
              (16,118,369
              )
              
              $
              (15,172,482
              )
              
              $
              (34,870,307
              )
              
              $
              (77,320,072
              )
              
              $
              (143,840,199
              )Net
      loss per common share (basic and fully diluted)
              
              $
              (0.13
              )
              
              $
              (0.17
              )
              
              $
              (0.33
              )
              
              $
              (1.04
              )
              
              $
              (1.56
              )Weighted
      average number of shares outstanding, basic and fully
    diluted
              
              
              125,166,675
              
              
              
              87,439,040
              
              
              
              105,894,140
              
              
              
              74,428,713
              
              
              
              92,565,014Comprehensive
      Loss:Net
      Loss
              
              $
              (16,118,369
              )
              
              $
              (15,172,482
              )
              
              $
              (34,870,307
              )
              
              $
              (77,320,072
              )
              
              $
              (143,840,199
              )Foreign
      currency translation gain
              
              
              30,044
              
              
              
              -
              
              
              
              30,044
              
              
              
              -
              
              
              
              30,044Comprehensive
      Loss:
              
              
              (16,088,325
              )
              
              
              (15,172,482
              )
              
              
              (34,840,263
              )
              
              
              (77,320,072
              )
              
              
              (143,810,155
              )Comprehensive
      loss attributable to the non controlling interest
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Comprehensive
      loss attributable to China Tel Group, Inc.
              
              $
              (16,088,325
              )
              
              $
              (15,172,482
              )
              
              $
              (34,840,263
              )
              
              $
              (77,320,072
              )
              
              $
              (143,810,155
              )


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 STATEMENT OF STOCKHOLDERS' DEFICIT FOR
THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2009 (Unaudited)




CHINA
      TEL GROUP, INC.Preferred stock
              
              
              Common stock
              
              
              Additional
              
              
              Other
              
              
              
              
              
              Non-
              
              
              TotalSeries A
              
              
              Paid
      in
              
              
              Comprehensive
              
              
              Accumulated
              
              
              controlling
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Income (Loss)
              
              
              Deficit
              
              
              Interest
              
              
              DeficitBalance,
      April 4, 2008 (date of inception)
              
              
              -
              
              
              $
              -
              
              
              
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Effect
      of merger with China Tel Group, Inc. (formerly Mortlock 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
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              385,807Subtotal
              
              
              -
              
              $
              
              -
              
              
              
              97,669,605
              
              
              $
              97,670
              
              
              $
              35,092,308
              
              
              $
              -
              
              
              $
              (109,319,963
              )
              
              $
              -
              
              
              $
              (74,129,985
              )


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 STATEMENT OF STOCKHOLDERS' DEFICIT
 FOR
THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH SEPTEMBER 30,
2009
 (Unaudited)


CHINA
      TEL GROUP, INC.Preferred stock
            
            
            Common stock
            
            
            Additional
            
            
            Other
            
            
            
            
            
            
            
            
            TotalSeries A
            
            
            Paid
      in
            
            
            Comprehensive
            
            
            Accumulated
            
            
            Non
      controlling
            
            
            Stockholders'Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Income (Loss)
            
            
            Deficit
            
            
            Interest
            
            
            DeficitBalance
      forward
            
            
            -
            
            
            $
            -
            
            
            
            97,669,605
            
            
            $
            97,670
            
            
            $
            35,092,308
            
            
            $
            -
            
            
            $
            (109,319,963
            )
            
            $
            -
            
            
            $
            (74,129,985
            )Issuance
      of Series A common stock in March 2009 as deposit toward purchase of an
      investment
            
            
            -
            
            
            
            -
            
            
            
            1,000,000
            
            
            
            1,000
            
            
            
            429,000
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            430,000Issuance
      of Series A common stock in May  2009 in exchange for previously
      incurred debt
            
            
            -
            
            
            
            -
            
            
            
            211,500
            
            
            
            211
            
            
            
            200,713
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            200,924Issuance
      of Series A common stock in June  2009 in exchange for
      previously incurred debt
            
            
            -
            
            
            
            -
            
            
            
            263,158
            
            
            
            263
            
            
            
            249,737
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            250,000Issuance
      of Series A common stock in June 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            2,900,000
            
            
            
            2,900
            
            
            
            1,075,100
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,078,000Issuance
      of Series A common stock in July 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            7,403,149
            
            
            
            7,403
            
            
            
            5,945,116
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            5,952,519Issuance
      of Series A common stock in August 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            8,153,115
            
            
            
            8,153
            
            
            
            6,094,339
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            6,102,492Issuance
      of Series A common stock in August 2009 in exchange for convertible
      debentures and related interest
            
            
            -
            
            
            
            -
            
            
            
            23,991,144
            
            
            
            23,991
            
            
            
            7,247,020
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,271,011Issuance
      of Series A common stock in September 2009 in exchange for services
      rendered
            
            
            -
            
            
            
            -
            
            
            
            4,364,134
            
            
            
            4,365
            
            
            
            4,059,520
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,063,885Issuance
      of Series A common stock in September 2009 in exchange for convertible
      debentures and related interest
            
            
            -
            
            
            
            -
            
            
            
            14,541,795
            
            
            
            14,542
            
            
            
            4,198,720
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,213,262Issuance
      of common stock for services to be rendered
            
            
            -
            
            
            
            -
            
            
            
            3,000,000
            
            
            
            3,000
            
            
            
            (3,000
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Equity
      based compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            510,577
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            510,577Foreign
      currency translation gain
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            30,044
            
            
            
            -
            
            
            
            -
            
            
            
            30,044Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (34,870,307
            )
            
            
            -
            
            
            
            (34,870,307
            )Balance,
      September 30, 2009
            
            
            -
            
            
            $
            -
            
            
            
            163,497,600
            
            
            $
            163,498
            
            
            $
            65,099,150
            
            
            $
            30,044
            
            
            $
            (144,190,270
            )
            
            $
            -
            
            
            $
            (78,897,578
            )


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




6


CHINA
TEL GROUP, INC.


(a
development stage company)


CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS


(unaudited)


From
      April 4, 2008
              
              
              From
      April 4, 2008Nine
      months
              
              
              (date
      of inception)
              
              
              (date
      of inception)Ended
              
              
              Through
              
              
              ThroughSeptember 30, 2009
              
              
              September 30, 2008
              
              
              September 30, 2009(restated)
              
              
              (restated)CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (34,870,307
              )
              
              $
              (77,320,072
              )
              
              $
              (143,840,199
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              58,880
              
              
              
              -
              
              
              
              58,880Non
      controlling interest
              
              
              -
              
              
              
              -
              
              
              
              -Amortization
      of financing costs
              
              
              2,614,695
              
              
              
              -
              
              
              
              3,000,883Accretion
      of convertible debt
              
              
              10,998,175
              
              
              
              -
              
              
              
              12,513,258Gain
      on change in fair value of debt derivative
              
              
              (22,021,336
              )
              
              
              -
              
              
              
              (9,938,836
              )Common
      stock issued in exchange for services
              
              
              20,653,684
              
              
              
              -
              
              
              
              20,653,684Beneficial
      conversion feature in conjunction with the issuance of convertible
      debentures
              
              
              -
              
              
              
              27,060,987
              
              
              
              27,060,987(Increase)
      decrease in:Accounts
      receivable
              
              
              60,549
              
              
              
              -
              
              
              
              60,549Inventory
              
              
              (3,881
              )
              
              
              -
              
              
              
              (3,881
              )Note
      receivable
              
              
              124,107
              
              
              
              
              
              
              
              124,107Prepaid
      expenses
              
              
              (27,110
              )
              
              
              
              
              
              
              (27,072
              )Increase
      (decrease) in:Accounts
      payable and accrued liabilities
              
              
              21,452,838
              
              
              
              27,358,464
              
              
              
              65,736,137Unearned
      revenue
              
              
              (11,810
              )
              
              
              -
              
              
              
              (11,810
              )Net
      cash used in operating activities
              
              
              (971,516
              )
              
              
              (22,900,621
              )
              
              
              (24,613,313
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Cash
      from acquisition of Perusat S.A.
              
