##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly three month period ended June 30, 2006
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 For the transition period from [          ] to [          ]
 Commission File Number: 000-26347
 Sun New Media, Inc.
  MINNESOTA
    
    410985135(State or other jurisdiction of incorporation)
    
    (IRS Employer
Identification No.)Fourth Floor 1120 Avenue of the Americas, New York, NY
    
    10036(Address of principal executive offices)
    
    (Zip Code)
 (212) 626-6744
 None
 Securities Registered pursuant to Section 12(g) of the Act:
    
    Common Stock, par value $0.01 per share(Title of class)
 þ o
 o þ
   o þ




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TABLE OF CONTENTS  PART IItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Controls and ProceduresPART IIItem 1. Legal ProceedingsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submissions of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. Exhibits and Reports on Form 8-KSIGNATURESINDEX TO EXHIBITSEXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  FORWARD LOOKING INFORMATION
 Private
Securities Litigation Reform Act of 1995
    
 PART I
 
 Item 1. Financial Statements
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Sun New Media, Inc.
 Condensed Consolidated Financial Statements
 June 30, 2006
 (Unaudited)
  Condensed Consolidated Balance Sheets
 Condensed Consolidated Statement of Operations
 Condensed Consolidated Statement of Cash Flows
 Notes to Condensed Consolidated Financial Statements
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SUN NEW MEDIA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
    
    (Audited)June 30, 2006
    
    March 31, 2006NOTE
    
    US$000
    
    US$000ASSETSCurrent AssetsCash and bank balances
    
    
    
    
    
    
    4,959
    
    
    
    1,374Accounts receivables, net of provision for
doubtful debts $67,683 (2005: $72,046)
    
    
    
    
    
    
    8,715
    
    
    
    416Other receivables, prepayments and deposits
    
    
    5
    
    
    
    3,686
    
    
    
    466Inventories
    
    
    
    
    
    
    101
    
    
    
    85Marketable securities
    
    
    
    
    
    
    19,089
    
    
    
    8,140Amounts due from stockholders
    
    
    6
    
    
    
    71
    
    
    
    292Amounts due from related parties
    
    
    6
    
    
    
    1,237
    
    
    
    893Total current assets
    
    
    
    
    
    
    37,858
    
    
    
    11,666Investment in affiliate
    
    
    
    
    
    
    382
    
    
    
    25Goodwill and intangible assets
    
    
    3
    
    
    
    60,222
    
    
    
    61,795Plant and equipment
    
    
    4
    
    
    
    2,215
    
    
    
    2,205Clearing broker deposit
    
    
    
    
    
    
    
    
    
    
    37Total Assets
    
    
    
    
    
    
    100,677
    
    
    
    75,728LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    
    
    
    
    
    731
    
    
    
    987Other payables and accruals
    
    
    7
    
    
    
    7,288
    
    
    
    6,928Amounts due to related parties
    
    
    6
    
    
    
    528
    
    
    
    489Factoring loan
    
    
    8
    
    
    
    179
    
    
    
    233Income taxes payable
    
    
    
    
    
    
    12
    
    
    
    Total current liabilities
    
    
    
    
    
    
    8,738
    
    
    
    8,637Minority interest
    
    
    
    
    
    
    446
    
    
    
    (102
    )Convertible notes
    
    
    9
    
    
    
    
    
    
    
    2,816Discount on warrants
    
    
    9
    
    
    
    (2,177
    )
    
    
    (2,393
    )Commitments and Contingencies
    
    
    10STOCKHOLDERS EQUITYCommon stock; authorized 750,000,000 shares,
US$0.01 par value
    
    
    
    
    
    
    Preference stock, authorized 250,000,000
shares, US$0.01 par value
    
    
    
    
    
    
    103,789,630/ 84,055,510 shares
of common stock issued and outstanding,
US$0.01 par value
    
    
    
    
    
    
    1,038
    
    
    
    841Nil/ 14,537,253 shares of common stock
reserved to be issued, US$0.01 par value
    
    
    
    
    
    
    
    
    
    
    145Additional paid in capital
    
    
    
    
    
    
    93,312
    
    
    
    81,943Accumulated other comprehensive (loss) income:Unrealized loss on marketable securities
    
    
    
    
    
    
    (1,002
    )
    
    
    Foreign currency translation adjustments
    
    
    
    
    
    
    (2
    )
    
    
    2Retained earnings/ (Deficit)
    
    
    
    
    
    
    324
    
    
    
    (16,161
    )Total stockholders equity
    
    
    
    
    
    
    93,670
    
    
    
    66,770Total liabilities and stockholders equity
    
    
    
    
    
    
    100,677
    
    
    
    75,728
 The accompanying notes are an integral part of these consolidated financial statements.
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SUN NEW MEDIA INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
 Three months ended
    
    Three months endedJune 30, 2006
    
    December 31, 2005(1)NOTE
    
    US$000
    
    US$000REVENUES
    
    
    
    
    
    
    8,819
    
    
    
    Costs of revenue
    
    
    
    
    
    
    228
    
    
    
    GROSS PROFIT
    
    
    
    
    
    
    8,591
    
    
    
    OPERATING EXPENSESGeneral and administrative
    
    
    
    
    
    
    1,577
    
    
    
    171Marketing and sales
    
    
    
    
    
    
    35
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    510
    
    
    
    Consulting and professional fees
    
    
    
    
    
    
    494
    
    
    
    180Total operating expenses
    
    
    
    
    
    
    2,616
    
    
    
    351OPERATING INCOME (LOSS) FROM CONTINUING
OPERATIONS
    
    
    
    
    
    
    5,975
    
    
    
    (351
    )Loss from discontinued operations
    
    
    
    
    
    
    (43
    )
    
    
    (11
    )Interest expense
    
    
    
    
    
    
    (5
    )
    
    
    Interest expense, warrant valuation
    
    
    
    
    
    
    (216
    )
    
    
    Interest income
    
    
    
    
    
    
    23
    
    
    
    Other income
    
    
    
    
    
    
    10,871
    
    
    
    Share of profits from affiliate
    
    
    
    
    
    
    356
    
    
    
    INCOME (LOSS) BEFORE INCOME TAX EXPENSE AND
MINORITY INTERESTS
    
    
    
    
    
    
    16,961
    
    
    
    (362
    )Income tax expenses
    
    
    4
    
    
    
    (12
    )
    
    
    INCOME (LOSS) AFTER INCOME TAX EXPENSE AND
BEFORE MINORITY INTERESTS
    
    
    
    
    
    
    16,949
    
    
    
    (362
    )Minority interests
    
    
    
    
    
    
    (446
    )
    
    
    INCOME (LOSS) AFTER INCOME TAX EXPENSE AND
MINORITY INTERESTS
    
    
    
    
    
    
    16,503
    
    
    
    (362
    )Other comprehensive loss  Currency translation
adjustment
    
    
    
    
    
    
    (18
    )
    
    
    NET INCOME (LOSS)
    
    
    
    
    
    
    16,485
    
    
    
    (362
    )EARNINGS (LOSS) PER SHAREWeighted average number of shares outstandingBasic
    
    
    
    
    
