**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

**FORM 10-QSB**
| x      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                         |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ** **                                                                                                                                                           |
|   | **For the quarterly three month  period ended December 31, 2006**                                                                                                    |
|   | ** **                                                                                                                                                           |
| o      | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE EXCHANGE ACT**                                                                                                 |
|   | ** **                                                                                                                                                           |
|   | **For the transition period from [          ]  to [          ]** |

 

**Commission FileNumber: 000-26347**

**SunNew Media, Inc.**

(Name of small business issuer as specified in itscharter)

| **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)           |

 

Issuer’s telephone number **(212) 626-6744**

Securities Registered under Section 12(b) of theExchange Act: **None**

| Securities Registered  pursuant to Section 12(g) of the Act: |   | **Common  Stock, par value $0.01 per share** |
|--------------------------------------------------------------|--------|----------------------------------------------|
|                                                         |   | (Title of class)                             |

 

This Quarterly Report on Form 10-QSB is the Registrant’sQuarterly Report for the quarter ended December 31, 2006 as filed with theSecurities and Exchange Commission.

Check whether the Registrant (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the Registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days  x Yes    o  No

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

o Yes    x No

State the number of shares outstanding of each of theRegistrant’s classes of common stock, as of the latest practicable date.

90,191,360common shares issued and outstanding as of January 31, 2007

Transitional Small Business Disclosure Format (Checkone):  o Yes    x No

 

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**TABLEOF CONTENTS**
| PART I             |   |                                                                                                |   |   |   |
|--------------------|--------|-----------------------------------------------------------------------------------------------------|--------|--------|--------|
|               |   | Item 1. Financial Statements                                                                        |   | 3      |   |
|               |   | Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 27     |   |
|               |   | Item  3. Controls and Procedures                                                                    |   | 50     |   |
| PART II            |   |                                                                                                |   |   |   |
|               |   | Item  1. Legal Proceedings                                                                          |   | 51     |   |
|               |   | Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |   | 51     |   |
|               |   | Item 3. Defaults Upon Senior Securities                                                             |   | 51     |   |
|               |   | Item 4. Submissions of Matters to a Vote of Security  Holders                                       |   | 51     |   |
|               |   | Item  5. Other Information                                                                          |   | 51     |   |
|               |   | Item 6. Exhibits and Reports on Form 8-K                                                            |   | 52     |   |
| SIGNATURES         |   | 54                                                                                                  |   |
| INDEX  TO EXHIBITS |   | 55                                                                                                  |   |
| EXHIBIT 31.1       |   |                                                                                                |   |
| EXHIBIT 31.2       |   |                                                                                                |   |
| EXHIBIT 32.1       |   |                                                                                                |   |
| EXHIBIT 32.2       |   |                                                                                                |   |

 

2

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***FORWARD LOOKING INFORMATION***

This quarterly report contains forward-lookingstatements as that term is defined in the *PrivateSecurities Litigation Reform Act of 1995*. These statements relate tofuture events or our future financial performance. In some cases, you canidentify forward-looking statements by terminology such as “may”, “will”, “should”,“expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”or “continue” or the negative of these terms or other comparable terminology.These statements are only predictions and involve known and unknown risks,uncertainties and other factors, including the risks in the section entitled “RiskFactors”, that may cause our or our industry’s actual results, levels ofactivity, performance or achievements to be materially different from anyfuture results, levels of activity, performance or achievements expressed orimplied by these forward-looking statements.

Although we believe that the expectations reflected inthe forward-looking statements are reasonable, we cannot guarantee futureresults, levels of activity, performance or achievements. Except as required byapplicable law, including the securities laws of the United States, we do notintend to update any of the forward-looking statements to conform thesestatements to actual results.

Our financial statements are stated in United StatesDollars and are prepared in accordance with United States Generally AcceptedAccounting Principles. In this quarterly report, unless otherwise specified,all dollar amounts are expressed in United States Dollars.

As used in this quarterly report, the terms “we”, “us”,“our”, “SNMD”, and “the Company” mean Sun New Media, Inc. and its wholly-ownedsubsidiaries Sun New Media Group Limited, Sun Global Marketing Network Limited,SE Global Equity Inc, and SE Global Capital, Inc. unless otherwise indicated.

**PARTI**

**Item 1. Condensed ConsolidatedFinancial Statements**

**Sun NewMedia, Inc.**

**CondensedConsolidated Financial Statements**

**December31, 2006**

**(Unaudited)**

(Expressed InUnited States Dollars)

**Condensed Consolidated BalanceSheets**

**Condensed Consolidated Statementof Operations**

**Condensed Consolidated Statementof Cash Flows**

**Notes to Condensed ConsolidatedFinancial Statements**

3

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**SUN NEW MEDIA INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

As of December 31, 2006and March 31, 2006
| ** **                                                                                  | ** ** | **(Unaudited)**                   | ** ** | **(Audited)**                 | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                                                                                  | ** ** | **December   31, 2006** | ** ** | **March  31, 2006** | ** ** |
| ** **                                                                                  | ** ** | **US$’000**                  | ** ** | **US$’000**              | ** ** |
| **ASSETS**                                                                                  |       |                              |       |                          |       |
| **Current Assets**                                                                          |       |                              |       |                          |       |
| Cash and bank  balances                                                                     |       | 1,590                             |       | 1,374                         |       |
| Accounts  receivables, net of provision for doubtful debts $69,281 (Mar 31, 2006:  $72,046) |       | 7,831                             |       | 416                           |       |
| Other  receivables, prepayments and deposits                                                |       | 1,938                             |       | 466                           |       |
| Inventories                                                                                 |       | 318                               |       | 85                            |       |
| Marketable  securities                                                                      |       | 15,765                            |       | 8,140                         |       |
| Amounts due from  stockholders                                                              |       | 409                               |       | 292                           |       |
| Amounts due from  related parties                                                           |       | 746                               |       | 893                           |       |
| **Total current assets**                                                                    |       | 28,597                            |       | 11,666                        |       |
| **Investment in affiliate**                                                                 |       | 241                               |       | 25                            |       |
| **Goodwill and intangible assets**                                                          |       | 35,597                            |       | 61,795                        |       |
| **Plant and equipment**                                                                     |       | 5,516                             |       | 2,205                         |       |
| **Clearing broker deposit**                                                                 |       | —                            |       | 37                            |       |
| **Total Assets**                                                                            | ** ** | **69,951**                        | ** ** | **75,728**                    | ** ** |
| ** **                                                                                  |       |                              |       |                          |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                              |       |                              |       |                          |       |
| **Current Liabilities**                                                                     |       |                              |       |                          |       |
| Accounts payable                                                                            |       | 1,009                             |       | 987                           |       |
| Other payables  and accruals                                                                |       | 2,686                             |       | 6,928                         |       |
| Amounts due to  related parties                                                             |       | —                            |       | 489                           |       |
| Factoring loan                                                                              |       | 185                               |       | 233                           |       |
| Income taxes  payable                                                                       |       | 286                               |       | —                        |       |
| **Total current liabilities**                                                               |       | 4,166                             |       | 8,637                         |       |
|                                                                                        |       |                              |       |                          |       |
| **Minority interest**                                                                       |       | 1,286                             |       | (102                          | )          |
| **Convertible notes**                                                                       |       | —                            |       | 2,816                         |       |
| **Discount on warrants**                                                                    |       | —                            |       | (2,570                        | )          |
| **Commitments and Contingencies  (Note 16)**                                                |       |                              |       |                          |       |
|                                                                                        |       |                              |       |                          |       |
| **STOCKHOLDERS’ EQUITY**                                                               |       |                              |       |                          |       |
| Common stock;  authorized 750,000,000 shares, US$0.01 par value                             |       | —                            |       |                          |       |
| Preference stock,  authorized 250,000,000 shares, US$0.01 par value                         |       | —                            |       |                          |       |
| 90,153,628/  84,055,510 shares of common stock issued and outstanding, US$0.01 par value    |       | 902                               |       | 841                           |       |
| 1,321,859/  14,537,253 shares of common stock reserved to be issued, US$0.01 par value      |       | 13                                |       | 145                           |       |
| Additional paid in  capital                                                                 |       | 94,859                            |       | 79,439                        |       |
| Accumulated other  comprehensive (loss) income:                                             |       |                              |       |                          |       |
| Unrealized loss on  marketable securities                                                   |       | (9,186                            | )          | —                        |       |
| Foreign currency  translation adjustments                                                   |       | (2                                | )          | 2                             |       |
| Deficit                                                                                     |       | (22,087                           | )          | (13,480                       | )          |
| **Total stockholders’ equity**                                                         |       | 64,499                            |       | 66,947                        |       |
| **Total liabilities and stockholder’s equity**                                         | ** ** | **69,951**                        | ** ** | **75,728**                    | ** ** |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

4

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**SUN NEW MEDIA INC.CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)**
| ** **                                                       | ** ** | **Three months ended  December 31** | ** ** | **Nine months ended  December 31** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                       | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005 **(1) | ** ** |
| ** **                                                       | ** ** | **US$’000**                                   | ** ** | **US$’000**                                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| ** **                                                       |       |                                               |       |                                              |       |   |   |   |   |
| **Revenues**                                                     |       | 3,951                                              |       | 182                                               |       | 18,937 |   | 209 |   |
| Costs of revenue                                                 |       | 2,058                                              |       | 92                                                |       | 4,669 |   | 111 |   |
|                                                             |       |                                               |       |                                              |       |   |   |   |   |
| **Gross  Profit**                                                |       | 1,893                                              |       | 90                                                |       | 14,268 |   | 98 |   |
|                                                             |       |                                               |       |                                              |       |   |   |   |   |
| **Operating  Expenses**                                          |       |                                               |       |                                              |       |   |   |   |   |
| General and administrative                                       |       | 1,516                                              |       | 263                                               |       | 4,901 |   | 280 |   |
| Marketing and sales                                              |       | 69                                                 |       | —                                            |       | 179 |   | — |   |
| Depreciation and amortization                                    |       | 665                                                |       | —                                            |       | 1,980 |   | — |   |
| Stock-based compensation                                         |       | —                                             |       | —                                            |       | 1,965 |   | — |   |
| Repurchase of stock grant                                        |       | (537                                               | )          | —                                            |       | (6,312 | ) | — |   |
| Consulting and professional fees                                 |       | 306                                                |       | 196                                               |       | 1,311 |   | 228 |   |
| Finders’ fee                                                |       | —                                             |       | —                                            |       | — |   | 55 |   |
| Impairment loss on intangible assets                             |       | 26,571                                             |       | —                                            |       | 26,571 |   | — |   |
| Total operating  expenses                                        |       | 28,590                                             |       | 459                                               |       | 30,595 |   | 563 |   |
|                                                             |       |                                               |       |                                              |       |   |   |   |   |
| **Operating  loss from continuing operations**                   | ** ** | **(26,697**                                        | **)**      | **(369**                                          | **)**      | **(16,327** | **)** | **(465** | **)** |
| Loss from discontinued operations                                |       | —                                             |       | —                                            |       | (43 | ) | — |   |
| Interest expense                                                 |       | (5                                                 | )          | —                                            |       | (91 | ) | — |   |
| Amortization of discount on notes                                |       | —                                             |       | —                                            |       | (2,570 | ) | — |   |
| Interest income                                                  |       | 16                                                 |       | —                                            |       | 41 |   | — |   |
| Other income                                                     |       | 38                                                 |       | 7                                                 |       | 10,941 |   | 7 |   |
| Share of (losses) profits from affiliate                         |       | (85                                                | )          | —                                            |       | 216 |   | — |   |
|                                                             |       |                                               |       |                                              |       |   |   |   |   |
| **Loss  before income tax expense and minority interests**       | ** ** | **(26,733**                                        | **)**      | **(362**                                          | **)**      | **(7,833** | **)** | **(458** | **)** |
| Income tax  expenses                                             |       | (54                                                | )          | —                                            |       | (237 | ) | — |   |
| **Loss  after income tax expense and before minority interests** | ** ** | **(26,787**                                        | **)**      | **(362**                                          | **)**      | **(8,070** | **)** | **(458** | **)** |
| Minority  interests                                              |       | (67                                                | )          | —                                            |       | (513 | ) | — |   |
| **Loss  after income tax expense and minority interests**        | ** ** | **(26,854**                                        | **)**      | **(362**                                          | **)**      | **(8,583** | **)** | **(458** | **)** |
| Other  comprehensive loss – Currency translation adjustment |       | (5                                                 | )          | —                                            |       | (24 | ) | — |   |
| **Net  Loss**                                                    | ** ** | **(26,859**                                        | **)**      | **(362**                                          | **)**      | **(8,607** | **)** | **(458** | **)** |
| ** **                                                       |       |                                               |       |                                              |       |   |   |   |   |
| **Basic  loss per share**                                        | ** ** | **(0.27**                                          | **)**      | **(0.01**                                         | **)**      | **(0.08** | **)** | **(0.01** | **)** |
| **Shares  used in computing basic loss per share (‘000)**   | ** ** | **99,630**                                         | ** ** | **64,516**                                        | ** ** | **101,820** | ** ** | **41,397** | ** ** |
| ** **                                                       |       |                                               |       |                                              |       |   |   |   |   |
| **Diluted  net loss per share**                                  | ** ** | **(0.27**                                          | **)**      | **(0.01**                                         | **)**      | **(0.06** | **)** | **(0.01** | **)** |
| **Shares  used in computing basic (loss) per share (‘000)** | ** ** | **99,630**                                         | ** ** | **64,516**                                        | ** ** | **101,820** | ** ** | **41,397** | ** ** |

 

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(1)          **Information is presented for theperiod from June 6, 2005 (date of commencement of operations) to December 31,2005.  The Company changed its financialyear end from September 30 to March 31 on February 17, 2006.**

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

5

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**SUN NEW MEDIA INC.CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)**
| ** **                                                                            | ** ** | **Nine months ended  December 31** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                          | ** ** | **2005 **(1) | ** ** |
| ** **                                                                            | ** ** | **US$’000**                                  | ** ** | **US$’000** | ** ** |
| **Cash  flows from operating activities**                                             |       |                                              |       |   |   |
| **Net  loss for the period before income taxes and minority interests**               | ** ** | **(7,833**                                        | **)**      | **(458** | **)** |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities; |       |                                              |       |   |   |
| Depreciation and amortization                                                         |       | 1,980                                             |       | — |   |
| Impairment loss on intangible assets                                                  |       | 26,571                                            |       | — |   |
| Share of profits from affiliate                                                       |       | (216                                              | )          | — |   |
| Gain on disposal of assets                                                            |       | (10,743                                           | )          | — |   |
| Gain on disposal of subsidiary companies                                              |       | (74                                               | )          | — |   |
| Consultancy services                                                                  |       | 150                                               |       | — |   |
| Stock-based compensation                                                              |       | 1,965                                             |       | — |   |
| Repurchase of stock grant*                                                            |       | (6,312                                            | )          | — |   |
| Finders’ fee                                                                     |       | (1,600                                            | )          | 55 |   |
| Amortization of discount on notes                                                     |       | 2,570                                             |       | — |   |
| Changes in  operating assets and liabilities:                                         |       |                                              |       |   |   |
| Accounts receivable                                                                   |       | (8,769                                            | )          | (51 | ) |
| Other debtor, deposits and prepayments                                                |       | (477                                              | )          | (354 | ) |
| Inventories                                                                           |       | 280                                               |       | — |   |
| Amounts due from related parties                                                      |       | 147                                               |       | (3 | ) |
| Amounts due from stockholders                                                         |       | (117                                              | )          | 160 |   |
| Accounts payable                                                                      |       | (892                                              | )          | 25 |   |
| Other payables and accruals                                                           |       | (35                                               | )          | 414 |   |
| Amounts due to related parties                                                        |       | (489                                              | )          | 1 |   |
| **Net  cash used in operating activities**                                            |       | (3,894                                            | )          | (211 | ) |
|                                                                                  |       |                                              |       |   |   |
| **Cash  flows from investing activities**                                             |       |                                              |       |   |   |
| Proceeds from  sale of plant and equipment                                            |       | 467                                               |       | — |   |
| Purchase of  plant and equipment                                                      |       | (2,300                                            | )          | (2 | ) |
| Cash (used in)/  acquired in business combination, net                                |       | (2,224                                            | )          | 50 |   |
| Disposal of  subsidiary companies, net                                                |       | 23                                                |       | — |   |
| Capitalization  of intangible assets                                                  |       | (384                                              | )          | — |   |
| **Net  cash used in investing activities**                                            |       | (4,418                                            | )          | 48 |   |
| ** **                                                                            |       |                                              |       |   |   |
| **Cash  flows from financing activities**                                             |       |                                              |       |   |   |
| Issuance of  common stock                                                             |       | 9,431                                             |       | 373 |   |
| Proceeds from  convertible note                                                       |       | —                                            |       | 918 |   |
| Expenses  incurred on issuance of common stocks                                       |       | (875                                              | )          | — |   |
| Repayment of  factoring loans                                                         |       | (48                                               | )          | — |   |
| **Net cash  provided by financing activities**                                        |       | 8,508                                             |       | 1,291 |   |
| ** **                                                                            |       |                                              |       |   |   |
| **Net  effect of exchange rate changes on consolidating subsidiaries**                |       | 20                                                |       | — |   |
| **Net  increase in cash and cash equivalents**                                        |       | 216                                               |       | 1,128 |   |
| **Cash  and cash equivalents, beginning of the period**                               |       | 1,374                                             |       | — |   |
| **Cash and cash equivalents, end  of the period**                                     |       | 1,590                                             |       | 1,128 |   |

 

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*                 During the three months ended December 31,2006, there was a repurchase of stock grant at no consideration which resultedin gain of $537,000 relating to stock options granted to Independent Directors.  In addition, for the nine months endedDecember 31, 2006, there was a repurchase of stock grant at no considerationwhich resulted in gain of $5.8 million relating to 1.5 million performanceshares that were granted and accrued for during the fiscal period ended March31, 2006.

(1)**         ****Information is presented for the period from June 6, 2005 (date ofcommencement of operations) to December 31, 2005.  The Company changed its year end fromSeptember 30 to March 31 on February 17, 2006.**

*Theaccompanying notes are an integral part of these consolidated financialstatements.*

6

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**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**1.****                                      NATUREOF OPERATIONS AND BASIS OF PRESENTATION**

Sun New Media’s principal business activities are (i) provision ofbusiness-to-business interactive marketing and information services; and (ii)provision of e-solutions and online platform to better manage distributionnetworks by industry, and provision of turnkey management solutions as integralparts 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 itssubsidiaries are collectively referred to herein as the “Company” or “SNMD”.

Our principal operatingsubsidiaries include the following:

·                              SunNew Media Group Limited;

·                              SunGlobal Marketing Network Limited;

·                              ChinaFocus Channel Development (HK) Limited;

·                              ChinaTradex Limited;

·                              SunNew Media Holdings Limited;

·                              WilliamBrand Administer Limited;

·                              BeijingTrans Global Logistics; and

·                              LifestyleMagazines Publishing Pte Ltd.