              
              19,419
              
              
              
              -
              
              
              
              19,419Proceeds
      received in connection with reverse merger
              
              
              -
              
              
              
              -
              
              
              
              55,404Investment
      in Chinacomm
              
              
              -
              
              
              
              (5,000,000
              )
              
              
              (5,000,000
              )Net
      cash provided by (used in) investing activities
              
              
              19,419
              
              
              
              (5,000,000
              )
              
              
              (4,925,177
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from advances from shareholders
              
              
              231,471
              
              
              
              -
              
              
              
              231,471Payments
      made to notes payable
              
              
              (41,902
              )
              
              
              -
              
              
              
              (41,902
              )Proceeds
      from notes payable, related party
              
              
              775,000
              
              
              
              -
              
              
              
              775,000Net
      proceeds from issuance of convertible debentures
              
              
              -
              
              
              
              28,198,938
              
              
              
              28,592,971Net
      cash provided by financing activities
              
              
              964,569
              
              
              
              28,198,938
              
              
              
              29,557,540Effect
      of currency rate change on cash
              
              
              (929
              )
              
              
              -
              
              
              
              (929
              )Net
      increase in cash and cash equivalents
              
              
              11,543
              
              
              
              298,317
              
              
              
              18,121Cash
      and cash equivalents, beginning of the period
              
              
              6,578
              
              
              
              -
              
              
              
              -Cash
      and cash equivalents, end of the period
              
              $
              18,121
              
              
              $
              298,317
              
              
              $
              18,121SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      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
              
              $
              14,010,122
              
              
              $
              4,322,844
              
              
              $
              18,332,966Common
      stock issued for services rendered
              
              $
              19,443,107
              
              
              $
              -
              
              
              $
              19,443,107


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


7


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 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 and
nine month periods ended September 30, 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 Accounting Standards Codification subtopic 915-10
Development Stage Entities, 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 generated minimal 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 September 30, 2009,
the Company has accumulated losses of $144,190,270.  (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,  its
wholly-owned subsidiaries, Trussnet USA, Inc., a Nevada corporation,
(“Trussnet”), Gulfstream Capital Partners, Ltd, and majority owned subsidiary,
Perusat S.A..  All significant intercompany balances and transactions have
been eliminated in consolidation.





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 of
Series 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.





8


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Series B
common stock is non transferable, not participating with any declared dividends
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 Accounting Standards Codification
subtopic 815-10 (“ASC 815-10”), Business Combinations, 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, 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, 2008


Current
      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
            )





Acquisition of Perusat
S.A





On April
15, 2009, the Company completed the purchase of 95% of the outstanding shares of
Perusat S.A.  The total purchase price was $705,000, consisting of an
aggregate of 1,000,000 shares of the Company’s common stock and a note payable
of $275,000.





The
common stock, valued at the date of closing, was $430,000 and was not registered
under the Securities Act of 1933, as amended.





In
accordance with ASC 815-10, the purchase method of accounting was used to
account for the acquisition of Perusat.  The results of
operations of Perusat have been included in the Consolidated Statements of
Losses since the date of acquisition.





9


CHINA
TEL GROUP, INC.


(a
development stage company)


(NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





In
accordance with ASC 815-10, the total purchase price was allocated to the
estimated fair value, as determined by management, of the assets acquired and
liabilities assumed, as follows:





Cash
            
            $
            19,419Current
      assets acquired
            
            
            352,566Property,
      plant and equipment, net
            
            
            612,893Software
      licenses, net
            
            
            124,357Total
      assets:
            
            $
            1,109,235Less:Liabilities
      assumed
            
            
            (1,201,391
            )Non
      controlling interest
            
            
            -Net:
            
            
            (92,156
            )Goodwill
      acquired
            
            
            797,156Total
      purchase price
            
            $
            705,000





The
Company identified software as identifiable intangible assets with estimated
life of 10 years.





Goodwill
in the amount of $797,156 represents the excess of the purchase price over the
fair value of the net identifiable tangible and intangible assets acquired and
their associated costs and expenses.





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





For
revenue from product sales and services, the Company recognizes revenue in
accordance with Accounting Standards Codification
subtopic 605-10, Revenue Recognition (“ASC 605-10”) requires that four
basic criteria must be met before revenue can be recognized: (i) persuasive
evidence of an arrangement exists; (ii) delivery has occurred or services have
been rendered; (iii) the selling price is fixed and determinable; and (iv)
collectibility is reasonably assured.  Determination of criteria (iii)
and (iv) are based on management's judgments regarding the fixed nature of the
selling prices of the products delivered and the collectibility 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.  The Company defers any revenue
for which the product has not been delivered or is subject to refund until such
time that the Company and the customer jointly determine that the product has
been delivered or no refund will be required. ASC 605-10 incorporates Accounting Standards Codification subtopic 605-25,
Multiple-Element Arraignments (“ASC 605-25”). ASC 605-25 addresses
accounting for arrangements that may involve the delivery or performance of
multiple products, services and/or rights to use assets.  The effect of
implementing ASC 605-25 on the Company's financial position and results of
operations was not significant.





10


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Revenue
arises from sale of local and long distance service access where payments are
received before the service has been rendered.  The Company sells
our products separately and in various bundles that contain multiple
deliverables.  They include long distance and prepaid phone cards,
along with other products and services.  In accordance with ASC
605-25, sales arrangements with multiple deliverables are divided into separate
units of accounting, if the deliverables in the arrangement meet the following
criteria: (i) the product has value to the customer on a standalone basis; (ii)
there is objective and reliable evidence of the fair value of undelivered items;
and (iii) delivery or performances of any undelivered item is probable and
substantially in our control.  The fair value of each separate element
is generally determined by prices charged when sold separately.  In
certain arrangements, the Company offers these products bundled
together.  If there is any discount from the combined fair value of the
individual elements, the discount is allocated to the portion of the revenues
attributable to the individual elements.  As per ASC 605-25, if fair value
of all undelivered elements in an arrangement exists, but fair value does not
exist for a delivered element, then revenue is recognized using the residual
method.  Under the residual method, the fair value of undelivered
elements is deferred and the remaining portion of the arrangement fee (after
allocation of 100 percent of any discount to the delivered item) is recognized
as revenue.





As of
September 30, 2009, the Company had unearned revenue of $23,040.





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





Accounting
Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”)
requires disclosure of the fair value of certain financial
instruments.  The carrying value of cash and cash equivalents,
accounts payable and accrued liabilities, and short-term borrowings, as
reflected in the consolidated balance sheets, approximate fair value because of
the short-term maturity of these instruments.  All other significant
financial assets, financial liabilities and equity instruments of the Company
are either recognized or disclosed in the consolidated financial statements
together with other information relevant for making a reasonable assessment of
future cash flows, interest rate risk and credit risk.  Where
practicable, the fair values of financial assets and financial liabilities have
been determined and disclosed; otherwise, only available information pertinent
to fair value has been disclosed.





Effective
January 1, 2008, we adopted Accounting Standards Codification subtopic 820-10,
Fair Value Measurements and Disclosures (“ASC 820-10”) which permits entities to
choose to measure many financial instruments and certain other items at fair
value.  Neither of these statements had an impact on the Company’s
consolidated financial position, results of operations or cash
flows.