    
    98,488,837
    
    
    
    64,518,537Net earnings (loss) per share of common stock
    
    
    
    
    
    
    0.17
    
    
    
    (0.01
    )Diluted
    
    
    
    
    
    
    102,496,663
    
    
    
    64,518,537Net earnings (loss) per share of common stock
    
    
    
    
    
    
    0.16
    
    
    
    (0.01
    )
 
 (1)
    
    Information is presented for the quarter ended December 31, 2005 as the Company
had not commenced operations as of the prior year period and the quarter ended December 31,
2005 represented the first quarter of the Companys last fiscal year before it changed the
date of its fiscal year end to March 31. The accompanying notes are an integral part of these consolidated financial statements.
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SUN NEW MEDIA INC.
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
 Three Months
    
    Three Months endedended June 30, 2006
    
    December 31, 2005 (1)US$
    
    US$Cash flows from operating activitiesNet income (loss) for the period before income taxes and
minority interests
    
    
    16,943
    
    
    
    (362
    )Adjustments to reconcile net income (loss) to net cash used in
operating activities;Depreciation and amortization
    
    
    510
    
    
    
    Share of profits from affiliate
    
    
    (356
    )
    
    
    Gain on disposal of assets
    
    
    (10,743
    )
    
    
    Gain on disposal of subsidiary companies
    
    
    (74
    )
    
    
    Consultancy services
    
    
    75
    
    
    
    Interest expense  warrants valuation
    
    
    216
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (8,335
    )
    
    
    (51
    )Other debtor, deposits and prepayments
    
    
    (3,039
    )
    
    
    (354
    )Inventories
    
    
    (16
    )
    
    
    Amounts due from related parties
    
    
    (344
    )
    
    
    (3
    )Amounts due from stockholders
    
    
    221
    
    
    
    257Accounts payable
    
    
    22
    
    
    
    23Other payables and accruals
    
    
    558
    
    
    
    376Amounts due to related parties
    
    
    39
    
    
    
    1Net cash used in operating activities
    
    
    (4,323
    )
    
    
    (112
    )Cash flows from investing activitiesProceeds from sale of fixed assets
    
    
    75
    
    
    
    Purchase of fixed assets
    
    
    (221
    )
    
    
    (2
    )Cash acquired in business combination, net
    
    
    11
    
    
    
    Disposal of subsidiary companies, net
    
    
    23
    
    
    
    Net cash used in investing activities
    
    
    (112
    )
    
    
    (2
    )Cash flows from financing activitiesIssuance of common stock
    
    
    8,955
    
    
    
    123Proceeds from convertible note
    
    
    
    
    
    
    918Expenses incurred on issuance of common stocks
    
    
    (875
    )
    
    
    Repayment of factoring loans
    
    
    (54
    )
    
    
    Net cash provided by financing activities
    
    
    8,026
    
    
    
    1,041Net effect of exchange rate changes on consolidating subsidiaries
    
    
    (6
    )
    
    
    Net increase in cash and cash equivalents
    
    
    3,585
    
    
    
    927Cash and cash equivalents, beginning of the period
    
    
    1,374
    
    
    
    202Cash and cash equivalents, end of the period
    
    
    4,959
    
    
    
    1,129
 
 (1)
    
    Information is presented for the quarter ended December 31, 2005 as the Company
had not commenced operations as of the prior year period and the quarter ended December 31,
2005 represented the first quarter of the Companys last fiscal year before it changed the
date of its fiscal year end to March 31. The accompanying notes are an integral part of these consolidated financial statements.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    NATURE OF OPERATIONS AND BASIS OF PRESENTATIONSun New Medias principal business activities are (i) provision of business-to-business
interactive marketing and information services; and (ii) provision of e-solutions and
online platform to better manage distribution networks by industry, and provision of
turnkey management solutions as integral parts of our transactional services.Our activities are based predominantly in Peoples Republic of China (PRC).Sun New Media Inc, a Minnesota corporation, and each of its subsidiaries are collectively
referred to herein as the Company or SNMD.Our principal operating subsidiaries include the following:
 o
    
    Sun New Media Group Limited;o
    
    Sun Global Marketing Network Limited;o
    
    China Focus Channel Development (HK) Limited;o
    
    Sun New Media Holdings Limited; ando
    
    Lifestyle Magazines Publishing Pte Ltd.
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIESBasis of Consolidation and PresentationThe consolidated financial statements include the accounts of the Company, its subsidiaries
and variable interest entities, or VIEs for which the Company is the primary beneficiary.
All significant inter-company accounts and transactions have been eliminated. Investments
in entities in which the Company can exercise significant influence, but which are less
than majority owned and not otherwise controlled by the Company, are accounted for under
the equity method. The Company has adopted FASB Interpretation No. 46R consolidation of
Variable Interest Entities, FIN 46R, an Interpretation of Accounting Research Bulletin No.
51. FIN 46R requires a VIE to be consolidated by a company if that company is subject to a
majority of the risk of loss for the VIEs or is entitled to receive a majority of the VIEs
residual returns. The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.We have the following significant domestic VIEs:
 
    
    Sun China Media (Beijing) Technology Co., Ltd., a PRC company controlled through us
by contract and is owned equally by Qiong Zhou and Jacob Di, both of whom are
non-executive employees of the Company.
    
    Suizhou Focus Trading Development Co., Ltd., a PRC company controlled by us by
contract and is engaged in marketing, information and technology services to beverage
and electronic device distributors. It is 60% owned by Qi Yang, one of our officers
and directors and 25% and 15% owned by Bingwei Wu and Quanyi Mao respectively, two
non-executive employees of the Company.
    
    Shanghai Shengji Technology Co., Ltd, a PRC company controlled by us by contract,
and is engaged in wireless mobile services. It is 40% owned by Hui Yan, 40% owned by
Min Lin and 20% owned by Kezhou Luan, each a non-executive employee of the Company.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)
 
    
    Sun China Media (Beijing) International Advertising Co. Ltd, a China company
controlled by us by contract which is engaged in the advertising business. It is 70%
owned by Qiong Zhou, and 30% owned by Guosheng Wang, both of whom are non-executive
employees of the Company.
    
    Dragon List Co. Ltd, a China company controlled by us by contract and is engaged in
digital publishing business. It is 70% owned by Qiong Zhou, and 30% owned by Jacob
Di, both of whom are non-executive employees of the Company.
    
