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<TITLE>CC Filed by Filing Services Canada Inc. 403-717-3898</TITLE>
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<P style="margin:0px" align=right><B>As filed with the Securities and Exchange Commission on February 1, 2008</B></P>
<P style="margin:0px" align=right><B>Registration No. 333-131017</B></P>
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<P style="line-height:14pt; margin:0px; font-size:12pt" align=center><B>SECURITIES AND EXCHANGE COMMISSION</B></P>
<P style="margin:0px" align=center><B>WASHINGTON, D.C. 20549</B></P>
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<P style="margin:0px" align=center><B>FORM S-1</B></P>
<P style="margin:0px" align=center><B>REGISTRATION STATEMENT</B></P>
<P style="margin:0px" align=center><B>UNDER</B></P>
<P style="margin:0px" align=center><B>THE SECURITIES ACT OF 1933</B></P>
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<P style="margin:0px" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
<P style="margin:0px" align=center>(Exact name of registrant as specified in its charter)</P>
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<TR><TD valign=top width=250.933><P style="margin:0px" align=center><B>Nevada</B></P>
<P style="margin:0px" align=center>(State or other jurisdiction of</P>
<P style="margin:0px" align=center>incorporation or organization)</P>
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<P style="margin:0px" align=center>&nbsp;(Primary Standard Industrial</P>
<P style="margin:0px" align=center>Classification Code Number)</P>
</TD><TD valign=top width=222.6><P style="margin:0px" align=center><B>98-0509797 </B></P>
<P style="margin:0px" align=center>(I.R.S. Employer</P>
<P style="margin:0px" align=center>Identification Number)</P>
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<TR><TD valign=top width=720 colspan=3><P style="margin:0px" align=center><B>No.786 Xinluo Street, High-tech Industrial Development Zone,<BR>
Jinan, China 250101 </B></P>
<P style="margin:0px" align=center><B>86-531-87027114 </B></P>
<P style="margin:0px" align=center>(Address, including zip code, and telephone number, including area code, of registrant&#146;s principal executive offices)</P>
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<TR><TD valign=top width=720 colspan=3><P style="margin:0px" align=center><B>Li Kunwu</B></P>
<P style="margin:0px" align=center><B>President and Chief Executive Officer</B></P>
<P style="margin:0px" align=center><B>No.786 Xinluo Street, High-tech Industrial Development Zone,<BR>
Jinan, China 250101 </B></P>
<P style="margin:0px" align=center><B>86-531-87027114 </B></P>
<P style="margin:0px" align=center>&nbsp;(Name, address, including zip code, and telephone number, including area code, of agent for service)</P>
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<P style="margin:0px" align=center><I>Copies to:</I></P>
<P style="margin:0px" align=center><B>Richard I. Anslow, Esq.</B></P>
<P style="margin:0px" align=center><B>Anslow + Jaclin,&nbsp;&nbsp;LLP</B></P>
<P style="margin:0px" align=center><B>195 Route 9 South, Suite 204</B></P>
<P style="margin:0px" align=center><B>Manalapan, New Jersey 07726</B></P>
<P style="margin:0px" align=center><B>(732) 409-1212</B></P>
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</TD></TR>
<TR><TD valign=top width=720 colspan=3><P style="margin:0px"><B>Approximate Date of Commencement of Proposed Sale to the Public:&nbsp;&nbsp;</B>from time to time after the effective date of this Registration Statement as determined by market conditions and other factors.</P>
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<P style="margin:0px; padding-left:29.333px; text-indent:19.067px">If any of the securities being registered on this Form are to be offered o3 a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:&nbsp;<FONT FACE="Wingdings"> &nbsp;x</FONT></P>
<P style="margin:0px; padding-left:29.333px; text-indent:19.067px">If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.&nbsp;<FONT FACE="Wingdings"> o</FONT></P>
<P style="margin:0px; padding-left:29.333px; text-indent:19.067px">If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.<FONT FACE="Wingdings"> &nbsp;o</FONT></P>
<P style="margin:0px; padding-left:29.333px; text-indent:19.067px">If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.<FONT FACE="Wingdings"> &nbsp;o</FONT></P>
<P style="margin:0px; padding-left:29.333px; text-indent:19.067px">If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.<FONT FACE="Wingdings"> o</FONT></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-left:29.333px">Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of &#147;large accelerated filer,&#148; &#147;accelerated filer&#148; and &#147;smaller reporting company&#148; in Rule 12b-2 of the Exchange Act.&nbsp;&nbsp;(Check one):</P>
<P style="margin:0px; text-indent:8.8px">&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=60.267></TD><TD width=162.533></TD><TD width=101.133></TD><TD width=142.067></TD><TD width=45.067></TD></TR>
<TR><TD valign=top width=60.267><P style="margin:0px; text-indent:8.8px">&nbsp;</P>
</TD><TD valign=top width=162.533><P style="margin:0px">Large accelerated filer</P>
</TD><TD valign=top width=101.133><P style="margin:0px; text-indent:8.8px">&nbsp;<FONT FACE="Wingdings">o</FONT></P>
</TD><TD valign=top width=142.067><P style="margin:0px">Accelerated filer</P>
</TD><TD valign=top width=45.067><P style="margin:0px; text-indent:8.8px">&nbsp;<FONT FACE="Wingdings">o</FONT></P>
</TD></TR>
<TR><TD valign=top width=60.267><P style="margin:0px; text-indent:8.8px">&nbsp;</P>
</TD><TD valign=top width=162.533><P style="margin:0px">Non-accelerated filer</P>
</TD><TD valign=top width=101.133><P style="margin:0px; text-indent:8.8px">&nbsp;<FONT FACE="Wingdings">o</FONT></P>
</TD><TD valign=top width=142.067><P style="margin:0px">Smaller reporting company</P>
</TD><TD valign=top width=45.067><P style="margin:0px; text-indent:8.8px">&nbsp;<FONT FACE="Wingdings">x</FONT></P>
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<TR><TD valign=top width=60.267><P style="margin:0px; text-indent:8.8px">&nbsp;</P>
</TD><TD valign=top width=162.533><P style="margin:0px">(Do not check if a smaller reporting company)</P>
</TD><TD valign=top width=101.133><P style="margin:0px; text-indent:8.8px">&nbsp;<FONT FACE="Wingdings">o</FONT></P>
</TD><TD valign=top width=142.067><P style="margin:0px; text-indent:8.8px">&nbsp;</P>
</TD><TD valign=top width=45.067><P style="margin:0px; text-indent:8.8px">&nbsp;</P>
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<P style="margin:0px; text-indent:8.8px" align=center><B>CALCULATION OF REGISTRATION FEE</B></P>
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<P style="margin:0px; page-break-before:always" align=center><BR>
<BR>
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<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.4></TD><TD width=22.733></TD><TD width=162.867></TD><TD width=128.133></TD><TD width=128.133></TD><TD width=128.133></TD><TD width=119.467></TD><TD width=8.667></TD></TR>
<TR><TD style="border-top:3px double #000000" valign=bottom width=216 colspan=3><P style="margin:0px" align=center><B>Title Of Each</B></P>
<P style="margin:0px" align=center><B>Class of Securities</B></P>
<P style="margin:0px" align=center><B>to be Registered</B></P>
</TD><TD style="border-left:1px solid #000000; border-top:3px double #000000" valign=bottom width=128.133><P style="margin:0px" align=center><B>Amount To</B></P>
<P style="margin:0px" align=center><B>Be Registered </B></P>
</TD><TD style="border-left:1px solid #000000; border-top:3px double #000000" valign=bottom width=128.133><P style="margin:0px" align=center><B>Proposed Maximum Offering Price Per Share </B></P>
</TD><TD style="border-left:1px solid #000000; border-top:3px double #000000" valign=bottom width=128.133><P style="margin:0px" align=center><B>Proposed Maximum Aggregate Offering Price</B></P>
</TD><TD style="border-left:1px solid #000000; border-top:3px double #000000" valign=bottom width=128.133 colspan=2><P style="margin:0px" align=center><B>Amount of Registration Fee</B></P>
</TD><A NAME="OLE_LINK3"></A><A NAME="OLE_LINK4"></A><A NAME="_Hlk189368241"></A></TR>
<TR><TD style="border-bottom:1px solid #000000" valign=bottom width=216 colspan=3><P style="margin:0px">&nbsp;Common Stock, $.001 par value(1)</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>11,551,449</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>$0.5627</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>$6,500,000.35</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133 colspan=2><P style="margin:0px" align=center>$255.45</P>
</TD></TR>
<TR><TD style="border-bottom:1px solid #000000" valign=bottom width=216 colspan=3><P style="margin:0px">&nbsp;Common Stock, $.001 par value(3)</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>5,897,243</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>0.5627</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>3,318,378.64</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133 colspan=2><P style="margin:0px" align=center>130.41</P>
</TD></TR>
<TR><TD style="border-bottom:1px solid #000000" valign=bottom width=216 colspan=3><P style="margin:0px">&nbsp;Common Stock, $.001 par value(7)</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>4,543,308</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>0.3762</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133><P style="margin:0px" align=center>1,709,192.47</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=128.133 colspan=2><P style="margin:0px" align=center>67.17</P>
</TD></TR>
<TR><TD style="border-bottom:3px double #000000" valign=bottom width=216 colspan=3><P style="margin:0px">Total </P>
</TD><TD style="border-left:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=128.133><P style="margin:0px" align=center>21,992,000(3)</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=128.133><P style="margin:0px" align=center>&nbsp;</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=128.133><P style="margin:0px" align=center>$11,527,571.146</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=128.133 colspan=2><P style="margin:0px" align=center>$453.03</P>
</TD><A NAME="hangingindent"></A></TR>
<TR><TD valign=top width=30.4><P style="margin:0px; font-size:8pt">&nbsp;</P>
</TD><TD valign=top width=22.733><P style="margin:0px">(1)</P>
</TD><TD valign=top width=675.4 colspan=6><P style="margin:0px">In accordance with the Registration Rights Agreement, 11,551,449 shares of common stock represents 130% of the 8,885,730 shares of common stock issuable in connection with the conversion of the Senior Secured Convertible Notes in accordance with the Securities Purchase Agreement dated December 21, 2007 between us and Castlerigg Master Investments Ltd., at a conversion price equal to $0.5627, or the average of the lowest weighted average price of our common stock for the 25 trading days prior to the date of the Senior Secured Convertible Notes.</P>
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</TABLE>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=29.667></TD><TD width=22.6></TD><TD width=667.667></TD></TR>
<TR><TD valign=top width=29.667><P style="margin:0px; font-size:8pt">&nbsp;</P>
</TD><TD valign=top width=22.6><P style="margin:0px">(2)</P>
</TD><TD valign=top width=667.667><P style="margin:0px">None of the 21,992,000 being registered are shares that have been, or will be, received as liquidated damages or conversion default payments.</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.533></TD><TD width=19.533></TD><TD width=669.867></TD></TR>
<TR><TD valign=top width=30.533><P style="margin:0px; font-size:8pt">&nbsp;</P>
</TD><TD valign=top width=19.533><P style="margin:0px">(3)</P>
</TD><TD valign=top width=669.867><P style="margin:0px">Represents warrants to purchase 5,897,243 shares of the Company&#146;s common stock at a price per share of $0.5627, issuable in connection with the Series B Warrant between us and Castlerigg Master Investments, Ltd. Dated December 21, 2007.</P>
</TD></TR>
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<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.533></TD><TD width=19.533></TD><TD width=669.867></TD></TR>
<TR><TD valign=top width=30.533><P style="margin:0px; font-size:8pt">&nbsp;</P>
</TD><TD valign=top width=19.533><P style="margin:0px">(4)</P>
</TD><TD valign=top width=669.867><P style="margin:0px">In accordance with the Registration Rights Agreement, 4,543,308 shares of common represent 130% of the 3,495,852stock issuable to make interest payments towards the total $1,314,897 that will accrue on the Senior Secured Convertible Notes during the life of the Senior Secured Convertible Notes. &nbsp;&nbsp;This represents 85% of the maximum interest payment the Company would pay in shares of common stock for the life of the Senior Secured Convertible Notes as $0.3762 is the lesser of 85% of the average volume weighted average bid price for the Company&#146;s common stock for the 25 consecutive trading days prior to February 1, 2008 and 85% of the average of the lowest three trading days during the 25 consecutive trading day period prior to February 1, 2008,assuming such date was an interest payment date, as defined within the Notes. </P>
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<P style="margin:0px; text-indent:19.067px" align=justify>The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.</P>
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<P style="margin:0px" align=center>SUBJECT TO COMPLETION FEBRUARY 1, 2008</P>
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<P style="margin:0px; text-indent:39.6px" align=justify>The information in this prospectus is not complete and may be changed.&nbsp;&nbsp;The selling stockholders may not sell these securities until the registration filed with the Securities and Exchange Commission is effective.&nbsp;&nbsp;This preliminary prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.</P>
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<P style="margin:0px" align=center>PROSPECTUS</P>
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<P style="margin:0px" align=center>21,992,000 shares of Common Stock</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:20pt; margin:0px; font-size:18pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>This prospectus relates to the sale or other disposition by the selling stockholders identified on pages 34 to 36 of this prospectus, or their transferees, of up to 21,992,000 shares of our common stock, which includes (i) 11,551,449 shares issuable upon conversion shares of our Senior Secured Convertible Note, (ii) 4,543,308 shares of our common stock issuable in connection with interest payments on our Senior Secured Convertible Note (ii) 5,897,243 shares issuable upon the exercise of the Series B Warrant that was granted in connection with the Senior Secured Convertible Note pursuant to that certain Securities Purchase Agreement.&nbsp;&nbsp;These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We will receive no proceeds from the sale or other disposition of the shares, or interests therein, by the selling stockholders. However, we will receive proceeds in the amount of $3,318,378.64 assuming the cash exercise of all of the warrants held by the selling stockholders, subject to certain of the warrants being exercised under a &#147;cashless exercise&#148; right.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Our common stock is traded on the over-the-counter electronic bulletin board. Our trading symbol is<FONT COLOR=#FF0000>&nbsp;</FONT>CVDT.&nbsp;&nbsp;On January 28,<FONT COLOR=#FF0000> &nbsp;</FONT>&nbsp;2008, the last bid price as reported was $0.55 per share.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The selling stockholders, and any participating broker-dealers may be deemed to be &#147;underwriters&#148; within the meaning of the Securities Act of 1933, and any commissions or discounts given to any such broker-dealer may be regarded as underwriting commissions or discounts under the Securities Act.&nbsp;&nbsp;The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute their common stock.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Brokers or dealers effecting transaction in the shares should confirm the registration of these securities under the securities laws of the states in which transactions occur or the existence of our exemption from registration.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify><B>An investment in shares of our common stock involves a high degree of risk.&nbsp;&nbsp;We urge you to carefully consider the Risk Factors beginning on page 5</B>.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify><B>Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.</B></P>
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<P style="margin:0px" align=center>February&nbsp;__, 2008</P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px">&nbsp;<A NAME="item_1_3_1"></A><A NAME="prospectus_summary"></A></P>
<P style="margin:0px" align=center><B>PROSPECTUS SUMMARY</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>This summary highlights selected information contained elsewhere in this prospectus.&nbsp;&nbsp;This summary does not contain all the information that you should consider before investing in the common stock.&nbsp;&nbsp;You should carefully read the entire prospectus, including &#147;Risk Factors&#148;, &#147;Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations&#148;and the Consolidated Financial Statements, before making an investment decision<I> .</I></P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_2"></A></P>
<P style="margin:0px" align=center><B>THE COMPANY</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Background</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>China VoIP &amp; Digital Telecom, Inc. is principally engaged in the development and sales of computer software and hardware, digital video pictures system; development and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license), as well as Voice over Internet Phone (&#147;VoIP&#148;) technology related businesses, and relies on China Tietong, a Chinese telecom provider, to provide VoIP services.&nbsp;&nbsp;China VoIP Digital Telecom Inc., formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. &nbsp;Accordingly, Jinan YinQuan became a wholly-owned subsidiary of China VoIP &amp; Digital Telecom, Inc.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Our principal business office is located in Jinan City, Shandong Province, China. &nbsp;The address is RM 508, No.786 Xinluo Street, High-Tech Industrial Development Zone, Jinan, China, and our telephone number at that address is 86-(531) 8702-7114. &nbsp;Our internet website is www.chinavoip-telecom.com.&nbsp;&nbsp;The information contained on our website is not incorporated by reference in this prospectus and should not be considered a part of this prospectus.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>In this prospectus, &#147;China VoIP,&#148; the &#147;Company,&#148; &#147;we,&#148; &#147;us&#148; and &#147;our&#148; refer to China VoIP &amp; Digital Telecom, Inc. and, unless the context otherwise indicates, our subsidiary MCM.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>History</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify>We were originally incorporated in Nevada on October 18, 2004 as a development stage company named &#147;Crawford Lake Mining, Inc.&#148; in the business of mineral exploration. &nbsp;On August 17, 2006, we entered in an agreement with Jinan YinQuan Technology Co., Ltd., a Chinese registered company. &nbsp;Upon the effectiveness of the share exchange agreement, the Company transferred opertation to the business of Jinan YinQuan, which has continued as the operating entity of the Company. Accordingly, the Company changed its name to China VoIP &amp; Digital Telecom Inc.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Share Exchange with Jinan YinQuan Technology Co., Ltd.</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px">On August 17, 2006, we acquired all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. &nbsp;Accordingly, Jinan YinQuan became a wholly-owned subsidiary of China VoIP &amp; Digital Telecom, Inc.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NP Soft Switch </B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Our NP soft switch IP phone system and its ancillary IP phone billing and management systems were are all proprietarily developed by Jinan Yinquan, and are protected by a software copyright certificate issued by the State Copyright Bureau. The technology has been registered as a software product at Shandong Information Industry Office. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The NP soft switch IP phone system is based on real-time Internet communication technology and related applications, and uses software to simulate circuit switching. It provides next-generation networks (IPv6 and NGN) call control and connection control functions designed for real time services, and serves as the core of call and control of a next-generation network. The NP system supports many IP phone access protocols, and can organize effectively individual and corporate communications. It boasts excellent capacity and scalability, and can be applied on many kinds of end equipments and accessing modes (including IP mobile phone, PSTN phone, IP fixed phone, soft terminal, WIFI IP phone, and etc.) </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The NP system consists of an access certification module (AC), soft switch call control module (SCC), billing system (BS), system management configuration (WEB), network management system (NMS) and database system (DBS), and adopts the distributed structure. Based on the number of users, distribution and network environment, soft switch system platforms or relay gateway can be installed anywhere in the world to balance the load. In a region with many network users, it is recommended to install a voice server, so that most data exchange of voice communication can be done locally to avoid cross-regional transmission of voice data. When a network users in different regions wish to communicate, a node server will be used to connect them in order to interconnect the different servers and the sharing of network resources. Different soft switch systems serve as the redundancy for each other. When one soft switch system is down, another one will be appointed to take its position according to the load condition and network status. The </P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">node server will send the parameters of the new soft switch server to the terminals, and terminals will register automatically themselves onto the new server. When a relay gateway is down or the network is down, the soft switch system will direct the call to other relay gateway to ensure the normal service.</P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The AC Module checks for equipment registration and calls. It covers the differences between different types of equipment and the deficiency of specific equipment, so that they can be connected easily with one another. The access certification is based on an account number, password and MAC address, and unauthorized users are prohibited from accessing the system. It supports standard signals, and makes sure the network phone set, residential gateway, soft switch and any other network terminal products that are manufactured by most equipment companies can register with and be used in the system, so as to achieve compatibility and communication between different protocols and products. The differences between different products and protocols will be handled by the system. Furthermore, it supports private signals. Private signals adopts TLS transmission layer encryption technology to avoid being intercepted and captured. Only the authorized terminal equipment with built-in private signals can log into the system. The AC module also supports both login and call signals to pass through NAT, and provides accessing and inter-communication functions with different protocol-type equipments under different network environment, so as to realize equipment login and call certifications. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The SCC Module is responsible for handling call signals, and providing different kinds of call services and the media flow routing function. Its open design supports standard SIP protocol issued by IETF, and 32 byte encryption key for voice transmission, which means even all RTP packets are captured in the midway, the voice cannot be recovered. Additionally, it supports both server transfer and P2P direct communication. The communication mode can be selected very flexibly according to the network condition of the user, application mode, terminal device, and call mode. This module is enhanced by private encryption key to protect against any unauthorized copying inside the system even from the administrator. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The Billing Module provides certification, billing and management functions to audio and other related value-added service, and by using it, user can choose different payment methods such as pre-payment, afterward payment, and the purchase of call card. The billing module enables multiple levels of management for distributors. Distributors at different levels will be awarded operator hall management functions, operation management model compatible with that of telecom carriers, and alert functions for pre paid call expenses to remind distributors or end users to recharge. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module records the details of every user&#146;s call, rate, call expense, and expense for value-added service, and account balance. User can check for such details at any time. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module allows the administrators to set up the call expense rate and value-added service expense rate. Therefore, different charge rates can be applied to different kind of users, such as large distributors, key accounts and special accounts. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">It has different kinds of statistics and analysis functions, and therefore can generate statistic reports and analysis tables according to the actual needs. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">It can provide powerful management platform to internet bars, including functions such as order processing, call expense adjustment, and statistics functions to meet the billing requirements of the bar owners. </P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The Network Administration Module system&#146;s web server will provide real time monitoring functions to cover server status, equipment status and call status inside the soft switch system, provide related statistics information, and meanwhile identify any abnormity in the system. </P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=center><B>RECENT DEVELOPMENTS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px">On December 21, 2007, China VoIP &amp; Digital Telecom Inc., a Nevada corporation, (the &quot;Company&quot;), entered into a Securities Purchase Agreement (the &#147;Securities Purchase Agreement&#148;) wit<A NAME="_DV_C6"></A>h an accredited institutional investor (<A NAME="_DV_M26"></A> the &#147;Investor&quot;). &nbsp;The<A NAME="_DV_M27"></A> aggregate purchase price was $5,000,000 and the investment was as follows: </P>
<P style="margin:0px"><BR></P>
<A NAME="_DV_M28"></A><P style="margin:0px">* $5,000,000 of 8.75% Senior Secured Convertible Notes (the &#147;Notes&#148;) convertible into Company common stock at the Average Market Price (the &#147;AMP&#148;) as of the day immediately preceding the closing date (the &#147;Conversion Price&#148;), defined as $.5627. &nbsp;The Notes will have a maturity date of 3 years from closing which can be extended by the Investor in its sole discretion for up to 2 additional years. &nbsp;The Company can make interest payments in cash or registered stock at the Company&#146;s option. &nbsp;If paid in stock, the price used will be 85% of the AMP (the &#147;Payment-in-Stock Price&#148;). &nbsp;The stock component of interest payment will be limited to 20% of the dollar value traded over the previous month.</P>
<P style="margin:0px"><BR></P>
<A NAME="_DV_M29"></A><P style="margin:0px">The Notes will be senior secured obligations of the Company and will be secured by a first priority perfected security interest in all of Company and its subsidiaries, assets, and capital stock. &nbsp;The Company will not be permitted to incur additional indebtedness without the Investors prior written consent.</P>
<P style="margin:0px"><BR>
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<A NAME="_DV_M30"></A><P style="margin:0px">The Investor may request that the Company repurchase up to 1/3<SUP>rd</SUP> of the Initial Investment amount on each of 12<SUP>th</SUP> and 24<SUP>th</SUP> month anniversaries of the closing (together &nbsp;the &#147;First Redemption Option&#148;, &#147;Second Redemption Option&#148;, &#147;First Redemption Date&#148; and &#147;Second Redemption Date&#148;, respectively). If however, the arithmetic average of the closing price of the common stock in each 30 day period following the effectiveness of the registration statement until the First Redemption Date has been greater than 125% of the initial Conversion Price and the dollar trading volume during the same 30 day period has been greater than $3.0 million, then the Investor will waive its first Redemption option. &nbsp;If the same conditions outlined above are met in any six months between the First Redemption Date and the Second Redemption Date, the Investor will waive its Second Redemption Option.</P>
<P style="margin:0px"><BR></P>
<A NAME="_DV_M31"></A><P style="margin:0px">After one year following the effectiveness of the Registration Statement (as defined in the Registration Rights Agreement), the Company will have the option to prepay the Notes at the greater of (i) 125% of the equity value and (ii) 125% of the issue price plus accrued and unpaid interest. &nbsp;Upon being irrevocably notified by the Company of the Company&#146;s desire to exercise the Company Optional Redemption (as defined in the Notes), the Investor will determine the date of the actual prepayment not to exceed 75 business days following the receipt of the notice. &nbsp;If the Company exercises the Company Optional Redemption it will issue the Investor 55% 5-year warrant coverage with a strike price equal to the strike price of the existing warrants (the &#147;Prepayment Warrants&#148;).</P>
<P style="margin:0px"><BR></P>
<A NAME="_DV_M32"></A><P style="margin:0px">Other than their relationship as a result of the Securities Purchase Agreement, there is no material relationship between the Company and any of the Investors. &nbsp;</P>
<P style="margin:0px"><BR></P>
<A NAME="_DV_C10"></A><P style="margin:0px">The Investor received three series of warrants, titled Series A Warrant, Series B Warrant, Series C Warrant (collectively the &#147;Warrants&#148;)<A NAME="_DV_X9"></A><A NAME="_DV_C12"></A>. <A NAME="_DV_C13"></A>The Warrants are exercisable at price per share of $.5627 and are subject to economic anti-dilution protection. &nbsp;The Series A Warrant is exercisable for 8,885,730 shares of the Company&#146;s common stock and expires the date eighty four (84) months after the earlier of (A) such time as all of the Registrable Securities (as defined in the Registration Rights Agreement) are available for resale pursuant to an effective Registration Statement and (B) two (2) years after December 21, 2007 . &nbsp;The Series B Warrant is exercisable for 6,220,011 shares of the Company&#146;s common stock and expires on the date on which the Notes issued pursuant to the Securities Purchase Agreement are no longer issued and outstanding. &nbsp;The Series C Warrant is exercisable for 6,353,297 shares of the Company&#146;s common stock and expires on the date sixty (60) months after the first time the Company elects a Company Optional Redemption.</P>
<A NAME="_DV_M33"></A><P style="margin:0px"><BR></P>
<P style="margin:0px">Also on December 21, 2007, the Company executed a Registration Rights Agreement, which requires the Company to file a Registration Statement registering:</P>
<A NAME="_DV_M34"></A><P style="margin:0px"><BR></P>
<P style="margin:0px">* all of the shares of Company common stock issuable upon conversion in full of the Notes;</P>
<P style="margin:0px"><BR></P>
<A NAME="_DV_M35"></A><P style="margin:0px">* the Common Stock issuable upon exercise of the Warrants; </P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px">The registration statement of which this prospectus is a part has been filed pursuant to such Agreements, see &#147;Selling Stockholders.&#148;</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=center><B>THE OFFERING</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=348.8></TD><TD width=335.133></TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=top width=348.8><P style="margin:0px; padding-left:19.067px"><B>Securities Covered Hereby&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></P>
</TD><TD style="background-color:#E2EEF6" valign=top width=335.133><P style="margin:0px; padding-left:19.067px" align=justify>21,992,000 shares, which includes (i) 11,551,449 shares underlying Senior Secured Convertible Note, (ii) 4,543,308 shares of common stock issuable to make interest payments towards the total $1,314,897 that will accrue on the Senior Secured Convertible Notes (iii) 5,897,243 shares subject to the Series B Warrant.</P>
<P style="margin:0px; padding-left:19.067px" align=justify>&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=top width=348.8><P style="margin:0px; padding-left:19.067px"><B>Common Stock Outstanding Prior to the Offering</B></P>
</TD><TD style="background-color:#FFFFFF" valign=top width=335.133><P style="margin:0px; padding-left:19.067px" align=justify>53,008,000 shares</P>
<P style="margin:0px; padding-left:19.067px" align=justify>&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=top width=348.8><P style="margin:0px; padding-left:19.067px"><B>Common Stock to be Outstanding after the Offering</B></P>
</TD><TD style="background-color:#E2EEF6" valign=top width=335.133><P style="margin:0px; padding-left:19.067px" align=justify>75,000,000 shares, assuming the selling stockholders convert the portion of their Senior Secured Convertible Note included herein and exercise all their warrants, and no conversion of other series of outstanding preferred stock nor exercise of the other outstanding warrants and options.</P>
<P style="margin:0px; padding-left:19.067px" align=justify>&nbsp;</P>
</TD></TR>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px">&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=352.4></TD><TD width=331.533></TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=top width=352.4><P style="margin:0px; padding-left:19.067px"><B>Use of Proceeds&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</B></P>
</TD><TD style="background-color:#FFFFFF" valign=top width=331.533><P style="margin:0px; padding-left:19.067px" align=justify>We will receive no proceeds from the sale or other disposition of the shares of common stock covered hereby by the selling stockholders.&nbsp;&nbsp;However, we will receive $3,318,378.64 if all of the warrants for underlying shares included in this prospectus are exercised for cash.&nbsp;&nbsp;We will use these proceeds for general corporate purposes.</P>
<P style="margin:0px; padding-left:19.067px" align=justify>&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=top width=352.4><P style="margin:0px; padding-left:19.067px"><B>OTC Electronic Bulletin Board Symbol</B></P>
</TD><TD style="background-color:#E2EEF6" valign=top width=331.533><P style="margin:0px; padding-left:19.067px" align=justify>&#147;CVDT&#148;</P>
</TD></TR>
</TABLE>
<P style="margin:0px">&nbsp;<A NAME="item_1_3_3"></A><A NAME="risk_factors"></A></P>
<P style="margin:0px" align=center><B>RISK FACTORS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px">See &#147;RISK FACTORS&#148; for a discussion of the above factors and certain additional factors that should be considered in evaluating an investment in the common stock.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=center><B>SUMMARY FINANCIAL AND OPERATING INFORMATION</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The following selected financial information is derived from the Consolidated Financial Statements appearing elsewhere in this prospectus and should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this prospectus.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=328.933></TD><TD width=4.933></TD><TD width=14></TD><TD width=59.067></TD><TD width=7.067></TD><TD width=12.933></TD><TD width=10.667></TD><TD width=59.2></TD><TD width=7.067></TD></TR>
<TR><TD valign=bottom width=328.933><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=4.933><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=162.933 colspan=6><P style="margin:0px" align=center><B>Year Ended December 31 30,</B></P>
</TD><TD valign=bottom width=7.067><P style="margin:0px"><B>&nbsp;</B></P>
</TD></TR>
<TR><TD valign=bottom width=328.933><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=4.933><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=162.933 colspan=6><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=7.067><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=328.933><P style="margin:0px">Summary of Operations</P>
</TD><TD valign=bottom width=4.933><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=73.067 colspan=2><P style="margin:0px" align=center><B>2006</B></P>
</TD><TD valign=bottom width=7.067><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD valign=bottom width=12.933><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=69.867 colspan=2><P style="margin:0px" align=center><B>2005</B></P>
</TD><TD valign=bottom width=7.067><P style="margin:0px"><B>&nbsp;</B></P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=328.933><P style="margin:0px; padding-left:29.333px; text-indent:-8.8px">Total revenues</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=4.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=14><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=59.067><P style="margin:0px" align=right>1,449,969</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=7.067><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=12.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=10.667><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=59.2><P style="margin:0px" align=right>990,495</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=7.067><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=328.933><P style="margin:0px; padding-left:29.333px; text-indent:-8.8px">Net income (loss)</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=4.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=14><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=59.067><P style="margin:0px" align=right>(530,338</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=7.067><P style="margin:0px">)</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=12.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=10.667><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=59.2><P style="margin:0px" align=right>271,929</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=7.067><P>&nbsp;</P></TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=328.933><P style="margin:0px; padding-left:29.333px; text-indent:-8.8px">Net profit (loss) per common share (basic and diluted)</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=4.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=14><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=59.067><P style="margin:0px" align=right>(0.01</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=7.067><P style="margin:0px">)</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=12.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=10.667><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=59.2><P style="margin:0px" align=right>0.01</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=7.067><P>&nbsp;</P></TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=328.933><P style="margin:0px; padding-left:29.333px; text-indent:-8.8px">Weighted average common shares outstanding, basic and diluted</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=4.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=14><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=59.067><P style="margin:0px" align=right>50,931,973</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=7.067><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=12.933><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=10.667><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=59.2><P style="margin:0px" align=right>40,000,000</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=7.067><P style="margin:0px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px">&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=408.6></TD><TD width=6.8></TD><TD width=8.4></TD><TD width=91.067></TD><TD width=6.8></TD><TD width=19.8></TD><TD width=8.4></TD><TD width=91.067></TD><TD width=6.8></TD></TR>
<TR><TD valign=bottom width=408.6><P style="margin:0px">Statement of Financial Position</P>
</TD><TD valign=bottom width=6.8><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=99.467 colspan=2><P style="margin:0px" align=center><B>As of</B></P>
<P style="margin:0px" align=center><B>September 30, 2007</B></P>
</TD><TD valign=bottom width=6.8><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD valign=bottom width=19.8><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=99.467 colspan=2><P style="margin:0px" align=center><B>As of</B></P>
<P style="margin:0px" align=center><B>September 30, 2006</B></P>
</TD><TD valign=bottom width=6.8><P style="margin:0px"><B>&nbsp;</B></P>
</TD></TR>
<TR><TD valign=bottom width=408.6><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=99.467 colspan=2><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=19.8><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=99.467 colspan=2><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=408.6><P style="margin:0px">Cash and cash equivalents</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.4><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=91.067><P style="margin:0px" align=right>828,258</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=19.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.4><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=91.067><P style="margin:0px" align=right>345,084</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=408.6><P style="margin:0px">Total assets</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=91.067><P style="margin:0px" align=right>3,765,367</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=19.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=91.067><P style="margin:0px" align=right>1,623,425</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=408.6><P style="margin:0px">Working capital</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=91.067><P style="margin:0px" align=right>1,665,954</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=19.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=91.067><P style="margin:0px" align=right>609,194</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=408.6><P style="margin:0px">Long-term debt</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=91.067><P style="margin:0px" align=right>-</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=19.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=91.067><P style="margin:0px" align=right>-</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=408.6><P style="margin:0px">Stockholders&#146; equity</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=91.067><P style="margin:0px" align=right>3,142,475</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=19.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.4><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=91.067><P style="margin:0px" align=right>1,074,505</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.8><P style="margin:0px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>4</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR></P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px">&nbsp;<A NAME="item_1_3_4"></A></P>