Accounting For Bad Debt and
Allowances





Bad debts
and allowances are provided based on historical experience and management's
evaluation of outstanding accounts receivable.  Management evaluates
past due or delinquency of accounts receivable based on the open invoices aged
on due date basis.  Allowance for doubtful accounts at September 30,
2009 was $4,695.





Inventories





The
inventory consists of finished goods substantially ready for resale
purposes.  The Company purchases the merchandise on delivered duty
paid basis.





11


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Property, Plant and
Equipment





Property,
plant and equipment are stated at cost, less accumulated depreciation and
impairment losses. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets.





The
estimated useful lives of property, plant and equipment are as
follows:





Buildings
            
            33
      yearsMachinery
      and equipment
            
            10
      yearsVehicles
            
            4 yearsFur  Furniture
      and fixtures
            
            10 yearsComputers
            
            4 years





The
Company evaluates the carrying value of items of property, plant and
equipment to be held and used whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable.  The
carrying value of an item of property, plant and equipment is considered
impaired when the projected undiscounted future cash flows related to the asset
are less than its carrying value.  The Company measures
impairment based on the amount by which the carrying value of the respective
asset exceeds its fair value.  Fair value is determined primarily
using the projected future cash flows discounted at a rate commensurate with the
risk involved.





Long-Lived
Assets





The
Company has adopted Accounting Standards Codification subtopic 360-10, Property,
Plant and Equipment (“ASC 360-10”).  ASC 360-10 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.  ASC 360-10 also requires assets to
be disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell.





Income
Taxes





The
Company has adopted Accounting Standards Codification subtopic 740-10, Income
Taxes (“ASC 740-10”)  ASC 740-10 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 adopted Statement of Accounting Standards Codification subtopic 220-10,
Comprehensive Income (“ASC 220-10”). ASC 220-10 establishes standards for the
reporting and displaying of comprehensive income and its
components.  Comprehensive income is defined as the change in equity
of a business during a period from transactions and other events and
circumstances from non-owners sources.  It includes all changes in
equity during a period, except those resulting from investments by owners and
distributions to owners.  ASC 220-10 requires other comprehensive
income (loss) to include foreign currency translation adjustments and unrealized
gains and losses on available for sale securities.





12


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Functional
Currency





The
functional currency of the Companies is the U. S. dollar.  When a
transaction is executed in a foreign currency, it is re-measured into U. S.
dollars based on appropriate rates of exchange in effect at the time of the
transaction.  At each balance sheet date, recorded balances that are
denominated in a currency other than the functional currency of the Companies
are adjusted to reflect the current exchange rate.  The resulting
foreign currency transactions gains (losses) are included in general and
administrative expenses in the accompanying consolidated statements of
operations.





Net Loss Per
Share





The
Company has adopted Accounting Standards Codification subtopic 260-10, Earnings
Per Share (“ASC 260-10”)  This requires 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.





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.





Stock Based
Compensation





Effective
for the year beginning January 1, 2006, the Company has adopted Accounting Standards Codification subtopic 718-10,
Compensation (“ASC 718-10”)  This requires the measurement and
recognition of compensation expense for all share-based payment awards made to
employees and directors, including employee stock options and employee stock
purchases related to a Employee Stock Purchase Plan based on the estimated fair
values.





As of
September 30, 2009, there were no outstanding employee stock
options.





Research and
Development





The
Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10,
Research and Development (“ASC 730-10”).  Under ASC 730-10, 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 $30,000 and $9,757,038 for the three and nine month periods ended
September 30, 2009, respectively; $11,016,074 for the three months and from
April 4, 2008 (since the Company’s inception) through September 30, 2008,
respectively and $61,585,210 from April 4, 2008 (since the Company’s inception)
through September 30, 2009.





13


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





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 an agreement between the parties, 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 6 for a complete discussion of this
agreement.





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 ASC 825-10 that it was not practicable
to estimate the fair value of the investment.





Liquidity





As shown
in the accompanying financial statements, the Company incurred loss from
operations of $34,870,307 for the nine month period ended September 30, 2009 and
$143,840,199 since the Company’s date of inception through September 30,
2009.


New Accounting
Pronouncements




With the
exception of those stated below, there have been no recent accounting
pronouncements or changes in accounting pronouncements during the nine months
ended September 30, 2009, as compared to the recent accounting
pronouncements described in the Annual Report that are of material significance,
or have potential material significance, to the Company.




Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification(“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with United States
generally accepted accounting practices.  Rules and interpretive
releases of the United Sates Securities and Exchange Commission (“SEC”), under
authority of Federal securities laws, are also sources of authoritative United
States generally accepted accounting principals for SEC
registrants.  All guidance contained in the Codification carries an
equal level of authority. The Codification superseded all existing non-SEC
accounting and reporting standards.  All other non-grandfathered,
non-SEC accounting literature not included in the Codification is
non-authoritative.  The FASB will not issue new standards in the form
of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates (“ASUs”).  The
FASB will not consider ASUs as authoritative in their own right.  ASUs
will serve only to update the Codification, provide background information about
the guidance and provide the bases for conclusions on the change(s) in the
Codification.  References made to FASB guidance throughout this
document have been updated for the Codification.





14


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009




Effective
January 1, 2008, the Company adopted FASB ASC 820-10, Fair Value Measurements and
Disclosures – Overall(“ASC 820-10”) with respect to its financial assets
and liabilities.  In February 2008, the FASB issued updated guidance
related to fair value measurements, which is included in the Codification in ASC
820-10-55, Fair Value
Measurements and Disclosures – Overall – Implementation Guidance and
Illustrations.  The updated guidance provided a one year
deferral of the effective date of ASC 820-10 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually. Therefore, the Company
adopted the provisions of ASC 820-10 for non-financial assets and non-financial
liabilities effective January 1, 2009, and such adoption did not have a
material impact on the Company’s results of operations or financial
condition.




Effective
April 1, 2009, the Company adopted FASB ASC 820-10-65, Fair Value Measurements and
Disclosures – Overall – Transition and Open Effective Date Information
(“ASC 820-10-65”).  ASC 820-10-65 provides additional guidance for
estimating fair value in accordance with ASC 820-10 when the volume and level of
activity for an asset or liability have significantly decreased.  ASC
820-10-65 also includes guidance on identifying circumstances that indicate a
transaction is not orderly.  The adoption of ASC 820-10-65 did not
have an impact on the Company’s results of operations or financial
condition.





Effective
April 1, 2009, the Company adopted FASB ASC 825-10-65, Financial Instruments – Overall –
Transition and Open Effective Date Information (“ASC 825-10-65”). ASC
825-10-65 amends ASC 825-10 to require disclosures about fair value of financial
instruments in interim financial statements, as well as in annual financial
statements, and also amends ASC 270-10 to require those disclosures in all
interim financial statements.  The adoption of ASC 825-10-65 did not
have a material impact on the Company’s results of operations or financial
condition.


Effective
April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall(“ASC 855-10”). ASC 855-10 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date, but before
financial statements are issued or are available to be issued.  It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date – that is, whether that date represents the
date the financial statements were issued or were available to be issued. 
This disclosure should alert all users of financial statements that an entity
has not evaluated subsequent events after that date in the set of financial
statements being presented.  Adoption of ASC 855-10 did not have a
material impact on the Company’s consolidated results of operations or financial
condition. The Company has evaluated subsequent events through November 11,
2009, the date the financial statements were issued.


Effective
July 1, 2009, the Company adopted FASB ASU No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) (“ASU 2009-05”). ASU 2009-05 provided amendments
to ASC 820-10, Fair Value
Measurements and Disclosures – Overall, for the fair value measurement of
liabilities.  ASU 2009-05 provides clarification that in circumstances
in which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using certain
techniques.  ASU 2009-05 also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of a liability.  ASU 2009-05 also clarifies
that both a quoted price in an active market for the identical liability at the
measurement date and the quoted price for the identical liability when traded as
an asset in an active market when no adjustments to the quoted price of the
asset are required are Level 1 fair value measurements.  Adoption of
ASU 2009-05 did not have a material impact on the Company’s results of
operations or financial condition.