    Sun Trade Media (Beijing) Co. Ltd, a China company controlled by us by contract and
is engaged in digital publishing business. It is 70% owned by Qiong Zhou, and 30%
owned by Jacob Di, both of whom are non-executive employees of the Company.
 The capital investment in these VIEs is funded by the Company and registered as
interest-free loans to these PRC employees. As of June 30, 2006, the total amount of
interest-free loans to the employee shareholders of the VIEs listed above was US$2,363,000.
Under various contractual agreements, employee shareholders of the VIEs are required to
transfer their ownership in these entities to our subsidiaries in China when permitted by
PRC laws and regulations or to our designees at any time for the amount of outstanding
loans, and all voting rights of the VIEs are assigned to us. We have the power to appoint
all directors and senior management personnel of the VIEs. Through our wholly-owned
subsidiaries in China, we have also entered into exclusive technical agreements and other
service agreements with the VIEs, under which these subsidiaries provide technical
services.Use of estimatesThe preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenue and expenses for the
periods that the financial statements are prepared. Actual amounts could differ from these
estimates.Financial instrumentsThe Companys financial instruments include cash and cash equivalents, accounts receivable
and payable. The fair values of these financial instruments approximate their carrying
values due to the short-term maturity of the instruments.Business combinationsThe Company accounts for its business combinations using the purchase method of accounting.
This method requires that the acquisition cost to be allocated to the assets and
liabilities the Company acquired based on their fair values. The Company makes estimates
and judgments in determining the fair value of the acquired assets and liabilities, based
on independent appraisal reports for material purchases as well as its experience with
similar assets and liabilities in similar industries. If different judgments or assumptions
were used, the amounts assigned to the individual acquired assets or liabilities could be
materially different. When considering whether an acquired assets group constitutes a
business, the Company used the criteria defined by EITF 98-3 determining Whether a
Non-monetary Transaction Involves Receipt of Productive Assets or of a Business.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)Goodwill and intangible assets, netGoodwill represents the excess of the purchase price over the fair value of the
identifiable assets and liabilities acquired as a result of the Companys acquisitions of
interests in its subsidiaries and VIEs. Under Statement of Financial Accounting Standards,
FAS No. 142, Goodwill and Other Intangible Assets, FAS 142, goodwill is no longer
amortized, but tested for impairment upon first adoption and annually, thereafter, or more
frequently if events or changes in circumstances indicate that it might be impaired. The
Company assesses goodwill for impairment periodically in accordance with SFAS 142.The Company applies the criteria specified in SFAS No. 141, Business Combinations to
determine whether an intangible asset should be recognized separately from goodwill.
Intangible assets acquired through business acquisitions are recognized as assets separate
from goodwill if they satisfy either the contractual-legal or reparability criterion. Per
SFAS 142, intangible assets with definite lives are amortized over their estimated useful
life and reviewed for impairment in accordance with SFAS No. 144, accounting for the
Impairment or Disposal of Long-lived Assets. The Company reviews the amortization methods
and estimated useful lives of intangible assets at least annually or when events or changes
in circumstances indicate that it might be impaired. The recoverability of an intangible
asset to be held and used is evaluated by comparing the carrying amount of the intangible
asset to its future net undiscounted cash flows. If the intangible asset is considered to
be impaired, the impairment loss is measured as the amount by which the carrying amount of
the intangible asset exceeds the fair value of the intangible asset, calculated using a
discounted future cash flow analysis. The Company uses estimates and judgments in its
impairment tests, and if different estimates or judgments had been utilized, the timing or
the amount of the impairment charges could be different.Plant and equipmentPlant and equipment are stated at cost, net of depreciation. Depreciation is computed
primarily on the straight-line method for financial reporting purposes over the following
estimated useful lives:
 YearsFurniture, fixtures and equipment
    