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES**

*Basis of Consolidation and Presentation*

The consolidated financial statements include the accounts of theCompany, its subsidiaries and variable interest entities, or VIEs for which theCompany is the primary beneficiary. All significant inter-company accounts andtransactions have been eliminated. Investments in entities in which the Companycan exercise significant influence, but which are less than majority owned andnot otherwise controlled by the Company, are accounted for under the equitymethod. The Company has adopted FASB Interpretation No. 46R consolidationof Variable Interest Entities, FIN 46R, an Interpretation of AccountingResearch Bulletin No. 51. FIN 46R requires a VIE to be consolidated by acompany if that company is subject to a majority of the risk of loss for theVIEs or is entitled to receive a majority of the VIE’s residual returns.The consolidated financialstatements have been prepared in accordance with accounting principlesgenerally 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 isowned equally by Qiong Zhou and Jacob Di, both of whom are non-executiveemployees of the Company.

·                  Suizhou FocusTrading Development Co., Ltd., a PRC company controlled by us by contract andis engaged in marketing, information and technology services to beverage andelectronic device distributors.  It is 60%owned by Qi Yang, one of our officers and 25% and 15% owned by Bingwei Wu and QuanyiMao respectively, two non-executive employees of the Company.

·                  Shanghai ShengjiTechnology Co., Ltd, a PRC company controlled by us by contract, and is engagedin wireless mobile services. It is 40% owned by Hui Yan, 40% owned by Min Linand 20% owned by Kezhou Luan, each a non-executive employee of the Company.

·                  Sun China Media (Beijing)International Advertising Co. Ltd, a China company controlled by us by contractwhich is engaged in the advertising business. It is 70% owned by Qiong Zhou, and 30% owned by Guosheng Wang, both ofwhom are non-executive employees of the Company.

·                  Dragon List Co.Ltd, a China company controlled by us by contract and is engaged in digitalpublishing business.  It is 70% owned byQiong Zhou, and 30% owned by Jacob Di, both of whom are non-executive employeesof the Company.

7

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**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

·                  Sun Trade Media(Beijing) Co. Ltd, a China company controlled by us by contract and is engagedin digital publishing business.  It is70% owned by Qiong Zhou, and 30% owned by Jacob Di, both of whom are non-executiveemployees of the Company.

·                  Sun Asia(Beijing) Investments Consultants Ltd, a company controlled by us by contractand is engaged in the provision of consultancy services.  It is 60% owned by Qiong Zhou, and 40% ownedby Xiaoang Li, both of whom are non-executive employees of the Company.

·                  Sun New MediaTechnology (Beijing) Co. Ltd, a company controlled by us by contract and isengaged in software development.  It is70% owned by Qiong Zhou, and 30% owned by Jacob Di, both of whom are non-executiveemployees of the Company.

·                  Wuhan XindaWeiye Trade and Development Co. Ltd, a company controlled by us by contract andengaged in trading.  It is 40% owned byJin Liu, 30% owned by Wanzhi Zhu and 30% owned by Mingde Jiang, all of whom arenon-executive employees of the Company.

·                  Beijing TransGlobal Logistics, a company 80% by us by contract and engaged in trading.  It is 80% owned by Qiong Zhou, 10% owned byYong Li and 10% owned by Mianchun Wang, Qiong Zhou is a non-executive employeesof the Company.

The capital investment in these VIEs is funded by the Company andregistered as interest-free loans to these PRC employees.  As of December 31, 2006, the total amount ofinterest-free loans to the employee shareholders of the VIEs listed above wasUS$3,270,000.  Under various contractualagreements, employee shareholders of the VIEs are required to transfer theirownership in these entities to our subsidiaries in China when permitted by PRClaws and regulations or to our designees at any time for the amount ofoutstanding loans, and all voting rights of the VIEs are assigned to us. Wehave the power to appoint all directors and senior management personnel of theVIEs.  Through our wholly-ownedsubsidiaries in China, we have also entered into exclusive technical agreementsand other service agreements with the VIEs, under which these subsidiariesprovide technical services.

*Use of estimates*

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amount of revenue and expenses for the periods thatthe financial statements are prepared. Actual amounts could differ from theseestimates.

*Financial instruments*

The Company’s financial instruments include cash and cash equivalents,accounts receivable and payable. The fair values of these financial instrumentsapproximate their carrying values due to the short-term maturity of theinstruments.

*Business combinations*

The Company accounts for its business combinations using the purchasemethod of accounting. This method requires that the acquisition cost to beallocated to the assets and liabilities the Company acquired based on theirfair values. The Company makes estimates and judgments in determining the fairvalue of the acquired assets and liabilities, based on independent appraisalreports for material purchases as well as its experience with similar assetsand liabilities in similar industries. If different judgments or assumptionswere used, the amounts assigned to the individual acquired assets orliabilities could be materially different. When considering whether an acquiredassets group constitutes a business, the Company used the criteria defined byEITF 98-3 determining Whether a Non-monetary Transaction Involves Receipt ofProductive Assets or of a Business.

8

----

**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

*Goodwill and intangible assets,net*

Goodwill represents the excess of the purchase price over the fairvalue of the identifiable assets and liabilities acquired as a result of theCompany’s acquisitions of interests in its subsidiaries and VIEs. UnderStatement of Financial Accounting Standards, FAS No. 142, Goodwill andOther Intangible Assets, FAS 142, goodwill is no longer amortized, but testedfor impairment upon first adoption and annually, thereafter, or more frequentlyif events or changes in circumstances indicate that it might be impaired. TheCompany assesses goodwill for impairment periodically in accordance with SFAS142.

The Company applies the criteria specified in SFAS No. 141,Business Combinations to determine whether an intangible asset should berecognized separately from goodwill. Intangible assets acquired throughbusiness acquisitions are recognized as assets separate from goodwill if theysatisfy either the contractual-legal or separability criterion. Per SFAS 142,intangible assets with definite lives are amortized over their estimated usefullife and reviewed for impairment in accordance with SFAS No. 144,accounting for the Impairment or Disposal of Long-lived Assets. The Companyreviews the amortization methods and estimated useful lives of intangibleassets at least annually or when events or changes in circumstances indicatethat it might be impaired. The recoverability of an intangible asset to be heldand used is evaluated by comparing the carrying amount of the intangible assetto its future net undiscounted cash flows. If the intangible asset isconsidered to be impaired, the impairment loss is measured as the amount bywhich the carrying amount of the intangible asset exceeds the fair value of theintangible asset, calculated using a discounted future cash flow analysis. TheCompany uses estimates and judgments in its impairment tests, and if differentestimates or judgments had been utilized, the timing or the amount of theimpairment charges could be different.

*Inventories*

Inventories are stated at the lower of cost (first-in, first outmethod) or market.  Certain inventorygoods purchased are subject to spoilage within a short period of time while inpossession of the Company.  Inventorycosts do not exceed net realizable value.

*Plant and equipment*

Plant and equipment are stated at cost, net of depreciation.  Depreciation is computed primarily on thestraight-line method for financial reporting purposes over the followingestimated useful lives:
|                                       | ** ** | **Years** | ** ** |
|---------------------------------------|------------|-----------|------------|
| Furniture,  fixtures and equipment    |       | 3 -  5    |       |
| Motor vehicles                        |       | 5         |       |
| Leasehold buildings and  improvements |       | 5 - 30    |       |

 

*Revenue recognition*

We earn revenue from provision of marketing, information andtransactional services and sales of channel management software. The Companyrecognizes revenues from transaction and information services in accordancewith Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” when allof the following conditions exist: persuasive evidence of an arrangement existsin the form of an accepted purchase order; delivery has occurred, based onshipping terms, or services have been rendered; the Company’s price to thebuyer is fixed or determinable, as documented on the accepted purchase order;and collectibility is reasonably assured.

9

----

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

*Revenue recognition (cont’d)*

The Company accounts for software sales in accordance with AmericanInstitute 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 forthose elements. Customers receive certain elements of our products over aperiod of time.  Judgment is alsorequired to assess whether future releases represent new products or upgradesand enhancements to existing products.

*Cost of revenues*

Cost of revenues includes the cost of product, salary and other relatedcosts for our management services and technical support staff, as well asthird-party contractor expenses. Additionally cost of revenues includes fees for hosting facilities,bandwidth costs, and equipment and related depreciation costs. Cost of revenueswill vary significantly from period to period depending on whether we will taketitle of the product and the level of management services provided.

*Earnings (loss) per share*

Basic earnings (loss) per share includes no dilution and is computed bydividing income (loss) available to common stockholders by the weighted averagenumber of common shares outstanding for the year. Diluted net earnings (loss)per share reflects the potential dilution of securities that could share inincome (loss) of the Company.

*Foreign currency transactions*

The financial statements are presented in United States dollars. Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “ForeignCurrency Translation”, since the functional currency of the Company isRenminbi, the foreign currency financial statements of the Company’ssubsidiaries are re-measured into U.S. dollars. Monetary assets and liabilitiesare re-measured using the foreign rate that prevailed at the balance sheetdate. Revenue and expenses are translated at weighted average rates of exchangeduring the year and stockholders’ equity accounts and capital asset accountsare translated by using historical exchange rates. Any re-measurement gain orloss incurred is reported in the consolidated statement of operations.

*Income taxes*

The Company follows the liability method of accounting for income taxesin accordance with SFAS No. 109. Under this method, future tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax balances. Future tax assets andliabilities are measured using enacted or substantially enacted tax ratesexpected to apply to the taxable income in the years in which those differencesare expected to be recovered or settled. The effect on future tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the date of enactment or substantive enactment. A valuation allowance isprovided for deferred tax assets if it is more likely than not that the Companywill not realize the future benefit, or if the future deductibility isuncertain.

10

----

**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

*Stock-based compensation*

Effective January 1, 2006, the company adopted SFAS No. 123 (revised2004), “Share Based Payment,” (“SFAS No. 123(R)”) which revisesSFAS No. 123 and supersedes APB 25. SFAS No. 123(R) requires that allshare-based payments to employees be recognized in the financial statementsbased on their fair values at the date of grant. The calculated fair value isrecognized as expense (net of any capitalization) over the requisite serviceperiod, net of estimated forfeitures, using the straight-line method under SFASNo. 123(R). The Company considers many factors when estimating expectedforfeitures, including types of awards, employee class and historicalexperience. The statement was adopted using the modified prospective method ofapplication which requires compensation expense to be recognized in thefinancial statements for all unvested stock options beginning in the quarter ofadoption. There were no unvested stock options at the beginning of thisreporting period therefore no compensation expense was recognized in theperiod. No adjustments to prior periods have been made as a result of adoptingSFAS No. 123(R).

As at September 30, 2005 the Company elected to account for stock-basedemployee compensation arrangements in accordance with the provisions ofAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees”, (“APB No. 25”) and comply with the disclosure provisions of SFASNo. 123 as amended by SFAS No. 148. During the period from September 18, 2005 to September 30, 2005, nostock-based employee compensation arrangements have been effected andaccordingly no disclosure of pro forma information is required. In accordancewith SFAS No. 123 the Company applies the fair value method using theBlack-Scholes option-pricing model in accounting for options granted toconsultants.

The Company accounts for equity instruments issued in exchange for thereceipt of goods or services from other than employees in accordance with SFASNo. 123 and the conclusions reached by the Emerging Issues Task Force in IssueNo. 96-18, “Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring or in Conjunction with Selling Goods or Services” (“EITF96-18”). Costs are measured at the estimated fair market value of theconsideration received or the estimated fair value of the equity instrumentsissued, whichever is more reliably measurable. The value of equity instrumentsissued for consideration other than employee services is determined on theearlier of a performance commitment or completion of performance by theprovider of goods or services as defined by EITF 96-18.

*Recently Issued AccountingPronouncements*

In November 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement 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.  SFASNo. 151 will be effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005.  We do not believe the adoption of SFASNo. 151 will have a material impact on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”,which requires that the compensation cost relating to share-based paymenttransactions (including the cost of all employee stock options) be recognizedin the financial statements.  The cost will be measuredbased on the estimate fair value of the equity or liability instruments issued. SFAS 123-R covers a wide range ofshare-based compensation arrangements including share options, restricted shareplans, performance-based awards, share appreciation rights, and employee sharepurchase plans. Management believes the adoption of thispronouncement will not have a material effect on our consolidated financialstatements.

11

----

**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

*Recently Issued AccountingPronouncements (cont’d)*

Also, in December 2004, the FASB issued SFAS 153, “Exchanges ofNon-monetary Assets, an amendment of APB Opinion No. 29, Accounting forNon-monetary Transactions”. The amendments made by SFAS No. 153 are basedon the principle that the exchange of non-monetary assets should be measuredusing the estimated fair market value of the assets exchanged. SFAS No. 153eliminates the narrow exception for non-monetary exchanges of similarproductive assets, and replaces it with a broader exception for exchanges ofnon-monetary assets do not have commercial substance. A non-monetary exchangehas “commercial substance” if the future cash flows of theentity are expected to change significantly as a result of the transaction. This pronouncement is effective for monetaryexchanges in fiscal periods beginning after June 15, 2005.  Managementbelieves the adoption of this pronouncement will not have a material effect onour consolidated financial statements.

In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accountingfor Conditional Asset Retirement Obligations”.  FIN 47 clarifies that the term “conditionalasset retirement obligation,” which as used in SFAS No. 143, “Accounting forAsset Retirement Obligations”, refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity.   The entity must record a liability for a “conditional”asset retirement obligation if the fair value of the obligation can bereasonably estimated.   FIN 47 alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation.  FIN 47 is effective no later than the end offiscal years ending after December 15, 2005.  Management believes the adoption of thisstatement does not have an immediate material impact on the consolidated financialstatements of the Company.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections”. This statement requires entities thatvoluntarily make a change in accounting principle to apply that changeretrospectively to prior periods’financial statements, unless this would be impracticable.  SFAS No. 154 supersedes APB Opinion No. 20, “AccountingChanges”, which previously required that most voluntary changes in accountingprinciple be recognized by including in the current period’s net income thecumulative effect of changing to the new accounting principle.  SFAS No. 154 also makes a distinction between “retrospectiveapplication” of an accounting principle and the “restatement” of financialstatements to reflect the correction of an error.  SFAS No. 154 applies to accounting changes anderror corrections that are made in fiscal years beginning after December 15,2005.   Management believes theadoption of this statement will not have an immediate material impact on the consolidatedfinancial statements of the Company.

The adoption of EITF Issue No. 03-13, “Applying the Conditions inParagraph 42 of FASB Statement No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets, in Determining Whether to Report DiscontinuedOperations” in the first quarter of 2005 did not have a material impact on theCompany’s results of operations and financial condition.

In October 2005, the FASB issued FSP FAS 123(R)-2, “PracticalAccommodation to the Application of Grant Date as Defined in FASB StatementNo. 123(R)”, which provides clarification of the concept of mutualunderstanding between employer and employee with respect to the grant date of ashare-based payment award. This FSP provides that a mutual understanding of thekey terms and conditions of an award shall be presumed to exist on the date theaward is approved by management if the recipient does not have the ability tonegotiate the key terms and conditions of the award and those key terms andconditions will be communicated to the individual recipient within a relativelyshort time period after the date of approval. This guidance shall be appliedupon initial adoption of SFAS 123R. The Company does not expect the adoption ofthe FSP will have a material impact on its consolidated results of operationsand financial condition.

12

----

**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

*Recently Issued AccountingPronouncements (cont’d)*

In November 2005, the FASB issued FSP FAS 123(R)-3, “TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards”, which provides a practical transition election related to accountingfor the tax effects of share-based payment awards to employees. An entity mustfollow either the transition guidance for the APIC pool in SFAS 123R or thealternative transition method described in the FSP. The alternative methodcomprises a computational component that establishes a beginning balance of theAPIC pool and a simplified method to determine the subsequent impact on theAPIC pool of awards that are fully vested and outstanding upon the adoption ofSFAS 123R. The impact on the APIC pool of awards partially vested upon, or grantedafter, the adoption of SFAS 123R should be determined in accordance with theguidance in that statement. The FSP was effective November 10, 2005. Asdescribed in the FSP, an entity will be permitted to take up to one year todetermine its transition alternatives to make its one-time election. TheCompany does not expect the adoption of the FSP will have a material impact onits consolidated results of operations and financial condition.

In February 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments-an amendment of FASB Statements No. 133 and140.” SFAS No. 155 amends SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities” to permit fair value remeasurement for anyhybrid financial instrument with an embedded derivative that otherwise wouldrequire bifurcation, provided that the whole instrument is accounted for on afair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting forthe Impairment or Disposal of Long-Lived Assets”, to allow a qualifyingspecial-purpose entity (“SPE”) to hold a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. SFAS No. 155 applies to all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006, with earlier application allowed. The Company does notexpect the adoption of SFAS No. 155 to have a material impact on itsconsolidated results of operations and financial condition.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets-an amendment of FASB Statement No. 140.” SFAS No. 156requires that all separately recognized servicing rights be initially measuredat fair value, if practicable. In addition, this Statement permits an entity tochoose between two measurement methods (amortization method or fair valuemeasurement method) for each class of separately recognized servicing assetsand liabilities. This new accounting standard is effective January 1, 2007. Theadoption of SFAS 156 is expected to have no material impact on our financialstatements.

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

*Related Parties*

Parties are considered to be related if one party has the ability,directly or indirectly, to control the other party, or exercise significantinfluence over the other party in making financial and operatingdecisions.  Parties are also consideredto be related if they are subject to common control or common significantinfluence.

*Deferred Expenses*

Payments made for future expenses were amortized over the life ofservice received.

13

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**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**2.****                                      SUMMARYOF THE COMPANY’S SIGNIFICANT ACCOUNTING POLICIES (CONT’D)**

*Marketable securities*

The Company accounts for investments in marketable securities underStatement of Financial Accounting Standards (SFAS) No. 115, *Accounting for Certain Investments in Debt and EquitySecurities.* Marketable equitysecurities are held as available for sale and are reported at fair value any unrealized gains and losses are included inaccumulated other comprehensive income or loss within stockholders’equity.  The treatment of adecline in the fair value of an individual security is based on whether thedecline is other-than-temporary. Significant judgment is required to assess whether the impairment isother-than-temporary, particularly for marketable equity securities thatprovide limited public information.  Ourjudgment of whether impairment is other-than-temporary is based on anassessment of factors including our ability and intent to hold the individualsecurity, severity of the impairment, expected duration of the impairment andforecasted recovery of fair value. Changes in the estimates and assumptions could affect our judgment ofwhether an identified impairment should be recorded as an unrealized loss inthe equity section of our consolidated balance sheets or as a realized loss inthe consolidated statements of operations.

**3****                                         CONCENTRATIONSAND CREDIT RISK**

The Company operates principally in China and grants credit toits customers in this geographic region. Although China is consideredeconomically stable, it is always possible that unanticipated events in foreigncountries could disrupt the Company’s operations.

At December 31, 2006, the Company has a credit risk exposure of uninsured cashin banks of $1.59 million.  The Company does not require collateral orother securities to support financial instruments that are subject to creditrisk.