15


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009




In
October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue
Arrangements, (amendments to FASB ASC Topic 605, Revenue Recognition) (“ASU
2009-13”) and ASU 2009-14, Certain Arrangements That Include
Software Elements, (amendments to FASB ASC Topic 985, Software) (“ASU
2009-14”).  ASU 2009-13 requires entities to allocate revenue in an
arrangement using estimated selling prices of the delivered goods and services
based on a selling price hierarchy.  The amendments eliminate the
residual method of revenue allocation and require revenue to be allocated using
the relative selling price method.  ASU 2009-14 removes tangible products
from the scope of software revenue guidance and provides guidance on determining
whether software deliverables in an arrangement that includes a tangible product
are covered by the scope of the software revenue guidance.  ASU 2009-13 and
ASU 2009-14 should be applied on a prospective basis for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010, with early adoption permitted.  The Company does
not expect adoption of ASU 2009-13 or ASU 2009-14 to have a material impact on
the Company’s results of operations or financial condition.





FASB ASC
855, Subsequent Events (“ASC 855” and formerly referred to as FAS-165), modified
the subsequent event guidance. The three modifications to the subsequent events
guidance are: (i) to name the two types of subsequent events either as
recognized or non-recognized subsequent events; (ii) to modify the definition of
subsequent events to refer to events or transactions that occur after the
balance sheet date, but before the financial statement are issued or available
to be issued; and (iii) to require entities to disclose the date through which
an entity has evaluated subsequent events and the basis for that date, i.e.
whether that date represents the date the financial statements were issued or
were available to be issued. This guidance is effective for interim or annual
financial periods ending after June 15, 2009, and should be applied
prospectively.




FASB ASC
105, Generally Accepted Accounting Principles (“ASC 105”) and formerly referred
to as FAS 168) establishes the Codification as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with United
States generally accepted accounting principals. . Rules and interpretive
releases of the SEC under authority of Federal securities laws are also sources
of authoritative generally accepted accounting principals for SEC
registrants.  ASC 105 is effective for financial statements issued for
interim and annual periods ending after September 15, 2009.





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 $34,870,307 for the nine month period ended
September 30, 2009.  Additionally, the Company has negative working
capital of $276,338,151 as of September 30, 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.


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 nine months ended September 30, 2009, the Company collected $124,107
towards the note leaving $2,915,016 unpaid at September 30, 2009.





16


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





On July
8, 2009, the Company filed a complaint for: (i) reformation of contract; (ii)
specific performance of contract; (iii) damages for breach of contract; (iv)
damages for promissory fraud; and (v) declaratory relief in the Superior Court
for the State of California, County of Orange, against Westmoore Management,
LLC, Westmoore Capital Group, LLC, Capital Asset Lending, a corporation, Matthew
Jennings (collectively, “Westmoore”) and Aspen Stock Transfer Agency, Inc.
stemming from the failure of Westmoore to perform its obligations under a
Settlement Agreement and Mutual Releases executed by Westmoore and the Company
on May 15, 2009.  Aspen Stock Transfer, the Company’s stock transfer
agent, was named in the litigation for the sole purpose of being included in
potential court orders to restrict the transfer of the Company’s shares held by
Westmoore.





On or
about September 25, 2009, the Company, Westmoore and Aspen Stock Transfer
entered into a Stipulation for Preliminary Injunction and Regarding Mechanics of
Third-Party Investors providing for an injunction to enjoin the transfer of any
shares of the Company held by Westmoore (“Stipulation”).  The
Stipulation further provided for the mechanics to resolve issues regarding the
validity of the convertible notes held by the subscribers whose purchase funds
were the subject of the lawsuit.  The Company and Westmoore are
currently soliciting responses from the subscribers of the convertible notes at
issue to determine the disposition of the convertible notes and the eventual
resolution or continuation of the litigation.





The
execution of the Stipulation has resulted in an injunction enjoining the
Company's stock transfer agent from transferring the Company's Series A common
stock by various Westmoore entities.  The Company is not reserving for the
note receivable due to the injunction on a sufficient number of the Company's
Series A common stock to satisfy the note receivable.





NOTE
4 –PREPAID EXPENSES





Prepaid
expenses at September 30, 2009 are comprised of the following:





Prepaid
      insurance
            
            $
            1,590Prepaid
      payroll taxes
            
            
            149,794Deferred
      charges
            
            
            6,289Other
      prepaid expenses
            
            
            6,273Total
      prepaid expenses
            
            $
            163,946





NOTE
5 – 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 $1,026,057
and $2,614,685 to operations for the three and nine month periods ended
September 30, 2009, respectively; $-0- from April 4, 2008 (date of inception)
through September 30, 2008 and 3,000,883 from April 4, 2008 (date of inception)
through September 30, 2009.





NOTE
6- DEPOSITS AND INVESTMENTS





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.





A summary
of the investment activity is as follows:





Fair
value of the investment:





September
      30, 2009Fair
      value of the investment
            $196,000,000





17


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Details
of the Company’s equity method investment as of September 30, 2009 are as
follows:





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





As of
September 30, 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 of
the investment and the Company determined, in accordance with ASC 825-10, that
it is not practicable to estimate the fair value of the investment.





NOTE
7 – INTANGIBLE ASSETS





Intangible
assets are comprised of software and other licenses and are amortized over the
estimated life of 10 years.  The Company periodically evaluates the
recoverability of intangible assets and takes into account events or
circumstances that warrant revised estimates of useful lives or indicate that
impairment exists.





For the
three and nine months ended September 30, 2009; the Company recorded
amortization of $6,544 and $10,235, respectively, as a charge to current period
operations.





NOTE
8 – CONVERTIBLE NOTES





Convertible
notes as of September 30, 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.
            
            $
            13,721,442
            
            
            $
            -
            
            
            $
            13,721,44210%
      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 per share or (b) 80% of the volume weighted average of the closing
      bid price for the shares on the Over The Counter Bulletin Board Exchange
      for the ten (10) day period prior to the convertible note holder’s
      election to convert.
            
            $
            10,398,243
            
            
            
            1,570,128
            
            
            $
            8,828,115Total
            
            
            24,119,685
            
            
            
            1,570,128
            
            
            
            22,549,557Less
      current maturities
            
            
            (24,119,685
            )
            
            
            (1,570,128
            )
            
            
            22,549,557
            )Long
      term portion
            
            $
            -
            
            
            $
            -
            
            
            $
            -





18


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





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 Accounting Standards Codification subtopic 470-20, Debt; Debt
With Conversion And Other Options (“ASC 470-20”), 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 September 30, 2009, the Company amortized
$27,060,987 as interest expense.





On
November 17, 2008, the Company also entered into an amended and restated
convertible note purchase agreement with certain convertible note holders for
the modification of certain terms and conditions contained in the previously
issued convertible note purchase agreements.  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 note
purchase agreements 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 per share or (b) 80% of the
volume weighted average of the closing bid price for the shres on The Over The
Counter Bulletin Board Exchange for the ten (10) day period prior to the
convertible note holder’s election to convert.  The effective interest
rate at the date of inception was 304.22%.





The
Company's identified embedded derivatives related to the amended and restated
convertible note purchase agreements 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 convertible 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
convertible note purchase agreements, 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 of four hundred and nine (409)
days.