<P style="margin:0px" align=center><B>RISK FACTORS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The shares of our common stock being offered for resale by the selling stockholders are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in the common stock. Before purchasing any of the shares of common stock, you should carefully consider the following factors relating to our business and prospects. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only risks facing us.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Risks Related to Our Business</B> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We depend on our key management personnel and the loss of their services could adversely affect our business. </I></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">We place substantial reliance upon the efforts and abilities of our executive officers, Li Kinwu, our Chairman, Chief Executive Officer and Chief Financial Officer and Wang Qinghua, our Chief of Technology. The loss of the services of any of our executive officers could have a material adverse effect on our business, operations, revenues or prospects. We do not maintain key man life insurance on the lives of these individuals.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We need to manage growth in operations to maximize our potential growth and achieve our expected revenues and our failure to manage growth will cause a disruption of our operations resulting in the failure to generate revenue.</I></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In order to maximize potential growth in our current and potential markets, we believe that we must expand our manufacturing and marketing operations. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.</I></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.</I></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We may never issue dividends.</I></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">We did not declare any dividends for the year ended December 31, 2006 and have not declared any dividends to date in 2007. Our board of directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>Future acquisitions may have an adverse effect on our ability to manage our business.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
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<P style="margin:0px; page-break-before:always">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If we are presented with appropriate opportunities, we may acquire complementary technologies or companies. Future acquisitions would expose us to potential risks, including risks associated with the assimilation of new technologies and personnel, unforeseen or hidden liabilities, the diversion of management attention and resources from our existing business and the inability to generate sufficient revenues to offset the costs and expenses of acquisitions. Any difficulties encountered in the acquisition and integration process may have an adverse effect on our ability to manage our business. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We may have difficulty defending our intellectual property rights from infringement resulting in lawsuits requiring us to devote financial and management resources that would have a negative impact on our operating results. </I></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always">We regard our service marks, trademarks, trade secrets, patents and similar intellectual property as critical to our success. We rely on trademark, patent and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights. We have received trademark and patent protection for certain of our products in the People's Republic of China. No assurance can be given that our patents and licenses will not be challenged, invalidated, infringed or circumvented, or that our intellectual property rights will provide competitive advantages to us. There can be no assurance that we will be able to obtain a license from a third-party technology that we may need to conduct our business or that such technology can be licensed at a reasonable cost.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>We have limited business insurance coverage in China.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability or disruption insurance for our operations in China. Any business disruption, litigation or natural disaster may result in substantial costs and diversion of our resources.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>Risks Related to Our Industry</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>If VoIP technology fails to gain acceptance among mainstream consumers, our ability to grow our business will be limited. </I></P>
<P style="margin-top:4.2px; margin-bottom:0px"><BR></P>
<P style="margin-top:5px; margin-bottom:0px">The market for VoIP service is continuing to rapidly evolve. We currently generate most of our revenue from the sale of VoIP services and related products to residential customers. Revenue generated from sales to residential customers will continue to account for most of our revenue for the foreseeable future. We believe that a significant portion of our initial residential customers are early adopters of VoIP technology. However, in order for our business to continue to grow and to become profitable, VoIP technology must gain acceptance among mainstream consumers, who tend to be less technically knowledgeable and more resistant to new technology services. Because potential VoIP customers need to connect additional hardware not required for the use of traditional telephone service, mainstream consumers may be reluctant to use our service. We have shifted our focus of advertising to reach out to the mainstream consumer and increase brand awareness, primarily with new television commercials. However, if mainstream consumers choose not to adopt our technology, our ability to grow our business will be limited. </P>
<P style="margin-top:15px; margin-bottom:0px"><I>Regulation of VoIP services is developing and therefore uncertain, and current or future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability. </I></P>
<P style="margin-top:4.2px; margin-bottom:0px"><BR></P>
<P style="margin-top:5px; margin-bottom:0px">Our business has developed in an environment largely free from government regulation. However, the United States and other countries have begun to assert regulatory authority over VoIP and are continuing to evaluate how VoIP will be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain. </P>
<P style="margin-top:10px; margin-bottom:0px">Current or future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth. </P>
<P style="margin-top:10px; margin-bottom:0px">Our international operations are also subject to regulatory risks, including the risk that regulations in some jurisdictions will prohibit us from providing our services cost-effectively or at all, which could limit our growth. Currently, there are several countries where regulations prohibit us from offering service. In addition, because customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing VoIP services is illegal, the governments of those countries may attempt to assert jurisdiction over us, which could expose us to significant liability and regulation. </P>
<P style="margin-top:18px; margin-bottom:0px"><B>Risks Related to Our Private Placement of Senior Convertible Note and Warrants and this Offering </B></P>
<P style="margin-top:5px; margin-bottom:0px"><BR>
<I>In order to raise sufficient funds to continue operations, we may have to issue additional securities at prices which may result in substantial dilution to our shareholders. </I></P>
<P style="margin-top:6px; margin-bottom:0px">If we raise additional funds through the sale of equity or convertible debt, current stockholders&#146; percentage ownership will be reduced. In addition, these transactions may dilute the value of Common Stock outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our Common Stock. We cannot assure that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition. </P>
<P style="margin-top:10px; margin-bottom:0px"><I>The shares issuable upon exercise of the Warrants issued to the Castlerigg Master Investments Ltd. are required to be registered with the Commission. We are subject to adverse consequences if the shares are not registered with the Commission within defined time periods. </I></P>
<P style="margin-top:10px; margin-bottom:0px"><BR>
<BR></P>
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<P style="margin-top:12px; margin-bottom:0px; page-break-before:always">The Registration Rights Agreement with the Original Note Holder requires us to file a registration statement for the resale of the 317,394 shares issuable upon exercise of the Class&nbsp;A Warrant. The registration statement must be filed within 45 days of December 31, 2007, must be declared effective by the Commission within 120 days, and must remain effective and available for use until earlier of the date the Castlerigg Master Investments Ltd. can sell all of the securities covered by the registration statement without restriction pursuant to Commission Rule 144 and the date all of such securities have been sold pursuant to the registration statement. If we fail to meet the deadlines for the filing or the effectiveness of the registration statement we will be subject to cash delay payments equal to 2% per month which shall apply retroactively from 90 days before closing. &nbsp;&nbsp;</P>
<P style="margin-top:10px; margin-bottom:0px"><I>The shares issued to Castlerigg Master Investments Ltd. &nbsp;upon conversion of the Note are required to be registered with the Commission. We are subject to adverse consequences if the shares are not registered with the Commission within defined time periods. </I></P>
<P style="margin-top:12px; margin-bottom:0px">The Registration Rights Agreement with the Buyer requires us to file a registration statement for the resale of the shares issuable upon conversion of the Note. The registration statement must be filed within 5 days after we receive stockholder approval for the issuance of such shares or exemption from NASDAQ from such requirement, must be declared effective by the Commission within 120 days (or 90 days if there is no review of the registration statement by the Commission), and must remain effective and available for use until earlier of the date all of such securities have been sold pursuant to the registration statement or the second anniversary of the date of the conversion of the Note. If we fail to meet the deadlines for the filing or the effectiveness of the registration statement, we are required to pay monthly liquidated damages of 1% of the outstanding principal amount of the Note plus accrued interest thereon until such failure is cured. The total penalties payable for failure to have a registration statement declared effective are capped at 12%. </P>
<P style="margin-top:10px; margin-bottom:0px"><I>Our Common Stock could be subject to extreme volatility. </I></P>
<P style="margin-top:12px; margin-bottom:0px">Our Common Stock is currently traded on OTCBB. &nbsp;The trading volume of our Common Stock each day is relatively low. Because of this limited liquidity, stockholders may be unable to sell their shares. Moreover, this means that sales or purchases of relatively small blocks of stock can have a significant impact on the price at which our stock is traded. The trading price of our Common Stock has, from time to time, fluctuated widely and may be subject to similar fluctuations in the future. The trading price of our Common Stock may be affected by a number of factors, including events described in the Risk Factors set forth in this prospectus, as well as our operating results, financial condition, public announcements by us, general conditions in the solar cell industry, and other events or factors. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our Common Stock. These fluctuations may have a negative effect on the market price of our Common Stock. </P>
<P style="margin-top:10px; margin-bottom:0px"><I>The influx of additional shares of our Common Stock into the market may create downward pressure on the trading price of our Common Stock. </I></P>
<P style="margin-top:12px; margin-bottom:0px">The initial sale or secondary resale of significant amounts of our Common Stock in the public markets could have an adverse effect on the market price of our Common Stock. As a result, you may lose all or a portion of your investment and we may experience difficulty in selling our equity securities in the future at prices that we deem to be appropriate. This prospectus covers the resale of up to 21,992,000 shares of our Common Stock. Due to the significance of the number of shares being registered, as compared to our presently outstanding shares, the entry of those shares into the public market or the mere expectation of the entry of those shares into the public market, could adversely affect the market price of our Common Stock and could impair our ability to obtain capital through securities offerings. </P>
<P style="margin-top:12px; margin-bottom:0px">The significant downward pressure on the market price of our Common Stock that would result from the sale of a significant amount of such shares of Common Stock could also encourage &#147;short sales.&#148; These &#147;short sales&#148; occur when an investor commits to sell a security that he or she does not own at the time such commitment is made, but that the investor hopes to buy in earnest at a lower price in the future before he or she must deliver the security to the counterparty on the original sale. Investors typically engage in short selling when they believe that the price of the underlying security will decline before the time of settlement. In the event of a significant increase in short selling of our Common Stock, other investors may interpret such increase as a sign that the market price of our Common Stock will decline, causing further downward pressure on the market price. </P>
<P style="margin-top:7.8px; margin-bottom:0px"><I>Substantial Voting Power May be Concentrated in the Hands of Certain Stockholders. </I></P>
<P style="margin-top:7.8px; margin-bottom:0px">Upon conversion of the Note, Castlerigg Master Investments Ltd. would acquire 8,885,730 shares of our Common Stock. This amount equates to approximately 11.84% of our outstanding Common Stock, after giving effect to such issuance and the other transactions contemplated hereby. </P>
<P style="margin-top:10px; margin-bottom:0px"><I>As long as the Series&nbsp;A Warrants, Series B Warrants and the Series C Warrants are outstanding, it may limit our ability to raise additional funds. &nbsp;</I></P>
<P style="margin-top:10px; margin-bottom:0px">During the term that the Series A Warrants, Series B Warrants and the Series C Warrants (the &#147;Warrants&#148;) are outstanding, the holders of the Warrants are given the opportunity to profit from a rise in the market price of our Common Stock. In addition, the Warrants are not redeemable by us. We may find it more difficult to raise additional equity capital while the Warrants are outstanding. At any time during which the Warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms from other sources. </P>
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<P style="margin:0px; page-break-before:always"><B>Risks Related To Doing Business in China</B> </P>
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<P style="margin:0px; page-break-before:always"><I>Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.</I> </P>
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<P style="margin:0px; page-break-before:always">Our business operations are primarily conducted in China. We also believe that a significant portion of the terminal devices we design are sold to end users in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to the economic, political and legal developments of China. Since the late 1970s, the PRC government has been reforming the economic system in China. These reforms have resulted in significant economic growth. However, we cannot predict the future direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China, could have a material adverse effect on the overall economic growth of China and investment in the VoIP industry. Such developments could materially and adversely affect our business, lead to reduction in demand for our services and materially and adversely affect our competitive position. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>Our business benefits from certain tax incentives, and changes to these tax incentives could adversely affect our operating results.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;The PRC government has provided various tax incentives to domestic high technology companies, including our PRC subsidiaries, in order to encourage the development of technology companies. Our subsidiaries in China are also entitled to a turnover tax exemption relating to their income derived from any technology development agreement and technical transfer agreement which has been registered with the relevant government authority. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;On March&nbsp;16, 2007, the National People&#146;s Congress, the Chinese legislature, passed a new tax law, which is scheduled to take effect on January&nbsp;1, 2008. The new law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. There are enterprises that have already been established prior to the promulgation of the new law and enjoyed low tax rates according to the provisions of the tax laws and administrative regulations that were in force before the promulgation of the new law. Such enterprises may continue to enjoy the preferential tax treatments within five years after the new law is promulgated, and then gradually transition to the tax rate provided in the new law. Enterprises that enjoy the preferential treatment of tax exemption for a fixed term may continue to enjoy such treatment after the promulgation of the new law until such fixed term expires. However, for enterprises that have not yet started to enjoy the preferential tax treatments due to the fact that they have not been profitable, the term of the preferential tax treatments would start running from the year the new law is promulgated, regardless of whether or not they are profitable on such year. Preferential tax treatments will continue to be granted to entities that conduct businesses in certain encouraged sectors and to entities otherwise classified as &#147;new and high technology enterprise,&#148; whether foreign-invested enterprises or domestic companies. Our subsidiaries&#146; qualifications are subject to an annual assessment by the relevant government authority in China. Thus, there is no assurance that our subsidiaries in China will continue to receive such or any other preferential tax treatment. If any of these incentives are reduced or eliminated by government authorities in the future, the effective tax rates of our subsidiaries in China and our effective tax rates on a consolidated basis could increase significantly. Any such change could adversely affect our operating results. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>Our subsidiaries in China are subject to restrictions on dividend payments, making other payments to us or any other affiliated company and borrowing or allocating tax losses among our subsidiaries.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;We are a holding company incorporated in Nevada. We conduct substantially all of our operations through our subsidiaries in China. Current PRC regulations permit our subsidiaries in China to pay dividends only out of their respective accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiaries in China are each required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. In addition, current PRC regulations prohibit inter-company borrowings or allocation of tax losses among our subsidiaries in China. Further, if any of our subsidiaries in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>Fluctuations in exchange rates could result in foreign currency exchange losses.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People&#146;s Bank of China. On July&nbsp;21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a greater fluctuation range between Renminbi and the U.S. dollar. For example, the daily fluctuation range between the Renminbi and the U.S. dollar reached 160 basis points, or 0.16%, on September&nbsp;15, 2006. From July&nbsp;21, 2005 to June&nbsp;25, 2007, the Renminbi cumulatively appreciated approximately 8.0% over the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;Substantially all of our revenues are denominated in RMB, while a small portion of our cost of revenues is denominated in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect our cost of revenues and profit margins as well as our net income. In addition, these fluctuations could result in exchange losses and increased costs in RMB terms. Furthermore, as we rely entirely on dividends paid to us by our subsidiaries in China, any significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on our ADSs in foreign currency terms. If we decide to convert RMB we </P>