For the nine months ended December 31, 2006, 4customers accounted for $14.9 million (79%)of total sales as follows:Customer A at $8.1 million (43%),Customer B at $1.6 million (8%), Customer C at $1 million (5%) and Customer D at $4.2 million (22%).

For the ninemonths ended December 31, 2005, there was no major concentration of credit risk.

**4****                                         INVENTORY**
|                  | ** ** | **December 31,  2006** | ** ** |
|------------------|------------|-----------------------------|------------|
| ** **       | ** ** | **US$’000**            | ** ** |
|             |       |                        |       |
| Work in progress |       | 104                         |       |
| Finished goods   |       | 214                         |       |
|             |       | 318                         |       |

 

14

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**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**5****                                         BUSINESSCOMBINATIONS**

Pursuant to FAS 141, paragraph 6, exchange transactions in which theconsideration given is cash are measured by the amount of cash paid. However,if the consideration given is not in the form of cash (that is, in the form ofnon-cash assets, liabilities incurred, or equity interests issued), measurementis based on the fair value of the consideration given or the fair value of theasset (or net assets) acquired, whichever is more clearly evident and, thus,more reliably measurable.

The Company is a recently formed business with a very short history ofoperating and stock performance.  At thetime of completion of following acquisitions, the Company’s common stock wastraded on the Over-the-Counter Bulletin Board (OTCBB) with a high volatility inboth volume and price. Therefore management decided to use the discounted fairmarket value of the shares issued to measure our consideration whenconsideration is not in the form of cash.

*Share Purchase Agreement between the Company, ChinaFocus Channel Development Limited (“Focus”), China Electronic Appliances (“CEAC”),Mr Yong Li and Mr Mianchun Wang for the acquisition of Beijing Trans GlobalLogistics (“BTGL”) and its subsidiary, Beijing CEAC Trans Global Logistics (“BCTGL”)(BTGL and BCTGL collectively Beijing CEAC)*

On October 19, 2006 we completed the acquisition of CEAC pursuant to aSale and Purchase Agreement dated May 23, 2006 (the “CEAC Purchase Agreement”)by and between the Company, Focus, CEAC, Yong Li and Mianchun Wang and acquiredan 80% controlling interest in BTGL. BTGL owns an 80% stake in BCTGL.

The considerationpaid by the Company was US$1.125 million (RMB 9 million) in cash and 138,066shares of the Company’s stocks.  Pursuantto the CEAC Purchase Agreement, the sellers will receive an additional 138,066of the Company’s stocks per year in each of the three years if Beijing CEACmeet the profit and revenue guarantee.

The purchase price was allocated as follows:
| Cash                           |   | $         | 749,722   |   |
|--------------------------------|--------|-----------|-----------|--------|
| Current assets                 |   | 1,254,139 |      |
| Current  liabilities           |   | (911,698  | )         |
| Property, plant  and equipment |   | 91,147    |      |
| Minority  interest             |   | (393,448  | )         |
| Goodwill on  consolidation     |   | 180,763   |      |
| Intangible  assets             |   | 675,899   |      |
| Purchase price                 |   | $         | 1,646,524 |   |

 

No proforma financials are required to be presented due to themateriality of the acquisition.

15

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**SUN NEW MEDIA INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**5****                                         BUSINESSCOMBINATIONS (CONT’D)**

*Share Purchase Agreement between the Company andSun Media Investment Holdings Limited (“SMIH”) for the acquisition ofCredential 114 Network Limited (“Credit 114”)*

On July 21, 2006 we completed the acquisition of Credit 114 pursuant toa Sale and Purchase Agreement dated June 14, 2006 (the “Credit 114 PurchaseAgreement”) by and between the Company and SMIH and acquired a 100% controllinginterest in Credit 114.

The consideration paid by the Company was US$2.5 million cash.

The purchase price was allocated as follows:
| Cash               |   | $         | 1         |   |
|--------------------|--------|-----------|-----------|--------|
| Intangible  assets |   | 2,499,999 |      |
| Purchase price     |   | $         | 2,500,000 |   |

 

No proforma financials are required to be presented due to themateriality of the acquisition.

*Share Purchase Agreement between the Company, ChinaFocus Channel Development Limited (“Focus”) and Ren Huiliang for theacquisition of William Brand Administer Limited and its subsidiary WilliamTextiles Limited (collectively “William Brand”)*

On September 30, 2006 we completed the acquisition of William Brandpursuant to a Sale and Purchase Agreement dated June 8, 2006 (the “WilliamBrand Purchase Agreement”) by and between the Company, (“Focus”) and RenHuiliang and acquired a 100% controlling interest in William Brand.  The company, Focus and Ren Huiliang agreedthat the effective date of the acquisition will be July 1, 2006.  William Brand is a China-based producer anddistributor of women’s luxury apparel.

The consideration paid by the Company for the acquisition was satisfiedthrough the issuance of 4,655,173 shares of the Company’s common stock.  Pursuant to the William Brand PurchaseAgreement, the shares are to be issued as follow:

·                                          1,165,793shares on Completion;

·                                          1,165,793shares to be issued if William Brand achieves a minimum of US$15 millionrevenue and US$3 million after-tax profits in Year 1;

·                                          1,165,793shares to be issued if William Brand achieves a minimum of US$17.5 millionrevenue and US$3.5 million after-tax profits in Year 2; and

·                                          1,165,793shares to be issued if William Brand achieves a minimum of US$20.0 millionrevenue and US$4.0 million after-tax profits in Year 3.

16

----

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**5             BUSINESS COMBINATIONS (CONT’D)**

At the time of entering into the agreement on June 8, 2006, our commonstock was traded on OTCBB with limited liquidity and a comparative shorttrading history.  As such, the managementdecided to use the discounted fair market value of the shares issued to measureour consideration (the Company stock) paid. . The Company used independentvaluation report as a guidance to record the intangibles arising from thistransaction.

The purchase price was allocated as follows:
| Cash                |   | $          | 14,275    |   |
|---------------------|--------|------------|-----------|--------|
| Current assets      |   | 3,073,120  |      |
| Current liabilities |   | (1,865,294 | )         |
| Intangible assets   |   | 2,904,709  |      |
| Purchase price      |   | $          | 4,126,810 |   |

 

Proforma financials

The acquisition of all the issued and outstanding shares of WilliamBrand is described as a “purchase acquisition”.

The accompanying pro forma condensed consolidated financial statementsare provided for informational purposes only. The Pro Forma Consolidated Balance Sheet and Pro Forma CombinedStatement of Operations are unaudited and are not necessarily indicative of theconsolidated financial position which actually would have occurred if the abovetransaction had been consummated on September 30, nor does it purport topresent the operating results that would be achieved for future periods.

The Unaudited Pro-Forma Consolidated Financial Statement reflectfinancial information which gives pro-forma effect to the acquisition of allthe outstanding common shares of William Brand in exchange for 1,163,793 sharesof common stock of the Company.

The acquisition is to be recorded as a purchase acquisition.  The Pro Forma Consolidated Balance Sheetincluded herein reflects the use of the purchase method of accounting for theabove transaction.

17

----

 

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**5             BUSINESS COMBINATIONS (CONT’D)**

UnauditedPro Forma Consolidated Balance Sheet

The acquisition was completed on September 30,2006 and has been accounted for in the consolidated balance sheet presented inthe Condensed Consolidated Balance Sheet as at September 30, 2006.

UnauditedPro Forma Consolidated Statement of Operations

The Pro-Forma Combined Statement of Operationsgive effect to the above transaction as if it occurred on the earliest date ofthe period presented, i.e., April 1, 2006.
| ** **                                                         | ** ** | **(UNAUDITED)**                                      | ** ** | **(UNAUDITED)**                                                    | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **SNMD  Apr 1 to Sep  30, 2006** | ** ** | **William Brand  Apr 1 to Jun  30, 2006** | ** ** | **Adjustments** | ** ** | **Pro-forma  Consolidated** | ** ** | **William Brand  Apr 1 to Sep 30,  2005 **(2) | ** ** |
| ** **                                                         | ** ** | **US$’000**                                     | ** ** | **US$’000**                                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **REVENUES**                                                       |       | 14,986                                               |       | 2,953                                                              |       |   |   | 17,939 |   | 5,442 |   |
| Cost of revenues                                                   |       | 2,611                                                |       | 2,352                                                              |       |   |   | 4,963 |   | 3,137 |   |
| **Gross Profit**                                                   |       | 12,375                                               |       | 601                                                                |       |   |   | 12,976 |   | 2,305 |   |
| ** **                                                         |       |                                                 |       |                                                               |       |   |   |   |   |   |   |
| **OPERATING EXPENSES**                                             |       |                                                 |       |                                                               |       |   |   |   |   |   |   |
| General and  administrative                                        |       | 3,385                                                |       | 304                                                                |       |   |   | 3,689 |   | 338 |   |
| Marketing and  sales                                               |       | 110                                                  |       | —                                                             |       |   |   | 110 |   | — |   |
| Depreciation and  amortization                                     |       | 1,315                                                |       | —                                                             |       | 242 | (1) | 1,557 |   | — |   |
| Stock-based  compensation                                          |       | 1,965                                                |       | —                                                             |       |   |   | 1,965 |   | — |   |
| Repurchase of  stock grant                                         |       | (5,775                                               | )          |                                                               |       |   |   | (5,775 | ) |   |   |
| Consulting and  professional fees                                  |       | 1,005                                                |       | —                                                             |       |   |   | 1,005 |   | — |   |
| Total operating  expenses                                          |       | 2,005                                                |       | 304                                                                |       |   |   | 2,551 |   | 338 |   |
| ** **                                                         |       |                                                 |       |                                                               |       |   |   |   |   |   |   |
| **Operating income from  continuing operations**                   |       | 10,370                                               |       | 297                                                                |       |   |   | 10,425 |   | 1,967 |   |
| Loss from discontinued  operations                                 |       | (43                                                  | )          | —                                                             |       |   |   | (43 | ) | — |   |
| Interest expense                                                   |       | (86                                                  | )          | —                                                             |       |   |   | (86 | ) | — |   |
| Amortization of  discount on notes                                 |       | (2,570                                               | )          | —                                                             |       |   |   | (2,570 | ) | — |   |
| Interest income                                                    |       | 25                                                   |       | —                                                             |       |   |   | 25 |   | — |   |
| Other income                                                       |       | 10,903                                               |       | —                                                             |       |   |   | 10,903 |   | — |   |
| Share of profits from  affiliates                                  |       | 301                                                  |       | —                                                             |       |   |   | 301 |   | — |   |
| **Income before income tax  expense and minority interests**       |       | 18,900                                               |       | 297                                                                |       |   |   | 18,955 |   | 1,967 |   |
| Income tax expense                                                 |       | (183                                                 | )          | —                                                             |       |   |   | (183 | ) | — |   |
| **Income after income tax expense  and before minority interests** |       | 18,717                                               |       | 297                                                                |       |   |   | 18,772 |   | 1,967 |   |
| Minority interests                                                 |       | (446                                                 | )          | —                                                             |       |   |   | (446 | ) | — |   |
| **Income after income tax expense  and minority interests**        |       | 18,271                                               |       | 297                                                                |       |   |   | 18,326 |   | 1,967 |   |
| Other comprehensive  loss – Currency translation adjustment   |       | (19                                                  | )          | —                                                             |       |   |   | (19 | ) | — |   |
| **Net income**                                                     |       | 18,252                                               |       | 297                                                                |       |   |   | 18,307 |   | 1,967 |   |
| ** **                                                         |       |                                                 |       |                                                               |       |   |   |   |   |   |   |
| **Basic net income per share**                                     |       | 0.18                                                 |       |                                                               |       |   |   | 0.18 |   |   |   |
| **Shares used in computing basic  income per share (‘000)**   |       | 102,922                                              |       |                                                               |       |   |   | 103,500 |   |   |   |
| ** **                                                         |       |                                                 |       |                                                               |       |   |   |   |   |   |   |
| **Diluted net income per share**                                   |       | 0.20                                                 |       |                                                               |       |   |   | 0.20 |   |   |   |
| **Shares used in computing diluted income per  share (‘000)** |       | 105,807                                              |       |                                                               |       |   |   | 106,385 |   |   |   |

 

----

(1)                      Amortization for intangibles from Apr 1 to Jun30, 2006.

(2)                      Information is presented for William Brandfrom Apr 1 to Sep 30, 2005 as it is not meaningful to present consolidatedpro-forma financials since the Company commenced operations on June 6, 2005.

18

----

 

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**5             BUSINESS COMBINATIONS (CONT’D)**

*Share Purchase Agreement between the Company andSMIH*

On September 3, 2006, pursuant to the Sale and Purchase agreement (the “SMIHPurchase Agreement”) dated April 20, 2006 between the Company and SMIH, theCompany acquired a property, automobiles, program rights and 46,629,331 sharesin Asia Premium Television Group Inc. The consideration paid by the Company for the acquisition is satisfiedthrough the issuance of 850,647 shares of the Company’s common stock.

At the time of entering into the agreement on April 20, 2006, ourcommon stock was traded on OTCBB with limited liquidity and short term tradinghistory, while Asia Premium Television Group. Inc. has been traded on theOTCBB, for a comparably longer time, therefore management decided to use thediscounted fair market value of the shares issued to measure our consideration(the Company stock) paid.

**6             GOODWILL AND INTANGIBLE ASSETS, NET**

The following table summarizes goodwill from the Company’sacquisitions:
|                 | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|-----------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **      | ** ** | **US$’000**            | ** ** | **US$’000**         | ** ** |
| Focus           |       | 7,800                       |       | 7,800                    |       |
| Beijing CEAC    |       | 181                         |       | —                   |       |
| Impairment loss |       | (7,800                      | )          | —                   |       |
|            |       | 181                         |       | 7,800                    |       |

 

The following table summarizes intangible assets:
|                                                   | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                        | ** ** | **US$’000**            | ** ** | **US$’000**         | ** ** |
| Service  agreements                               |       | 25,000                      |       | 25,000                   |       |
| Magazines  mastheads                              |       | 2,562                       |       | 2,562                    |       |
| License                                           |       | 23,245                      |       | 24,452                   |       |
| Non-compete  agreements and customer relationship |       | 2,904                       |       | —                   |       |
| Database                                          |       | 2,500                       |       | —                   |       |
| Program rights                                    |       | 1,792                       |       | —                   |       |
| Technology                                        |       | 2,367                       |       | 1,981                    |       |
| Partnership  agreement & license              |       | 1,056                       |       | —                   |       |
|                                              |       | 61,426                      |       | 53,995                   |       |
| Less:  Accumulated amortization                   |       | (1,307                      | )          | —                   |       |
| : Impairment loss                                 |       | (24,703                     | )          | —                   |       |
|                                              |       | 35,416                      |       | 53,995                   |       |

 

The above intangible assets have original estimated useful lives asfollow:
| Service agreements                                |   | 30 years      |
|---------------------------------------------------|--------|---------------|
| Non-compete  agreements and customer relationship |   | 3 years       |
| Partnership  agreements and license               |   | 3 years       |
| Technology                                        |   | 2 to 10 years |

 

Magazines mastheads, license and program rights haveperpetual useful lives and thus are not amortized.

Please refer to the Company’s Annual Report on Form 10-KSB filed withthe U.S. Securities and Exchange Commission on June 30, 2006, for more detailson goodwill and intangible assets.

19

----

 

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**7.            PLANT AND EQUIPMENT, NET**

Plant and equipment is summarized as follows:
|                                    | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **US$’000**            | ** ** | **US$’000**         | ** ** |
| Cost                               |       |                        |       |                     |       |
| Motor vehicles                     |       | 552                         |       | 124                      |       |
| Leasehold building and improvement |       | 3,130                       |       | 1,401                    |       |
| Furniture, fixtures and equipments |       | 2,741                       |       | 983                      |       |
|                               |       | 6,423                       |       | 2,508                    |       |
| Accumulated  depreciation          |       | (907                        | )          | (303                     | )          |
|                               |       | 5,516                       |       | 2,205                    |       |

 

**8.            OTHER RECEIVABLES, PREPAYMENTS ANDDEPOSITS**

Other receivables, prepayments and deposits are summarized as follow:
|                                  | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **US$’000**            | ** ** | **US$’000**         | ** ** |
|                             |       |                        |       |                     |       |
| Other  receivables               |       | 1,535                       |       | 115                      |       |
| Staff advances                   |       | 35                          |       | 34                       |       |
| Deferred  expenses               |       | 1                           |       | 2                        |       |
| Rental deposits                  |       | 46                          |       | 9                        |       |
| Prepaid  administrative expenses |       | 321                         |       | 306                      |       |
|                             |       | 1,938                       |       | 466                      |       |

 

Deferred expense represents a prepayment for management fees under amanagement agreement between the Company and Capital Alliance Group Inc. (“CAG”)which lasts for two years effective September 18, 2005.  As part of the reverse acquisitiontransaction pursuant to which Sun Media Investment Holdings Limited acquired acontrolling interest in the Company (the “Transaction”), the Company enteredinto a management agreement (“Management Agreement”) with CAG, a minorityshareholder of the Company.  Under theManagement Agreement, CAG provides the Company with advisory services, whichinclude general corporate, administrative, technical and management advisory servicesas is reasonably considered necessary or advisable by Company to achieve thegoals and needs of the Company as determined by the policies and proceedings ofmanagement and the Board of Directors and the requirements of the Securitiesand Exchange Commission.  The Company isrequired to issue 250,000 shares to CAG in return as consideration.  The fair value of the Company’s Common Stockas of September 18, 2005 was US$0.01108.

20

----

 

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**9.            AMOUNTS DUE FROM/ (TO) STOCKHOLDERS/RELATED PARTIES**

As of December 31, 2006, the Company has the followingamounts due from related parties:

Advances due from
|                                                                | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **US$’000**            | ** ** |
| Related Parties                                                |       |                        |       |
| Sun3C Media Plc  and its subsidiaries                          |       | 134                         |       |
| Global Woman  Multimedia Holdings Limited and its subsidiaries |       | 67                          |       |
| Sun Business  Network Limited and its subsidiaries             |       | 521                         |       |
| Sun Culture  Foundation Limited                                |       | 24                          |       |
|                                                           |       | 746                         |       |
| Stockholders                                                   |       |                        |       |
| Capital Alliance  Group Inc                                    |       | 63                          |       |
| Sun Media  Investment Holdings Limited and its subsidiaries    |       | 346                         |       |
|                                                           |       | 409                         |       |

 

The amounts are non-trade, interest free and with nofixed terms of repayment.

**10.****                               OTHERPAYABLES AND ACCRUALS**

Other payables and accruals are summarized as follow:
|                             | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|-----------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                  | ** ** | **US$’000**            | ** ** | **US$’000**         | ** ** |
|                        |       |                        |       |                     |       |
| Other payables              |       | 1,496                       |       | 127                      |       |
| Accrued  operating expenses |       | 927                         |       | 6,727                    |       |
| Prepayment from  customers  |       | 263                         |       | 74                       |       |
|                        |       | 2,686                       |       | 6,928                    |       |

 

Included in accrued operating expenses is an accrual of stock-basedcompensation payable to senior management of $0 (March 31, 2006: $5,775,000).