19


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





NOTE
9- NOTES PAYABLE





Notes
payable at September 30, 2009 were comprised of the following:





Promissory
      note,  secured (see below)
            
            $
            191,000,000Note
      payable, due 9/15/2010, with monthly payments of $3,769 including
      interest, secured by financed equipment (currently in
    default)
            
            
            141,357Note
      payable, due 2/28/2010, with monthly payments of $940 including interest,
      secured by financed equipment
            
            
            7,463Note
      payable, due 1/22/2010, with monthly payments of $8,889 including interest
      at 14%, secured by equipment
            
            
            38,961Note
      payable, due 1/22/2010, with monthly payments of $10,901 including
      interest at 14%, secured by equipment
            
            
            57,682Total
            
            
            191,245,463Less
      current portion:
            
            
            (191,245,463
            )Long
      term portion:
            
            $
            -





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 by the Company’s
acquired interest in ChinaComm Cayman.





NOTE
10 – 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 was higher at the subsequent balance sheet
date, the Company recorded a non-operating, non-cash charge.  If the
fair value of the derivatives was lower at the subsequent balance sheet date,
the Company recorded non-operating, non-cash income.  At September 30,
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 161.35%; and risk free interest rate of 0.14% and recorded
non-operating income of $22,021,336 representing the change in fair value from
December 31, 2008.  The derivatives were classified as short-term
liabilities.  The derivative liability at September 30, 2009 is
$4,144,550.





20


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





NOTE
11 - NON CONTROLLING INTEREST





Acquisition of Perusat
S.A





On April
15, 2009, the Company acquired a 95% interest in Perusat S.A., organized under
the laws of the Country of Peru.





The
following table summarizes the changes in Non Controlling Interest from April
15, 2009 (date of acquisition) to September 30, 2009:





Balance
      as of April 15, 2009 (date of acquisition) (negative)
            
            $
            -Period
      loss applicable to non controlling interest from the date of acquisition
      through September 30, 2009
            
            
            -Adjustment
      to non controlling interest due to losses in excess of book
      value
            
            
            -Balance
      as of September 30, 2009
            
            $
            -





NOTE
12 – 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.





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,
therefore classified outside of equity for reporting purposes





NOTE
13 – STOCKHOLDERS EQUITY





The
Company is authorized to issue 500,000,000 shares of Series A common
stock.  As of September 30, 2009, there were 158,497,600 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 notes.





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


21


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





During
the nine month period ended September 30, 2009, the Company issued an aggregate
of 31,846,924 shares of common stock amounting to $20,021,336 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 nine month period ended September 30, 2009, the Company issued an aggregate
of 2,658,790 shares of common stock in exchange of outstanding accounts
payable.





During
the nine month period ended September 30, 2009, the Company issued an aggregate
of 38,532,939 shares of common stock in exchange of convertible debentures and
related accrued interest.





During
the nine month period ended September 30, 2009, the Company issued 1,000,000
shares of Series A common stock in connection with the acquisition of 95%
interest in Perusat S.A. (See Note 1).





NOTE
14- RELATED PARTY TRANSACTIONS





The
Company has the following material related party transactions:





Note
      payable dated April 15, 2009, non interest bearing, due on demand;
      unsecured
            
            $
            275,000Note
      payable dated June 27, 2009, 15% per annum interest,  originally
      due July 15, 2009; unsecured, currently in default
            
            
            375,000Note
      payable dated May 20, 2009, 8% per annum interest, due December 1, 2009;
      unsecured
            
            
            200,000Note
      payable dated April 1, 2009, 8% per annum interest, due originally October
      1, 2009; unsecured, currently in default
            
            
            100,000Note
      payable due September 17, 2009, 8% per annum interest, due March 17,
      2010
            
            
            100,000Total
            
            $
            1,050,000





Some of
the Directors and Officers of the Company were previously equity owners of
Trussnet USA, Inc., a Delaware corporation (“Trussnet Delaware”). Trussnet
Delaware and 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 Communications Co.
Ltd.





The
Company has not paid Trussnet Delaware for a significant portion of the services
provided.  As of September 30, 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 the Trussnet Delaware
office space.





22


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





NOTE
15 – FAIR VALUE MEASUREMENT





The
Company adopted the provisions of ASC 825-10 on January 1, 2008 (“ASC
825-10”).  ASC 825-10 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.  ASC
825-10 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.  ASC 825-10 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 ASC 825-10, 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.





The
following table sets forth the Company’s short and long-term investments as of
September 30, 2009, which are measured at fair value on a recurring basis by
level within the fair value hierarchy.  As required by ASC 825-10,
these are classified based on the lowest level of input that is significant to
the fair value measurement:





Items
recorded or measured at fair value on a recurring basis in the accompanying
consolidated financial statements consisted of the following items as of
September 30, 2009:





23


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Quoted
      Prices in Active Markets for Identical Instruments
              Level
      1
            
            
            Significant
      Other Observable Inputs
              Level
      2
            
            
            Significant
      Unobservable Inputs
              Level
      3
            
            
            TotalAssets:Cash
            
            $
            18,121
            
            
            $
            -
            
            
            $
            -
            
            
            $
            18,121Equity
      Based Investments
            
            
            -
            
            
            
            -
            
            
            
            196,000,000
            
            
            
            196,000,000Total
      assets
            
            $
            18,121
            
            
            $
            -
            
            
            $
            196,000,000
            
            
            $
            196,018,121Liabilities:Debt
      Derivative
            
            $
            -
            
            
            $
            -
            
            
            $
            (4,144,550
            )
            
            $
            (4,144,550
            )





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
September 30, 2009, the carrying amounts of the convertible notes payable
approximate fair value because the entire convertible notes have been classified
to current maturity.





NOTE
16 – RESTATEMENT





The
Company restated their Statement of Losses for the periods for the three months
ended September 30, 2008 from April 4, 2008 (since the Company’s date of
inception) through September 30, 2008 and the Statement of Cash Flows from April
4, 2008 (since the Company’s date of inception) through September 30, 2008 to
properly classify research and development costs of $32,996,825 from
construction in process to a current period expense and to correct the
calculation of the beneficial conversion features relating to issued convertible
debentures.  The effects on the statements are as
follows:





24


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Condensed
Consolidated Statement of Losses


Three
months ended September 30, 2008





Operating
      Expenses:
            
            As Previously
              Reported
            
            
            Adjustment
            
            
            Reference
            
            
            As RestatedSelling,
      General and Administrative
            
            $
            1,943,302
            
            
            
            
            
            $
            
            
            
            $
            1,943,302Research
      and Development
            
            
            -
            
            
            
            11,016,074
            
            
            
            
            
            
            
            11,016,074Total
      Operating Expenses
            
            
            1,943,302
            
            
            
            11,016,074
            
            
            (a)
            
            
            
            12,959,576Net
      Loss from Operations
            
            
            (1,943,302
            )
            
            
            (11,016,074
            )
            
            
            
            
            
            
            (12,959,576Interest
      Expense
            
            
            (9,561,638
            )
            
            
            7,348,532
            
            
            (b)
            
            
            
            (2,213,106
            )Net
      Loss Before Income Taxes
            
            
            (11,504,940
            )
            
            
            (3,667,542
            )
            
            
            
            
            
            
            (15,172,482
            )Provision
      for Income Taxes
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Net
      Loss
            
            $
            (11,504,940
            )
            
            $
            (3,667,542
            )
            
            (a),(b)
            
            
            $
            (15,172,482
            )








Condensed
Consolidated Statement of Losses


From
April 4, 2008 (date of inception) to September 30, 2008





Operating
      Expenses:
            
            As Previously
              Reported
            
            
            Adjustment
            
            
            Reference
            
            
            As RestatedSelling,
      General and Administrative
            
            $
            5,027,872
            
            
            
            
            
            $
            
            
            
            $
            5,027,872Research
      and Development
            
            
            -
            
            
            
            44,012,899
            
            
            
            
            
            
            
            44,012,899Total
      operating expenses
            
            
            5,027,872
            
            
            
            44,012,899
            
            
            (a)
            
            
            
            44,012,899Net
      Loss from Operations
            
            
            (5,027,872
            )
            
            
            (44,012,899
            )
            
            
            
            
            
            
            (49,040,771Interest
      Expense
            
            
            (56,051,988
            )
            
            
            27,772,687
            
            
            (b)
            
            
            
            (28,279,301
            )Net
      Loss Before Income Taxes
            
            
            (61,079,860
            )
            
            
            (16,240,212
            )
            
            
            
            
            
            
            (77,320,072
            )Provision
      for Income Taxes
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Net
      Loss
            
            $
            (61,079,860
            )
            
            $
            (16,240,212
            )
            
            (a),(b)
            
            
            $
            (77,320,072
            )





25


CHINA
TEL GROUP, INC.