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<P style="margin:0px; page-break-before:always">receive from our subsidiaries into U.S. dollars for the purpose of distributing dividends on our ordinary shares or for other purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions to reduce our exposure to foreign currency exchange risk. In addition, our currency exchange losses may be magnified by China&#146;s exchange control regulations that restrict our ability to convert RMB into U.S. dollars. </P>
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<P style="margin:0px"><I>Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;Because substantially all of our revenues are denominated in RMB, any restrictions on currency exchange may limit our ability to use revenues generated in RMB to fund any business activities we may have outside China or to make dividend payments in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, RMB are freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of the State Administration of Foreign Exchange, or SAFE, is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign exchange transactions under our subsidiaries&#146; capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><I>Uncertainties with respect to the PRC legal system could adversely affect us.</I> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">We conduct substantially all of our business through our subsidiaries established in China. Our subsidiaries are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises and Sino-foreign joint ventures. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention. </P>
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<P style="margin:0px" align=justify>&nbsp;<A NAME="forward_looking"></A></P>
<P style="margin:0px" align=center><B>FORWARD LOOKING STATEMENTS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Information included or incorporated by reference in this prospectus may contain forward-looking statements.&nbsp;&nbsp;This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.&nbsp;&nbsp;Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words &#147;may,&#148;&nbsp;&#147;should,&#148;&nbsp;&#147;expect,&#148;&nbsp;&#147;anticipate,&#148;&nbsp;&#147;estimate,&#148;&nbsp;&#147;believe,&#148;&nbsp;&#147;intend&#148;or &#147;project&#148;or the negative of these words or other variations on these words or comparable terminology.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>This prospectus contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our technology, (c) our manufacturing, (d) the regulation to which we are subject, (e) anticipated trends in our industry and (f) our needs for working capital. These statements may be found under &#147;Management&#146;s Discussion and Analysis or Plan of Operations&#148; and &#147;Business,&#148; as well as in this prospectus generally.&nbsp;&nbsp;Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under &#147;Risk Factors&#148; and matters described in this prospectus generally.&nbsp;&nbsp;In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will in fact occur.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in the prospectus, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus.</P>
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<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>10</P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<A NAME="item_1_3_5"></A><A NAME="use_proceeds"></A><P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><B>USE OF PROCEEDS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We will not receive any portion of the proceeds from the sale or other disposition of the shares of common stock covered hereby, or interests therein, by the selling stockholders. We may receive proceeds of up to $3,318,378.64 if all the warrants held by the selling stockholders are exercised for cash. Management currently anticipates that any such proceeds will be utilized for working capital and other general corporate purposes. We cannot estimate how many, if any, warrants may be exercised as a result of this offering or that they will be exercised for cash.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We are obligated to bear the expenses of the registration of the shares. We anticipate that these expenses will be approximately $40,000.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_6"></A><A NAME="dividend_policy"></A></P>
<P style="margin:0px" align=center><B>DIVIDEND POLICY</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We have never declared dividends or paid cash dividends on our common stock and our board of directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_7"></A><A NAME="market_for"></A></P>
<P style="margin:0px" align=center><B>MARKET FOR OUR COMMON STOCK</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Principal Market and Market Prices</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Our common stock is traded on the over-the-counter market on the OTC Electronic Bulletin Board (OTCBB) under the symbol CVDT.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The following table sets forth, for the calendar quarters indicated, the reported high and low bid quotations per share of the common stock as reported on the OTCBB.&nbsp;&nbsp;These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=115.2></TD><TD width=100.8></TD><TD width=100.8></TD><TD width=100.8></TD><TD width=100.8></TD><TD width=100.8></TD><TD width=100.733></TD></TR>
<TR><TD style="border-left:1px solid #000000; border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=115.2><P style="margin:0px" align=center><B>Fiscal Period</B></P>
</TD><TD style="border-left:1px solid #000000; border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=201.6 colspan=2><P style="margin:0px" align=center><B>Fiscal Year Ending</B></P>
<P style="margin:0px" align=center><B>12/31/08</B></P>
</TD><TD style="border-left:1px solid #000000; border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=201.6 colspan=2><P style="margin:0px" align=center><B>Fiscal Year Ended</B></P>
<P style="margin:0px" align=center><B>12/31/07</B></P>
</TD><TD style="border:1px solid #000000" valign=bottom width=201.533 colspan=2><P style="margin:0px" align=center><B>Fiscal Year Ended</B></P>
<P style="margin:0px" align=center><B>12/31/06</B></P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=115.2><P style="margin:0px">&nbsp;</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>High</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>Low</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>High</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>Low</P>
</TD><TD style="border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>High</P>
</TD><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.733><P style="margin:0px" align=center>Low</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=115.2><P style="margin:0px" align=center>First Quarter</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>$0.69(1)</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>$0.40(1)</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>$4.94</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>$2.01</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>$---- (2)</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.733><P style="margin:0px" align=center>$---- (2)</P>
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<TR><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=115.2><P style="margin:0px" align=center>Second Quarter</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P>&nbsp;</P></TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;2.34</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;1.11</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;---- (2)</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.733><P style="margin:0px" align=center>&nbsp;&nbsp;---- (2)</P>
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<TR><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=115.2><P style="margin:0px" align=center>Third Quarter</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;1.19</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;0.46</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;2.28</P>
</TD><TD style="background-color:#E2EEF6; border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.733><P style="margin:0px" align=center>&nbsp;&nbsp;2.02</P>
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<TR><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=115.2><P style="margin:0px" align=center>Fourth Quarter</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;1.65</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;0.41</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.8><P style="margin:0px" align=center>&nbsp;&nbsp;3.70</P>
</TD><TD style="background-color:#FFFFFF; border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=100.733><P style="margin:0px" align=center>&nbsp;&nbsp;2.50</P>
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<P style="margin:0px"><B>(1)</B>Reflects prices through&nbsp;January 28, 2008</P>
<P style="margin:0px">(2) At this time, our common stock was not traded publicly. &nbsp;</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We have not paid any dividends on our shares of common stock since inception and do not expect to declare any dividends on our common stock in the foreseeable future.&nbsp;&nbsp;Any declared dividend in the future would be subject to the terms of the outstanding preferred stock at that time.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>Approximate Number of Holders of Our Common Stock</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>On February 1, 2008, there were approximately 86 holders of record of the common stock.&nbsp;&nbsp;Since of shares of common stock are held in street or nominee name, it is believed that there are a substantial number of additional beneficial owners of our common stock.</P>
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<P style="margin:0px" align=center><B>MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL</B></P>
<P style="margin:0px" align=center><B>CONDITION AND RESULTS OF OPERATIONS</B></P>
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<P style="margin:0px; text-indent:39.6px" align=justify>The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this prospectus.&nbsp;&nbsp;In addition to historical information contained herein, the following discussion and other parts of this prospectus contain certain forward-looking statements that involve risks and uncertainties.&nbsp;&nbsp;Our actual results could differ materially from those discussed in the forward-looking statements due to factors discussed under &#147;Risk Factors&#148;, as well as factors discussed elsewhere in this prospectus.&nbsp;&nbsp;The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus.</P>
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<P style="margin:0px"><B>Results of Operations</B></P>
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<P style="margin:0px"><B>Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006</B></P>
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<P style="margin:0px">During the nine months ended September 30, 2007, we earned $4,155,855 in revenues as compared to $889,602 during the same period ended in 2006, an increase of $3,266,253 or approximately 467%.&nbsp;</P>
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<P style="margin:0px" align=justify>The increase of revenue is mainly contributed to our efforts on promotion and more interest in our services.&nbsp;&nbsp;</P>
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<P style="margin:0px">The gross profit increased from $309,974 during the nine months ended September 30, 2006 to $1,191,081 in the same period of 2007.&nbsp;&nbsp;</P>
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<P style="margin:0px" align=justify>Meanwhile, selling, general and administrative expenses were
$290,587 during the nine month period ended September 30, 2007 as compared to $133,840 for the same period ended in 2006, an increase of $47,344 or approximately 145%.&nbsp;&nbsp;</P>
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<P style="margin:0px" align=justify>Net income of $854,878 recorded during the nine months ended September 30, 2007, as compared to a net loss of $175,105 during the same period of 2006.&nbsp;</P>
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<P style="margin:0px"><B>Liquidity and Capital Resources</B></P>
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<P style="margin:0px" align=justify>Cash provided in operating activities during the nine months ended September 30, 2007 mainly consisted of a loss in cash received from customers of $318,854.&nbsp;&nbsp;</P>
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<P style="margin:0px" align=justify>Cash flows provided by investing activities led to a loss of $985,580 or the nine month period ended September 30, 2007 as compared to a loss of $360,132 provided for the same period of 2006.&nbsp;&nbsp;</P>
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<P style="margin:0px" align=justify>Cash flows provided by financing activities were a loss of $659,558 during the nine months period ended September 30, 2007 as compared to a loss of $147,005 for the same period of 2006.&nbsp;&nbsp;</P>
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<P style="margin:0px"><B>Management&#146;s Plan</B></P>
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<P style="margin:0px">We were originally incorporated in Nevada on October 18, 2004 as a development stage company named &#147;Crawford Lake Mining, Inc.&#148; in the business of mineral exploration. &nbsp;On August 17, 2006, we entered in an agreement with Jinan YinQuan Technology Co., Ltd., a Chinese registered company. &nbsp;Upon the effectiveness of the Acquisition, the Company succeeded to the business of Jinan YinQuan, which will be continued as its sole line of business. Accordingly, the Company has changed its name to China VoIP &amp; Digital Telecom Inc. and has also changed its symbol to CVDT.</P>
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<P style="margin:0px">During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:</P>
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<P style="margin-top: -12pt; padding-left: 24pt">We intend to continue with our marketing strategies to market our NPSoft Switch System in the People's Republic of China. We currently offer our products to 17 cities within the Shandong Province, 3 cities within Zhejiang Province and 1 city in Anhui Province. &nbsp;Furthermore, our NP Soft Switch system is being tested in 2 other markets.</P>
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<P style="margin-top: -12pt; padding-left: 24pt">Along with the continued marketing activities of our current products and services, we are also developing other telecommunication technologies in order to complement our VOIP product offering.</P>
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<P style="margin-top: -12pt; padding-left: 24pt">During the next twelve months, the Company expects to roll out new technologies and also expand into new markets within the People's Republic of China.</P>
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<P style="margin-top: -12pt; padding-left: 24pt">The capital recently acquired from the sale of Senior Secured Convertible Notes will be used to finance some or all of the following activities: 1) acquisition of other companies running business in other provinces of China; 2) purchase of new equipment to satisfy increasing region and customer requirements; 3) marketing and general administrative expenses for new launched regions of China.</P>
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<P style="margin:0px"><B>Critical Accounting Policies</B></P>
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<P style="margin:0px" align=justify>The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.&nbsp;&nbsp;On an on-going basis, management evaluates our estimates and assumptions, including but not limited to those related to revenue recognition and the impairment of long-lived assets, goodwill and other intangible assets.&nbsp;&nbsp;Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.&nbsp;&nbsp;Actual results may differ from these estimates under different assumptions or conditions.</P>
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<P style="margin:0px"><B>Recent Accounting Pronouncements</B></P>
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<P style="margin:0px">In September 2006, FASB issued SFAS 157 &#145;Fair Value Measurements&#146;. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.</P>
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<P style="margin:0px">In September 2006, FASB issued SFAS 158 &#145;Employers&#146; Accounting for Defined Benefit Pension and Other Postretirement Plans&#151;an amendment of FASB Statements No. 87, 88, 106, and 132(R)&#146; This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:</P>
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<P style="margin:0px">A brief description of the provisions of this Statement </P>
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<P style="margin-top: -12pt; padding-left: 24pt">The date that adoption is required </P>
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<P style="margin-top: -12pt; padding-left: 24pt">The date the employer plans to adopt the recognition provisions of this Statement, if earlier.</P>
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<P style="margin-top: -12pt; padding-left: 24pt">The requirement to measure plan assets and benefit obligations as of the date of the employer&#8217;s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.</P>
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<P style="margin:0px">In February of 2007 the FASB issued SFAS 159, &#147;The Fair Value Option for Financial Assets and Financial Liabilities&#151;Including an amendment of FASB Statement No. 115.&#148; &nbsp;The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. &nbsp;The statement is effective as of the beginning of an entity&#146;s first fiscal year that begins after November 15, 2007. &nbsp;The company is analyzing the potential accounting treatment.</P>
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<P style="margin:0px"><B>Inflation</B></P>
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<P style="margin:0px" align=justify>To date, inflation has not had a material effect on our business. We believe that the effects of future inflation may be minimized by controlling costs and increasing our manufacturing efficiency through the increase of our product sales.</P>
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<P style="margin:0px; text-indent:39.6px" align=center><B>BUSINESS</B></P>
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<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Business of Issuer</B></P>
<P style="margin:0px">China VoIP Digital Telecom Inc. (&#147;the Company&#148;), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan became our wholly-owned subsidiary. </P>
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<P style="margin:0px">Jinan YinQuan is an equity joint venture established in JiNan in 2001, in the People&#146;s Republic of China (&#147;the PRC&#148;). &nbsp;The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. </P>
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<P style="margin:0px">The Company&#146;s principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license). &nbsp;Currently, the Company is focused on the Voice over Internet Phone (&#147;VoIP&#148;) technology related business, and relies on China Tietong, a Chinese telecom provider, to provide VoIP services.</P>
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<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Industry Background</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">VoIP is a technology that enables communications over the Internet through the compression of voice, video and/or other media into data packets that can be efficiently transmitted over data networks and then converted back into the original media at the other end. Data networks, such as the Internet or local area networks, or LANs, have always utilized packet-switched technology to transmit information between two communicating terminals. The most common protocol used for communicating on these packet switched networks is IP. VoIP allows for the transmission of voice along with other data over these same packet </P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">switched networks, and provides an alternative to traditional telephone networks, which use a fixed electrical path to carry voice signals through a series of switches to a destination.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">As a result of the potential cost savings and added features of VoIP, consumers, enterprises, traditional telecommunication service providers and cable television providers are viewing VoIP as the future of telecommunications. VoIP has experienced significant growth in recent years due to:</P>