**11.          FACTORING LOAN**

This relates to amount which has been obtained from a finance companyunder a factoring facility.  Interest ischarged at 1.5% per annum above the prevailing Singapore Inter-Bank offerrate.  These loans are secured by aguarantee given by Sun Business Network Ltd, a related party and floatingcharge over accounts receivables amounting to $185,000 (March 31, 2006: $233,000).

21

----

 

**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**12.****                               CONVERTIBLENOTES WITH DETACHABLE WARRANTS**

**Convertible Notes with Detachable Warrants**

On December 31, 2005, when the per share market price of the Company’sstock was $4.09, the Company issued a $918,000 convertible note with detachablewarrants to one accredited investor. The note is convertible into the Company’scommon 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 with detachablewarrants to the same accredited investor. The note is convertible into theCompany’s common stock at the rate of $2.04 per share.  Under the terms of the notes, the Companyagreed to undertake certain obligations to file and maintain effective aregistration statement for shares of the common stock underlying the notes.

In accordance with the guidelines of APB No. 14, “Accounting forConvertible Debt and Debt Issued with Stock Purchase Warrants”, EITF Issue No.98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios” and EITF Issue No.00-27, “Application of issue No. 98-5 to Certain Convertible Instruments”, theCompany has determined that each of the above notes was issued with abeneficial conversion feature.  Theintrinsic value was calculated at the date of issue as the difference betweenthe conversion price of the note and the fair value of the Company’s commonstock into which the note was convertible, multiplied by the number of commonshares into which the note was convertible, limited by the face amount of thenote.  The Company has treated thebeneficial conversion features as a discount to the face amount of the notesand is amortizing them over the term of the respective notes.  Upon conversion of all or a portion of thenote, the proportionate share of unamortized discount has been charged tointerest expense.

During the three months ended June 30, 2006, the convertible notes werefully converted to 1,380,392 shares of common stock.

**Detachable Warrants**

On December 31, 2005, and March 6, 2006 we issued warrants for thepurchase of an aggregate of 11 million and 4 million shares respectively, ofcommon stock to one accredited investor. The exercise price of the warrantsranges from $2.04 to $4.80.

During the three months ended June 30, 2006, warrants for 3,454,023shares were exercised and the Company received net proceeds of $8.3 million.

**13.****                               INCOMETAXES**

The Company is incorporated in the Minnesota, United States and hasoperations in the PRC, British Virgin Islands and the United States ofAmerica.  The Company has incurred netaccumulated operating losses for income tax purposes. The Company believes thatit is more likely than not that these net accumulated operating losses will notbe utilized in the future. Therefore, the Company has provided full valuationallowance for the deferred tax assets arising from the losses at theselocations as of September 30, 2006.

The components of income before income taxes are as follows:
|                                           | ** ** | **Three months ended  December 31** | ** ** | **Nine months ended  December 31** | ** ** |
|-------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **US$’000**                                   | ** ** | **US$’000**                                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                      |       |                                               |       |                                              |       |   |   |   |   |
| Loss subject to non-China operations      |       | (26,177                                            | )          | (362                                              | )          | (6,407 | ) | (458 | ) |
| Loss subject to  China operations         |       | (556                                               | )          | —                                            |       | (1,426 | ) | — |   |
| Loss before  taxes                        |       | (26,733                                            | )          | (362                                              | )          | (7,833 | ) | (458 | ) |
| Income taxes  subject to China operations |       | 54                                                 |       | —                                            |       | 237 |   | — |   |
| Effective tax rate for  China operations  |       | 10                                                 | %          | —                                            |       | 30 | % | — |   |

 

22

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**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**13.****                               INCOMETAXES (CONT’D)**

Pursuant to the PRC Income Tax Laws, the Company’s subsidiaries andVIEs are generally subject to Enterprise Income Taxes, EIT, at a statutory rateof 33%, which comprises 30% national income tax and 3% local income tax. Someof these subsidiaries and VIEs are qualified new technology enterprises andunder PRC Income Tax Laws, they are subject to a preferential tax rate of 15%.  In addition, some of the Company’ssubsidiaries are Foreign Investment Enterprises and under PRC Income Tax Laws,they are entitled to either a three-year tax exemption followed by three yearswith a 50% reduction in the tax rate, commencing the first operating year, or atwo-year tax exemption followed by three years with a 50% reduction in the taxrate, commencing the first profitable year. The VIEs are wholly owned by theCompany’s employees and controlled by the Company through various contractualagreements. To the extent that these VIEs have undistributed after-tax netincome, the Company has to pay taxes on behalf of its employees when dividendsare distributed from these local entities in the future. The dividend tax rateis 20%.

The provisions for income taxes for the three and nine months endedDecember 31, 2006 differ from the amounts computed by applying the EITprimarily due to the tax holidays enjoyed by certain of its entities in theBritish Virgin Islands and losses incurred by certain of the Company’s entitiesin the PRC.

**14.****                               NETLOSS PER SHARE**

Basic net loss pershare is computed using the weighted average number of the ordinary sharesoutstanding during the period.  Dilutednet loss per share is computed using the weighted average number of ordinaryshares and ordinary share equivalents outstanding during the period. Options topurchase ordinary shares that were anti-dilutive and were excluded from thecalculation of diluted net loss per share were 763,164 for both the three andnine months ended December 31, 2006 and were 461,000 for both the three monthsended December 31, 2005 and for the period from June 6, 2005 to December 31,2005. Warrants to purchase ordinary shares that were anti-dilutive and wereexcluded from the calculation of diluted net loss per share were approximately12.1 million for both the three and nine months ended December 31, 2006 andwere 11.0 million for both the three months ended December 31, 2005 and for theperiod from June 6, 2005 to December 31, 2005. Convertible notes into ordinary shares that were anti-dilutive and wereexcluded from the calculation of diluted net loss per share were 0 for both thethree and nine months ended December 31, 2006 and 450,000 for the three monthsended December 31, 2005 and for the period from June 6, 2005 to December 31,2005.

The following table sets forth thecomputation of basic and diluted net loss per share for the periods indicated: 
|                                                        | ** ** | **Three months ended  December 31**                 | ** ** | **Nine months ended  December 31** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| **Basic net income per share calculation**             | ** ** | ** **                                                         |       |                                              | ** ** | ** ** |   |   |   |
| Numerator:                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Net loss used in computing basic net income per  share |       | (26,859                                                            | )          | (362                                              | )          | (8,607 | ) | (458 | ) |
| Denominator:                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Weighted average ordinary shares outstanding           |       | 99,630                                                             |       | 64,516                                            |       | 101,820 |   | 41,397 |   |
| Basic net loss per share                               |       | (0.27                                                              | )          | (0.01                                             | )          | (0.08 | ) | (0.01 | ) |
| Numerator:                                             |       |                                                               |       |                                              |       |   |   |   |   |
| Net loss                                               |       | (26,859                                                            | )          | (362                                              | )          | (8,607 | ) | (458 | ) |
| Amortization of discount on notes                      |       | —                                                             |       | —                                            |       | 2,570 |   | — |   |
| Interest on convertible notes                          |       | —                                                             |       | —                                            |       | 77 |   | — |   |
| Net loss used in computing diluted net loss per  share |       | (26,859                                                            | )          | (362                                              | )          | (5,960 | ) | (458 | ) |
| Denominator:                                           |       |                                                               |       |                                              |       |   |   |   |   |
| Weighted average ordinary shares outstanding           |       | 99,630                                                             |       | 64,516                                            |       | 101,820 |   | 41,397 |   |
| Diluted net  income per share                          |       | (0.27                                                              | )          | (0.01                                             | )          | (0.06 | ) | (0.01 | ) |

 

23

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**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**15.****                               STOCK-BASEDCOMPENSATION**

The Company’s stock option program is a long-term retention programthat is intended to attract, retain and incentivize talented employees, and toalign stockholder and employee interests. The Company currently grant options pursuant to the 1) 2001 Stock OptionPlan, 2) 2004 Stock Option Plan 3) 2006 Stock Option Plan.

**2001 Stock Option Plan**

Effective October 10, 2001, the Company adopted the 2001 Stock OptionPlan (the “2001 Plan”) allowing for the awarding of options to acquire sharesof common stock.

**2004 Stock Option Plan**

Effective January 22, 2004, the Company adopted the 2004 Stock OptionPlan (the “2004 Plan”) allowing for the awarding of options to acquire sharesof common stock.

**2006 Stock Option Plan**

In April 2006, the 2006 Stock Option Plan (the 2006 Plan) was approvedby the Company’s Board of Directors.  Thepurpose of the 2006 Plan is to reward employees, officers and directors andconsultants and advisors to the Company who are expected to contribute to thegrowth and success of the Company.  The2006 Plan provides for the award of options to purchase shares of the Company’scommon stock.  Stock options granted underthe 2006 Plan may be either incentive stock options or nonqualified stockoptions.

During the three months ended September 30, 2006, the Company granted283,230 options to directors and 1,200,000 to the Company’s Chief FinancialOfficer.  No stock awards were grantedduring the three months ended September 30, 2006.

During the three months ended December 31, 2006, the Companyrepurchased 226,584 options from directors at zero consideration.  No stock awards were granted during the threemonths ended December 31, 2006.

***Stock Compensation***

Effective January 1, 2006, Company adopted SFAS 123R. See Note 2 for adescription of the Company’s adoption of SFAS 123R. The fair value ofstock-based compensation awards is determined using the Black-Scholes option pricingmodel, which is consistent with the valuation techniques previously utilizedfor options in footnote disclosures required under SFAS 123, as amended by FASBStatement No. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure.”  The determination of thefair value of stock-based compensation awards on the date of grant using anoption-pricing model is affected by the Company’s stock price as well asassumptions regarding a number of complex and subjective variables, includingthe expected volatility of the Company’s stock price over the term of theawards, actual and projected employee stock option exercise behaviors,risk-free interest rate and expected dividends.

The assumptions used to value stock-based compensation awards for the threeand nine months ended December 31, 2006 and 2005 are as follows:
|                           | ** ** | **Three months ended  December 31** | ** ** | **Nine months ended  December 31** | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                | ** ** | **US$’000**                                   | ** ** | **US$’000**                                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Expected term  (in years) |       | N/A                                                |       | N/A                                               |       | 5.0-5.4 |   | N/A |   |
| Expected  volatility      |       | N/A                                                |       | N/A                                               |       | 69.7%-70% |   | N/A |   |
| Risk-free  interest rate  |       | N/A                                                |       | N/A                                               |       | 4.85%-4.77% |   | N/A |   |
| Expected dividend yield   |       | N/A                                                |       | N/A                                               |       | 0 |   | N/A |   |

 

24

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**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**15.****                               STOCK-BASEDCOMPENSATION (CONT’D)**

Expected term represents the average of theexpiration period and the vesting term. Expected volatilities are based on the weekly closing prices of theCompany’s stock after the Company’s reverse takeover in September 18,2005.  Risk-free rate is based on USTreasury zero-coupon issues with remaining terms similar to the expected termon the stock-based awards.  The Companydoes not anticipate paying any cash dividends in the foreseeable future.  Forfeitures are estimated at the time ofgrant and revised in subsequent periods if actual forfeitures differ from thoseestimates.  The Company uses historicaldata to estimate pre-vesting option forfeitures and record stock-based compensationexpense only for those awards that are expected to vest.

Stock based compensation recognized on theCompany’s Condensed Consolidated Statement of Operations for the three and ninemonths ended December 31, 2006 is 0 and $1,964,450 respectively.

As of December 31, 2006, there was $1.23 millionof unrecognized compensation cost, adjusted for estimated forfeitures, relatedto non-vested stock-based awards granted to the Company’s employees.  This cost is expected to be recognized over aperiod of 2 years.  Total unrecognizedcompensation cost may be adjusted for future changes in estimated forfeitures.

The following table sets forth the summary ofoption activity under the Company’s stock option program for the six monthsended December 31, 2006:
|                                                          | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                               | ** ** | ** **               | ** ** | **US$**                                    | ** ** | **Years**                                                   | ** ** |
| **March  31, 2006**                                      |       | 445,500                  |       | 0.741                                      |       |                                                        |       |
| Exercise                                                 |       | (339,000                 | )          | 0.74                                       |       |                                                        |       |
| Granted                                                  |       | 1,483,230                |       | 3.20                                       |       |                                                        |       |
| Cancelled                                                |       | (226,584                 | )          | 3.85                                       |       |                                                        |       |
| **December  31, 2006**                                   |       | 1,363,146                |       | 2.91                                       |       |                                                        |       |
| **Vested  and expected to vest as of December 31, 2006** |       | 763,146                  |       | 2.80                                       |       | 9.17                                                        |       |
| **Exercisable as of September 30,  2006**                |       | 763,146                  |       | 2.80                                       |       | 9.17                                                        |       |

 

The weighted average estimated fair value ofoptions granted during the three months and nine months ended December 31, 2006was both $2.11.

Information regarding the stock optionsoutstanding as at December 31, 2006 is summarized as below:
| Exercise Price | ** ** | **Options  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Options  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| ** **          | ** ** | ** **               | ** ** | **Years**                                                   | ** ** | ** **               | ** ** | ** **                                 | ** ** |
| $0.56 - $1.14       |       | 106,500                  |       | 5.65                                                        |       | 106,500                  |       | $                                          | 0.84       |   |
| $3.05 - $3.85       |       | 1,256,646                |       | 9.74                                                        |       | 656,646                  |       | $                                          | 1.63       |   |

 

**2006 Stock Award**

On September 18, 2006, the board awarded20,000 shares of common stock to the Company’s Chief Financial Officer.  The Company recorded $63,200 as stock-basedcompensation in the statement of operations.

On March 31, 2006, the board awarded 1,044,600 shares of common stock to employees. TheCompany recorded $3,879,099 as stock-based employee compensation in thestatement of operations.

For the financial period ended March 31, 2006,the Company also recorded an expense of $5,775,000 relating to the award of1,500,000 shares of common stock to senior management as stock basedcompensation in the statement of operations. The stock grant was subsequently cancelled by the Board during the threemonths ended September 2006 and a gain of $5,775,000 was recognized by theCompany.

25

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**SUN NEW MEDIA INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

**16.****                               COMMITMENTSAND CONTINGENCIES**

*Commitments*

The Company leases office premises for its operations in PRC and UnitedStates under operating leases.  Rentalexpenses under operating lease for the three and nine months ended December 31,2006 was US$97,394 and US$352,156 respectively. Rental expenses under operating lease for the three months endedDecember 31, 2005 and for the period from June 6, 2005 to December 31, 2005 wasUS$10,317.

Future minimum rental payments under non-cancelable operating leasesare approximately as follows:
|                          | ** ** | **December 31,  2006** | ** ** | **March 31,  2006** | ** ** |
|--------------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **US$’000**            | ** ** | **US$’000**         | ** ** |
|                     |       |                        |       |                     |       |
| Within one year          |       | 273                         |       | 175                      |       |
| Within two  tofive years |       | 46                          |       | 62                       |       |
|                     |       | 319                         |       | 237                      |       |

 

**17           REPORT OF SEGMENT INFORMATION**

We determine our businesssegments based upon our management and internal reporting structure. Ourreportable segments are transactional services segment, marketing &information services segment, HQ & investments segment and Online Brokeragesegment (discontinued operations).  TheCompany does not allocate any operating costs or assets to its transactionalservices, marketing & information services, HQ & investments and onlinebrokerage segments as management does not use this information to measure theperformance of these operating segments. Management does not believe that allocating these expenses or assets isnecessary in evaluating these segments’ performance.

Informationregarding our business segments is as follows:
|                                             | ** ** | **Three months ended  December 31** | ** ** | **Nine months ended  December 31** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005 (1)** | ** ** |
| ** **                                  | ** ** | **US$’000**                                   | ** ** | **US$’000**                                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                        |       |                                               |       |                                              |       |   |   |   |   |
| **Revenue**                                 |       |                                               |       |                                              |       |   |   |   |   |
| Transactional Services                      |       | 2,712                                              |       | —                                            |       | 14,809 |   | — |   |
| Marketing & Information Services        |       | 1,239                                              |       | —                                            |       | 4,128 |   | — |   |
| HQ & investments                        |       | —                                             |       | —                                            |       | — |   | — |   |
| Online Brokerage (Discontinued operations)  |       | —                                             |       | 182                                               |       | — |   | 209 |   |
| **Gross  profit**                           |       |                                               |       |                                              |       |   |   |   |   |
| Transactional Service                       |       | 857                                                |       | —                                            |       | 10,810 |   | — |   |
| Marketing & Information Services        |       | 1,036                                              |       | —                                            |       | 3,458 |   | — |   |
| HQ & investments                        |       | —                                             |       | —                                            |       | — |   | — |   |
| Online Brokerage (Discontinued operations)  |       | —                                             |       | 90                                                |       | — |   | 98 |   |
| **Depreciation  and amortization**          |       |                                               |       |                                              |       |   |   |   |   |
| Transactional Service                       |       | 17                                                 |       | —                                            |       | 17 |   | — |   |
| Marketing & Information Service         |       | 8                                                  |       | —                                            |       | 24 |   | — |   |
| HQ & investments                        |       | 640                                                |       | —                                            |       | 1,939 |   | — |   |
| Online Brokerage  (Discontinued operations) |       | —                                             |       | —                                            |       | — |   | — |   |

 

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**(1)****        ****Information is presented for the period from June 6, 2005 (date ofcommencement of operations) to December 31, 2005.  The Company changed its financial year endfrom September 30 to March 31 on February 17, 2006.**

 

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

The followingdiscussion should be read in conjunction with our Financial Statements and thenotes thereto presented in “Item 1 — Financial Statements.” The mattersdiscussed in this report on Form 10-QSB include “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, as amended,and Section 21E of the Securities Exchange Act of 1934, as amended, Anystatements contained in this Form 10-QSB that are not statements of historicalfact may be deemed to be forward-looking statements. Words such as “may”, “will”,“expect”, “believe”, “anticipate”, “intend”, “could”, “plan”, “estimate” or “continue”or similar words are intended to identify forward-looking statements, althoughnot all forward-looking statements are identified by those words. Whileforward-looking statements are sometimes presented with numerical specificity,they are based on current expectations and various assumptions made bymanagement regarding future circumstances over which we may have little or nocontrol. These statements are inherently predictive, speculative and subject torisk and uncertainties, and it should not be assumed that they will prove to becorrect. A number of important factors, including those identified under thecaption “Risk Factors” in our annual report on Form 10-KSB filed with the SEC,which is hereby incorporated by reference, as well as factors discussedelsewhere in this Form 10-QSB, could cause our actual results to differmaterially from those in forward-looking statements or forward-lookingfinancial information. Actual results may differ from forward-looking resultsfor a number of reasons, including market acceptance of our services, adversemarket conditions affecting the Internet sector, retention of major clients,competitive factors, failure to keep pace with changing technologies andfailure to protect our intellectual property. Should one or more of these risksor uncertainties materialize, or should underlying assumptions prove incorrect,our actual results may vary materially from those anticipated, estimated orprojected. These forward looking statements are made only as of the datehereof, and we undertake no obligation to update or revise these forwardlooking statements, whether as a result of new information, future events orotherwise.