(a
development stage company)


NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER
30, 2009





Condensed
Consolidated Statement of Cash Flows


From
April 4, 2008 (date of inception) to September 30, 2008





As PreviouslyReported
            
            
            Adjustment
            
            
            Reference
            
            
            As RestatedCash
      Flows from Operating Activities:Net
      Loss for the Period
            
            $
            (61,079,860
            )
            
            $
            (16,240,212
            )
            
            
            (a),(b)
            
            
            $
            (77,320,072
            )Adjustments
      to Reconcile Net Loss to Net Cash Used in Operating
      Activities:Beneficial
      Conversion Feature in Conjunction with the Issuance of Convertible
      Debentures
            
            
            46,406,344
            
            
            
            (19,345,357
            )
            
            
            (b)
            
            
            
            27,060,987Amortization
      of Debt Discount
            
            
            8,427,330
            
            
            
            (8,427,330
            )
            
            
            (b)(Increase)
      Decrease in:Construction
      in Process
            
            
            (44,012,899
            )
            
            
            44,012,899
            
            
            
            (a)
            
            
            
            -Increase
      (Decrease) in:Accounts
      Payable and Other Current Liabilities
            
            
            27,358,464
            
            
            
            -
            
            
            
            
            
            
            
            27,358,464Net
      Cash used in Operating Activities
            
            
            (22,900,621
            )
            
            
            -
            
            
            
            
            
            
            
            (22,900,621
            )Cash
      Flows from Investing Activities:Investment
      in Chinacomm
            
            
            (5,000,000
            )
            
            
            -
            
            
            
            
            
            
            
            (5,000,000
            )Net
      Cash used in Investing Activities
            
            
            (5,000,000
            )
            
            
            -
            
            
            
            
            
            
            
            (5,000,000
            )Cash
      Flows from Financing Activities:Net
      Proceeds from Issuance of Convertible Debentures
            
            
            28,198,938
            
            
            
            -
            
            
            
            
            
            
            
            28,198,938Net
      Cash Provided by Financing Activities
            
            
            28,198,938
            
            
            
            -
            
            
            
            
            
            
            
            28,198,938Net
      Increase in Cash
            
            
            298,317
            
            
            
            -
            
            
            
            
            
            
            
            298,317Cash
      at Beginning of Period
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            -Cash
      at End of Period
            
            $
            298,317
            
            
            $
            -
            
            
            
            
            
            
            $
            298,317





(a)
            Correct
      classification of research and development costs from construction in
      process to a current period cost.(b)
            Correct
      calculation of beneficial conversion feature in connection with
      convertible debentures issued





NOTE
17 – SUBSEQUENT EVENTS




In
October 2009, the Company issued an aggregate of 7,172178 shares of Series A
common stock. 6,242,622 shares were issued to consultants for services rendered
having a value of approximately $2.5 million. An additional 929,556 shares were
issued in exchange for convertible notes and related interest of
$408,169.
 
 In
November 2009, the Company issued an aggregate of 193,520 shares of Series A
common stock in exchange for convertible notes and related interest of
$68,293.
 
 On
November 2, 2009 the Company exercised its right to terminate the Amended and
Restated Stock Purchase Agreement previously entered into with Olotoa
Investments, LLC. In terminating the agreement, the Company reserved its rights
to seek damages from Olotoa for its breach of the Agreement.
 
 Effective
November 2, 2009, Mr. Robert P. Weygand, Jr. tendered his resignation as a
member of the Board of Directors of the Company. The Company’s Board of
Directors accepted the tendered resignation.


26





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 the
Company’s senior 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 the Company’s senior management on the basis
of assumptions made by them and considered by the Company’s senior management to
be reasonable.  The Company’s 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 the Company’s  future business and financial
      performance;




●
            The
      Company’s  competitive
position;




●
            Growth
      of the telecommunications industry in China and Latin America;
      and




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




The
Company believes it is important to communicate the Company’s 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.  The Company 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 forms an
integral part of the financial statements.  The financial statements
begin on Page 3.





27


Overview
and Business Operations





Peoples
Republic of China





The
present operations of China Tel Group, Inc. (“Company”) conducted in the Peoples
Republic of China (“PRC”), all of which are conducted through the Company's
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 PRC for CECT-Chinacomm Communications Co, Ltd., a PRC company (together
with its subsidiaries and affiliates, “Chinacomm”).  Through the
Company's wholly owned subsidiaries, the Company 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 ChinaComm Cayman, will operate and service
the Chinacomm Network in exchange for a approximately ninety percent (90%) 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 Trussnet Dalian 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.  These agreements will become material
to the Company’s operations only when we provide a sufficient amount of 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 the Equipment and to capitalize Yunji
and Trussnet Dalian.  Until we provide this capital, Chinacomm will
continue to operating the Chinacomm Network and retain any revenue it generates
from therefrom.





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





The
Company has 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, generally performed by Trussnet Delaware
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.





Peru





The
present operations of the Company conducted in Peru are all conducted through
Perusat, S.A., a Peruvian company (“Perusat”).  On April 15, 2009, the
Company acquired 95% of the stock of Perusat through a wholly owned subsidiary
of Trussnet in exchange for 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.  The Company has delivered the share consideration and has
received 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.  The
Company has not yet paid the initial $50,000 due at the Closing or any of the
quarterly $50,000 installments due pursuant to the stock purchase agreement
between the Company and Perusat which documented this
acquisition.





28


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.  The Company believes this license is suitable to deploy a
broadband wireless telecommunications network in the licensed area.





Perusat
currently represents less than 1% of the total assets of the
Company.





Opportunities
in Latin America and Elsewhere





The
Company is actively exploring other opportunities to acquire radio frequency
spectrum through public auction or through merger, acquisition or joint venture
with companies who already hold spectrum rights in Latin American countries,
including Peru, Argentina, Chile, Brazil and the Dominican Republic, as well as
in Russia and other sovereign nations of the former Soviet Union, and in
India.  The status of the Company’s investigation of these
opportunities is in various phases, depending on the particular opportunity;
however, it is most mature in Peru, where the Company believes there are the
greatest potential synergies with the Company’s existing operations through
Perusat.





Financial
Overview





Since our
inception, the Company has incurred comprehensive accumulated deficit
of $144,190,270.  As of September 30, 2009, the Company had cash of
$18,121and had current liabilities of $280,411,767.  (Reference in
this report to “Since the Company’s inception” refers to April 4, 2008, the date
Trussnet was formed and the date used for financial activities for accounting
purposes in this report.).  The Company has expressed substantial
doubt about its ability to continue as a going concern.  In order
to continue to operate our business, the Company will need to raise substantial
amounts of additional capital and/or debt.





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.