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<P style="margin-top: -12pt; padding-left: 24pt">Demand for lower cost telephone service; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Increasing demand for long distance communication services driven by the increased mobility of the global workforce; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Improved quality and reliability of VoIP calls due to technological advances, increased network development and greater bandwidth capacity; and </P>
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<P style="margin-top: -12pt; padding-left: 24pt">New product innovations that allow VoIP providers to offer services not currently offered by traditional telephone companies.</P>
<P style="margin-top: -12pt; padding-left: 24pt">The traditional telephone networks maintained by many local and long distance telephone companies were designed solely to carry low-fidelity audio signals with a high level of reliability. Although these traditional telephone networks are very reliable for voice communications, these networks are not well suited to service the explosive growth of digital communication applications for the following reasons:</P>
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<P style="margin-top: -12pt; padding-left: 24pt">They are expensive to build because each subscriber's telephone must be individually connected to the central office switch, which is usually several miles away from a typical subscriber's location; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">They transmit data at very low rates and resolutions, making them poorly suited for delivering high-fidelity audio, entertainment-quality video or other rich multimedia content; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">They use dedicated circuits for each telephone call, which allot fixed bandwidth throughout the duration of each call, whether or not voice is actually being transmitted; and </P>
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<P style="margin-top:0px; margin-bottom:4.2px">They may experience difficulty in providing new or differentiated services or functions, such as video communications, that the network was not originally designed to accommodate. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Until recently, traditional telephone companies have avoided the use of packet switched networks for transmitting voice calls due to the potential for poor sound quality attributable to latency issues (delays) and lost packets which can prevent real-time transmission. Recent improvements in packet switch technology, compression and broadband access technologies, as well as improved hardware and provisioning techniques, have significantly improved the quality and usability of packet-switched voice calls. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Historically, packet-switched networks were built mainly for carrying non real-time data, although they are now fully capable of transmitting real time data. The advantages of such networks are their efficiency, flexibility and scalability. Bandwidth is only consumed when needed. Networks can be built in a variety of configurations to suit the number of users, client/server application requirements and desired availability of bandwidth, and many terminals can share the same connection to the network. As a result, significantly more traffic can be transmitted over a packet switched network, such as a home network or the Internet, than a circuit-switched telephony network. Packet switching technology allows service providers to converge their traditionally separate voice and data networks and more efficiently utilize their networks by carrying voice, video, facsimile and data traffic over the same network. The improved efficiency of packet switching technology creates network cost savings that can be passed on to the consumer in the form of lower telephony rates.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The growth of the Internet in recent years has proven the scalability of these underlying packet switched networks. As broadband connectivity, including cable modem and digital subscriber line, or DSL, has become more available and less expensive, it is now possible for service providers like us to offer voice and video services that run over these IP networks to businesses and residential consumers. Providing such services has the potential to both substantially lower the cost of telephone service and equipment costs to these customers and to increase the breadth of features available to our subscribers. Services like full-</P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">motion, two-way video are now supported by the bandwidth spectrum commonly available to broadband customers, whether business or residential. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">As a result of these growth trends, various service providers, enterprises and consumers are continuing to procure offerings from VoIP providers, including Jinan Yinquan. &nbsp;Specifically, consumers in emerging markets are increasingly using VoIP-enabled services, such as Internet Protocol, or IP, telephones, to realize significant cost savings on long distance and international calls, while in markets where a significant number of consumers have access to broadband internet services, these consumers are increasingly looking at VoIP as a viable and more affordable substitute for their traditional telecommunications provider.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Accordingly, many of the traditional telecommunications providers are looking to deploy VoIP as a defensive strategy, while cable companies, ISPs and other broadband providers are looking at VoIP service offerings as a way to capture new revenue streams from existing and new customers. These providers have two primary alternative means to develop and deploy VoIP offerings: they can build them in-house; or they can partner with a company like Jinan Yinquan and outsource all or a portion of the effort. Those seeking to offer VoIP service offerings by developing an in-house service must learn a vastly different set of platforms, and integrate several additional components with their existing systems, which requires the development of significant technical expertise and the deployment and management of substantial capital expenditures.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Alternatively, a full service VoIP company, like Jinan Yinquan, can provide these service providers with the ability to outsource their VoIP services, and thereby effectively reduce the upfront and ongoing cost of providing the service, and efficiently reduce the time to market and risks associated with developing and maintaining an in-house VoIP service.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Our Strategy</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Different from other VoIP services companies, we enable customers using our VoIP products and services without a PC connection. Our objective is to provide reliable, scalable, and profitable worldwide Internet communication services with unmatched quality. &nbsp;Our goal is to achieve this objective by delivering innovative technologies and services and balancing the needs of our customers with the needs of our business. &nbsp;We intend to bring the best possible voice and video products and services, at an affordable price, to either residential or businesses customers and enhance the ways in which these customers communicate with each other, and within the world. &nbsp;</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Specific strategies to accomplish this objective include:</P>
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<P style="margin-top: -12pt; padding-left: 24pt"><I>Focus on our retail VoIP business. </I>From 2005, we began to shift the focus of our sales and marketing efforts to growing the VoIP services for retail customers from the efforts to providing one-off solution services to enterprise customers. &nbsp;The retail users can enable the Company to generate continuing revenue stream although it will involve more after sales services. &nbsp;In addition, these customers are more likely to subscribe to our additional services and are less likely to leave the service. </P>
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<P style="margin-top: -12pt; padding-left: 24pt"><I>Expand our business into whole China region. &nbsp;</I>As of end of 2006, we have successfully expanded our business into all major cities in Shandong Province of China. &nbsp;Apart from the efforts to expand intensively our services in the Shandong Province, we are aggressively planning to develop our business in other provinces of China. &nbsp;We believed that our successful experience and model in Shandong Province can be copied in other cities. &nbsp;To achieve our final goals, we will adopt following approaches to develop our business: 1) setup branches in other provinces; 2) acquire or merge with other companies already operated in other provinces; 3) co-operate or find agents to expand our business in other provinces.</P>
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<P style="margin-top: -12pt; padding-left: 24pt"><I>Capitalize on our technological expertise to introduce new products and features. </I>Over the past years, we have developed several core technologies that form the backbone of our voice and video over IP service and which we intend to use to develop product enhancements and future products. &nbsp;</P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">We developed our unique technologies used to provide video and voice service through special devices or software. &nbsp;As a result, we are able to update the software functionality of our customers' requirements without any third party assistance. &nbsp;</P>
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<P style="margin-top: -12pt; padding-left: 24pt"><I>Extend our strategic partnership with Major Chinese Telecom Operators.</I> &nbsp;Currently, we set up partnership with China Tietong, one of the six major telecom operators in China. &nbsp;Thanking for the strong marketing support from China Tietong, we can expand our business quickly and legally in China. &nbsp;In future, we will enhance our partnership with China Tietong and seek cooperation opportunities with other major telecom players in China. &nbsp;</P>
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<P style="margin-top: -12pt; padding-left: 24pt"><I>Develop additional distribution channels.</I> We have established relationships with telephone caf&#233;, retailers and other distributors of telecommunications products and services. To further accelerate growth of our products and services, we intend to build upon our existing relationships and establish new relationships with distributors, value added resellers and system integrators, other service providers, equipment manufacturers and retailers to make our products more readily available and accessible to potential customers of our services. </P>
<P style="margin-top:17.533px; margin-bottom:0px"><B>Technology </B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Our NP soft switch IP phone system and its ancillary IP phone billing and management systems were are all proprietarily developed by Jinan Yinquan, and are protected by a software copyright certificate issued by the State Copyright Bureau. The technology has been registered as a software product at Shandong Information Industry Office. </P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>TECHNICAL FEATURES OF THE NP SYSTEM </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The NP soft switch IP phone system is based on real-time Internet communication technology and related applications, and uses software to simulate circuit switching. It provides next-generation networks (IPv6 and NGN) call control and connection control functions designed for real time services, and serves as the core of call and control of a next-generation network. The NP system supports many IP phone access protocols, and can organize effectively individual and corporate communications. It boasts excellent capacity and scalability, and can be applied on many kinds of end equipments and accessing modes (including IP mobile phone, PSTN phone, IP fixed phone, soft terminal, WIFI IP phone, and etc.) </P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>TECHNICAL SPECIFICATIONS OF THE NP SYSTEM: </I></B></P>
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<P style="margin-top: -12pt; padding-left: 24pt">Developed based on standard and proprietary protocol suites with sound switching capacity and compatibility; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Supports speech, fax, video phone and chat; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Is a fully distributed network structure that supports load balance, overload protection, and redundant backup to ensure the high stability and reliability of the system; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Function of passing through NAT/Firewall; it can pass through multiple level of NAT to reduce operation cost; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Web based configuration and maintenance system and remote web administration system, which realize centralized control and administration to reduce maintenance cost; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Supports many kinds of value-added services, and provide scalable ports for new businesses; support unconditional transfer, busy transfer, offline transfer, no-response transfer, call holding/recovering, call park/pickup, call transfer, caller ID display, number change, call restriction, and caller ID blocking; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Supports different kinds of internet accessing modes, and can be connected with Cable Modem, xDsl, Fttb+LAN, PPPoE and intranet; prove sound compatibility with different network environment, and support fully Ipv6; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Fully opened system structure and interoperability with networks based on different protocols, which ensures a stable platform to support the across-region and across-industry information sharing; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Seamless integration with IP PBX, ensuring the provision of various solutions for internal but across-region communication inside companies; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">IVR function, that supports centralized or distributed call center for corporate users; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Remote conference call function, which allows the participant to use any kind of voice communication device, such as fixed phone set, mobile phone, Linktone, and soft switch IP phone; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Supports Presence technology; end user can set up his/her own configuration and have others see his/her presence status; </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Supports interconnections with other kinds of IP phone systems, and even different soft switch system. </P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>SYSTEM STRUCTURE </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The NP system consists of an access certification module (AC), soft switch call control module (SCC), billing system (BS), system management configuration (WEB), network management system (NMS) and database system (DBS), and adopts the distributed structure. Based on the number of users, distribution and network environment, soft switch system platforms or relay gateway can be installed anywhere in the world to balance the load. In a region with many network users, it is recommended to install a voice server, so that most data exchange of voice communication can be done locally to avoid cross-regional transmission of voice data. When a network users in different regions wish to communicate, a node server will be used to connect them in order to interconnect the different servers and the sharing of network resources. Different soft switch systems serve as the redundancy for each other. When one soft switch system is down, another one will be appointed to take its position according to the load condition and network status. The node server will send the parameters of the new soft switch server to the terminals, and terminals will register automatically themselves onto the new server. When a relay gateway is down or the network is down, the soft switch system will direct the call to other relay gateway to ensure the normal service.</P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>AC Module </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module checks for equipment registration and calls. It covers the differences between different types of equipment and the deficiency of specific equipment, so that they can be connected easily with one another. The access certification is based on an account number, password and MAC address, and unauthorized users are prohibited from accessing the system. It supports standard signals, and makes sure the network phone set, residential gateway, soft switch and any other network terminal products that are manufactured by most equipment companies can register with and be used in the system, so as to achieve compatibility and communication between different protocols and products. The differences between different products and protocols will be handled by the system. Furthermore, it supports private signals. Private signals adopts TLS transmission layer encryption technology to avoid being intercepted and captured. Only the authorized terminal equipment with built-in private signals can log into the system. The AC module also supports both login and call signals to pass through NAT, and provides accessing and inter-communication functions with different protocol-type equipments under different network environment, so as to realize equipment login and call certifications. </P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>SCC Module </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module is responsible for handling call signals, and providing different kinds of call services and the media flow routing function. Its open design supports standard SIP protocol issued by IETF, and 32 byte encryption key for voice transmission, which means even all RTP packets are captured in the midway, the voice cannot be recovered. Additionally, it supports both server transfer and P2P direct communication. The communication mode can be selected very flexibly according to the network condition of the user, application mode, terminal device, and call mode. This module is enhanced by private encryption key to protect against any unauthorized copying inside the system even from the administrator. </P>
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<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt; page-break-before:always"><B><I>Billing Module </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module provides certification, billing and management functions to audio and other related value-added service, and by using it, user can choose different payment methods such as pre-payment, afterward payment, and the purchase of call card. The billing module enables multiple levels of management for distributors. Distributors at different levels will be awarded operator hall management functions, operation management model compatible with that of telecom carriers, and alert functions for pre paid call expenses to remind distributors or end users to recharge. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module records the details of every user&#146;s call, rate, call expense, and expense for value-added service, and account balance. User can check for such details at any time. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">This module allows the administrators to set up the call expense rate and value-added service expense rate. Therefore, different charge rates can be applied to different kind of users, such as large distributors, key accounts and special accounts. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">It has different kinds of statistics and analysis functions, and therefore can generate statistic reports and analysis tables according to the actual needs. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">It can provide powerful management platform to internet bars, including functions such as order processing, call expense adjustment, and statistics functions to meet the billing requirements of the bar owners. </P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>Network Administration Module </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The system&#146;s web server will provide real time monitoring functions to cover server status, equipment status and call status inside the soft switch system, provide related statistics information, and meanwhile identify any abnormity in the system<FONT FACE="Arial">. </FONT></P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>SYSTEM INNOVATION &#151; PROPRIETARY PROTOCOL SUITE </I></B></P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>Large Number of Concurrent Lines </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">By using proprietary built-in hardware, protocol suite, terminal device, relay gateway, and soft switch system, Jinan Yinquan can use P2P mode to transfer the audio for all kinds of calls (PC2PC, PC2Phone, Phone2PC, Phone2Phone). &nbsp;During the call, the signals for call holding and call status information will be sent to the soft switch system, which will monitor the calls to all users and send control signals to those users with established calls to ensure call quality. Because the signal is of very limited data volume and thus occupies very limited bandwidth, the network congestion will be effectively avoided. The server is responsible only for processing signals instead of sending audio, which can increase greatly the number of concurrent lines of soft switch system. If Jinan Yinquan&#146;s terminals adopt the equipments based on our proprietary protocol suite, a single system will be able to support 10,000 concurrent lines. </P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>Management Control </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Multiple control server domain names have been reserved in terminal devices. When the terminal devices fail in communicating with registration server, such reserved server address will be retrieved automatically. If the connection route fails in meeting the requirements due to poor network quality, you can require to change registration server and connection route to ensure the call quality. </P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>VALUE-ADDED FUNCTIONS </I></B></P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">The system supports IM, presence and technologies, No matter whether the terminals of users are busy or idle, the performance of the terminals will not be affected. All operations of the terminals will be transferred as signals to registration server, which will be responsible for processing such data. </P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>Recording </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">When the user needs to record a call, the system will switch automatically into server transfer mode to save the audio stream. This kind of service will be awarded to the public security department or the police office when needed. The system will automatically cancel the P2P mode. </P>