    
    3 - 5Motor vehicles
    
    
    5Leasehold buildings and improvements
    
    
    5 - 30
 Revenue recognitionWe earn revenue from provision of marketing, information and transactional services and
sales of channel management software. The Company recognizes revenues from transaction and
information services in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue
Recognition, when all of the following conditions exist: persuasive evidence of an
arrangement exists in the form of an accepted purchase order; delivery has occurred, based
on shipping terms, or services have been rendered; the Companys price to the buyer is
fixed or determinable, as documented on the accepted purchase order; and collectibility is
reasonably assured.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)Revenue recognition (contd)The Company accounts for software sales in accordance with American Institute of Certified
Public Accountants Statement of Position (SOP) 97-2, Software Revenue Recognition. The
application of SOP 97-2 requires judgment, including whether a software arrangement
includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE)
of fair value exists for those elements. Customers receive certain elements of our products
over a period of time. Judgment is also required to assess whether future releases
represent new products or upgrades and enhancements to existing products.Cost of revenuesCost of revenues includes the cost of product, salary and other related costs for our
management services and technical support staff, as well as third-party contractor
expenses. Additionally cost of revenues includes fees for hosting facilities, bandwidth
costs, and equipment and related depreciation costs. Cost of revenues will vary
significantly from period to period depending on whether we will take title of the product
and the level of management services provided.Earnings (loss) per shareBasic earnings (loss) per share includes no dilution and is computed by dividing income
(loss) available to common stockholders by the weighted average number of common shares
outstanding for the year. Diluted net earnings (loss) per share reflects the potential
dilution of securities that could share in income (loss) of the Company.Foreign currency transactionsThe financial statements are presented in United States dollars. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation, since the functional currency of the Company is Renminbi, the foreign
currency financial statements of the Companys subsidiaries are re-measured into U.S.
dollars. Monetary assets and liabilities are re-measured using the foreign rate that
prevailed at the balance sheet date. Revenue and expenses are translated at weighted
average rates of exchange during the year and stockholders equity accounts and capital
asset accounts are translated by using historical exchange rates. Any re-measurement gain
or loss incurred is reported in the consolidated statement of operations.Income taxesThe Company follows the liability method of accounting for income taxes in accordance with
SFAS No. 109. Under this method, future tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax balances.
Future tax assets and liabilities are measured using enacted or substantially enacted tax
rates expected to apply to the taxable income in the years in which those differences are
expected to be recovered or settled. The effect on future tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the date of
enactment or substantive enactment. A valuation allowance is provided for deferred tax
assets if it is more likely than not that the Company will not realize the future benefit,
or if the future deductibility is uncertain.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)Stock-based compensationEffective January 1, 2006, the company adopted SFAS No. 123 (revised 2004), Share Based
Payment, (SFAS No. 123(R)) which revises SFAS No. 123 and supersedes APB 25. SFAS No.
123(R) requires that all share-based payments to employees be recognized in the financial
statements based on their fair values at the date of grant. The calculated fair value is
recognized as expense (net of any capitalization) over the requisite service period, net of
estimated forfeitures, using the straight-line method under SFAS No. 123(R). The Company
considers many factors when estimating expected forfeitures, including types of awards,
employee class and historical experience. The statement was adopted using the modified
prospective method of application which requires compensation expense to be recognized in
the financial statements for all unvested stock options beginning in the quarter of
adoption. There were no unvested stock options at the beginning of this reporting period
therefore no compensation expense was recognized in the period. No adjustments to prior
periods have been made as a result of adopting SFAS No. 123(R).As at September 30, 2005 the Company elected to account for stock-based employee
compensation arrangements in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25) and comply with
the disclosure provisions of SFAS No. 123 as amended by SFAS No. 148. During the period
from September 18, 2005 to September 30, 2005, no stock-based employee compensation
arrangements have been effected and accordingly no disclosure of pro forma information is
required. In accordance with SFAS No. 123 the Company applies the fair value method using
the Black-Scholes option-pricing model in accounting for options granted to consultants.The Company accounts for equity instruments issued in exchange for the receipt of goods or
services from other than employees in accordance with SFAS No. 123 and the conclusions
reached by the Emerging Issues Task Force in Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with
Selling Goods or Services (EITF 96-18). Costs are measured at the estimated fair market
value of the consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments issued for
consideration other than employee services is determined on the earlier of a performance
commitment or completion of performance by the provider of goods or services as defined by
EITF 96-18.Recently Issued Accounting PronouncementsIn November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costs, which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material. SFAS No. 151 will be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. We do not believe the adoption of SFAS No. 151 will
have a material impact on our consolidated financial statements.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)Recently Issued Accounting Pronouncements (contd)In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires that
the compensation cost relating to share-based payment transactions (including the cost of
all employee stock options) be recognized in the financial statements. The cost will be
measured based on the estimate fair value of the equity or liability instruments issued.
SFAS 123-R covers a wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Management believes the adoption of this pronouncement will
not have a material effect on our consolidated financial statements.Also, in December 2004, the FASB issued SFAS 153, Exchanges of Non-monetary Assets, an
amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions. The amendments
made by SFAS No. 153 are based on the principle that the exchange of non-monetary assets
should be measured using the estimated fair market value of the assets exchanged. SFAS No.
153 eliminates the narrow exception for non-monetary exchanges of similar productive
assets, and replaces it with a broader exception for exchanges of non-monetary assets do
not have commercial substance. A non-monetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result of the
transaction. This pronouncement is effective for monetary exchanges in fiscal periods
beginning after June 15, 2005. Management believes the adoption of this pronouncement will
not have a material effect on our consolidated financial statements.In March 2005, the FASB issued FASB Interpretation No. 47 (FIN 47), Accounting for
Conditional Asset Retirement Obligations. FIN 47 clarifies that the term conditional
asset retirement obligation, which as used in SFAS No. 143, Accounting for Asset
Retirement Obligations, refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) method of settlement are conditional on a future
event that may or may not be within the control of the entity. The entity must record a
liability for a conditional asset retirement obligation if the fair value of the
obligation can be reasonably estimated. FIN 47 also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending after
December 15, 2005. Management believes the adoption of this statement does not have an
immediate material impact on the consolidated financial statements of the Company.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections.
This statement requires entities that voluntarily make a change in accounting principle to
apply that change retrospectively to prior periods financial statements, unless this would
be impracticable. SFAS No. 154 supersedes APB Opinion No. 20, Accounting Changes, which
previously required that most voluntary changes in accounting principle be recognized by
including in the current periods net income the cumulative effect of changing to the new
accounting principle. SFAS No. 154 also makes a distinction between retrospective
application of an accounting principle and the restatement of financial statements to
reflect the correction of an error. SFAS No. 154 applies to accounting changes and error
corrections that are made in fiscal years beginning after December 15, 2005. Management
believes the adoption of this statement will not have an immediate material impact on the
consolidated financial statements of the Company.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)Recently Issued Accounting Pronouncements (contd)The adoption of EITF Issue No. 03-13, Applying the Conditions in Paragraph 42 of FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in
Determining Whether to Report Discontinued Operations in the first quarter of 2005 did not
have a material impact on the Companys results of operations and financial condition.In October 2005, the FASB issued FSP FAS 123(R)-2, Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R), which provides
clarification of the concept of mutual understanding between employer and employee with
respect to the grant date of a share-based payment award. This FSP provides that a mutual
understanding of the key terms and conditions of an award shall be presumed to exist on the
date the award is approved by management if the recipient does not have the ability to
negotiate the key terms and conditions of the award and those key terms and conditions will
be communicated to the individual recipient within a relatively short time period after the
date of approval. This guidance shall be applied upon initial adoption of SFAS 123R. The
Company does not expect the adoption of the FSP will have a material impact on its
consolidated results of operations and financial condition.In November 2005, the FASB issued FSP FAS 123(R)-3, Transition Election Related to
Accounting for the Tax Effects of Share-Based Payment Awards, which provides a practical
transition election related to accounting for the tax effects of share-based payment awards
to employees. An entity must follow either the transition guidance for the APIC pool in
SFAS 123R or the alternative transition method described in the FSP. The alternative method
comprises a computational component that establishes a beginning balance of the APIC pool
and a simplified method to determine the subsequent impact on the APIC pool of awards that
are fully vested and outstanding upon the adoption of SFAS 123R. The impact on the APIC
pool of awards partially vested upon, or granted after, the adoption of SFAS 123R should be
determined in accordance with the guidance in that statement. The FSP was effective
November 10, 2005. As described in the FSP, an entity will be permitted to take up to one
year to determine its transition alternatives to make its one-time election. The Company
does not expect the adoption of the FSP will have a material impact on its consolidated
results of operations and financial condition.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments-an amendment of FASB Statements No. 133 and 140. SFAS No. 155 amends SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities to permit fair value
remeasurement for any hybrid financial instrument with an embedded derivative that
otherwise would require bifurcation, provided that the whole instrument is accounted for on
a fair value basis. SFAS No. 155 amends SFAS No. 140, Accounting for the Impairment or
Disposal of Long-Lived Assets, to allow a qualifying special-purpose entity (SPE) to
hold a derivative financial instrument that pertains to a beneficial interest other than
another derivative financial instrument. SFAS No. 155 applies to all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006, with earlier application allowed. The Company does not expect the
adoption of SFAS No. 155 to have a material impact on its consolidated results of
operations and financial condition.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 2.
    
    SUMMARY OF THE COMPANYS SIGNIFICANT ACCOUNTING POLICIES (CONTD)Recently Issued Accounting Pronouncements (contd)In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
Assets-an amendment of FASB Statement No. 140. SFAS No. 156 requires that all separately
recognized servicing rights be initially measured at fair value, if practicable. In
addition, this Statement permits an entity to choose between two measurement methods
(amortization method or fair value measurement method) for each class of separately
recognized servicing assets and liabilities. This new accounting standard is effective
January 1, 2007. The adoption of SFAS 156 is expected to have no material impact on our
financial statements.Other recent accounting pronouncements issued by the FASB (including its Emerging Issues
Task Force), the AICPA, and the SEC did not or are not believed by management to have a
material impact on the Companys present or future consolidated financial statements.Related PartiesParties are considered to be related if one party has the ability, directly or indirectly,
to control the other party, or exercise significant influence over the other party in
making financial and operating decisions. Parties are also considered to be related if
they are subject to common control or common significant influence.Deferred ExpensesPayments made for future expenses were amortized over the life of service received.Marketable securitiesThe Company accounts for investments in marketable securities under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities.Marketable equity securities are held as available for sale and are reported
at fair value any unrealized gains and losses are included in accumulated other
comprehensive income or loss within stockholders equity. The treatment of a decline in
the fair value of an individual security is based on whether the decline is
other-than-temporary. Significant judgment is required to assess whether the impairment is
other-than-temporary, particularly for marketable equity securities that provide limited
public information. Our judgment of whether impairment is other-than-temporary is based on
an assessment of factors including our ability and intent to hold the individual security,
severity of the impairment, expected duration of the impairment and forecasted recovery of
fair value. Changes in the estimates and assumptions could affect our judgment of whether
an identified impairment should be recorded as an unrealized loss in the equity section of
our consolidated balance sheets or as a realized loss in the consolidated statements of
operations.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 3
    