Agreement with Olotoa Investments,
LLC





On July
13, 2009, the Company entered into an amended and restated agreement
with Olotoa Investments, LLC (“Olotoa”), a private investment group, to sell 49%
of our Series A common stock, on a fully diluted basis calculated on January 11,
2010, for an amended purchase price of $314 million (“Amended and Restated
Agreement”).  Pursuant to the terms of the Amended and Restated
Agreement, Olotoa 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 and July 1, 2009, the Company requested
Olotoa to pay $50 million and $65 million, respectively, of the amended purchase
price.  Olotoa failed to make the requested payments.





The
Company exercised its right to terminate the Amended and Restated Agreement
with Olotoa on November 2, 2009.





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.





29


On March
9, 2009, the Company 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 Tay Yong Lee is
the sole shareholder, provided bridge financing for this transaction due to the
Company’s lack of funds.  The Company 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.





Trussnet
Capital Partners (HK) Ltd. has agreed to the delayed payment of the interest
payment due on June 9, 2009 and September 9, 2009 under the promissory
note.  The first two quarterly payments are now due on December 9,
2009.  The accrued interest owed to Trussnet Capital Partners (HK) Ltd. as
of September 30, 2009 is $8,531,333





Pending
Strategic Transactions





During
the period ending September 30, 2009, the Company has entered into, but not
closed, the following strategic transactions:





Agreement with Runcom
Technologies, Inc.





On
October 6, 2008, the Company 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 the Company 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.





The
Company has 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.





Critical
Accounting Policies and Estimates





The
Company’s Management’s Discussion and Analysis of Financial Condition and
Results of Operations discusses the Company’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States.  The preparation of these consolidated
financial statements requires senior management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.  On an on-going
basis, senior management evaluates its estimates and judgments, including those
related to revenue recognition, accrued expenses, financing operations, and
contingencies and litigation.  Senior 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 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 September 30, 2009.





Development Stage
Company.The Company is a
development stage company, as defined in Accounting Standards Codification subtopic 915-10
Development Stage Entities.





30


Revenue
Recognition.  The Company recognizes revenue from product sales
and services in accordance with Accounting
Standards Codification subtopic 605-10, Revenue Recognition (“ASC
605-10”) requiring four basic criteria to be met before revenue can be
recognized: (i) persuasive evidence of an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the selling price is fixed and
determinable; and (iv) collectibility is reasonably
assured.  Determination of criteria (iii) and (iv) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered and the collectibility of those amounts.





Loss Per Share. In accordance with
Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC
260-10”), 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 September 30, 2009, the Company had
approximately 37.3 million shares of common stock related to the
issuance of debt instruments that could be converted into shares of the
Company’s Series A common stock if all debt instruments were
converted.  Diluted loss per share is not presented, because the
issuance of these additional common shares would be anti-dilutive.





Convertible
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 was higher at
the subsequent balance sheet date, the Company recorded a non-operating,
non-cash charge.  If the fair value of the derivatives was lower at
the subsequent balance sheet date, the Company recorded non-operating, non-cash
income.  At September 30, 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 161.35%; and risk free
interest rate of 0.14% and recorded non-operating income of $22,021,336
representing the change in fair value from December 31, 2008.  The
derivatives were classified as short-term liabilities.  The derivative
liability at September 30, 2009 is $4,144,550.





Goodwill and Identifiable
Intangible Assets.Goodwill consists of the excess of the purchase price over the fair value
of net assets acquired in purchase business
combinations.  At September 30, 2009, all goodwill is related to
the acquisition of Perusat.  In accordance with Accounting Standards
Codification subtopic 305-10, Intangibles, Goodwill and Other (“ASC 305-10”),
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 ASC
305-10, in the impairment tests for indefinite-lived intangible assets, the
Company compares 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, the Company calculates the impairment as the excess of the carrying value
over the estimate of fair value and, accordingly, records 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 Accounting
Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC
360-10”).





Impairment of Long-Lived
Assets.In
accordance with ASC 360-10, the Company estimates 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 the
Company’s estimate of future undiscounted cash flows, the Company then
calculates the impairment as the excess of the carrying value of the asset over
the Company’s estimate of its fair value.





31


Results of
operations:





Three
months ended September 30, 2009 as compared to Three months ended September 30,
2008.





Revenue:





September
      30, 2009
            
            
            September
      30, 2008$
            258,528
            
            
            $
            -





The
Company's revenue for the three months ended September 30, 2009 is based on the
acquisition of Perusat acquired on April 15, 2009.  The
Company did not have revenue during the same period last year.





Cost of
Sales





September
      30, 2009
            
            
            September
      30, 2008$
            235,816
            
            
            $
            -





The
Company's cost of sales for the three months ended September 30, 2009 was
$235,816, or 91.2% of sales.  The Company did not have sales or
related cost of sales during the same period last year.





Operating
Expenses:





Selling, General and
Administrative Expenses:





September
      30, 2009
            
            
            September
      30, 2008$
            18,801,147
            
            
            $
            1,943,302





The
Company's selling, general and administrative expenses for the three months
ended September 30, 2009 increased by $16,857,845,
or 867.5% as compared to the same period last year.  The
increase is primarily associated with equity based payments for service
providers and other consultants during the current period compared to the same
period last year.





Research and
Development:





September
      30, 2009
            
            
            September
      30, 2008$
            30,000
            
            
            $
            11,016,074





The
Company's research and development costs decreased by 10,986,074,
or 100% as compared to the same period last year.  The
Company's investments in research and development are primarily complete as
compared to research and development investments during the same period last
year, when we were in the initial phases of deployment operations.





Other Income
(expense):





Loss on Change in Fair Value
of Debt Derivative:





September
      30, 2009
            
            
            September
      30, 2008$
            11,997,895
            
            
            $
            -





32


During
the three months ended September 30, 2009, the Company incurred a non
cash gain in the change in the fair value of our debt derivatives relating to
our amended and restated convertible notes issued on November 17,
2008.  The Company did not have any derivatives as of September
30, 2008.





Interest
Expense:





September
      30, 2009
            
            
            September
      30, 2008$
            9,256,200
            
            
            $
            2,213,106





For the
three months ended September 30, 2009, the Company's interest expense
increased $7,043,094, or 318.3%, compared to the similar period last
year.  This increase is primarily attributable to amortization of debt
discount attributable to the amended and restated convertible notes issued on
November 17, 2008 totaling $4,765,675.





Net
Loss:





September
      30, 2009
            
            
            September 30,2008$
            16,118,369
            
            
            $
            15,172,482





For the
three months ended September 30, 2009, our net loss decreased by $945,887,
or 6.2%, as compared to the same period last year, primarily for the
reasons described above.





Nine
months ended September 30, 2009 as compared to from April 4, 2008 (date of
inception) through September 30, 2009.





Revenue:





September
      30, 2009
            
            
            September
      30, 2008$
            457,766
            
            
            $
            -




Our
revenue for the nine months ended September 30, 2009 is based on the acquisition
of Perusat acquired on April 15, 2009.





Cost of
Sales





September
      30, 2009
            
            
            September
      30, 2008$
            364,247
            
            
            $
            -




Our cost
of sales for the nine months ended September 30, 2009 was $364,247, or 79.6% of
sales.





Operating
Expenses:





Selling, General and
Administrative Expenses:





September
      30, 2009
            
            
            September
      30, 2008$
            25,205,098
            
            
            $
            5,027,872





33


Our
selling, general and administrative expenses for the nine months ended September
30, 2009 was $25,205,098as compared with $5,027,872 for the period from April 4, 2008 (since the
Company’s date of inception) through September 30, 2008.  During the
nine months ended September 30, 2009, we paid approximately $20.7
million in stock based compensation to service providers and other
consultants.





Research and
Development:





September
      30, 2009
            
            
            September
      30, 2008$
            9,757,038
            
            
            $
            44,012,899





Our
research and development costs of $9,757,038 are a reduction as compared to the
short prior period.  Our investments in research and development are
primarily complete as compared to our same period last year, when we were in
initial phases of deployment operations.