***Overview***

Sun New Media’sprincipal business activities are the (i) provision of business-to-businessinteractive marketing and information services; and (ii) provision ofe-solutions and online platform to better manage distribution networks byindustry, and provision of turnkey management solutions as integral parts ofour transactional services.

Our activities arebased predominantly in People’s Republic of China (“PRC”).

Because ourresults for the three months ended December 31, 2005 and period from June 6,2005 to December 31, 2005 were principally the result of operations which havesince been discontinued, a comparative analysis with the three months and ninemonths ended December 31, 2006 is not meaningful.

***Results of Operations***

**ThreeMonths and Nine Months Ended December 31, 2006**

**Revenue** Ourrevenue for the three months ended December 31, 2006 was $3.9 million, of which69% were derived from our Transactional Services and the remaining 31% from ourMarketing and Information Services. During the three months ended December 31, 2006, Transactional Serviceswas positively impacted by the completed acquisition of our electroniccomponents vertical business which contributed to the revenue fromTransactional Services.  TransactionalServices revenue was negatively impacted during the three months ended December31, 2006 by a decline of 81% as compared to the three months ended September30, 2006 in our beverage distribution business. Marketing and Information Services revenue was negatively impactedduring the three months ended December 31, 2006 by a decline of 49% as comparedto the three months ended September 30, 2006 in our in our media and marketingbusiness.

Our revenue for the ninemonths ended December 31, 2006 was $18.9 million, of which 78% were derivedfrom our Transactional Services and the remaining 22% from our Marketing andInformation Services.  During the ninemonths ended December 31, 2006, Transactional Services revenue was positivelyimpacted by the completed acquisition of our electronic components and apparelsvertical business and the first full quarter of operations of our beveragedistribution business, which contributed to the revenues from TransactionalServices.  Transactional Services revenuewas negatively impacted during the nine months ended December 31, 2006 by adecline of 81% in the beverage distribution business during the three monthsended December 31, 2006 as compared to the three months ended September 30,2006. The reduction in our beverage distribution business in the latter half ofthe nine months ended December 31, 2006 was due to a combination of factors,including: financial difficulties suffered by our beverage distributionpartner; an increase in inventory financing requirements

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from the distributionpartner’s largest supplier; and, an increased reliance on large retail chaincustomers. Marketing and Information Services revenue was positively impactedby the inception of media marketing and services business, which accounted forthe majority of the Marketing and Information Services revenues for the sixmonths ended December 31, 2006.

**Costs of Revenue**  Cost of revenue for the three months ended December31, 2006 was $2.1 million.  TransactionalServices costs were 90% of the total or approximately $1.9 million.  The remaining costs for the three monthsended December 31, 2006 was $0.2 million or 10% and related to direct costs,such as printing costs, editorial costs and distribution costs within ourMarketing and Information Services businesses. The cost of revenue decreased for the three months ended December 31,2006 as compared to the three months ended September 30, 2006.  .

Cost of revenue for thenine months ended December 31, 2006 was $4.7 million. Transactional Servicescosts were 86% of the total, or approximately $4.0 million.  The remaining cost for the nine months endedDecember 31, 2006 were $0.7 million or 14% and related to direct costs, such asprinting costs, editorial costs and distribution costs within our Marketing andInformation Services businesses. Transactional Services cost of revenue increased for the latter sixmonths ended December 31, 2006 as compared to the prior three months ended June30, 2006 with the completed acquisition of our electronics components andapparels vertical business.

**Operating Expenses**  Total operating expenses for the three monthsended December 31, 2006 were approximately $28.6 million.  This was significantly higher than the totaloperating expenses of $(0.53) million in the prior three months ended September30, 2006, due mainly to an impairment loss of $26.5 million for the intangiblesand goodwill arising out of the Focus acquisition and a gain of $0.5 millionrecognized for the repurchase of stock grant at no consideration in the threemonths ended December 31, 2006 and a gain of $5.8 million recognized for therepurchase of stock grant at no consideration in the three months endedSeptember 30, 2006.  The gain of $5.8million relates to 1.5 million performance shares that were granted during thefiscal period ended March 31, 2006.  Anexpense was accrued for this grant in the fiscal period ended March 31, 2006but the shares remained unissued, until the accrued grant was repurchased inthe three months ended September 30, 2006. Excluding the impairment loss of $26.5 million and the gain of $0.5million, operating expenses were approximately $2.6 million for the threemonths ended December 31, 2006.  Thetotal operating expenses included expenses related to general &administrative and marketing & sales of $1.6 million, depreciation andamortization of $0.7 million and consulting and professional fees of $0.3million for the three months ended December 31, 2006.

Total operating expensesfor the nine months ended December 31, 2006 were approximately $33.3 million.This was significantly increased due to an impairment loss of $26.5 million forthe intangibles and goodwill arising out of the Focus acquisition and a gain of$6.3 million recognized for the repurchase of stock grant at no considerationin the nine months ended December 31, 2006. Excluding the impairment loss of $26.5 million and gain of $6.3 millionrecognized for the repurchase of stock grants at no consideration, operatingexpenses were approximately $13.1 million for the nine months ended December31, 2006.  The total operating expensesinclude expenses related to general & administrative and marketing &sales of $5.1 million, depreciation and amortization of $2.0 million,consulting and professional fees of $1.3 million, interest on convertible noteof $0.1 million, stock-based compensation of $2.0 million and amortization ofdiscount on notes of $2.6 million for the nine months ended December 31, 2006.

**Other Income**Other income for the three months ended December 31, 2006 was $38,000.

Other income for the ninemonths ended December 31, 2006 was $10.9 million comprise mainly $10.7 millionarising from the sale of non-core business-to-consumer (“B2C”) business assetsto Sun TV Shop.  Of the $10.7 million,approximately 94% is attributed to the divestments of our interests in thedigital mail order catalogue publishing and merchandising that we have beenrecently developing with two parties.  OnJune 30, 2006, we entered into a Sale and Purchase Agreement with Sun TV Shop,Plc (“STVS”, a related party) to sell certain of our assets in exchange for32.6 million shares in STVS.  Theseshares account for approximately 9% of STVS’ shares outstanding and as of July6, 2006 were valued at approximately US$11.9 million based upon the last tradedprice.

**Net Loss** Ournet loss for three months ended December 31, 2006 was $26.9 million.  This included an impairment loss of $26.6million on for the intangibles and goodwill arising out of the Focusacquisition and a gain of $0.5 million recognized for the repurchase of stockgrant at no consideration in the three months ended December 31, 2006.  The repurchase of stock grants relates to thecancellation of 226,584 options granted to directors in the three months endedSeptember 30, 2006.

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Our net loss for the ninemonths ended December 31, 2006 was $8.6 million.  This included an impairment loss of $26.6million on for the intangibles and goodwill arising out of the Focusacquisition and a gain of $6.3 million recognized for the repurchase of stockgrant at no consideration in the nine months ended September 30, 2006.

**Three Months Ended December 31,2005**

Our results for the threemonths ended December 31, 2005 include the results of our interactive marketingand sales services business and our brokerage business (discontinuedoperations).

**Revenue**Brokerage commission revenue for the three months ended December 31, 2005 was$182,114.  We had no revenue related toour interactive marketing and sales services business during the three monthsended December 31, 2005.

**Expenses** Ourtotal expenses for three months ended December 31, 2005 were $551,251.  These included expenses relating to ourbrokerage business of clearing firm charges of $30,369, commission expenses of$60,416 and general and administrative expenses of $104,619 and general andadministrative expenses relating to our interactive marketing and salesservices business of $355,117.

**Net Loss** Ournet loss for three months ended December 31, 2005 was $362,227.

***Liquidity and Capital Resources***

As of December 31, 2006,we had $1.59 million cash, all of which was available for general workingcapital purposes.

Weanticipate needing additional liquidity over the next 12 months in order toassist the company in executing its current business plan. We anticipateraising capital through additional private placements of our equitysecurities, proceeds received from the exercise of outstanding warrants andoptions, and, if available on satisfactory terms, debt financing.

We plan to use additionalcapital for marketing and advertising, as well as for strategic acquisition ofexisting businesses that complement our market niche, and for general workingcapital purposes.

***Off-Balance Sheet Arrangements***

As of December 31, 2006,we had no off-balance sheet arrangements.

***Capital Expenditure Commitments***

As at December 31, 2006,we had no outstanding commitments for capital expenditures. However, we expectto invest approximately $0.13 million in capital expenditure over the next 6months.

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**Strategic Acquisitions and Recent Developments**

There have been no new acquisitions and significantdevelopments except as disclosed in our 10-QSB on September 30, 2006.

·       On December 5, 2006, weappointed Mr. Walter Beach to serve as an independent member of our Board ofDirectors and as Chariman of the Compensation Committee.

·            On November 30, 2006,Grant Thornton Hong Kong (“GTHK”), which was engaged on September 13, 2006 (seebelow), resigned as our independent auditor. Concurrent with GTHK’sresignation, we re-engaged Bernstein & Pinchuk LLP (“B&P”) to serve asour independent auditor.

After preliminary consultations with GTHK, on November 13, 2006, theCompany announced that its previously released financial statements could notbe relied upon and that the Company would be restating certain historicalfinancial statements.   Specifically, the Company noted the followingnon-cash issues (the “Issues”):

Accounting for business combinations, where historically the Companyrecorded the cost of the transactions (the Company used the criteria definedunder SFAS 141, para 6) using the discounted fair market value of the sharesissued which is equivalent to the fair value of the acquired assets and GTHKadvised that the Company restate the financial statements to reflect use of thequoted stock market price. Substantially all of the Company’s acquisitions havebeen paid using consideration in the form of the Company’s stock. Thefinancial impact of the restatement would have increased Goodwill andintangible assets by approximately $39.2 million as of March 31, 2006, $39.2million as of June 30, 2006 and $39.5 million as of September 30, 2006.Additional paid in capital would have increased by approximately $39.2 millionas of March 31, 2006, $39.2 million as of June 30, 2006 and $39.5 million as ofSeptember 30, 2006.  Amortization expensewould have increased by approximately $0 for fiscal period ended March 31,2006, $79,000 for the three months ended June 30, 2006 and $537,000 for thethree months ended September 30, 2006

Expensing of stock-based compensation, where historically the Companyrecorded expenses for stock based compensation that had been anticipated to begranted in a future period (the Company used the criteria defined under SFAS123(r) (paragraph 57)), but not yet granted.   GTHK advised that theCompany reverse this accrual in the period ended March 31, 2006.  The financial impact of the restatement wouldhave decreased Stock-based compensation by approximately $5.8 million as ofMarch 31, 2006, and increased Stock-based compensation expense by $5.8 millionas of September 30, 2006.

GTHK advised that the Company adjust the allocation of the interestexpense (the Company used the criteria defined under APB 14 and EITF 98-5)associated with the beneficial conversion feature and the attached warrants ofthe Company’s convertible debt. The financial impact of the restatement wouldhave increased Amortization of Discount on notes by approximately $29,000 forthe three months ended December 31 2005 and $282,000 for the fiscal periodended March 31, 2006 and decreased Amortization of Discount on notes by$143,000 for the three months ended June 30, 2006.

After further review of the Issues and in consultation with Bernstein& Pinchuk LLP (“B&P”), the Company’s immediate prior independentauditors, the Company has determined that its previous accounting treatment wascorrect and that its announcement of November 13, 2006, which was made in conjunctionwith the required Securities and Exchange Commission (“SEC”) filing deadline,was premature.  GTHK does not agree withthe Company’s conclusion.  As a result ofthis disagreement, the Company has accepted the resignation of GTHK as itsindependent accountants effective as of November 30, 2006.  However, it is the mutual understandingbetween the Company and GTHK that, after the completion of the audit for thecurrent fiscal year, both parties will explore the possibility of reappointingGTHK as the independent auditors, with any such appointment being subject toresolution of any disagreements regarding accounting treatment and GTHK’s thenapplicable new client acceptance processes.

Because it was only recently appointed, GTHK has not issued any reporton the Company’s financial statements to date.  However, if unresolved,the Issues would have caused GTHK to make reference to such matters in anyreport issued by GTHK.

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Effective as of November 30, 2006, the Company hasre-engaged B&P as its independent auditors.  The Company’s decision tore-engage B&P was approved by its board of directors.  Prior tore-engaging B&P as the Company’s independent accountant, the Companyconsulted with B&P regarding the Issues.  The Company has authorizedGTHK to respond fully to any inquiries of B&P regarding the Issues.

·            On November 21, 2006, we entered into anagreement with Mr. Yang Qi, Mr. Wu Bing Wei and Mr. Mao Quanyi,collectively the owners of Hubei Zhengyuan Trade Development (“HZTD”) to unwindour past business relationship and dealings with HZTD. Our past businessrelationship is characterized by two previous agreements with the owners ofHZTD: A Supplemental Agreement dated January 27, 2006 and a Management ServicesAgreement dated March 31, 2006 (see *Strategic Acquisitions andRecent Developments* section above.)

According to the terms of the agreement signed on November 21, werelinquished certain rights under the management services agreement dated March31, 2006 and $4.75 million in past due account receivables for14.9 million shares of SNMD stock held by the owners of HZTD. HZTDregained the right to distribute TsingTao beer to large scale wholesalers andretail chains, and we retained select personnel, intellectual property, systemsand access to the distribution network. In addition, the we retaineddistribution rights of Tsingtao beer to small commercial enterprises.

·            On October 31, 2006, we accepted theresignation of Mr. William Adamopoulos as a member of the Board of Directors.

·            On October 30, 2006,the independent members of our Board of Directors returned to the Company theentirety of their SNMD stock grants and Board equity compensation. Thedirectors, Kay Koplovitz, Mark Newburg, William Adamopoulos and Yu Bing eachreturned a total of 56,646 options to buy Company stock at $3.85 per share.25,000 of these options were granted to each director upon his/her election tothe Board by the SNMD shareholders; 31,646 options were granted to eachdirector as part of his/her annual equity compensation package for serving theBoard. The issuance of these options were initially disclosed with theSecurities & Exchange Commission on Form 4 on October 9, 2006.

·            OnOctober 19, 2006 we entered into and subsequently completed a SupplementaryAgreement with Mr. Li Yong, Mr. Wang Jingchun, and the China ElectronicAppliance Company (CEAC), a subsidiary of the China Electronics Company (CEC),to revise the terms of the original agreement dated May 23, 2006 (see *Strategic Acquisitions and**RecentDevelopments* above).

Through the revisedagreement, we gained an 80% stake in Beijing Trans Global Logistics (“BTGL”)and the exclusive right to operate the online exhibitions of the ChinaElectronic Parts Exhibition Company, a subsidiary of CEAC and the dominantplayer in Electronic Exhibition industry, in exchange for 9 million RMB cashplus 552,264 new SNMD shares. The 552,264 shares will be issued in fourinstallments as follows: 138,066 shares upon completion of the deal, and138,066 shares in years one, two and three following the completion of the dealif and only if the revenue guarantees (listed below) are met. Other key pointsof the revised agreement include: CEAC will no longer provide revenueguarantees of 400 million RMB in year one, 450 million in year two, and 500million in year three; Sun New Media will no longer provide US $4 million cashor bank credit to finance the offline parts business, and instead, CEACguarantees 25 million RMB in advertising revenue to the joint venture for yearone, 27.5 million RMB for year two, and 30 million for year three. We expect tomaintain a 80% net margin on operating costs of about 2 million RMB/year.

·            On October 11, 2006, we accepted theresignation of Dr. Herbert Kloiber as a member of the Board of Directors.

·            On October 5, 2006, we accepted theresignation of Mr. Ricky Ang as both Chief Executive Officer and a memberof the Board of Directors. Concurrent with Mr. Ang’s resignation andeffective as of October 5, 2006, we appointed Executive ChairmanDr. Bruno Wu as Chief Executive Officer.

·            OnSeptember 30, 2006 we completed the acquisition of William Brand pursuant to aSale and Purchase Agreement dated June 8, 2006 (the “William Brand PurchaseAgreement”) by and between the Company, China Focus Channel Development Limtied(“Focus”) and Ren Huiliang and acquired a 100% controlling interest in WilliamBrand.  The company, Focus and RenHuiliang agreed that the effective date of the acquisition will be July 1,2006.  William Brand is a China-basedproducer and distributor of women’s luxury apparel. The consideration paid bythe Company for the acquisition was satisfied through the issuance of 4,655,173shares of the Company’s common stock. Pursuant to the William Brand Purchase Agreement, the shares are to beissued as follow: 1,165,793 shares on Completion; 1,165,793 shares to be issuedif William Brand achieves a minimum of US$15 million revenue and US$3 millionafter-tax profits in Year 1;  1,165,793shares to be issued if William Brand achieves a minimum of US$17.5 millionrevenue and US$3.5

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million after-tax profits in Year 2; and 1,165,793shares to be issued if William Brand achieves a minimum of US$20.0 millionrevenue and US$4.0 million after-tax profits in Year 3.

·            OnSeptember 19, 2006, we accepted the resignation of Mr. Frank Zhao as ChiefFinancial Officer of the Company. Concurrently, we appointed Mr. Thomas A.Schuler as Chief Financial Officer of the Company.

·            On September 13, 2006we appointed Grant Thornton, Hong Kong (“GTHK”) as our independent auditor.

·            On September 7, 2006,we completed our acquisition of property, automobiles, program rights and46,629,331 shares in Asia Premium Television Group Inc. pursuant to the Saleand Purchase agreement dated April 20, 2006 between the Company and SMIH. Theconsideration for the acquisition was 850,647 shares of SNMD stock.

·            On August 18, 2006, we accepted theresignation of Mr. Qi Yang as a member of the Board of Directors.

·            On July 21, 2006 we completed theacquisition of Credit 114 pursuant to a Sale and Purchase Agreement dated June14, 2006 (the “Credit 114 Purchase Agreement”) by and between the Company andSun Media Investment Holdings (“SMIH”). The consideration paid by the Companywas US$2.5 million cash. We also signed a Supplementary Agreement with SMIH toacquire search engine technology and additional on-line business media content.This Supplementary Agreement was dated June 14, 2006.

·            On June 30, 2006, we entered into a Saleand Purchase Agreement****with Sun TVShop, Plc. (“STVS”), a company listed on the *AlternativeInvestment Market* of the United Kingdom, to sell certain assets inexchange for 32.6 million shares in STVS. According to the Agreement, 50%of the STVS stock paid to the Registrant will be restricted from trading forone year, and the remainder will remain restricted until the second anniversaryof the date of the Agreement.