    GOODWILL AND INTANGIBLE ASSETSThe following table summarizes goodwill from the Companys acquisitions:
 As of
    
    As ofJune 30, 2006
    
    March 31, 2006US$000
    
    US$000Focus
    
    
    7,800
    
    
    
    7,800Less: Accumulated amortization
    
    
    (65
    )
    
    
    7,735
    
    
    
    7,800
 The following table summarizes intangible assets:
 As of
    
    As ofJune 30, 2006
    
    March 31, 2006US$000
    
    US$000Service agreements
    
    
    25,000
    
    
    
    25,000Magazines mastheads
    
    
    2,562
    
    
    
    2,562License
    
    
    23,245
    
    
    
    24,452Technology
    
    
    1,980
    
    
    
    1,98152,787
    
    
    
    53,995Less: Accumulated amortization
    
    
    (300
    )
    
    
    52,487
    
    
    
    53,995
 The above intangible assets have original estimated useful lives as follow:
 Service agreements
    
    30 yearsTechnology
    
    2 to 10 years
 Please refer to the Companys Annual Report on Form 10-KSB filed with the U.S. Securities
and Exchange Commission on June 30, 2006, for more details on goodwill and intangible
assets.4.
    
    PLANT AND EQUIPMENT, NETPlant and equipment is summarized as follows:
 As of
    
    As ofJune 30, 2006
    

    March 31, 2006US$000
    
    US$000CostMotor vehicles
    
    
    
    
    
    
    124Leasehold building and improvement
    
    
    1,506
    
    
    
    1,401Furniture, fixtures and equipments
    
    
    1,163
    
    
    
    9832,669
    
    
    
    2,508Accumulated depreciation
    
    
    (454
    )
    
    
    (303
    )2,215
    
    
    
    2,205
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 5.
    
    OTHER RECEIVABLES, PREPAYMENTS AND DEPOSITSOther receivables, prepayments and deposits are summarized as follow:
 As of
    
    As ofJune 30, 2006
    
    March 31, 2006US$000
    
    US$000Other receivables
    
    
    783
    
    
    
    115Staff advances
    
    
    12
    
    
    
    34Deferred expenses
    
    
    2
    
    
    
    2Rental deposits
    
    
    9
    
    
    
    9Prepaid administrative expenses
    
    
    505
    
    
    
    306Prepaid consideration for acquisitions
    
    
    2,375
    
    
    
    3,686
    
    
    
    466
 Deferred expense represents a prepayment for management fees under a management agreement
between the Company and Capital Alliance Group Inc. (CAG) which lasts for two years
effective September 18, 2005. As part of the reverse acquisition transaction pursuant to
which Sun Media Investment Holdings Limited acquired a controlling interest in the Company
(the Transaction), the Company entered into a management agreement (Management
Agreement) with CAG, a minority shareholder of the Company. Under the Management
Agreement, CAG provides the Company with advisory services, which include general
corporate, administrative, technical and management advisory services as is reasonably
considered necessary or advisable by Company to achieve the goals and needs of the Company
as determined by the policies and proceedings of management and the Board of Directors and
the requirements of the Securities and Exchange Commission. The Company is required to
issue 250,000 shares to CAG in return as consideration. The fair value of the Companys
Common Stock as of September 18, 2005 was US$0.01108.Prepaid consideration for acquisitions represents prepayments for the acquisition of Credit
Network 114 Limited and Beijing Trans Global Logistics and Beijing CEAC Trans Global
Logistics.6.
    
    AMOUNTS DUE FROM/ (TO) STOCKHOLDERS/ RELATED PARTIESThe amounts are non-trade, interest free and with no fixed terms of repayment.7.
    
    OTHER PAYABLES AND ACCRUALSOther payables and accruals are summarized as follow:
 As of
    
    As ofJune 30, 2006
    
    March 31, 2006US$000
    
    US$000Other payables
    
    
    968
    
    
    
    127Accrued operating expenses
    
    
    6,261
    
    
    
    6,727Prepayment from customers
    
    
    59
    
    
    
    747,288
    
    
    
    6,928
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 8.
    
    FACTORING LOANThis relates to amount which has been obtained from a finance company under a factoring
facility. Interest is charged at 1.5% per annum above the prevailing Singapore Inter-Bank
offer rate. These loans are secured by a guarantee given by Sun Business Network Ltd, a
related party and floating charge over accounts receivables amounting to $179,000 (Mar
2006: $233,000).9.
    
    CONVERTIBLE NOTES, WARRANTS AND STOCKConvertible NotesOn December 31, 2005, when the per share market price of the Companys stock was $4.09, the
Company issued a $918,000 convertible note to one accredited investor. The note is
convertible into the Companys common stock at the rate of $2.04 per share. On March 6,
2006, when the market price of the Companys stock was $3.93, the Company issued a
$1,898,000 convertible note to the same accredited investor. The note is convertible into
the Companys common stock at the rate of $2.04 per share. Under the terms of the notes,
the Company agreed to undertake certain obligations to file and maintain effective a
registration statement for shares of the common stock underlying the notes.In accordance with the guidelines of APB No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants, EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios and EITF Issue No. 00-27, Application of issue No. 98-5 to Certain Convertible
Instruments, the Company has determined that each of the above notes was issued with a
beneficial conversion feature. The intrinsic value was calculated at the date of issue as
the difference between the conversion price of the note and the fair value of the Companys
common stock into which the note was convertible, multiplied by the number of common shares
into which the note was convertible, limited by the face amount of the note. The Company
has treated the beneficial conversion features as a discount to the face amount of the
notes and is amortizing them over the term of the respective notes. Upon conversion of all
or a portion of the note, the proportionate share of unamortized discount has been charged
to interest expense. As of June 30, 2006, $216,150 was charged to non-cash interest
expenses.WarrantsOn December 31, 2005, and March 6, 2006 we issued warrants for the purchase of an aggregate
of 11 million and 4 million shares respectively, of common stock to one accredited
investor. The exercise price of the warrants ranges from $2.04 to $4.80. We recorded a
non-cash charge of $216,150 (March 2006: $110,053) as warrants valuation expenses for the
three months ended June 30, 2006. This expense relates to the amortization of debt
discount created by assigning a portion of the proceeds received in conjunction with note
financings to warrants issued with the debt.
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    CONVERTIBLE NOTES, WARRANTS AND STOCK (CONTD)
 Stock Option Plan
 2001 Stock Option Plan
  2004 Stock Option Plan
   Weighted
    
    Weighted AverageAverage Exercise
    
    RemainingNumber of
    
    Price
    
    Contractual Lifeoptions
    
    US$
    
    YearsBalance, September 30, 2005
    
    
    488,500
    
    
    
    0.765
    
    
    
    1.82Exercise of stock options
    
    
    (43,000
    )Balance, March 31, 2006
    
    
    445,500
    
    
    
    0.741
    
    
    
    0.82Exercise of stock options
    
    
    (204,000
    )Balance, June 30, 2006
    
    
    241,500
    
    
    
    0.788
    
    
    
    0
 2006 Stock Award
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 9.
    