<P style="line-height:11pt; margin-top:11.267px; margin-bottom:0px; font-size:9pt"><B><I>Encryption </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Signal based encryption can prevent others from acquiring user information. Based on the encryption on audio packets, the captured audio packets by an authorized person will not be recovered into audio</P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Product and services</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We have different lines of products or services designed for individual users and enterprise users. &nbsp;Following products are designed for individual users or small enterprise users:</P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>IP telephone</I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">IP telephone is the hardware that supports the protocol of SIP or H.323. It has all of the same functions of a traditional telephone. It has two Ethernet Interfaces, taking one IP address, with one router. Using the IP telephone does not interfere with internet usage. To satisfy different terminal devices connected with soft switch platform, this kind of equipment can be further classified into the following three series: </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Only one Ethernet port (10/100M) and one IP address. After having been connected with information socket and configured through web, it can become an end user of soft switch system. </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Built-in route with more than two Ethernet ports (10/100M). One of them is connected with information socket to occupy one IP address, and the other is connected with hub and used for the accessing of other networking equipments, such as a computer or any other IP phone set. </P>
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<P style="margin-top: -12pt; padding-left: 24pt">After having been configured through web, it can become an end user of soft switch system. </P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>Analog Gateway: IAD</I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">An Analog gateway connects the soft switch system with the common telephone and converts the traditional telephone into a complete VoIP telephone having access to all of the functions and benefits that are found with using this state of the art technology. It includes following models:</P>
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<P style="margin-top: -12pt; padding-left: 24pt">One FXS line: It can support one telephone. </P>
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<P style="margin-top: -12pt; padding-left: 24pt">One line with router: It can connect with one telephone, including a router, we connect its LAN with computer, and so calling will not affect our going to the Internet. </P>
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<P style="margin-top: -12pt; padding-left: 24pt">Many FXS: 2,4,8,16,32,48, and 64 lines, ect. They can respectively connect with telephones in the same number as them. They are suitable to be used inside buildings and by enterprises. &nbsp;</P>
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<P style="margin-top: -12pt; padding-left: 24pt">With fleeing interface: It has the interface same as common telephone line&#8217;s. We connect the common line with the interface to realize one telephone with two numbers. We can get the calls from soft switch telephones and common telephones. When we call somebody, we can choose to use the low-cost soft switch telephone and common telephone. </P>
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<P style="margin-top:14.2px; margin-bottom:0px"><B><I>Video Telephone </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">A Video telephone device supports the protocol of SIP or H.323. Along with receiving and making calls, you can see the caller on video as long as the other caller also has this capability.</P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>Softphone</I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Softphone is the software that supports the protocol of SIP or H.323. Users make calls by using the computer keyboard or soft keyboard to dial, with the same functions as IP telephone. The Softphone user communicates using a computer headset. &nbsp;Using this function, a user can communicate with any hardware terminal device.</P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>Wife Phone </I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">WiFi Phone is new product to be introduced by the Company. It is a type of IP phone set that supports both SIP protocol and 802.11 connection, and also an end user device for soft switch platform. Within the coverage scope of 802.11 wireless networks, it has the same functions as IP phone sets, and the differences are network accessing mode and the supports to route functions. &nbsp;Currently, we have identified several OEM manufactures alternatives in China, who are able to manufacture the wifi phone set. &nbsp;We are also seeking co-operation opportunity with other wifi router companies. &nbsp;We are planning to put this kind of product into use in the first half year of 2007.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Following services or products are designed for these median or big size enterprises:</P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>NGN Soft Switch System <A NAME="ngn"></A></I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The communications technology has been driven by the development of Internet technology all the time. And the prologue of a new round communications technology competition has been kicked off by the new communications technology and instruments which are represented by VoIP. This also expands the competition among telecom operators from areas and users to the communications technologies . VoIP has been the preferred technology for the newcomers in telecom market. The great prospect of VoIP has been embodied in three aspects:</P>
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<P style="margin-top:0px; margin-bottom:4.2px">The new telecom operators organize the low-cost communication networks of their own with VoIP.</P>
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<P style="margin-top:0px; margin-bottom:4.2px">The international Internet operators provide the net users with the voice communication services through VoIP. &nbsp;In a sense, they have partaken the market share from traditional telecom enterprises gradually.</P>
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<P style="margin-top:0px; margin-bottom:4.2px">A number of large or medium size enterprises start organizing VoIP communication networks of their own, which could lower communication cost as well as expedite information exchange, in order to confront globalize competition among enterprises. According to the analysis from Gartner , due to capital and technology , the application of VoIP is at the very outset, it will reach the peak of its application in 3 to 5 years.</P>
<P style="margin-top:10.867px; margin-bottom:0px"><B><I>NP PBX<A NAME="pbx"></A></I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The NPPBX is a small voice-switch platform with powerful functions. &nbsp;It combined PBX and VoIP advanced technology perfectly, had proposed many kinds of VoIP solutions for the enterprises. These solutions can reduce the communication cost of all large and medium-sized enterprises and government significantly, increase working efficiency at the same time. NPPBX will become an indispensable part </P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">for enterprise with popularization. NPPBX has many kinds of function, include: voice mail, computer-telephones, conference call, calling control, CDR, and API etc. It is both IAD and PBX. So, NPPBX is not only the supplement to the traditional PBX, but also the substitute of that. &nbsp;NP-PBX influences neither the use nor the functions of the original network. Moreover, it creates new network applications, as well as increases the rate of utilization of the inner equipments and resources in the whole enterprise, which reduces its communication cost. &nbsp;VoIP can realize voice transmission among different areas through IP network. &nbsp;It is feasible to save a large number of the toll fees, and realize zero calling charge inside the organization. &nbsp;NPPBX adopts SIP, performs as the voice gatekeeper, voice gateway as well as the traditional voice exchange in one, offering the low-cost voice communication to users as the enterprise, government, financial institution, education department, intelligent building, and hotels, etc.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">NPPBX, as the substitute of the traditional PBX, has very obvious comparative advantages to the traditional one. It integrates PSTN and Internet in to one, and saves a large number of management and maintenance cost. It would be more convenient and easier to provide the value-added services through NPPBX. &nbsp;The single system has a lot of functions, which the traditional one could realize only with many other supplementary equipment. NP PBX is more universal and practice, for it&#8217;s easier to use&#12289;configure and maintain. &nbsp;Due to the application of the computer, it&#8217;s easier for capacity-expansion of the system and decreasing the fund input. NPPBX is a flexible voice platform with following functions and may lowers the calling charges for the enterprises:</P>
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<P style="margin-top:0px; margin-bottom:4.2px">Distributing the extensions at your willing: Via the easy understanding configuration interface, anybody that can operate the computer may configure his user&#8217;s information easily. &nbsp;Thus you never need to retain a professional for the maintenance.</P>
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<P style="margin-top:0px; margin-bottom:4.2px">Auto-telephones and calling group: &nbsp;After recording the voice prompt according to user&#8217;s demands, it&#146;s possible for the caller dialing a certain number to reach the corresponding department. The telephones in this department will ring in turn according to the set order , until someone answers it. &nbsp;It&#146;s also possible to set an extension to answer the incoming call directly. </P>
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<P style="margin-top:0px; margin-bottom:4.2px">Voice message (64/256/1024 hours): The caller may leave a voice message in the phone when you are unavailable to reply in time . You may listen the message either by the appointed phone or by other extensions. Besides, the system will send the message to your E-mail, so you may listen it by computer when you outside. </P>
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<P style="margin-top:0px; margin-bottom:4.2px">Conference call (available for 8/32 lines): It&#8217;s easy for you to hold a conference call either through the WEB interface or the extensions. &nbsp;Not only the registered NP PBX extensions but also the traditional phones can be invited into the conference call. You may invite your staff to enter a conference call of the company through the telephone in hotel room or cell-phone when he is on the business trip. &nbsp;Whenever, wherever, you may hold your conference call. </P>
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<P style="margin-top:0px; margin-bottom:4.2px">Register to SIP soft-switch: You may register NPPBX through a VoIP ID to the soft switch platform which supports SIP, in order to make domestic or international toll through the platform.</P>
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<P style="margin-top:0px; margin-bottom:4.2px">Other functions: NPPBX also has other functions like Call hold&#12289;Call transfer&#12289;Caller ID&#12289;Non-interruption, ect. Users may configure all the functions by dialing the corresponding keys on the phone set.</P>
<P style="margin-top:14.2px; margin-bottom:0px"><B><I>Call Center<A NAME="call"></A></I></B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The term &#8220;call center&#8221; often conjures up images of hundreds of agents working for huge telemarketing conglomerates. &nbsp;However, that&#146;s simply not the case any more. &nbsp;Call center systems have progressed to the point that even small companies with as few as 10 agents can get the same powerful call management features as the big players. &nbsp;Call centers now are increasingly called &#147;contact centers&#148; as they incorporate inquires from web and email sources in addition to phone calls depending on technology. &nbsp;Call center systems address many facets of your business with features such as instant routing of important customers to the best agents, reduced hold times, more efficient scheduling of employees, and detailed reporting. &nbsp;Call center is typically applicable for: </P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Government hot line </P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Company customer service center, follow-up service center</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Integrated information service</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Materials circulation/EC </P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Media interaction</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Fax memory transmit</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Data inquire center (inquire marks/ electric charge)</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Multi-party communication, such as conference call</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Enterprise or individual secretary service, voicemail</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Telephone direct selling, telephone shopping</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Telephone interview survey</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Enterprise yellow page service</P>
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<P style="margin-top: -12pt; padding-left: 24pt">&nbsp;Against-counterfeit inquire service</P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Competition</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The market for our products and services is increasingly competitive, evolving rapidly and is subject to shifting customer needs and introductions of new products and services. Our current and potential competitors approach the market from different areas of expertise and vary in size and scope with respect to the products and services that they offer or may offer in the future. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We face competition from traditional telephone service providers in China, such as the China Telecom, China Netcom and cable access providers. &nbsp;These competitors are increasingly integrating enhanced functionalities with their basic services. &nbsp;Their already existed network and subscribers are their strong competitive advantage. &nbsp;In addition, their IP card service which offer customer considerable discounts on the long distant calls is our direct competitive service. &nbsp;These traditional telephone service providers are much bigger than us, but we compete with them by lower price and better services.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We face competition from other VoIP service providers which are competing with telephone service providers. These competitors include Skype, which is offering enhanced services with their basic telephone services. &nbsp;There are also some Chinese VoIP services providers competing in the whole China market, but they are in small scales.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We face competition from providers of enhanced services and products, such as answering machines, voicemail, Internet call waiting, and virtual telephone numbers for fax or voice communications. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Furthermore, we face competition from Internet service providers such as AOL, MSN, and YAHOO, which are increasingly integrating enhanced functionalities with their basic services. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We compete with all of the above companies for a share of the telecommunications spending of our target market. We differentiate ourselves in the market as follows: 1) we offering lower price and better services to compete with traditional telephone providers; 2) we offering convenient devices and lower prices to compete with IP phone card service; 3) we offering convenient devices and multifunction to compete with Skype and other international VoIP service providers; 4) we offering high quality and multifunction to compete to local VoIP services providers.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We believe that we compete favorably based on these factors. Many of our current and potential competitors, however, have greater name recognition, longer operating histories, larger subscriber bases and significantly greater financial resources than we have. In particular, many of our competitors are large, established network service providers such as China Telecom and China Netcom that are able to market and distribute enhanced communications services within their already large base of subscribers. They may be able to devote greater resources to product development and marketing and sales than we can. As a </P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">result, they may be able to respond more quickly to new technologies and changes in customer requirements than we can. Furthermore, other international competitors such as Vonage, Skype may be able to adopt more aggressive pricing policies and offer customers more attractive terms, including potentially providing a competing solution at little or no cost as part of a bundled product offering. We cannot assure you that our current and future competitors will not offer or develop products or services that are superior to ours or achieve greater market acceptance than ours or that we will be able to compete effectively against them.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Suppliers</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We outsource the manufacturing of the videophones, broadband phone adapters, business telephones and cordless handsets to third-party manufacturers. We do not have long-term purchase agreements with these contract manufacturers. &nbsp;We currently rely on China Tietong, a Chinese telecom provider, to switch our VoIP phone calls with traditional phone calls; In addition, we also use the traditional phone numbers allocated by China Tietong, and paying China Tietong the charges for each phone switching by their traditional telephone system. &nbsp;While we believe that relations with our suppliers are good, there can be no assurance that our suppliers will be able or willing to supply products and services to us in the future. While we believe that we could replace our suppliers if necessary, our ability to provide service to our subscribers would be impacted during this timeframe, and this could have an adverse effect on our business, financial condition and results of operations.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Research and Development</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The VoIP market is characterized by rapid technological changes and advances. Accordingly, we make substantial investments in the design and development of new products and services and enhancements and features to existing products and services. Our current and future research and development efforts relate to our service offerings and the development of new endpoints for subscribers of our service. Future development will also focus on emerging audio and video telephony standards and protocols, and 802.11 standard and other wireless applications applicable to future wireless telecom. The development of new products and the enhancement of existing products are essential to our success. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We estimate our research and development cost in 2008 will be approximately $200,000 per year.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Regulatory</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">The use of the Internet and private IP networks to provide voice, video and other forms of real-time, two-way communications services is a relatively recent development. Although the provisioning of such services is currently permitted or unregulated within some countries, several other governments have adopted laws and/or regulations that could restrict or prohibit the provisioning of voice communications services over the Internet or private IP networks. &nbsp;More aggressive domestic or international regulation of the Internet, in general, and Internet telephony providers and services, specifically, may materially and adversely affect our business, financial condition, operating results and future prospects, particularly if increased numbers of governments impose regulations restricting the use and sale of IP telephony services.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">However, our business is mainly focused on Chinese market. &nbsp;The Chinese government&#8217;s regulations on the VoIP market have following characters:</P>