·            On May 23, 2006, wesigned a strategic cooperative and sales purchase agreement (the “CEACAgreement”) with China Electronic Appliances Corporation (“CEAC”), a subsidiaryof the China Electronics Corporation (“CEC”), and two individuals, Mr. Yong Liand Mr. Mianchun Wang, management designees from CEAC. The CEAC Agreementprovides that the Registrant and its subsidiary Focus shall purchase a 49%stake in Beijing Trans Global Logistics (“BTGL”) and its subsidiary fromMessrs. Wang and Li and a 31% stake in BTGL from CEAC. As a result, the Companywill effectively own 80% of shares of BTGL and will effectively own 64% of theshares in Beijing CEAC Trans Global Logistics. The consideration for theacquisition is 15,710,000 RMB to be satisfied by the Company with 9,000,000 RMBin 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 haveprovided a revenue and profit guarantee to the Company. Assuming BTGL and itssubsidiary meet this guarantee in each of the three years following the signingof the agreement, the sellers will receive an additional 139,792 shares of theCompany’s common stock per year. Assuming management meets all performancetargets, a maximum aggregate of 559,168 shares may be issued in thistransaction.

·             On April20, 2006, pursuant to the Sale and Purchase Agreement (the “GAI PurchaseAgreement”) dated April 20, 2006 by and among the Company and Kingston CapitalGroup Limited (“Kingston”), the Company sold 100% of the issued and outstandingshares of Global American Investments Inc. to Kingston in exchange forUS$40,000. Kingston is unrelated to the Company and the transaction wasnegotiated at arm’s length.

·             OnJanuary 27, 2006, we completed the acquisition of China Focus ChannelDevelopment Co. Ltd. (“Focus”), pursuant to a Sale and Purchase agreement (the “FocusPurchase Agreement”) dated November 22, 2005 with Yang Qi, Mao Quan Yi and WuBing Wei

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(collectively, the“Sellers”) in exchange for 14,900,000 shares of our common stock. We have basedour beverages vertical business on the business of Focus.

The terms of theFocus Purchase Agreement also provide that we must issue an additional2,000,000 shares of its common stock to the Sellers, if:

a)         the audited net profitafter tax (“PAT”) of Suizhou Focus Channel Development Limited (“SFC”), whollyowned subsidiary of Focus, is in excess of $4.5 million for the fiscal yearending December 31, 2006;

b)         the audited PAT of SFC isin excess of $5.0 million for the fiscal year ending December 31, 2007; and

c)          the audited PAT of SFCfor the fiscal year ending December 31, 2008 is in excess of $5.5 million.

In the event thatthe audited PAT is less than the guaranteed amounts for each of the fiscalyears, the Sellers shall either make-up the shortfall in cash, or forfeit theirrights to receive the shares of our common stock.

Concurrently, onJanuary 27, 2006, we entered into a supplemental agreement with the sellers toprovide for a 90-day period for the transfer of the business and assets ofHubei 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, HZTDwill pay SFC and/ or its nominees a management fee equal to 12% of its totalcash sales. In addition, the Sellers will guarantee SFC that the management feepayable to SFC arising from this New Agreement shall not be less than RMB4million (approximately US$500,000) per month, and that the operating costs ofSFC including staff costs shall not be more than RMB8 million (approximately US$1million) per annum subject to an inflationary cost increase of no more than 10%per annum for the duration of the New Agreement.

Notwithstandingthe above, the profit guarantees as provided by the Sellers as per the originalPurchase Agreement remained unchanged.

In addition to theNew Agreement, the Company and the Sellers have entered in to a separateSupplemental Agreement (the “New Supplemental Agreement) to the originalPurchase Agreement to alter the following terms:

a)                          the profit related shares shall be reducedto 700,000 shares per year from the original 2,000,000 shares per year forwhich the profit guarantees are met;

b)                         the Company shall pay the Sellers a cashcomponent of RMB40 million (approximately US$5 million); and

c)                          the business and assets of HZTD shall remainwith HZTD and will not be transferred to SFC as provided in the originalPurchase Agreement.

In summary, assuming that profit guarantee for each of the three yearsare met, total consideration for the acquisition of Focus shall be 17 millionshares and cash of RMB40 million (approximately US$5 million) instead of 20.9million shares.

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***Subsequent Events***

The following is a list of events that occurred afterthe fiscal quarter ended December 31, 2006.

·       On February 1, 2007, we entered into a supplementary agreement withBarron Partners LLP to modify the terms of our original stock purchaseagreement, dated December 31, 2005. Following the Supplementary Agreement, only3 million of the original 11,545,977 million unexercised warrants remain, andBarron has agreed to limit selling of the shares underlying the warrants to 10%per month for the first 10 months following the date of the agreement.

·       On January 29, 2007, we announced that Mr. Mark Newburg had resignedboth as the Chairman of the Audit Committee and as a member of  the Board of Directors. Mr. Newburg’sdecision resulted from personal reasons and from the restructuring of theCompany’s Board. He remains involved with the Company as a strategicbusiness consultant.

·       On January 22, 2007, our Board of Directors appointed Mr. Chen Zhaobinto serve as a non-independent member of the Board. Mr. Chen does not receivecompensation in return for his service to the Company.

**Critical Accounting Policies andEstimates**

Our unaudited financial statements and accompanyingnotes are prepared in accordance with generally accepted accounting principlesused in the United States. Preparing financial statements requires managementto make estimates and assumptions that affect the reported amounts of assets,liabilities, revenue, and expenses. These estimates and assumptions areaffected by management’s application of accounting policies. We believe thatunderstanding the basis and nature of the estimates and assumptions involvedwith the following aspects of our consolidated financial statements is criticalto an understanding of our financials.

**Revenue recognition**

We earn revenue from provision of marketing,information and transactional services and sales of channel managementsoftware. The Company recognizes revenues from transaction and informationservices in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition,” when all of the following conditions exist: persuasive evidenceof an arrangement exists in the form of an accepted purchase order; deliveryhas occurred, based on shipping terms, or services have been rendered; theCompany’s price to the buyer is fixed or determinable, as documented on theaccepted purchase order; and collectibility is reasonably assured.

The Company accounts for software sales in accordancewith American Institute of Certified Public Accountants Statement of Position (“SOP”)97-2, Software Revenue Recognition. The application of SOP 97-2 requiresjudgment, including whether a software arrangement includes multiple elements,and if so, whether vendor-specific objective evidence (“VSOE”) of fair valueexists for those elements. Customers receive certain elements of our productsover a period of time. Judgment is also required to assess whether futurereleases represent new products or upgrades and enhancements to existingproducts.

**Share-based compensation**

Effective January 1, 2006, the company adopted SFASNo. 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 thefinancial statements based on their fair values at the date of grant. Thecalculated fair value is recognized as expense (net of any capitalization) overthe requisite service period, net of estimated forfeitures, using thestraight-line method under SFAS No. 123(R). The Company considers many factorswhen estimating expected forfeitures, including types of awards, employee classand historical experience. The statement was adopted using the modifiedprospective method of application which requires compensation expense to berecognized in the financial statements for all unvested stock options beginningin the quarter of adoption. There were no unvested stock options at thebeginning of this reporting period therefore no compensation expense wasrecognized in the period. No adjustments to prior periods have been made as aresult of adopting SFAS No. 123(R).

As at September 30, 2005 the Company elected toaccount for stock-based employee compensation arrangements in accordance withthe provisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees”, (“APB No. 25”) and comply with the disclosureprovisions of SFAS No. 123 as amended by SFAS No. 148. During the period fromSeptember 18, 2005 to September 30, 2005, no stock-based employee compensationarrangements

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have been effected and accordingly no disclosure ofpro forma information is required. In accordance with SFAS No. 123 the Companyapplies the fair value method using the Black-Scholes option-pricing model inaccounting for options granted to consultants.

The Company accounts for equity instruments issued inexchange for the receipt of goods or services from other than employees inaccordance with SFAS No. 123 and the conclusions reached by the Emerging IssuesTask Force in Issue No. 96-18, “Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring or in Conjunction with SellingGoods or Services” (“EITF 96-18”). Costs are measured at the estimated fairmarket value of the consideration received or the estimated fair value of theequity instruments issued, whichever is more reliably measurable. The value ofequity instruments issued for consideration other than employee services isdetermined on the earlier of a performance commitment or completion ofperformance by the provider of goods or services as defined by EITF 96-18.

**Risk Factors**

*You should consider carefully all ofthe information in this Quarterly Report**on Form 10-QSB, including the risks and uncertaintiesdescribed below, before**making aninvestment 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 yourinvestment.*

**Risks Related to Our Business**

***Our short operatinghistory and rapidly evolving business makes it difficult******for us to accurately forecastrevenues and expenses.***

We commenced our interactive marketing and salesservices operations in June 2005 and have a very limited operating history forthis division. Our previously reported operating results related principally tothe legacy brokerage business that we operated prior to the reverseacquisition. Such business was disposed of during the quarter ended June 30,2006 and the results of such operations are reported as discontinuedoperations. The quarter ended June 30, 2006 represented the first quarterduring which we had meaningful operating results relating to our ongoingoperations. Accordingly, you should consider our future prospects in light ofthe risks and uncertainties experienced by early stage companies in evolvingindustries in China. Since inception, we have announced a number of proposedtransactions to develop this business and which will have a material impact onour operations for the fiscal year ending March 31, 2007 and beyond. As aresult, it is difficult for us to predict future revenues and operatingexpenses. We based our expense levels, in part, on our expectations of futurerevenues from these transactions. If our interactive marketing and salesservices business develops slower than we expect, our losses may be higher thananticipated and may cause our stock price to decline.

Some of the other risks and uncertainties of ourbusiness relate to our ability to:

·             offer newand innovative products and services to attract and retain a larger consumer base;

·             attractcustomers;

·             increaseawareness of our brand and continue to develop consumer and customer loyalty;

·             respondto competitive market conditions;

·             respondto changes in our regulatory environment;

·             managerisks associated with intellectual property rights;

·             maintaineffective control of our costs and expenses;

·             raisesufficient capital to sustain and expand our business;

·             attract,retain and motivate qualified personnel; and

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·             upgrade our technology to support increasedtraffic and expanded services.

If we are unsuccessful in addressing any of theserisks and uncertainties, our business may be materially and adversely affected.

***The development ofour business is dependent upon the completion and******integration of acquisitions andother transactions that have only recently or******not yet closed.***

Our principal focus is on our PRC-based Marketing,Information and Transactional Services, which we are creating through theacquisition of various entities and assets. Certain of these transactions haveonly recently closed. Accordingly, it is difficult to evaluate our businessbased upon our historical financial results, including those for the quarterended June 30, 2006. If we are unable to successfully operate and integrate thebusinesses we acquire, our business will not be successful. We expect tocontinually look for new businesses to acquire to maintain and sustain ouroperations. If we fail to identify such business, are unable to acquire suchbusinesses on reasonable terms, or fail to successfully integrate suchbusinesses, our operating results and prospects could be harmed.

***We recognized alarge gain in the quarter ended June 30, 2006 which may not be******repeated. Ourconsolidation and de-consolidation activities may result in******substantial non-operating gains orlosses which may mean that our results of******operations may be materiallyimpacted by non-operating factors.***

In the quarter ended June 30, 2006 we recorded netgains of approximately $10.7 million relating to the disposition of assets. Aspart of our strategy we expect to continue to engage in a significant level ofmerger and acquisitions and investment activities as we seek to build ourbusiness. When we decide to dispose of assets or operations which we determineto be non-core to our continuing operations, we may recognize gains or losses.As in the quarter ended June 30, 2006 these may involve significant gains orlosses. Such gains and losses are not predictable and the fluctuating impact onour net income may have an adverse affect on the valuation of the Company andour share price.

***If the Internetand, in particular, interactive marketing are not broadly******adopted in China, ourability to increase revenue and sustain profitability******could be materially and adverselyaffected.***

The use of the Internet as a marketing channel is atan early stage in China. Internet and broadband penetration rates in China areboth relatively low compared to those in most developed countries. Many of ourcurrent and potential customers have limited experience with the Internet as amarketing channel, and have not historically devoted a significant portion oftheir marketing budgets to online marketing and promotion. As a result, theymay not consider the Internet effective in promoting their products andservices as compared to traditional print and broadcast media. Our ability togenerate significant revenues may be negatively impacted by a number offactors, many of which are beyond our control, including:

·             difficultiesassociated with developing a larger consumer base with demographiccharacteristics attractive to customers;

·             increasedcompetition and potential downward pressure on online marketing prices;

·             ineffectivenessof our online marketing delivery, tracking and reporting systems; and

·             lack ofincrease in Internet usage in China.

***We face significantcompetition and may suffer from a loss of users and******customers as a result.***

We expect to facesignificant competition in our interactive marketing and sales servicesbusiness, particularly from other companies that seek to provide onlinemarketing services. Our main competitors include Sohu.com, Tom Online, BeijingMedia in China and Next Media Group in Hong Kong. Many of these competitorshave significantly greater financial resources than we do. They also have longeroperating histories and more experience in attracting and retaining users andmanaging customers than we do. They may use their experience and resources tocompete with us in a variety of ways, including by competing more heavily forusers, customers, distributors and networks of third-party websites, investingmore heavily in research and development and making acquisitions.

 

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We also face competition from traditional advertisingmedia, such as newspapers, magazines, yellow pages, billboards and other formsof outdoor media, television and radio. Most large companies in China allocate,and will likely continue to allocate, the bulk of their marketing budgets totraditional advertising media and only a small portion of their budgets toonline marketing. If these companies do not devote a larger portion of theirmarketing budgets to online marketing services provided by us, or if ourexisting customers reduce the amount they spend on online marketing, ourresults of operations and future growth prospects could be adversely affected.

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

We believe that recognition of our brand willcontribute significantly to the success of our business. We also believe thatmaintaining and enhancing our brand is critical to expanding our base ofconsumers and customers. As our market becomes increasingly competitive,maintaining and enhancing our brand will depend largely on our ability toremain as an Internet marketing leader in China, which may be increasinglydifficult and expensive.

***If we fail tocontinue to innovate and provide relevant services, we may not be******able to generatesufficient user traffic levels to remain competitive.***

We must continue to invest significant resources inresearch and development to enhance services and introduce additional highquality services to attract and retain consumers. If we are unable toanticipate consumer preferences or industry changes, or if we are unable tomodify our services on a timely basis, we may lose consumers and customers. Ouroperating results would also suffer if our innovations do not respond to theneeds of our consumers and customers, are not appropriately timed with marketopportunities or are not effectively brought to market.

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

The online marketing industry is subject to rapidtechnological changes. Our future success will depend on our ability to respondto rapidly changing technologies, adapt our services to evolving industrystandards and improve the performance and reliability of our services. Ourfailure to adapt to such changes could harm our business. New marketing mediacould also adversely affect us. For example, the number of people accessing theInternet through devices other than personal computers, including mobiletelephones and hand-held devices, has increased in recent years. If we are slowto develop products and technologies that are more compatible with non-PCcommunications devices, we may not be successful in capturing a significant shareof this increasingly important market for media and other services. Inaddition, the widespread adoption of new Internet, networking ortelecommunications technologies or other technological changes could requiresubstantial expenditures to modify or adapt our products, services orinfrastructure. If we fail to keep up with rapid technological changes toremain competitive in our rapidly evolving industry, our future success may beadversely affected.

***We may faceintellectual property infringement claims and other related claims,******that could betime-consuming and costly to defend and may result in our******inability to continue providingcertain of our existing services.***

Internet, technology and media companies arefrequently involved in litigation based on allegations of infringement ofintellectual property rights, unfair competition, invasion of privacy,defamation and other violations of third-party rights. The validity,enforceability and scope of protection of intellectual property inInternet-related industries, particularly in China, are uncertain and stillevolving. In addition, many parties are actively developing and seekingprotection for Internet-related technologies, including seeking patentprotection. There may be patents issued or pending that are held by others thatcover significant aspects of our technologies, products, business methods orservices. As we face increasing competition and as litigation becomes morecommon in China for resolving commercial disputes, we face a higher risk of beingthe subject of intellectual property infringement claims.

Intellectual property litigation is expensive and timeconsuming and could divert resources and management attention from theoperations of our businesses. If there is a successful claim of infringement,we may be required to pay substantial fines and damages or enter into royaltyor license agreements that may not be available on commercially acceptableterms, if at all. Our failure to obtain a license of the rights on a timelybasis could harm our business. Any intellectual property litigation could havea material adverse effect on our business, financial condition or results ofoperations.

 

***We may not be ableto prevent others from unauthorized use of our intellectual******property, which couldharm our business and competitive position.***

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We rely on a combination of copyright, trademark andtrade secret laws, as well as nondisclosure agreements and other methods toprotect our intellectual property rights. The protection of intellectualproperty rights in China may not be as effective as those in the United Statesor other countries. The steps we have taken may be inadequate to prevent themisappropriation of our technology. Reverse engineering, unauthorized copyingor other misappropriation of our technologies could enable third parties tobenefit from our technologies without paying us. From time to time, we may haveto enforce our intellectual property rights through litigation. Such litigationmay result in substantial costs and diversion of resources and managementattention.

***If we fail toattract customers for our online marketing services, our business******and growth prospectscould be seriously harmed.***

Our online marketing customers will not maintain abusiness relationship with us if their investment does not generate sales leadsand ultimately consumers. Failure to retain our existing online marketingcustomers or attract new customers for our online marketing services couldseriously harm our business and growth prospects.

***Because weprimarily rely on distributors in providing our e-marketing******services, our failure toretain key distributors or attract additional******distributors could materially andadversely affect our business.***

Online marketing is at an early stage of developmentin China and is not as widely accepted by or available to businesses in Chinaas in the United States. As a result, we rely heavily on a nationwidedistribution network of third-party distributors for our sales to, andcollection of payment from, our corporate and consumer customers. If ourdistributors do not provide quality services to our consumer customers orotherwise breach their contracts with our consumer customers, we may losecustomers and our results of operations may be materially and adverselyaffected. We do not have long-term agreements with any of our distributors,including our key distributors, and cannot assure you that we will continue tomaintain favorable relationships with them. Our distribution arrangements arenon-exclusive. Furthermore, some of our distributors may have contracts withour competitors or potential competitors and may not renew their distributionagreements with us. In addition, as new methods for accessing the Internet,including the use of wireless devices, become available, we may need to expandour distribution network to cater to the new technologies. If we fail to retainour key distributors or attract additional distributors on terms that arecommercially reasonable, our business and results of operations could bematerially and adversely affected.

***Our strategy ofacquiring complementary businesses, assets and technologies may******fail.***

As part of our business strategy, we have pursued, andintend to continue to pursue, selective strategic acquisitions of businesses,assets and technologies that complement our existing business. Our acquisitionsinvolve uncertainties and risks, including:

·       potentialongoing financial obligations and unforeseen or hidden liabilities;

·       failure toachieve the intended objectives, benefits or revenue-enhancing opportunities;

·       costs anddifficulties of integrating acquired businesses and managing a larger business;and

·       diversion ofresources and management attention.

Our failure to address these risks successfully mayhave a material adverse effect on our financial condition and results ofoperations. Any such acquisition may require a significant amount of capitalinvestment, which would decrease the amount of cash available for workingcapital or capital expenditures. In addition, if we use our equity securitiesto pay for acquisitions, we may dilute the value of our common stock. If weborrow funds to finance acquisitions, such debt instruments may containrestrictive covenants that could, among other things, restrict us fromdistributing dividends. Such acquisitions may also generate significantamortization expenses related to intangible assets.