    CONVERTIBLE NOTES, WARRANTS AND STOCK (CONTD)
 Stock Option Plan (contd)
 2006 Stock option plan
  10. COMMITMENTS AND CONTINGENCIES
 Commitments
   As of
    
    As ofJune 30, 2006
    
    March 31, 2006US$000
    
    US$0002006
    
    
    232
    
    
    
    1752007
    
    
    31
    
    
    
    62263
    
    
    
    237
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SUN NEW MEDIA INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 11
    
    REPORT OF SEGMENT INFORMATIONWe determine our business segments based upon our management and internal reporting
structure. Our reportable segments are transactional services segment and marketing and
information services segment.Information regarding our business segments is as follows:
 Period fromPeriod from
    
    October 1, 2005April 1, 2006 to
    
    to December 31,June 30, 2006
    
    2005US$000
    
    US$000RevenueTransactional Services
    
    
    8,372
    
    
    
    Marketing & Information Services
    
    
    447
    
    
    
    HQ & investments
    
    
    
    
    
    
    Online
Brokerage (Discontinued operations)
    
    
    
    
    
    
    182Gross profitTransactional Service
    
    
    8,372
    
    
    
    Marketing & Information Services
    
    
    219
    
    
    
    HQ & investments
    
    
    
    
    
    
    Online Brokerage (Discontinued operations)
    
    
    
    
    
    
    90Depreciation and amortizationTransactional Service
    
    
    
    
    
    
    Marketing & Information Service
    
    
    8
    
    
    
    HQ & investments
    
    
    502
    
    
    
    Online Brokerage (Discontinued operations)
    
    
    
    
    
    
    
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
      20




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Results of Operations
 Quarter Ended June 30, 2006
 Revenue
 Costs of Revenues
 Operating Expenses
 Other Income
  Loss from discontinued operations
 Net Income
 Quarter Ended December 31, 2005
  Revenue
 Expenses
 Loss from discontinued operations
 Net Loss
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Liquidity and Capital Resources
    Off-Balance Sheet Arrangements
  Capital Expenditure Commitments
  Strategic Acquisitions and Recent Developments
  
    
    On June 14, 2006, the Company entered into a Sales & Purchase
Agreement with Sun Media Investment Holdings Ltd. (SMIH) to
acquire 100% of the outstanding shares of Credit Network 114
Limited (Credit 114). Credit 114 is incorporated in British
Virgin Islands and is engaged in the business of data collection
and management The Company also signed a supplementary agreement
with SMIH to acquire search engine technology and additional
on-line business media content. The transaction is expected to
take place over a 90 day period, over which time the Company will
pay SMIH a total of US $2.5 million for 100 percent ownership of
Credit 114 and the assets described above. The first of four
equal payments of US $625,000 will be made within 10 days of
signing the agreement, the second within 30 days of signing, the
third within 60 days and the fourth within 90 days.
 
    
    On June 8, 2006, the Company entered into agreement with Mr. Ren
Huiliang (the Seller) to purchase 100% of William Brand
Administer Limited and its subsidiary William Textiles Limited,
collectively William Brand. William Brand is a China-based
producer and distributor of womens luxury apparel. The
consideration for the acquisition is to be satisfied in full
through the issuance of 4,655,172 shares of the Companys common
stock. The Company will issue the shares to the Seller in four
installments: the first installment of 1,163,793 shares will be
issued within thirty days of the completion of the deal; the
remaining shares will be issued in thirds at the end of each of
the next three years, subject to William Brands attainment of
revenue and profit guarantees in each year. William Brand must
achieve a minimum of US $15 million of revenue in year one, US
$17.5 million in year two, and US $20 million in year three.
William Brand must also generate minimum after-tax profits of US
$3 million, US $3.5 million, and US $4 million in years one, two
and three, respectively.
 
    
    On May 23, 2006, the Company signed a strategic cooperative and
sales purchase agreement (the CEAC Agreement) with China
Electronic Appliances Corporation (CEAC), a subsidiary of the
China Electronics Corporation (CEC), and two individuals, Mr.
Yong Li and Mr. Mianchun Wang, management designees from CEAC.
The CEAC Agreement provides that the Registrant and its
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subsidiary Focus shall purchase a 49% stake in Beijing Trans Global Logistics (BTGL) and
its subsidiary from Messrs. Wang and Li and a 31% stake in BTGL from CEAC. As a result, the
Company will effectively own 80% of shares of BTGL and will effectively own 64% of the shares
in Beijing CEAC Trans Global Logistics. The consideration for the acquisition is 15,710,000
RMB to be satisfied by the Company with 9,000,000 RMB in cash and 6.71 million RMB in 139,792
shares of the Companys common stock. As part of the transaction, CEAC and Mr. Yong Li and
Mr. Mianchun Wang have provided a revenue and profit guarantee to the Company. Assuming BTGL
and its subsidiary meet this guarantee in each of the three years following the signing of
the agreement, the sellers will receive an additional 139,792 shares of the Companys common
stock per year. Assuming management meets all performance targets, a maximum aggregate of
559,168 shares may be issued in this transaction.
 
    
    On April 20, 2006, the Company entered into an agreement (the
ASTV Purchase Agreement) with SMIH. The ASTV Purchase Agreement
provides that the Company will purchase various assets, including
real estate, automobiles, office equipment, and program rights, as
well as SMIHs 48,629,331 shares in Asia Premium Television Group
(OTCBB: ASTV, ASTV) to be satisfied by the issuance of 860,647
shares of Company common stock.
 
    
    On April 20, 2006, pursuant to the Sale and Purchase Agreement
(the GAI Purchase Agreement) dated April 20, 2006 by and among
the Company and Kingston Capital Group Limited (Kingston), the
Company sold 100% of the issued and outstanding shares of Global
American Investments Inc. to Kingston in exchange for US$40,000.
Kingston is unrelated to the Company and the transaction was
negotiated at arms length.
 
    
    On January 27, 2006, we completed the acquisition of China Focus
Channel Development Co. Ltd. (Focus), pursuant to a Sale and
Purchase agreement (the Focus Purchase Agreement) dated November
22, 2005 with Yang Qi, Mao Quan Yi and Wu Bing Wei (collectively,
the Sellers) in exchange for 14,900,000 shares of our common
stock. We have based our beverages vertical business on the
business of Focus.The terms of the Focus Purchase Agreement also provide that we must issue an additional
2,000,000 shares of its common stock to the Sellers, if:
 a)
    
    the audited net profit after tax (PAT) of Suizhou Focus Channel Development
Limited (SFC), wholly owned subsidiary of Focus, is in excess of $4.5 million for the
fiscal year ending December 31, 2006;b)
    
    the audited PAT of SFC is in excess of $5.0 million for the fiscal year ending
December 31, 2007; andc)
    
    the audited PAT of SFC for the fiscal year ending December 31, 2008 is in excess
of $5.5 million.
 In the event that the audited PAT is less than the guaranteed amounts for each of the fiscal
years, the Sellers shall either make-up the shortfall in cash, or forfeit their rights to
receive the shares of our common stock.Concurrently, on January 27, 2006, we entered into a supplemental agreement with the sellers
to provide for a 90-day period for the transfer of the business and assets of Hubei Zhengyuan
Trade Development Ltd. (HZTD), a PRC company, to SFC.On March 31, 2006, SFC and HZTD, entered into a management services agreement (the New
Agreement) which took effect on April 1, 2006. Under the terms of the New Agreement, HZTD
will pay SFC and/ or its nominees a management fee equal to 12% of its total cash sales. In
addition, the Sellers will guarantee SFC that the management fee payable to SFC arising from
this New Agreement shall not be less than RMB4 million (approximately US$500,000) per month,
and that the operating costs of SFC including staff costs shall not be more than RMB8 million
 23