Other Income
(expense):





Gain on Change in Fair Value
of Debt Derivative:





September
      30, 2009
            
            
            September
      30, 2008$
            22,021,336
            
            
            $
            -





For the
nine months ended September 30, 2009, we incurred a non cash gain from the
change in the fair value of our debt derivatives relating to our amended and
restated convertible notes issued on November 17, 2008.  We did not
have any derivatives as of September 30, 2008.





Interest
Expense:





September
      30, 2009
            
            
            September
      30, 2008$
            21,953,206
            
            
            $
            28,279,301





For the
nine months ended September 30, 2009, our interest expense of $21,953,206
includes approximately $11 million in amortized debt discount relating to our
convertible notes issued on November 17, 2008. During the period from April 4,
2008 (since the Company’s date of inception) through September 30, 2008 we
incurred a beneficial conversion feature of $27,060,987 relating to our
convertible debt.





Net
Loss:





September
      30, 2009
            
            
            September
      30, 2008$
            34,870,307
            
            
            $
            77,320,072





Our net
loss of $34,870,307for the nine months ended September 30, 2009 is the result of the factors
described above.





34





ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





As of
September 30, 2009, the Company did not hold any market risk sensitive
instruments.





If the
Company is 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, the Company will then
have exposure to changes in dollar/RMB exchange rates which could be material to
the Company’s business.  The revenues realized from the Company’s
investment in Perusat will be denominated in Peruvian Nuevo Sol.  As a
result, similar exposure to exchange rate fluctuations in the dollar/Nuevo Sol
exchange rate could be also material to the Company’s 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 the 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.





The
Company’s senior management is responsible for establishing and maintaining
adequate internal control over the Company’s 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 the Company’s disclosure controls and procedures as
of September 30, 2009, the Company’s senior management did not complete the
assessment of the effectiveness of its 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".  Senior management has concluded, as a
result, that its disclosure controls and procedures may not be effective at the
reasonable assurance level as of September 30, 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.





The
Company is required to complete implementing the internal controls based on the
criteria established in Internal Control -- Integrated Framework issued by the
COSO.  The Company’s senior 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 the
Company is 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.





35


The
Company’s registered public accountant has not conducted an audit of the
Company’s 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 the Company’s
controls and procedures with regards to internal control over financial
reporting.








ITEM
      4(T).
            CONTROLS AND
      PROCEDURES.





There are
no changes in the Company’s 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, the Company 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.  The
Company has provided documents to the SEC in response to the subpoena and
continued to be available to provide any information or documents requested by
the SEC.





On May
22, 2009, a complaint was filed by Michael Fischer (“Fisher”) naming the Company
as a defendant in the United Stated District Court for the Central District of
California, Case No. CV09-3682 VBF PWJx.  The complaint alleges a
claim for breach of contract relating to the Company’s default under a
convertible note purchase agreement entered into by the Company with
Fisher.  (See Item 3 below.)  The complaint requests damages
of $1,000,000 plus interest and costs.  The Company responded to the
complaint.  A judgment has been entered in this action in favor of
Fisher in the amount of $1,000,000 plus interest consistent with the amount owed
by the Company under the convertible note purchase agreement.  The
parties are currently is negotiation regarding the amount of costs to be
recovered by Mr. Fisher in the proceeding.  The Company intends to pay
the judgment entered in favor of Mr. Fisher as soon as funds are available to do
so.





On July
8, 2009, the Company filed a complaint for: (i) reformation of contract; (ii)
specific performance of contract; (iii) damages for breach of contract; (iv)
damages for promissory fraud; and (v) declaratory relief in the Superior Court
for the State of California, County of Orange, against Westmoore Management,
LLC, Westmoore Capital Group, LLC, Capital Asset Lending, a corporation, Matthew
Jennings (collectively, “Westmoore”) and Aspen Stock Transfer Agency, Inc.
stemming from the failure of Westmoore to perform its obligations under a
Settlement Agreement and Mutual Releases executed by Westmoore and the Company
on May 15, 2009.  Aspen Stock Transfer, the Company’s stock transfer
agent, was named in the litigation for the sole purpose of being included in
court orders the Company anticipates it may seek to restrict the transfer of the
Company’s shares held by Westmoore.





On or
about September 25, 2009,
the Company, Westmoore and Aspen Stock Transfer entered into a Stipulation for
Preliminary Injunction and Regarding Mechanics of Third-Party Investors
providing for an injunction to enjoin the transfer of any shares of the Company
held by Westmoore (“Stipulation”).  The Stipulation further provided
for the mechanics to resolve issues regarding the validity of the convertible
notes held by the investors whose purchase funds were the subject of the
lawsuit.  The Company and Westmoore are currently soliciting responses
from the investors of the convertible notes at issue to determine the
disposition of the convertible notes and the eventual resolution or continuation
of the litigation.





On July
17, 2009, a complaint was filed against the Company by Edgar Pereda Gomez
(“Gomez”) in the Superior Court for the State of California, County of San
Diego, Case No. 37-2009-00094247-CU-BC-CTL.  The complaint alleges a
claim for breach of contract arising from the Company’s default under a
convertible note purchase agreement entered into by the Company with Gomez and
seeks damages in amount of $525,000 plus interest and costs.  (See
Item 3 below.)  The Company has responded to the
complaint.  The Company has entered into a Stipulation for Entry of
Judgment to resolve this lawsuit.  The Stipulation for Entry of
Judgment provides for entry of a judgment in the amount of $525,000 plus
interest and costs against the Company.  The Company intends to
satisfy the amounts owed under the stipulation as soon as funds are available to
do so.





In July
2009 the Company received notice of a potential claim against the Company by
Francisco Perezcalva (“Perezcalva”).  This claim is also for breach of
contract arising from the Company’s default under a convertible note purchase
agreement entered into by the Company with Perezcalva.  (See Item 3
below.)  The claim is in the amount of $500,000 plus interests and
costs.  The Company is working to resolve the claim without the need
for litigation.





36





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 the
Company’s Annual Report on Form 10-K for the year ended December 31, 2008, which
could materially affect the Company’s 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 the Company’s 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 August 2009 the Company issued
23,991,144 Series A common shares for the conversion of convertible notes issued
by the Company in 2008 including interest.





In August 2009, the Company issued a
total of 5,500,000 Series A common shares to consultants to the
Company.  The 5,500,000 Series A common shares were issued as
consideration under independent contractor agreements entered into by the
contractors with the Company.





In
September 2009 the Company issued 11,224,190 Series A common shares for the
conversion of convertible notes issued by the Company in 2008 including
interest.





In
October 2009, the Company issued a total of 5,000,000 Series A common shares to
consultants to the Company.  The 5,000,000 Series A common shares were
issued as consideration under independent contractor agreements entered into by
the contractors with the Company.





In
October 2009 the Company issued 4,251,090 Series A common shares for the
conversion of convertible notes issued by the Company in 2008 including
interest.





As of the
date of this report, in November 2009, the Company issued 597,707 Series A
common shares for the conversion of convertible notes issued by the Company in
2008 including interest.





ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES.





As of
September 30, 2009, the Company is in default on payment of the principal and
interest on approximately $14.2 million of our convertible notes and
amended and restated convertible notes.  The Company intends to cure
the default and satisfy the convertible notes as soon as funds are available to
the Company.





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





None.





ITEM
      5.
            OTHER
      INFORMATION.





None.


37





ITEM
      6.
            EXHIBITS.





31.1
            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: 
      November 11, 2009
            CHINA
      TEL GROUP, INC.By:
            /s/ George
      AlvarezGeorge
      AlvarezChief
      Executive Officer







38