***We may not be ableto manage our expanding operations effectively.***

We commenced our interactive marketing and salesservices operations in 2005 and are expanding our operations rapidly. Weanticipate significant continued expansion of our business as we address growthin our consumer and customer base and market opportunities. To manage thepotential growth of our operations and personnel, we will be required to improveoperational and financial systems, procedures and controls, and expand, trainand manage our growing employee base.

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Furthermore, our management will be required tomaintain and expand our relationships with other websites, Internet companies,and other third parties. We cannot assure you that our current and plannedpersonnel, systems, procedures and controls will be adequate to support ourfuture operations.

***Our operatingresults may fluctuate, which makes our results difficult to******predict and could causeour results to fall short of expectations.***

Our operating results may fluctuate as a result of anumber of factors, many of which are outside of our control. For these reasons,comparing our operating results on a period-to-period basis may not be meaningful,and you should not rely on our past results as an indication of our futureperformance. Our quarterly and annual revenues and costs and expenses as apercentage of our revenues may be significantly different from our historicalor projected rates. Our operating results in future quarters may fall belowexpectations. Any of these events could cause the price of our Common Stock tofall. Any of the risk factors listed in this “Risk Factors” section, and inparticular, the following risk factors, could cause our operating results tofluctuate from quarter to quarter:

·       generaleconomic conditions in China and economic conditions specific to the Internet,Internet search and online marketing;

·       our ability toattract additional customers;

·       the announcementor introduction of new or enhanced products and services by us or ourcompetitors;

·       the amount andtiming of operating costs and capital expenditures related to the maintenanceand expansion of our businesses, operations and infrastructure;

·       the results ofour acquisitions of, or investments in, other businesses or assets;

·       PRC regulationsor actions pertaining to activities on the Internet, including gambling, onlinegames and other forms of entertainment; and

·       geopoliticalevents or natural disasters such as war, threat of war, Severe AcuteRespiratory Syndrome, or SARS, or other epidemics.

Because of our limited operating history and ourrapidly growing business, our historical operating results may not be useful toyou in predicting our future operating results. Advertising spending in Chinahas historically been cyclical, reflecting overall economic conditions as wellas budgeting and buying patterns. Our rapid growth has lessened the impact ofthe cyclicality and seasonality of our business. As we continue to grow, weexpect that the cyclicality and seasonality in our business may cause ouroperating results to fluctuate.

***The successfuloperation of our business depends upon the performance and******reliability of theInternet infrastructure and fixed telecommunications******networks in China.***

Our business depends on the performance andreliability of the Internet infrastructure in China. Almost all access to theInternet is maintained through state-owned telecommunication operators underthe administrative control and regulatory supervision of the Ministry ofInformation Industry of China. In addition, the national networks in China areconnected to the Internet through international gateways controlled by the PRCgovernment. These international gateways are the only channels through which adomestic user can connect to the Internet. We cannot assure you that a moresophisticated Internet infrastructure will be developed in China. We may nothave access to alternative networks in the event of disruptions, failures orother problems with China’s Internet infrastructure. In addition, the Internetinfrastructure in China may not support the demands associated with continuedgrowth in Internet usage.

***Our success dependson the continuing efforts of our senior management team and******other key personnel andour business may be harmed if we lose their services.***

Our future success depends heavily upon the continuingservices of the members of our senior management team, in particular ourchairman Dr. Bruno Wu. If one or more of our senior executives or other keypersonnel are unable or unwilling

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to continue in their present positions, we may not beable to replace them easily or at all, and our business may be disrupted andour financial condition and results of operations may be materially andadversely affected. Competition for senior management and key personnel isintense, the pool of qualified candidates is very limited, and we may not beable to retain the services of our senior executives or key personnel, or attractand retain high-quality senior executives or key personnel in the future.

In addition, if any member of our senior managementteam or any of our other key personnel joins a competitor or forms a competingcompany, we may lose customers, distributors, know-how and key professionalsand staff members. Each of our executive officers and key employees has enteredinto an employment agreement with us, which contains confidentiality andnon-competition

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provisions. If anydisputes arise between any of our senior executives or key personnel and us, wecannot assure you the extent to which any of these agreements may be enforced.

***We rely on highlyskilled personnel and, if we are unable to retain or motivate******key personnel or hirequalified personnel, we may not be able to grow******effectively.***

Our performance and future success depends on thetalents and efforts of highly skilled individuals. We will need to continue toidentify, hire, develop, motivate and retain highly skilled personnel for allareas of our organization. Competition in our industry for qualified employeesis intense. Our continued ability to compete effectively depends on our abilityto attract new employees and to retain and motivate our existing employees.

As competition in our industry intensifies, it may bemore difficult for us to hire, motivate and retain highly skilled personnel. Ifwe do not succeed in attracting additional highly skilled personnel orretaining or motivating our existing personnel, we may be unable to groweffectively.

***Interruption orfailure of our information technology and communications******systems could impair our ability toeffectively provide our products and******services, which could damage ourreputation and harm our operating results.***

Our ability to provide our services depends on thecontinuing operation of our information technology and communications systems.Any damage to or failure of our systems could interrupt our service. Serviceinterruptions could reduce our revenues and profits, and damage our brand ifour system is perceived to be unreliable. Our systems are vulnerable to damageor interruption as a result of terrorist attacks, war, earthquakes, floods,fires, power loss, telecommunications failures, computer viruses, interruptionsin access to our websites through the use of “denial of service” or similarattacks, hacking or other attempts to harm our systems, and similar events. Ourservers, which are hosted at third-party Internet data centers, are alsovulnerable to break-ins, sabotage and vandalism. Some of our systems are notfully redundant, and our disaster recovery planning does not account for allpossible scenarios. The occurrence of a natural disaster or a closure of anInternet data center by a third-party provider without adequate notice could resultin lengthy service interruptions.

***Our business couldbe adversely affected if our software contains bugs.***

Our online systems, including our websites, and othersoftware applications and products, could contain undetected errors or “bugs”that could adversely affect their performance. We regularly update and enhanceour websites and our other online systems and introduce new versions of oursoftware products and applications. The occurrence of errors in any of thesemay cause us to lose market share, damage our reputation and brand name, andmaterially and adversely affect our business.

***Concerns about thesecurity of electronic commerce transactions and******confidentiality of information onthe Internet may reduce use of our network******and impede our growth.***

A significant barrier to electronic commerce andcommunications over the Internet in general has been public concern oversecurity and privacy, including the transmission of confidential information.If these concerns are not adequately addressed, they may inhibit the growth ofthe Internet and other online services generally, especially as a means ofconducting commercial transactions. If a well-publicized Internet breach ofsecurity were to occur, general Internet usage could decline, which couldreduce traffic to our destination websites and impede our growth.

***We have limitedbusiness insurance coverage.***

The insurance industry in China is still at an earlystage of development. Insurance companies in China offer limited businessinsurance products. We do not have any business liability or disruptioninsurance coverage for our operations in China. Any business disruption,litigation or natural disaster may result in our incurring substantial costsand the diversion of our resources.

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***Fluctuation andimpairment of marketable securities will materially impact our******net income***

Marketable securities are carried at fair marketvalue, fluctuation of market price of those securities could adversely impactnet income and earnings per share, we have no control over the market price ofthose securities and cannot predict the possible impact to our financialresult.

***Any change of theindefinite status of any of our intangible assets may require******us to record additionalamortization expenses***

Some of our intangible assets are characterized asindefinite intangible assets and therefore are not required to be amortized.Any changes of the conditions upon which we based categorization of theseintangible asset as indefinite will likely require us to amortize theseintangible assets over their economic life. Such additional amortization costcould adversely impact our net income and earnings per share.

**Risks Related to Our CorporateStructure**

***PRC laws andregulations governing our businesses and the validity of certain******of our contractualarrangements are uncertain. If we are found to be in******violation, we could be subject tosanctions. In addition, changes in such PRC******laws and regulations may materiallyand adversely affect our business.***

Although we are a Minnesota corporation and our stockholdershave approved reincorporation of our Company into the State of Delaware, mostof our operations and employees are located in the PRC. As such, there aresubstantial uncertainties regarding the interpretation and application of PRClaws and regulations, including, but not limited to, the laws and regulationsgoverning our business, or the enforcement and performance of our contractualarrangements with certain of our affiliated Chinese entities. We are consideredforeign persons or foreign invested enterprises under PRC law. As a result, weare subject to PRC law limitations on foreign ownership of Internet andadvertising companies. These laws and regulations are relatively new and may besubject to change, and their official interpretation and enforcement mayinvolve substantial uncertainty. The effectiveness of newly enacted laws,regulations or amendments may be delayed, resulting in detrimental reliance byforeign investors. New laws and regulations that affect existing and proposedfuture businesses may also be applied retroactively.

The PRC government has broad discretion in dealingwith violations of laws and regulations, including levying fines, revokingbusiness and other licenses and requiring actions necessary for compliance. Inparticular, licenses and permits issued or granted to us by relevantgovernmental bodies may be revoked at a later time by higher regulatory bodies.We cannot predict the effect of the interpretation of existing or new PRC lawsor regulations on our businesses. We cannot assure you that our currentownership and operating structure would not be found in violation of anycurrent or future PRC laws or regulations. As a result, we may be subject tosanctions, including fines, and could be required to restructure our operationsor cease to provide certain services. Any of these or similar actions couldsignificantly disrupt our business operations or restrict us from conducting asubstantial portion of our business operations, which could materially andadversely affect our business, financial condition and results of operations.

***Our corporateactions are substantially controlled by our principal******shareholders and affiliatedentities.***

As of November 30, 2006, our principal shareholdersand their affiliated entities own approximately 41% of our outstanding commonstock (which will be reduced to approximately 40% after completion of announcedbut not yet closed transactions). These shareholders, acting individually or asa group, could exert substantial influence over matters such as electingdirectors and approving mergers or other business combination transactions.This concentration of ownership may also discourage, delay or prevent a changein control of our company, which could deprive our shareholders of anopportunity to receive a premium for their shares as part of a sale of ourcompany and might reduce the price of our Common stock. These actions may betaken even if they are opposed by our other shareholders.

**Risks Related to Doing Business inChina**

***Adverse changes ineconomic and political policies of the PRC government could******have a material adverseeffect on the overall economic growth of China, which******could adversely affect our business.***

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As our interactive marketing and sales servicesbusiness expands, we expect an increasing portion of our business operations tobe conducted in China. Accordingly, our results of operations, financialcondition and prospects are subject to a significant degree to economic,political and legal developments in China. China’s economy differs from theeconomies of most developed countries in many

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respects, including theamount of government involvement, level of development, growth rate, control offoreign exchange and allocation of resources. While China’s economy hasexperienced significant growth in the past 20 years, growth has been unevenacross different regions and among various economic sectors of China. The PRCgovernment has implemented various measures to encourage economic developmentand guide the allocation of resources. Some of these measures benefit theoverall PRC economy, but may also have a negative effect on us. For example,our financial condition and results of operations may be adversely affected bygovernmental control over capital investments or changes in tax regulationsthat are applicable to us. Since early 2004, the PRC government has implementedcertain measures to control the pace of economic growth. Such measures maycause a decrease in the level of economic activity in China, which in turncould adversely affect our results of operations and financial condition.

***Our subsidiariesand affiliates are subject to restrictions on paying dividends******and making otherpayments to us.***

As our interactive marketing and sales servicesbusiness develops, we expect to increasingly rely on dividends payments fromour subsidiaries and affiliated entities in China. However, PRC regulationscurrently permit payment of dividends only out of accumulated profits, asdetermined in accordance with PRC accounting standards and regulations. Oursubsidiaries and affiliated entities in China are also required to set aside aportion of their after-tax profits according to PRC accounting standards andregulations for certain reserve funds. The PRC government also imposes controlson the conversion of RMB into foreign currencies and the remittance ofcurrencies out of China. We may experience difficulties in completing theadministrative procedures necessary to obtain and remit foreign currency.Furthermore, if our subsidiaries or affiliated entities in China incur debt ontheir own in the future, the instruments governing the debt may restrict theirability to pay dividends or make other payments. If either we or oursubsidiaries is unable to receive all of the revenues from our operations throughthese contractual or dividend arrangements, we may be unable to declaredividends on our common stock.

***Uncertainties withrespect to the PRC legal system could adversely affect us.***

We conduct a substantial and increasing portion ourbusiness through subsidiaries and affiliated entities based in China. Ouroperations in China are governed by PRC laws and regulations. Our subsidiariesare generally subject to laws and regulations applicable to foreign investmentsin China and, in particular, laws applicable to wholly foreign-ownedenterprises. The PRC legal system is based on written statutes. Prior courtdecisions may be cited for reference but have limited precedent value.

Since 1979, PRC legislation and regulations havesignificantly enhanced the protections afforded to various forms of foreigninvestments in China. However, China has not developed a fully integrated legalsystem and recently-enacted laws and regulations may not sufficiently cover allaspects of economic activities in China. In particular, because these laws andregulations are relatively new, and because of the limited published decisionsand their non-binding nature, the interpretation and enforcement of these lawsand regulations involve uncertainties. In addition, the PRC legal system isbased in part on governmental policies and internal rules (some of which arenot published on a timely basis or at all) that may have a retroactive effect.As a result, we may not be aware of our violation of these policies and rulesuntil after the occurrence of the violation. In addition, any litigation inChina may be protracted and result in substantial costs and diversion ofresources and management attention.

***You may experiencedifficulties in effecting service of legal process,******enforcing foreign judgments orbringing original actions in China based on******United States or other foreign lawsagainst us or our management.***

We conduct a substantial and increasing portion of ouroperations in China and a substantial portion of our assets will be located inChina. In addition, all of our senior executive officers reside within China.As a result, it may not be possible to effect service of process within theUnited States or elsewhere outside China on our senior executive officers,including matters arising under U.S. federal securities laws or applicablestate securities laws. Moreover, our PRC counsel has advised us that PRC doesnot have treaties with the United States or many other countries providing forthe reciprocal recognition and enforcement of judgment of courts.

***Governmentalcontrol of currency conversion may affect the value of your******investment.***

The PRC government imposes controls on the conversionof RMB to foreign currencies and, in certain cases, the remittance ofcurrencies out of China. As our interactive marketing and sales servicesbusiness expands, we expect to derive an increasing percentage of our revenuesin RMB. Under our current structure, we expect our income will be primarilyderived from dividend payments from our PRC subsidiaries. Shortages in theavailability of foreign currency may restrict the ability of our PRCsubsidiaries and our affiliated entities to remit sufficient foreign currencyto pay dividends or other payments to

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us, or otherwise satisfy their foreign currency denominatedobligations. Under existing PRC foreign exchange regulations, payments ofcurrent account items, including profit distributions, interest payments andexpenditures from trade-related transactions, can be made in foreign currencieswithout prior

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approval from the PRC State Administration of ForeignExchange by complying with certain procedural requirements. However, approvalfrom appropriate government authorities is required when RMB is to be convertedinto foreign currency and remitted out of China to pay capital expenses such asthe repayment of bank loans denominated in foreign currencies. The PRCgovernment may also at its discretion restrict access in the future to foreigncurrencies for current account transactions. If the foreign  exchange control system prevents us fromobtaining sufficient foreign currency to satisfy our demands, we may not beable to pay dividends in foreign currencies to our shareholders, includingholders of our Common stock.

***Fluctuation in thevalue of RMB may have a material adverse effect on your******investment.***

The value of RMB against the U.S. dollar and othercurrencies may fluctuate and is affected by, among other things, changes inpolitical and economic conditions. On July 21, 2005, the PRC government changedits decade-old policy of pegging the value of the RMB to the U.S. dollar. Underthe new policy, the RMB is permitted to fluctuate within a narrow and managedband against a basket of foreign currencies. This change in policy has resultedin an approximately 2.0% appreciation of the RMB against the U.S. dollar. Whilethe international reaction to the RMB revaluation has generally been positive,there remains significant international pressure on the PRC government to adopta more flexible currency policy, which could result in a further andsignificant appreciation of the RMB against the U.S. dollar. As our interactivemarketing and sales services business continues to grow, a greater portion ofour revenues and costs will be denominated in RMB, while a significant portionof our financial assets may be denominated in U.S. dollars. We expect to relysignificantly on dividends and other fees paid to us by our subsidiaries andaffiliated entities in China. Any significant revaluation of RMB may materiallyand adversely affect our cash flows, revenues, earnings and financial position,and the value of, and any dividends payable on, our Common stock in U.S.dollars. For example, an appreciation of RMB against the U.S. dollar would makeany new RMB denominated investments or expenditures more costly to us, to theextent that we need to convert U.S. dollars into RMB for such purposes.

***We may not be ableto consolidate the financial results of some of our******affiliated companies or suchconsolidation could materially adversely affect******our operating results and financialcondition.***

For PRC regulatory reasons, much of our operations areconducted through affiliated companies which currently are considered foraccounting purposes as variable interest entities (VIE’s”), and we are consideredthe primary beneficiary, enabling us to consolidate its financial results inour consolidated financial statements. In the event that in the future acompany we hold as a VIE would no longer meet the definition of a VIE, or weare deemed not to be the primary beneficiary, we would not be able toconsolidate line by line that entity’s financial results in our consolidatedfinancial statements. Also, if in the future an affiliate company becomes a VIEand we become the primary beneficiary, we would be required to consolidate thatentity’s financial results in our consolidated financial statements. If suchentity’s financial results were negative, this could have a correspondingnegative impact on our operating results.

***We face risksrelated to health epidemics and other outbreaks.***

Our business could be adversely affected by theeffects of SARS or another epidemic or outbreak. China reported a number ofcases of SARS in April 2004. Any prolonged recurrence of SARS or other adversepublic health developments in China may have a material adverse effect on ourbusiness operations. For instance, health or other governmental regulationsadopted in response may require temporary closure of Internet cafes, which isone of the avenues where users could access our websites, or of our offices.Such closures would severely disrupt our business operations and adverselyaffect our results of operations. We have not adopted any written preventivemeasures or contingency plans to combat any future outbreak of SARS or anyother epidemic.

**Risks Related to Our Common Stock**

***There has been onlya limited public market for our common stock to date.***

To date, there has been only a limited public marketfor our common stock on the Over-the-Counter Bulletin Board. Our common stockis currently not listed on any exchange. If an active trading market for ourcommon stock does not develop, the market price and liquidity of our commonstock will be materially and adversely affected.

***The market pricefor our common stock may be volatile.***

46

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The market price for our common stock may be volatileand subject to wide fluctuations in response to factors including thefollowing:

·       actual or anticipated fluctuations in ourquarterly operating results;

 

47

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·       changes infinancial estimates by securities research analysts, if any;

·       conditions inthe China consumer goods and online marketing markets;

·       changes in theeconomic performance or market valuations of other U.S. public companies withsubstantial operations in China;

·       announcementsby us or our competitors of new products, acquisitions, strategic partnerships,joint ventures or capital commitments;

·       addition ordeparture of key personnel;

·       fluctuations ofexchange rates between RMB and the U.S. dollar;

·       intellectualproperty litigation; and

·       generaleconomic or political conditions in China.

In addition, the securities market has from time totime experienced significant price and volume fluctuations that are not relatedto the operating performance of particular companies. These market fluctuationsmay also materially and adversely affect the market price of our Common stock.