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##### Table of Contents



(approximately US$1 million) per annum subject to an inflationary cost increase of no more
than 10% per annum for the duration of the New Agreement.Notwithstanding the above, the profit guarantees as provided by the Sellers as per the
original Purchase Agreement remained unchanged.
 Critical Accounting Policies and Estimates
  Revenue recognition
   Share-based compensation
 Share Based
Payment
  24




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Risk Factors
 You should consider carefully all of the information in this Quarterly Report on Form 10-QSB,
including the risks and uncertainties described below, before making an investment in our common
stock. Any of the following risks could have a material adverse effect on our business, financial
condition and results of operations. In any such case, the market price of our common stock could
decline, and you may lose all or part of your investment.
 Risks Related to Our Business
 Our short operating history and rapidly evolving business makes it difficult for us to accurately
forecast revenues and expenses.
   
    
    offer new and innovative products and services to attract and retain a larger consumer base;
    
    attract customers;
    
    increase awareness of our brand and continue to develop consumer and customer loyalty;
    
    respond to competitive market conditions;
    
    respond to changes in our regulatory environment;
    
    manage risks associated with intellectual property rights;
    
    maintain effective control of our costs and expenses;
    
    raise sufficient capital to sustain and expand our business;
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##### Table of Contents




    
    attract, retain and motivate qualified personnel; and
    
    upgrade our technology to support increased traffic and expanded services.
  The development of our business is dependent upon the completion and integration of acquisitions
and other transactions that have only recently or not yet closed.
  We recognized a large gain in the quarter ended June 30, 2006 which may not be repeated. Our
consolidation and de-consolidation activities may result in substantial non-operating gains or
losses which may mean that our results of operations may be materially impacted by non-operating
factors.
  If the Internet and, in particular, interactive marketing are not broadly adopted in China, our
ability to increase revenue and sustain profitability could be materially and adversely affected.
  
    
    difficulties associated with developing a larger
consumer base with demographic characteristics
attractive to customers;
    
    increased competition and potential downward pressure on online marketing prices;
    
    ineffectiveness of our online marketing delivery, tracking and reporting systems; and
    
    lack of increase in Internet usage in China.
 We face significant competition and may suffer from a loss of users and customers as a result.
  26




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Our business depends on a strong brand, and if we are not able to maintain and enhance our brand,
our business and operating results may be harmed.




If we fail to continue to innovate and provide relevant services, we may not be able to
generate sufficient user traffic levels to remain competitive.




If we fail to keep up with rapid technological changes, our future success may be adversely
affected.




We may face intellectual property infringement claims and other related claims, that could be
time-consuming and costly to defend and may result in our inability to continue providing certain
of our existing services.


27




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##### Table of Contents



We may not be able to prevent others from unauthorized use of our intellectual property, which
could harm our business and competitive position.
  If we fail to attract customers for our online marketing services, our business and growth
prospects could be seriously harmed.
  Because we primarily rely on distributors in providing our e-marketing services, our failure
to retain key distributors or attract additional distributors could materially and adversely affect
our business.
  Our strategy of acquiring complementary businesses, assets and technologies may fail.
  
    
    potential ongoing financial obligations and unforeseen or hidden liabilities;
    
    failure to achieve the intended objectives, benefits or revenue-enhancing opportunities;
    
    costs and difficulties of integrating acquired businesses and managing a larger business; and
    
    diversion of resources and management attention.
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We may not be able to manage our expanding operations effectively.
  Our operating results may fluctuate, which makes our results difficult to predict and could
cause our results to fall short of expectations.
  
    
    general economic conditions in China and economic conditions
specific to the Internet, Internet search and online marketing;
    
    our ability to attract additional customers;
    
    the announcement or introduction of new or enhanced products and
services by us or our competitors;
    
    the amount and timing of operating costs and capital expenditures
related to the maintenance and expansion of our businesses,
operations and infrastructure;
    
    the results of our acquisitions of, or investments in, other businesses or assets;
    
    PRC regulations or actions pertaining to activities on the
Internet, including gambling, online games and other forms of
entertainment; and
    
    geopolitical events or natural disasters such as war, threat of
war, Severe Acute Respiratory Syndrome, or SARS, or other
epidemics.
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The successful operation of our business depends upon the performance and reliability of the
Internet infrastructure and fixed telecommunications networks in China.
  Our success depends on the continuing efforts of our senior management team and other key
personnel and our business may be harmed if we lose their services.
   We rely on highly skilled personnel and, if we are unable to retain or motivate key personnel
or hire qualified personnel, we may not be able to grow effectively.
   Interruption or failure of our information technology and communications systems could impair
our ability to effectively provide our products and services, which could damage our reputation and
harm our operating results.
 30
    Table of Contents    Our business could be adversely affected if our software contains bugs.
  Concerns about the security of electronic commerce transactions and confidentiality of
information on the Internet may reduce use of our network and impede our growth.
  We have limited business insurance coverage.
  Fluctuation and impairment of marketable securities will materially impact our net income
  Any change of the indefinite status of any of our intangible assets may require us to record
additional amortization expenses
  Risks Related to Our Corporate Structure
 PRC laws and regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation, we could be subject to
sanctions. In addition, changes in such PRC laws and regulations may materially and adversely
affect our business.
 31
    Table of Contents     Our corporate actions are substantially controlled by our principal shareholders
and affiliated entities.
  Risks Related to Doing Business in China
 Adverse changes in economic and political policies of the PRC government could have a material
adverse effect on the overall economic growth of China, which could adversely affect our business.
  Our subsidiaries and affiliates are subject to restrictions on paying dividends and making other
payments to us.
 32
    Table of Contents    Uncertainties with respect to the PRC legal system could adversely affect us.
   You may experience difficulties in effecting service of legal process, enforcing foreign
judgments or bringing original actions in China based on United States or other foreign laws
against us or our management.
  Governmental control of currency conversion may affect the value of your investment.
 33
    Table of Contents    Fluctuation in the value of RMB may have a material adverse effect on your investment.
  We may not be able to consolidate the financial results of some of our affiliated companies or
such consolidation could materially adversely affect our operating results and financial condition.
  We face risks related to health epidemics and other outbreaks.
  Risks Related to Our Common Stock
 There has been only a limited public market for our common stock to date.
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The market price for our common stock may be volatile.
  