<P style="font-family: Wingdings; margin-bottom: -14pt">l</P>
<P style="margin-top: -12pt; padding-left: 24pt">At present, the Chinese government has not given a clear definition to VoIP service, which leads to the regulation absence in VoIP business and the non-presence of clear relevant management policies. </P>
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<P style="margin-top: -12pt; padding-left: 24pt">As a result, sometimes VoIP services can be considered as telecom services, while sometimes value-added services. &nbsp;Moreover, it is planed that the VoIP service will be divided into two categories, &#8220;Multiparty Communication&#8221; and &#8220;IP-VPN service&#8221;, so that it can be regulated by respective regulations. </P>
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<P style="margin-top: -12pt; padding-left: 24pt">In future, It is most likely that the regulation and policies in connection with VoIP service will manage the market according to the value-added service attributes, while impose strict criteria on market entering license like telecom business. </P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Intellectual Property and Proprietary Rights</B></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Our ability to compete depends, in part, on our ability to obtain and enforce intellectual property protection for our technology in China and internationally. We currently rely primarily on a combination of trade secrets, patents, copyrights, trademarks and licenses to protect our intellectually property. As of February 1, 2008, we have four (4) software copyrights. &nbsp;In particular, we have a software copyright certificate for NP Network Telephone, a software copyright certificate for billing and managing system of IP phone systems, a software copyright certificate for a long-distance video monitoring system that have issued and a number of software copyrights pending. Our patents expire on dates ranging from 2028 to 2030. We cannot predict whether our pending patent applications will result in issued patents.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">To protect our trade secrets and other proprietary information, we require our employees to sign agreements providing for the maintenance of confidentiality and also the assignment of rights to inventions made by them while in our employ. There can be no assurance that our means of protecting our proprietary rights will be adequate or that competition will not independently develop </P>
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<P style="margin-top:4.2px; margin-bottom:4.2px; page-break-before:always">technologies that are similar or superior to our technology, duplicate our technology or design around any of our patents. &nbsp;Our failure to protect our proprietary information could cause our business and operating results to suffer.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">We license intellectual property from third parties and incorporate such intellectual property into our services. These relationships are generally non-exclusive and have a limited duration. Moreover, we have certain obligations with respect to non-use and non-disclosure of such intellectual property. We cannot assure you that the steps we have taken to prevent infringement or misappropriation of our intellectual property or the intellectual property of third parties will be successful.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px"><B>Employees</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As of January 29, 2008, we had 51 full-time employees: 15 are in research and development, 10 are in operations and customer care, 21 are in sales and marketing and 5 are in general and administrative functions. &nbsp;Although our employees are covered by employment agreements titled, &#147;Labor Contracts&#148; none of our employees are covered by collective bargaining agreements. We believe that our relations with our employees are good. </P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_9"></A></P>
<P style="margin:0px"><B>Properties</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px">The Company&#146;s executive office is located in Jinan City, Shandong Province, China. &nbsp;The address is RM 508, No.786 Xinluo Street, High-Tech Industrial Development Zone, Jinan, China, occupying 900 square meters, under a lease expiring on March 31, 2008, and renewable at the Company&#146;s option. &nbsp;Lease payments are approximately $16,000 annually. &nbsp;The Company is expected to move into the newly purchased office building before March 31 of 2008. The new building is located in Yi ke Industrial Base at Jinan High-Tech Industrial Development Zone, on the eleventh floor, occupying 2,000 square meters.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Litigation</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify>None.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_10"></A><A NAME="management"></A></P>
<P style="margin:0px" align=center><B>MANAGEMENT</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Executive Officers and Directors</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>As of February 1, 2008, the directors and executive officers of the Company were:</P>
<P style="margin:0px"><BR></P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>25</P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px">&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=190></TD><TD width=45></TD><TD width=116></TD><TD width=128></TD></TR>
<TR><TD width=190><P>&nbsp;</P></TD><TD width=45><P>&nbsp;</P></TD><TD width=116><P>&nbsp;</P></TD><TD width=128><P>&nbsp;</P></TD></TR>
<TR><TD width=190><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=45><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=116><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=128><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin:0px"><I>Name</I></P>
</TD><TD valign=top width=45><P style="margin:0px"><I>Age</I></P>
</TD><TD valign=top width=116><P style="margin:0px"><I>Principal Position</I></P>
</TD><TD valign=top width=128><P style="margin:0px"><I>Appointment/</I></P>
<P style="margin:0px"><I>Resignation</I></P>
<P style="margin:0px"><I>date</I></P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin-top:0.867px; margin-bottom:0.867px">&nbsp;</P>
</TD><TD valign=top width=45><P style="margin-top:0.867px; margin-bottom:0.867px">&nbsp;</P>
</TD><TD valign=top width=116><P style="margin-top:0.867px; margin-bottom:0.867px">&nbsp;</P>
</TD><TD valign=top width=128><P style="margin-top:0.867px; margin-bottom:0.867px">&nbsp;</P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin:0px">Li Kunwu</P>
</TD><TD valign=top width=45><P style="margin:0px">42</P>
</TD><TD valign=top width=116><P style="margin:0px">Chairman, CEO</P>
</TD><TD valign=top width=128><P style="margin:0px">January 1, 2002</P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin:0px">Kan Kaili</P>
</TD><TD valign=top width=45><P style="margin:0px">62</P>
</TD><TD valign=top width=116><P style="margin:0px">Independent Director</P>
</TD><TD valign=top width=128><P style="margin:0px">August 15, 2007</P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin:0px">Wang Qinghua</P>
</TD><TD valign=top width=45><P style="margin:0px">46</P>
</TD><TD valign=top width=116><P style="margin:0px">VP, CTO</P>
</TD><TD valign=top width=128><P style="margin:0px">August 14, 2001</P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin:0px">Xu Yinyi</P>
</TD><TD valign=top width=45><P style="margin:0px">47</P>
</TD><TD valign=top width=116><P style="margin:0px">Director</P>
</TD><TD valign=top width=128><P style="margin:0px">November 26, 2004</P>
</TD></TR>
<TR><TD valign=top width=190><P style="margin:0px">Jiang Yanli</P>
</TD><TD valign=top width=45><P style="margin:0px">40</P>
</TD><TD valign=top width=116><P style="margin:0px">Director</P>
</TD><TD valign=top width=128><P style="margin:0px">August 16, 2006</P>
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<P style="margin-top:3.333px; margin-bottom:3.333px; padding-right:4px"><B>Mr. Li</B> is currently serving as the Chairman of the Company. &nbsp;Prior to that, Mr. Li was the Financial Director of Shandong Luneng Taishan Football Club Co. Ltd., one of the top 15 Football Club of China, more than 3 years. &nbsp;He also served as Finance manager or Financial Controller in Shandong Luneng Group and its subsidiaries. &nbsp;Mr. Li is a CPA in the PRC, with an experience serving as a Financial Controller in large-scale state-owned enterprises for more than fifteen years. He holds degrees in economics, management/finance, and accounting from Shandong University.</P>
<P style="margin:4.2px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px"><B>Mr. Wang</B> is serving as the Managing Director and Chief Technology Officer of the Company. &nbsp;He is also the key founder of the Jinan Yinquan. &nbsp;Mr. Wang is an expert in the areas of software, system integration, net - work communication, and project management. &nbsp;Prior to foundation of the Company, Mr. Wang severed as a CEO of Shandong Meigao Electronics Project Co., Ltd. &nbsp;Mr. Wang also served as Vice President, Senior Engineer and other positions in other IT companies.</P>
<P style="margin:3.333px"><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px"><B>Mr. Xu</B> is serving as the Director of the Company. &nbsp;He is currently the Chairman and CEO of Shanghai Nanzheng Industry Co. Ltd. &nbsp;He was the CEO of China Southern Security Corporation Qingdao Branch. Prior to that, he served as CEO of Shandong Luye Group Ltd. &nbsp;He also served as the Chief Representative of Foreign Trade Section of Jinan Government in Shanghai.</P>
<P style="margin:3.333px"><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px"><B>Mr. Jiang</B> serves as Director of the Company. &nbsp;He is also the only member of the audit committee of the Company. Mr Jiang has a master's degree in finance management and consultation with more than twenty years of experience. He is currently serving for numerous state and private owned organizations including the commissioner of CPPCC Shandong Province, the vice-chairman of China International Commercial Chamber Qingdao Chamber, executive commissioner of Qingdao Industry &amp; Commerce League, vice-president of Qingdao Professional Manager Association and vice-chairman of Qingdao Internal Audit Association . In 2005, Mr Jiang was honored with the &#147;100 Faithful Stars of China Economy&#148; award for his service to China and its economy. &nbsp;Mr Jiang has published more than 40 economic and financial thesis and has written articles for newspapers and magazines, including the state, provincial and civic.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px; color:#FF0000">&nbsp;<BR>
<FONT COLOR=#000000><B>Professor Kan</B></FONT><FONT COLOR=#000000>, who earned a Doctorate degree from Stanford&nbsp;University, currently serves as the Professor of Beijing University of Posts and Telecommunications. He is a director of China's Information Industry Policy and Development Institute and Commissioner of the Advisory Commission for China's Telecommunications Act.He formally served as a strategy consultant on telecommunications policies and development of the World Bank.His primary areas of concentration are policies of telecommunications and the information industry as well as business management strategy. </FONT></P>
<P style="margin:5.867px"><BR></P>
<P style="margin:3.333px"><BR></P>
<P style="line-height:12.75pt; margin:0px"><B>Family relationships</B></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">None.</P>
<P style="margin:3.333px"><BR></P>
<P style="line-height:12.75pt; margin:0px"><B>Involvement in certain legal proceedings</B></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">No bankruptcy petition has been filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">No director has been convicted in a criminal proceeding and is not subject to a pending criminal proceeding (excluding traffic violations and other minor offenses).</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">No director has been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">No director has been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated.</P>
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<P style="line-height:12.75pt; margin:0px; page-break-before:always"><B>Audit committee financial expert</B></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">The Company&#146;s board of directors has determined it has at least one audit committee financial expert serving on its audit committee, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">The name of such financial expert is Mr. Jiang Yanli and he is an independent Director.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px"><I>Safe Harbor</I></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">(i) A person who is determined to be an audit committee financial expert will not be deemed an expert for any purpose, including without limitation for purposes of section 11 of the Securities Act of 1933 (15 U.S.C. 77k), as a result of being designated or identified as an audit committee financial expert pursuant to this Item 401 of Regulation S-B.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">(ii) The designation or identification of a person as an audit committee financial expert pursuant to this Item 401 of Regulation S-B does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">(iii) The designation or identification of a person as an audit committee financial expert pursuant to this Item 401 of Regulation S-B does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.</P>
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<P style="line-height:12.75pt; margin:0px"><B>Section 16(a) Beneficial Ownership Reporting Compliance</B></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">Under Section 16(a) Beneficial Ownership Reporting Compliance, each person who was at any time during the fiscal year, a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to section 12 (&#147;reporting person&#148;) is required to file Forms 3, 4, and 5 on a timely basis, during the most recent fiscal year or prior fiscal years. &nbsp;Due to lack of knowledge, the relevant beneficial owners did not file on time. &nbsp;They will file Form 3 and Form 5 shortly.</P>
<P style="margin:3.333px"><BR></P>
<P style="line-height:12.75pt; margin:0px"><B>Code of Ethics</B></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">The Company has Standards of Ethical Conduct Policy (&#147;Code of Ethics&#148;) that applies to all employees and directors, including the Chairman, Chief Executive Officer, and Chief Financial Officer. The Code of Ethics is filed as Exhibit 14.1 to this 10-KSB report. </P>
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<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The Board of Directors has a standing Audit Committee.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; text-indent:39.6px" align=justify>The Audit Committee reviews with our independent public accountants the scope and timing of the accountants' audit services and any other services they are asked to perform, their report on our financial statements following completion of their audit and our policies and procedures with respect to internal accounting and financial controls.&nbsp;&nbsp;In addition, the Audit Committee reviews the independence of the independent public accountants and makes annual recommendations to the Board of Directors for the appointment of independent public accountants for the ensuing year.&nbsp;&nbsp;The Audit Committee met 1 time during the fiscal year ended December 31, 2007.&nbsp;&nbsp;The Audit Committee has not designated an Audit Committee Financial Expert.&nbsp;&nbsp;We are in the process of revising the Committee Charters and the Code of Ethics, as well as reorganizing the Committees.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Director Compensation&nbsp;</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Directors are not paid an annual fee of $3,000 for services as members of our Board of Directors or any committee thereof. </P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_11"></A></P>
<P style="margin:0px"><B>Executive Compensation</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px">The following table sets forth the aggregate cash compensation paid by us to (i) our Chief Executive Officer and (ii) our most highly compensated officers:</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>27</P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
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<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=72.733></TD><TD width=2.667></TD><TD width=34.533></TD><TD width=3.533></TD><TD width=49.4></TD><TD width=5.6></TD><TD width=34.6></TD><TD width=5.6></TD><TD width=33.267></TD><TD width=18.133></TD><TD width=42.933></TD><TD width=62.533></TD><TD width=61.933></TD><TD width=4.8></TD><TD width=54.667></TD><TD width=56.267></TD><TD width=0.933></TD><TD width=177.867></TD></TR>
<TR><TD width=75.4 colspan=2><P>&nbsp;</P></TD><TD width=38.067 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=55 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=40.2 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=51.4 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=42.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=62.533><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=61.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=294.533 colspan=5><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=722 colspan=18><P style="margin:0px" align=center><I>SUMMARY COMPENSATION TABLE</I></P>
</TD></TR>
<TR><TD valign=bottom width=75.4 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=38.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=51.4 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=42.933><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=61.933><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=59.467 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=56.267><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=178.8 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=72.733><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=37.2 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=52.933 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=40.2 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=38.867 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=61.067 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=62.533><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=66.733 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=54.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=57.2 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=177.867><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=241.133 colspan=6><P style="margin:0px" align=center><I>Long Term Compensation</I></P>
</TD><TD valign=bottom width=177.867><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=169.2 colspan=8><P style="margin:0px" align=center><I>Annual Compensation</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=129.267 colspan=3><P style="margin:0px" align=center><I>Awards</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=57.2 colspan=2><P style="margin:0px" align=center><I>Payouts</I></P>
</TD><TD valign=bottom width=177.867><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=top width=72.733><P style="margin:0px" align=center><I>Name and Principal Position</I></P>
</TD><TD valign=top width=37.2 colspan=2><P style="margin:0px" align=center><I>Year</I></P>
</TD><TD valign=top width=52.933 colspan=2><P style="margin:0px" align=center><I>Salary</I></P>
</TD><TD valign=top width=40.2 colspan=2><P style="margin:0px" align=center><I>Bonus</I></P>
</TD><TD valign=top width=38.867 colspan=2><P style="margin:0px" align=center><I>Other</I></P>
</TD><TD valign=top width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=top width=62.533><P style="margin:0px" align=center><I>Restricted Stock Awards</I></P>
</TD><TD valign=top width=66.733 colspan=2><P style="margin:0px" align=center><I>Securities Underlying Options/ SAR</I></P>
</TD><TD valign=top width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=top width=57.2 colspan=2><P style="margin:0px" align=center><I>LTIP Payouts</I></P>
</TD><TD valign=top width=177.867><P style="margin:0px" align=center><I>All other compensation</I></P>
</TD></TR>