***We will needadditional capital, and the sale of additional common stock or******other equity securitiescould result in additional dilution to our******shareholders.***

We expect to require additional cash resources to fundour operations, as well as investments or acquisitions which we may decide topursue. To satisfy our cash requirements, we may seek to sell additional equityor debt securities or obtain a credit facility. The sale of additional equitysecurities could result in additional dilution to our shareholders. Theincurrence of indebtedness would result in increased debt service obligationsand could result in operating and financing covenants that would restrict ouroperations. We cannot assure you that financing will be available in amounts oron terms acceptable to us, if at all.

***Substantial futuresales or the perception of sales of our common stock in the******public market couldcause the price of our common stock to decline.***

Sales of our common stock in the public market or theperception that these sales could occur, could cause the market price of ourcommon stock to decline. As of November 30, 2006, approximately 63,967,197 shares,or 71% of our outstanding shares will be freely transferable withoutrestriction or additional registration under the Securities Act of 1933, asamended, or the Securities Act or are subject to a pending registrationstatement. The remaining common stock outstanding as of such date will beavailable for sale, subject to volume and other restrictions as applicableunder Rule 144 under the Securities Act.

***You may facedifficulties in protecting your interests, and your ability to******protect your rights throughthe U.S. federal courts may be limited, because we******conduct a significant portion of ouroperations in China and all of our******officers reside outside the United States.***

We conduct a substantial portion of our operations inChina through our wholly owned subsidiaries in China. All of our officersreside outside the United States and some or all of the assets of those personsare located outside the United States. As a result, it may be difficult orimpossible for you to bring an action against us or against these individualsin China in the event that you believe that your rights have been infringedunder the securities laws or otherwise. Even if you are successful in bringingan action of this kind, the laws of China may render you unable to enforce a judgmentagainst our assets or the assets of our directors and officers.

***If we fail tomaintain an effective system of internal control over******financial reporting, we may not beable to accurately report our financial******results or prevent fraud.***

48

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We are subject to reporting obligations under the U.S.securities laws. The Securities and Exchange Commission, or the SEC, asrequired by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rulesrequiring every public company to include a management report on such company’sinternal controls over financial reporting in its annual report, which containsmanagement’s assessment of the effectiveness of the company’s internal controlsover financial reporting. In addition, an independent registered publicaccounting firm must attest to and report on management’s assessment of theeffectiveness of the company’s internal controls over financial reporting.

These requirements may first apply to our annualreport on Form 10-K for the fiscal year ending March 31, 2007. Our managementmay conclude that our internal controls over our financial reporting are noteffective. Moreover, even if our management concludes that our internalcontrols over financial reporting are effective, our independent registeredpublic accounting firm may still decline to attest to our management’sassessment or may issue a report that is qualified if they are not satisfiedwith our controls or the level at which our controls are documented, designed,operated or reviewed, or if it interprets the relevant requirements differentlyfrom us. Our reporting obligations as a public company will place a significantstrain on our management, operational and financial resources and systems forthe foreseeable future. We are a young company with limited accounting personneland other resources with which to address our internal controls and procedures.If we fail to timely achieve and maintain the adequacy of our internalcontrols, we may not be able to conclude that we have effective internalcontrols over financial reporting at a reasonable assurance level. Moreover,effective internal controls over financial reporting are necessary for us toproduce reliable financial reports and are important to help prevent fraud. Asa result, our failure to achieve and maintain effective internal controls overfinancial reporting could result in the loss of investor confidence in thereliability of our financial statements, which in turn could harm our businessand negatively impact the trading price of our common stock. Furthermore, weanticipate that we will incur considerable costs and use significant managementtime and other resources in an effort to comply with Section 404 and otherrequirements of the Sarbanes-Oxley Act.

***We will incurincreased costs as a result of being a public company.***

As a public company, we will incur significant legal,accounting and other expenses that we did not incur as a private company. Inaddition, the Sarbanes-Oxley Act, as well as rules subsequently implemented bySEC has required changes in corporate governance practices of public companies.We expect these new rules and regulations to increase our legal, accounting andfinancial compliance costs and make certain corporate activities moretime-consuming and costly. In addition, we will incur additional costsassociated with our public company reporting requirements. We are currentlyevaluating and monitoring developments with respect to these new rules, and wecannot predict or estimate the amount of additional costs we may incur or thetiming of such costs.

***There is a limitedpublic float of our common stock, which can result in******increased volatility in our stockprice and prevent the realization of a profit******on resale of the Company’s commonstock***

There is a limited public float of our common stock.The term “public float” refers to shares freely and actively tradable on theOver-the-Counter Bulletin Board System and not owned by officers, directors oraffiliates, as such term is defined under the Securities Act. Due to ourrelatively small public float and the limited trading volume of our commonstock, purchases and sales of relatively small amounts of our common stock canhave a disproportionate effect on the market price for our common stock. As aresult, the market price of our common stock can have increased volatilitywhich may affect a stockholder’s ability to sell our shares in a timely manner.

***Our common stock issubject to restrictions on sales by broker-dealers and******penny stock rules, which may bedetrimental to investors.***

Our common stock is subject to Rules 15g-1 through15g-9 under the Exchange Act, which impose certain sales practice requirementson broker-dealers who sell our common stock to persons other than establishedcustomers and “accredited investors” (as defined in Rule 501(c) of theSecurities Act). For transactions covered by this rule, a broker-dealer mustmake a special suitability determination for the purchaser and have receivedthe purchaser’s written consent to the transaction prior to the sale. This ruleadversely affects the ability of broker-dealers to sell our common stock andpurchasers of our common stock to sell their shares of our common stock.

Additionally, our common stock is subject to SECregulations applicable to “penny stock.” Penny stock includes any non-Nasdaqequity security that has a market price of less than $5.00 per share, subjectto certain exceptions. The regulations require that prior to any non-exemptbuy/sell transaction in a penny stock, a disclosure schedule proscribed by theSEC

49

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relating to the penny stock market must be deliveredby a broker-dealer to the purchaser of such penny stock. This disclosure mustinclude the amount of commissions payable to both the broker-dealer and theregistered representative and current price quotations for our common stock.The regulations also require that monthly statements be sent to holders ofpenny stock that disclose recent price information for the penny stock andinformation of the limited market for penny stocks. These requirementsadversely affect the market liquidity of our common stock.

***When we account foremployee share options using the fair value method, such******accounting treatment couldsignificantly reduce our net income.***

On December 16, 2004, the Financial AccountingStandard Board, or FASB, issued FASB Statement No. 123(R), Share-Based Payment,which requires a public company to recognize, as an expense, the fair value ofstock options and other share-based compensation to employees at the firstfiscal year that begins on or after June 15, 2005. Currently, we recordshare-based compensation to the extent that the fair value of the shares on thedate of grant exceeds the exercise price of the option. We recognizecompensation expense over the related vesting periods. For the periods afterDecember 31, 2005, we could have ongoing accounting charges significantlygreater than those we would have recorded under our current method ofaccounting for share options. See “Management’s Discussion and Analysis ofFinancial Conditions and Results of Operations—Critical Accounting Policies fora more detailed presentation of accounting for share-based compensation plans.

**Item 3. Controls and Procedures**

***Evaluation of DisclosureControls and Procedures***

As at the end of the period covered by this report,the Company carried out an evaluation, under the supervision and with theparticipation of its Principal Executive Officer and Chief Financial Officer,of the effectiveness of the design and operation of our disclosure controls andprocedures. Based on this evaluation, the Principal Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were effective as of the end of the period covered by this report toensure that information required to be disclosed by the Company in the reportsfiled by it under the Securities and Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and include controls and procedures designed toensure that information required to be disclosed by the Company in such reportsis accumulated and communicated to the Company’s management, including thePrincipal Executive Officer and Chief Financial Officer of the Company, asappropriate, to allow timely decisions regarding required disclosure.

***Section 404Compliance Project***

Beginning with the fiscalyear ending March 31, 2008, Section 404 of the Sarbanes-Oxley Act of 2002will require us to include management’s report on our internal control overfinancial reporting in our Annual Report on Form 10-KSB. The internalcontrol report must contain (1) a statement of management’s responsibilityfor establishing and maintaining adequate internal control over our financialreporting, (2) a statement identifying the framework used by management toconduct the required evaluation of the effectiveness of our internal controlover financial reporting, (3) management’s assessment of the effectivenessof our internal control over financial reporting as of the end of our mostrecent fiscal year, including a statement as to whether or not our internalcontrol over financial reporting is effective, and (4) a statement thatour registered independent public accounting firm has issued an attestationreport on management’s assessment of our internal control over financialreporting.

We plan to initiate aSection 404 compliance project pursuant to which management expects toadopt a detailed project work plan to assess the adequacy of our internalcontrol over financial reporting, remediate any control deficiencies that maybe identified, validate through testing that controls are functioning asdocumented and implement a continuous reporting and improvement process forinternal control over financial reporting. During fiscal 2007 there have beenno changes in ourinternal control over financial reporting that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

***InherentLimitation of the Effectiveness of Internal Control***

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the internal control system are met.Because of the inherent limitations of any internal control system, no evaluationof controls can provide absolute assurance that all control issues, if any,within a company have been detected.

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**PARTII**

**Item 1. Legal Proceedings**

None.

**Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds.**

During the quarterended December 31, 2006, we issued shares in the following transactionspursuant to exemptions from the registration requirements of the Securities Actof 1933, as amended (the “Act”).

·                  InNovember 2006, we issued 153,000 shares of common stock at price of $2.30 pershare and warrants to purchase an aggregate of 153,000 shares of common stockat an exercise price of $4.90 per share. These issuances were to an investorpursuant to Regulation S of the Act.

**Item 3. Defaults Upon SeniorSecurities.**

None.

**Item 4. Submissions of Matters to aVote of Security Holders**

None.

**Item 5. Other Information.**

None.

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**Item 6. Exhibits and Reports on Form8-K**
| No.    | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |       | Sale and Purchase Agreement dated June 30, 2006 to  sell certain of the Registrant’s assets to Sun TV Shop, Plc. (incorporated by  reference from our Current Report on Form 8-K filed on July 7, 2006)                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2    |       | Updated letter from Moores  Rowland Mazars, the Registrant’s former accountant (incorporated by  reference from our Current Report on Form 8-K/A filed on July 11, 2006)                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.3    |       | Financials for the Sale and Purchase Agreement to  Acquire Magzone Asia Pte Ltd, dated January 4, 2006 by and among Sun New  Media, Inc. (the “Company”), Seeds Capital Pte Ltd, Wong Sing Lam, Tay Koon  Chuan, and Wang Jian (collectively, the “Sellers”) (incorporated by reference  from our Current Report on Form 8-K/A filed on July 21, 2006) |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.4    |       | Financials for the Sale and Purchase Agreement to  acquire Lifestyle Magazines Publishing Pte. Ltd (“Lifestyle Magazine”). dated  February 14, 2006 by and between Sun New Media, Inc. and United Home  Limited (incorporated by reference from our Current Report on Form 8-K/A  filed on August 7, 2006)                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.5    |       | Announcement of operating and financial results for  the three months ended June 30, 2006 (incorporated by reference from our  Current Report on Form 8-K filed on August 7, 2006),                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.6    |       | Financials for the Sale and Purchase agreement to  acquire of Telefaith Holdings Ltd. dated December 8, 2005 by and among  Sun New Media, Inc., Yan Hui, Lin Min, and Luan Kezhou (incorporated by  reference from our Current Report on Form 8-K/A filed on August 8, 2006)                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.7    |       | Resignation of Mr. Qi  Yang as Director of the Registrant (incorporated by reference from our  Current Report on Form 8-K filed on August 24, 2006)                                                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.8    |       | Appointment of Grant Thornton HK as independent  auditor for the fiscal period ending March 31, 2007 (incorporated by  reference from our Current Report on Form 8-K filed on September 19, 2006)                                                                                                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.9    |       | Appointment of Thomas A.  Schuler as Chief Financial Officer (incorporated by reference from our  Current Report on Form 8-K filed on September 25, 2006)                                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.0    |       | Completion of the acquisition of William Brand  Administer Limited and its subsidiary William Textiles Limited (incorporated  by reference from our Current Report on Form 8-K filed on September 30, 2006)                                                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1    |       | Resignation of Mr. Ricky Ang as CEO of the Company  and Appointment of Dr. Bruno Wu as CEO of the Company (incorporated by  reference from our Current Report on Form 8-K filed on October 5, 2006)                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2    |       | Resignation of Dr. Herbert Kloiber as a member of  the Board of Directors (incorporated by reference from our Current Report on  Form 8-K filed on October 11, 2006)                                                                                                                                                                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3    |       | Resignation of Mr. William Adamopoulos as a member  of the Board of Directors (incorporated by reference from our Current Report  on Form 8-K filed on  November 03, 2006)                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.5    |       | Sale and Purchase  Agreement with the Sellers of Hubei Zhengyuan Co., Ltd, dated November 21,  2006 (incorporated by reference from our Current Report on Form 8-K  filed on November 27,  2006)                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.6    |       | Resignation of Grant  Thornton HK as independent auditor for the fiscal period ending March 31,  2007, and Reappointment  of Bernstein & Pinchuk as  independent auditor for the fiscal period ending March 31, 2007 (incorporated by reference from our Current Report on Form 8-K filed  on  December 6, 2006)                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.7    |       | Appointment of Mr. Walter Beach as a member of the Board of Directors  (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2006)                                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.8    |       | Supplementary Agreement with Barron Partners LLP  (“Barron”) to modify the terms of a Stock Purchase Agreement between Barron  and the Company, dated December 31, 2007 (incorporated by reference from our  Current Report on Form 8-K filed on February 6, 2007)                                                                                                    |

 

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| 31.1   |   | Certificate of CEO as Required by Rule  13a-14(a)/15d-14                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                              |
| 31.2   |   | Certificate of CFO as Required by Rule  13a-14(a)/15d-14                                                                                                          |
|   |   |                                                                                                                                                              |
| 32.1   |   | 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 Code |
|   |   |                                                                                                                                                              |
| 32.2   |   | 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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**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| **SUN NEW MEDIA, INC.**  | ** ** | ** **                                     |
|--------------------------|------------|------------------------------------------------|
| ** **               | ** ** | ** **                                     |
| Date: Februrary 14, 2007 |       | By:                                            | /s/ Bruno Wu Zheng |
|                     |       | Bruno Wu Zheng                                 |
|                     |       | Executive Chairman and Chief Executive Officer |
|                     |       |                                           |
| Date: Februrary 14, 2007 |       | By:                                            | /s/ Thomas A. Schuler |
|                     |       | Thomas A. Schuler                              |
|                     |       | Chief Financial Officer                        |

 

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INDEXTO EXHIBITS
| No.    | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                 |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1    |       | Sale and Purchase Agreement dated June 30, 2006 to  sell certain of the Registrant’s assets to Sun TV Shop, Plc. (incorporated by  reference from our Current Report on Form 8-K filed on July 7, 2006)                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.2    |       | Updated letter from Moores Rowland Mazars, the  Registrant’s former accountant (incorporated by reference from our Current  Report on Form 8-K/A filed on July 11, 2006)                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.3    |       | Financials for the Sale and Purchase Agreement to  Acquire Magzone Asia Pte Ltd, dated January 4, 2006 by and among Sun New  Media, Inc. (the “Company”), Seeds Capital Pte Ltd, Wong Sing Lam, Tay Koon  Chuan, and Wang Jian (collectively, the “Sellers”) (incorporated by reference  from our Current Report on Form 8-K/A filed on July 21, 2006) |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.4    |       | Financials for the Sale and Purchase Agreement to  acquire Lifestyle Magazines Publishing Pte. Ltd (“Lifestyle Magazine”). dated  February 14, 2006 by and between Sun New Media, Inc. and United Home  Limited (incorporated by reference from our Current Report on Form 8-K/A  filed on August 7, 2006)                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.5    |       | Announcement of operating and financial results for  the three months ended June 30, 2006 (incorporated by reference from our  Current Report on Form 8-K filed on August 7, 2006),                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.6    |       | Financials for the Sale and Purchase agreement to  acquire of Telefaith Holdings Ltd. dated December 8, 2005 by and among  Sun New Media, Inc., Yan Hui, Lin Min, and Luan Kezhou (incorporated by  reference from our Current Report on Form 8-K/A filed on August 8, 2006)                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.7    |       | Resignation of Mr. Qi Yang as Director of the  Registrant (incorporated by reference from our Current Report on Form 8-K  filed on August 24, 2006)                                                                                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.8    |       | Appointment of Grant Thornton HK as independent  auditor for the fiscal period ending March 31, 2007 (incorporated by  reference from our Current Report on Form 8-K filed on September 19, 2006)                                                                                                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 2.9    |       | Appointment of Thomas A.  Schuler as Chief Financial Officer (incorporated by reference from our  Current Report on Form 8-K filed on September 25, 2006)                                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.0    |       | Completion of the acquisition of William Brand  Administer Limited and its subsidiary William Textiles Limited (incorporated  by reference from our Current Report on Form 8-K filed on September 30, 2006)                                                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1    |       | Resignation of Mr. Ricky Ang as CEO of the Company  and Appointment of Dr. Bruno Wu as CEO of the Company (incorporated by  reference from our Current Report on Form 8-K filed on October 5, 2006)                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2    |       | Resignation of Dr. Herbert Kloiber as a member of  the Board of Directors (incorporated by reference from our Current Report on  Form 8-K filed on October 11, 2006)                                                                                                                                                                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.3    |       | Resignation of Mr. William Adamopoulos as a member  of the Board of Directors (incorporated by reference from our Current Report  on Form 8-K filed on  November 3, 2006)                                                                                                                                                                                                       |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.5    |       | Sale and Purchase  Agreement with the Sellers of Hubei Zhengyuan Co., Ltd, dated November 21,  2006 (incorporated by reference from our Current Report on Form 8-K  filed on November 27,  2006)                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.6    |       | Resignation of Grant  Thornton HK as independent auditor for the fiscal period ending March 31,  2007, and Reappointment  of Bernstein & Pinchuk as  independent auditor for the fiscal period ending March 31, 2007 (incorporated by reference from our Current Report on Form 8-K filed  on  December 6, 2006)                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.7    |       | Appointment of Mr. Walter Beach as a member of the Board of Directors  (incorporated by reference from our Current Report on Form 8-K filed on December 6, 2006)                                                                                                                                                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                                                            |
| 3.8    |       | Supplementary Agreement with Barron Partners LLP (“Barron”)  to modify the terms of a Stock Purchase Agreement between Barron and the  Company, dated December 31, 2007 (incorporated by reference from our Current  Report on Form 8-K filed on February 6, 2007)                                                                                                    |

 

55

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| 31.1   |   | Certificate of CEO as Required by Rule  13a-14(a)/15d-14                                                                                                          |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                              |
| 31.2   |   | Certificate of CFO as Required by Rule  13a-14(a)/15d-14                                                                                                          |
|   |   |                                                                                                                                                              |
| 32.1   |   | 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 Code |
|   |   |                                                                                                                                                              |
| 32.2   |   | 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 |

 

56

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