    
    actual or anticipated fluctuations in our quarterly operating results;
    
    changes in financial estimates by securities research analysts, if any;
    
    conditions in the China consumer goods and online marketing markets;
    
    changes in the economic performance or market valuations of other
U.S. public companies with substantial operations in China;
    
    announcements by us or our competitors of new products,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
    
    addition or departure of key personnel;
    
    fluctuations of exchange rates between RMB and the U.S. dollar;
    
    intellectual property litigation; and
    
    general economic or political conditions in China.
  We will need additional capital, and the sale of additional common stock or other equity
securities could result in additional dilution to our shareholders.
  Substantial future sales or the perception of sales of our common stock in the public market
could cause the price of our common stock to decline.
  You may face difficulties in protecting your interests, and your ability to protect your
rights through the U.S. federal courts may be limited, because we conduct a significant portion of
our operations in China and all of our officers reside outside the United States.
 35
    Table of Contents    If we fail to maintain an effective system of internal control over financial reporting, we may not
be able to accurately report our financial results or prevent fraud.
  We will incur increased costs as a result of being a public company.
  There is a limited public float of our common stock, which can result in increased volatility
in our stock price and prevent the realization of a profit on resale of the Companys common stock
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##### Table of Contents



Our common stock is subject to restrictions on sales by broker-dealers and penny stock rules, which
may be detrimental to investors.
   When we account for employee share options using the fair value method, such accounting treatment
could significantly reduce our net income.
  
 Item 3. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control
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##### Table of Contents



PART II
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 Securities Act of 1933,
 
    
    In May 2006, we issued 40,000 shares of common stock at price of
$2.30 per share and warrants to purchase an aggregate of 40,000
shares of common stock at an exercise price of $4.90 per share.
These issuances were to an investor pursuant to Regulation S of
the Act.
 
    
    We issued common stock in connection with acquisitions as follows:
 a.
    
    13,098,320 shares of common stock pursuant to the transactions with Sun Business
Network Ltd.;b.
    
    460,526 shares of common stock pursuant to the acquisition of China Sport TV
Productions Limited; andc.
    
    978,406 shares of common stock pursuant to the acquisition of Lifestyle Magazines
Publishing Pte Ltd.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submissions of Matters to a Vote of Security Holders
  
 Item 5. Other Information.
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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K
 No.
    
    Description2.1
    
    Termination Agreement dated March 31, 2006 by and between the
Registrant and Sun Media Investment Holdings Limited relating to the
Sale and Purchase Agreement dated December 6, 2005 by and between the
Registrant and Sun Media Investment Holdings Limited to acquire
shares of Sun Business Network Ltd. (incorporated by reference from
our Current Report on Form 8-K filed on April 5, 2006)2.2
    
    Sale and Purchase Agreement dated April 20, 2006 by and between the
Registrant and Kingston Capital Group Limited to divest Global
American Investments Inc (incorporated by reference from our Current
Report on Form 8-K filed on April 26, 2006)2.3
    
    Sale and Purchase Agreement dated April 20, 2006 by and between the
Registrant and Sun Media Investment Holdings Limited to purchase
various assets (incorporated by reference from our Current Report on
Form 8-K filed on April 26, 2006)2.4
    
    Sales Purchase Agreement dated May 23, 2006 by and between the
Registrant, its subsidiary, China Focus Channel Development Co. Ltd
(Focus) and China Electronic Appliances Corporation (CEAC) and
two individuals to purchase a 49% stake in Beijing Trans Global
Logistics (BTGL) and its subsidiary from the two individuals and a
31% stake in BTGL from CEAC (incorporated by reference from our
Current Report on Form 8-K filed on May 30, 2006)2.5
    
    Sale and Purchase Agreement dated June 8, 2006 by and between the
Registrant, its subsidiary, Focus, and Mr Ren Huiliang to acquire
William Brand Administer Limited and its subsidiary William Textiles
Limited (incorporated by reference from our Current Report on Form
8-K filed on June 14, 2006)2.6
    
    Sale and Purchase Agreement dated June 14, 2006 by and between the
Registrant and Sun Media Investment Holdings Limited to acquire
Credit Network 114 Limited (incorporated by reference from our
Current Report on Form 8-K filed on June 20, 2006)31.1
    
    Certificate of CEO as Required by Rule 13a-14(a)/15d-1431.2
    
    Certificate of CFO as Required by Rule 13a-14(a)/15d-1432.1
    
    Certificate of CEO as Required by Rule 13a-14(b) and Rule 15d-14(b)
(17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code32.2
    
    Certificate of CFO as Required by Rule 13a-14(b) and Rule 15d-14(b)
(17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code
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##### Table of Contents



SIGNATURES
  SUN NEW MEDIA, INC.
 Date: August 9, 2006
    
    By:
    
    /s/ Ricky Gee Hing AngRicky Gee Hing AngChief Executive OfficerDate: August 9, 2006
    
    By:
    
    /s/ Frank ZhaoFrank ZhaoChief Financial Officer
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##### Table of Contents



No.
    
    Description2.1
    
    Termination Agreement dated March 31, 2006 by and between the
Registrant and Sun Media Investment Holdings Limited relating to the
Sale and Purchase Agreement dated December 6, 2005 by and between the
Registrant and Sun Media Investment Holdings Limited to acquire
shares of Sun Business Network Ltd. (incorporated by reference from
our Current Report on Form 8-K filed on April 5, 2006)2.2
    
    Sale and Purchase Agreement dated April 20, 2006 by and between the
Registrant and Kingston Capital Group Limited to divest Global
American Investments Inc (incorporated by reference from our Current
Report on Form 8-K filed on April 26, 2006)2.3
    
    Sale and Purchase Agreement dated April 20, 2006 by and between the
Registrant and Sun Media Investment Holdings Limited to purchase
various assets (incorporated by reference from our Current Report on
Form 8-K filed on April 26, 2006)2.4
    
    Sales Purchase Agreement dated May 23, 2006 by and between the
Registrant, its subsidiary, China Focus Channel Development Co. Ltd
(Focus) and China Electronic Appliances Corporation (CEAC) and
two individuals to purchase a 49% stake in Beijing Trans Global
Logistics (BTGL) and its subsidiary from the two individuals and a
31% stake in BTGL from CEAC (incorporated by reference from our
Current Report on Form 8-K filed on May 30, 2006)2.5
    
    Sale and Purchase Agreement dated June 8, 2006 by and between the
Registrant, its subsidiary, Focus, and Mr Ren Huiliang to acquire
William Brand Administer Limited and its subsidiary William Textiles
Limited (incorporated by reference from our Current Report on Form
8-K filed on June 14, 2006)2.6
    
    Sale and Purchase Agreement dated June 14, 2006 by and between the
Registrant and Sun Media Investment Holdings Limited to acquire
Credit Network 114 Limited (incorporated by reference from our
Current Report on Form 8-K filed on June 20, 2006)31.1
    
    Certificate of CEO as Required by Rule 13a-14(a)/15d-1431.2
    
    Certificate of CFO as Required by Rule 13a-14(a)/15d-1432.1
    
    Certificate of CEO as Required by Rule 13a-14(b) and Rule 15d-14(b)
(17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code32.2
    
    Certificate of CFO as Required by Rule 13a-14(b) and Rule 15d-14(b)
(17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of
the United States Code