<TR><TD valign=top width=72.733><P style="margin:0px" align=center><I>Li Kunwu</I></P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin:0px" align=center><I>2007</I></P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin:0px" align=center><I>$ 15,000</I></P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=177.867><P style="margin:0px" align=right><I>-</I></P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin:0px" align=center><I>CEO</I></P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin:0px" align=center><I>2006</I></P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin:0px" align=center><I>$ 15,000</I></P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=177.867><P style="margin:0px" align=right><I>-</I></P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin:0px" align=center><I>2005</I></P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin:0px" align=center><I>$ 15,000</I></P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=177.867><P style="margin:0px" align=right><I>-</I></P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=177.867><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin:0px" align=center><I>Wang Qinghua</I></P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin:0px" align=center><I>2007</I></P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin:0px" align=center><I>$ 14,000</I></P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=177.867><P style="margin:0px" align=right><I>-</I></P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin:0px" align=center><I>CTO</I></P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin:0px" align=center><I>2006</I></P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin:0px" align=center><I>$ 14,000</I></P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=177.867><P style="margin:0px" align=right><I>-</I></P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin:0px" align=center><I>2005</I></P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin:0px" align=center><I>$ 14,000</I></P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin:0px" align=right><I>-</I></P>
</TD><TD valign=bottom width=177.867><P style="margin:0px" align=right><I>-</I></P>
</TD></TR>
<TR><TD valign=bottom width=72.733><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=37.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=52.933 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=40.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=38.867 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=61.067 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.533><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=66.733 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=54.667><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=57.2 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=177.867><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px"><B>Employment Agreements</B></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">The Company executed a labor contract with Mr. Li Kunwu for a term of 5 years. &nbsp;Specifically, the contract was effective January 3, 2007 and expires on January 2, 2012. &nbsp;The annual salary is $15,000.</P>
<P style="margin-top:3.333px; margin-bottom:3.333px">The Company executed a labor contract with Mr. Wang Qinhua for a term of 5 years. &nbsp;Specifically, the contract was effective June 1, 2006 and expires on May 31, 2011. &nbsp;The annual salary is $14,000.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR></P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=center><B>SECURITY OWNERSHIP</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The following table sets forth, as of February 1, 2008, certain information regarding the beneficial ownership of Common Stock by (i) each person who is known by the Company to own beneficially more than five percent of the outstanding Common Stock, (ii) each director and executive officer of the Company, and (iii) all directors and executive officers as a group:</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=148></TD><TD width=241></TD><TD width=99></TD><TD width=88></TD></TR>
<TR><TD valign=top width=148><P style="margin:0px"><I>Title of class</I></P>
</TD><TD valign=top width=241><P style="margin:0px"><I>Name and Address of Beneficial Owner</I></P>
</TD><TD valign=top width=99><P style="margin:0px" align=center><I>Number of Shares</I></P>
</TD><TD valign=top width=88><P style="margin:0px" align=center><I>Percent of Class</I></P>
</TD></TR>
<TR><TD valign=top width=148><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=top width=241><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=top width=99><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=top width=88><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#CCFFFF" valign=top width=148><P style="margin:0px">Common stock</P>
</TD><TD style="background-color:#CCFFFF" valign=top width=241><P style="margin:0px">Li Kunwu (CEO and Director)</P>
</TD><TD style="background-color:#CCFFFF" valign=top width=99><P style="margin:0px" align=right>6,200,000</P>
</TD><TD style="background-color:#CCFFFF" valign=top width=88><P style="margin:0px" align=right>11.69%</P>
</TD></TR>
<TR><TD valign=top width=148><P style="margin:0px">Common stock</P>
</TD><TD valign=top width=241><P style="margin:0px">Wang Qinghua &nbsp;(CTO and Director)</P>
</TD><TD valign=top width=99><P style="margin:0px" align=right>6,200,000</P>
</TD><TD valign=top width=88><P style="margin:0px" align=right>11.69%</P>
</TD></TR>
<TR><TD style="background-color:#CCFFFF" valign=top width=148><P style="margin:0px">Common stock</P>
</TD><TD style="background-color:#CCFFFF" valign=top width=241><P style="margin:0px">Xu Yinyi &nbsp;(Director)</P>
</TD><TD style="background-color:#CCFFFF" valign=top width=99><P style="margin:0px" align=right>2,880,000</P>
</TD><TD style="background-color:#CCFFFF" valign=top width=88><P style="margin:0px" align=right>5.43%</P>
</TD></TR>
<TR><TD valign=top width=148><P style="margin:0px">Common stock</P>
</TD><TD valign=top width=241><P style="margin:0px">Jiang Yanli &nbsp;(Director)</P>
</TD><TD valign=top width=99><P style="margin:0px" align=right>200,000</P>
</TD><TD valign=top width=88><P style="margin:0px" align=right>0.37%</P>
</TD></TR>
<TR><TD valign=top width=148><P style="margin:0px">All executive officers and Directors as a group (4 Persons)</P>
</TD><TD valign=top width=241><P>&nbsp;</P></TD><TD valign=top width=99><P style="margin:0px" align=right>15,480,000</P>
</TD><TD valign=top width=88><P style="margin:0px" align=right>29.20%</P>
</TD></TR>
</TABLE>
<P style="margin-top:3.333px; margin-bottom:3.333px">Notes:</P>
<P style="line-height:14pt; margin-top:3.333px; margin-bottom:-18.667px; padding-left:48px; text-indent:-24px">(1)</P>
<P style="margin-top:0px; margin-bottom:3.333px; padding-left:48px">All persons have their mailing address at the China office&#146; address: RM 508, No.786 Xinluo Street, High-Tech Industrial Development Zone, Jinan, China.</P>
<P style="line-height:14pt; margin-top:3.333px; margin-bottom:-18.667px; padding-left:48px; text-indent:-24px">(2)</P>
<P style="margin-top:0px; margin-bottom:3.333px; padding-left:48px">Based on 53,008,000 shares of the Company&#146;s common stock issued and outstanding.</P>
<P style="margin:0px"><BR></P>
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<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_12"></A><A NAME="certain_relationships"></A></P>
<P style="margin:0px" align=center><B>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>None, however any future transactions or loans between us and our officers, directors, principal stockholders or affiliates will be on terms no less favorable to us than could be obtained from an unaffiliated third party, and will be approved by a majority of disinterested directors.</P>
<P style="margin:0px">&nbsp;<A NAME="description_securities"></A></P>
<P style="margin:0px" align=center><B>DESCRIPTION OF SECURITIES</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Common Stock</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We are authorized to issue 75,000,000 shares of common stock, $0.001 par value, of which 53,008,000 shares were issued and outstanding as of February 1, 2008.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The holders of common stock are entitled to one vote for each share held of record on all matters to be voted by stockholders. There is no cumulative voting with respect to the election of directors with the result that the holders of more than 50% of the shares of common stock and other voting shares voted for the election of directors can elect all of the directors.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The holders of shares of common stock are entitled to dividends when and as declared by the Board of Directors from funds legally available therefore, and, upon liquidation are entitled to share pro rata in any distribution to holders of common stock, subject to the right of holders of outstanding preferred stock. No dividends have ever been declared by the Board of Directors on the common stock. See &#147;Dividend Policy.&#148;&nbsp;&nbsp;Holders of our common stock have no preemptive rights.&nbsp;&nbsp;There are no conversion rights or redemption or sinking fund provisions with respect to our common stock.&nbsp;&nbsp;All of the outstanding shares of common stock are, and all shares sold hereunder will be, when issued upon payment therefore, duly authorized, validly issued, fully paid and non-assessable.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Preferred Stock</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We are not authorized to issue any shares of preferred stock as of February 1, 2008.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate.&nbsp;&nbsp;In the event that we determine to authorize and issue any shares of preferred stock, a certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Nevada.&nbsp;&nbsp;The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Nevada law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control without further action by our stockholders, and may adversely affect the voting and other rights of the holders of our common stock<FONT COLOR=#FF0000>.</FONT></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px"><B>Transfer Agent</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
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<P style="margin:0px; text-indent:48px; page-break-before:always" align=justify>Integrity Stock Transfer, Las Vegas, Nevada, is the transfer agent for our common stock.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>33</P>
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<A NAME="selling_stockholders"></A><P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><B>SELLING STOCKHOLDERS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The shares of common stock being offered by the selling stockholders are those issuable to the selling stockholders upon conversion of the convertible notes and upon exercise of the warrants. &nbsp;For additional information regarding the issuance of those convertible notes and warrants, see &quot;Private Placement of Convertible Notes and Warrants&quot; above. &nbsp;We are registering the shares of common stock in order to permit the selling stockholders to offer the shares for resale from time to time. &nbsp;Except for the ownership of the shares of common stock, the convertible notes and the warrants issued pursuant to the Securities Purchase Agreement, the selling stockholders have not had any material relationship with us within the past three years.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling stockholders. &nbsp;The second column lists the number of shares of common stock beneficially owned by each selling stockholder, based on its ownership of the convertible notes and warrants, as of February 1, 2008, assuming conversion of all convertible notes and exercise of the warrants held by the selling stockholders on that date, without regard to any limitations on conversions or exercise.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The third column lists the shares of common stock being offered by this prospectus by the selling stockholders.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">In accordance with the terms of a registration rights agreement with the selling stockholders, this prospectus generally covers the resale of at least 130% of the sum of (i) the number of shares of common stock issuable upon conversion of the convertible notes as of the Trading Day immediately preceding the date the registration statement is initially filed with the SEC, (ii) the number of shares of common stock issuable as Interest Shares pursuant to the terms of the Notes as of the Trading Day immediately preceding the date the registration statement is initially filed with the SEC and (iii) the number of shares of common stock issuable upon exercise of the related warrants as of the Trading Day immediately preceding the date the registration statement is initially filed with the SEC. &nbsp;Because the conversion price of the convertible notes and the exercise price of the warrants may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus. &nbsp;The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">Under the terms of the convertible notes and the warrants, a selling stockholder may not convert the convertible notes or exercise the warrants to the extent such conversion or exercise would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding shares of common stock following such conversion or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion of the convertible notes which have not been converted and upon exercise of the warrants which have not been exercised. &nbsp;The number of shares in the second column does not reflect this limitation. &nbsp;The selling stockholders may sell all, some or none of their shares in this offering. &nbsp;See &quot;Plan of Distribution.&quot;</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=259.4></TD><TD width=97.867></TD><TD width=90.667></TD><TD width=90.667></TD><TD width=90.667></TD><TD width=90.667></TD></TR>
<TR><TD valign=bottom width=259.4><P style="margin:0px" align=center><B>Name(1)</B></P>
</TD><TD valign=bottom width=97.867><P style="margin:0px" align=center><B>Shares</B></P>
<P style="margin:0px" align=center><B>Beneficially</B></P>
<P style="margin:0px" align=center><B>Owned Prior</B></P>
<P style="margin:0px" align=center><B>To Offering(1)</B></P>
</TD><TD valign=bottom width=90.667><P>&nbsp;</P></TD><TD valign=bottom width=90.667><P style="margin:0px" align=center><B>Shares</B></P>
<P style="margin:0px" align=center><B>to be</B></P>
<P style="margin:0px" align=center><B>Offered</B></P>
</TD><TD valign=bottom width=90.667><P style="margin:0px" align=center><B>Amount</B></P>
<P style="margin:0px" align=center><B>Beneficially</B></P>
<P style="margin:0px" align=center><B>Owned</B></P>
<P style="margin:0px" align=center><B>After</B></P>
<P style="margin:0px" align=center><B>Offering(2)</B></P>
</TD><TD valign=bottom width=90.667><P style="margin:0px" align=center><B>Percent</B></P>
<P style="margin:0px" align=center><B>Beneficially</B></P>
<P style="margin:0px" align=center><B>Owned</B></P>
<P style="margin:0px" align=center><B>After</B></P>
<P style="margin:0px" align=center><B>Offering</B></P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=259.4><P style="margin:0px" align=center><B>Castlerigg Master Investments Ltd. (3) (4)</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=97.867><P style="margin:0px" align=center><B>21,992,000</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P style="margin:0px" align=center><B>21,992,000</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P style="margin:0px" align=center><B>0</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P style="margin:0px" align=center><B>*</B></P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=259.4><P style="margin:0px" align=center><B>Totals</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=97.867><P style="margin:0px" align=center><B>21,992,000</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P style="margin:0px" align=center><B>21,992,000</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P style="margin:0px" align=center><B>0</B></P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=90.667><P style="margin:0px" align=center><B>0</B></P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.333></TD><TD width=426.067></TD></TR>
<TR><TD valign=top width=30.333><P style="margin:0px">*</P>
</TD><TD valign=top width=426.067><P style="margin:0px">Less than one percent (1%).</P>
</TD></TR>
</TABLE>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify><BR>
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<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.333></TD><TD width=30.333></TD><TD width=659.2></TD></TR>
<TR><TD valign=top width=30.333><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=30.333><P style="margin:0px">1.</P>
</TD><TD valign=top width=659.2><P style="margin:0px">Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Beneficial ownership includes shares of common stock underlying the Senior Secured Convertible Note, and Series B Warrant. &nbsp;The Series A Warrant is exercisable for 8,885,730 shares of the Company&#146;s common stock and expires the date eighty four (84) months after the earlier of (A) such time as all of the Registrable Securities (as defined in the Registration Rights Agreement) are available for resale pursuant to an effective Registration Statement and (B) two (2) years after December 21, 2007. &nbsp;The Series B Warrant is exercisable for 6,220,011 shares of the Company&#146;s common stock and expires on the date on which the Notes issued pursuant to the Securities Purchase Agreement are no longer issued and outstanding. &nbsp;The Series C Warrant is exercisable for 6,353,297 shares of the Company&#146;s common stock and expires on the date sixty (60) months after the first time the Company elects a Company Optional Redemption. &nbsp;Additionally, as the Company is obligated to register 43,991,507 shares of the Company&#146;s common stock in conjunction with the Securities Purchase Agreement, Senior Secured Convertible Note, and the Warrants dated December 21, 2007, Castlerigg Master Investments Ltd. would have beneficially owned an additional 21,999,507 shares. &nbsp;In this regard, the Company will register 21,999,507 additional shares of the Company&#146;s common stock in&nbsp;a subsequent Registration Statement on Form S-1. &nbsp;At this time, the Company is currently limited in the amount of shares it can issue as it has issued an amount of shares of the Company&#146;s common stock equal to the amount authorized. &nbsp;The Company plans to issue a proxy requesting shareholders to approve an increase of the authorized shares. &nbsp;</P>
</TD></TR>
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<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.333></TD><TD width=30.333></TD><TD width=659.2></TD></TR>
<TR><TD valign=top width=30.333><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=30.333><P style="margin:0px">2.</P>
</TD><TD valign=top width=659.2><P style="margin:0px" align=justify>Assumes the sale of all shares covered hereby. &nbsp;Additionally, as the Company is obligated to register 43,991,507 shares of the Company&#146;s common stock in conjunction with the Securities Purchase Agreement, Senior Secured Convertible Note, and the Warrants dated December 21, 2007, the Company will register 21,999,507 additional shares of the Company&#146;s common stock in&nbsp;a separate Registration Statement on Form S-1. &nbsp;At this time, the Company is currently limited in the amount of shares it can issue as it has issued an amount of shares of the Company&#146;s common stock equal to the amount authorized. &nbsp;After the Company increases the number of authorized shares as set forth in footnote (1) above, Castlerigg Master Investments Ltd. will beneficially own 21,999,507 shares of common stock. &nbsp;The Company plans to issue a proxy requesting shareholders to approve an increase of the authorized shares.</P>
</TD></TR>
</TABLE>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.333></TD><TD width=30.333></TD><TD width=659.2></TD></TR>
<TR><TD valign=top width=30.333><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=30.333><P style="margin:0px">3.</P>
</TD><TD valign=top width=659.2><P style="margin:0px" align=justify>In accordance with the Registration Rights Agreement, consists of (i) 11,551,449 shares of common stock which represents 130% of the 8,885,730 shares of common stock underlying the Senior Secured Convertible Notes (ii) 4,543,308 shares of common stock which represents 130% of the 3,494,852 shares issuable for interest payments as $0.3762 is the lesser of 85% of the average volume weighted average bid price for the Company&#146;s common stock for the 25 consecutive trading days prior to February 1, 2008 and 85% of the average of the lowest three trading days during the 25 consecutive trading day period prior to February 1, 2008,assuming such date was an interest payment date, as defined within the Notes and (iii) 5,897,243shares upon exercise of Series Warrant B at an exercise price of $0.5627 per share.</P>
</TD></TR>
</TABLE>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=30.333></TD><TD width=30.333></TD><TD width=659.2></TD></TR>
<TR><TD valign=top width=30.333><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=30.333><P style="margin:0px">4.</P>
</TD><TD valign=top width=659.2><P style="margin:0px">Sandell Asset Management Corp. (&#147;SAMC&#148;) is the investment manager of Castlerigg Master Investments Ltd. (&#147;Castlerigg&#148;) . Thomas Sandell is the controlling person of SAMC and may be deemed to share beneficial ownership of the shares beneficially owned by Castlerigg. Castlerigg International Ltd. (&#147;Castlerigg International&#148;) is the controlling shareholder of Castlerigg International Holdings Limited (&#147;Holdings&#148;). &nbsp;Holdings is the controlling shareholder of Castlerigg. &nbsp;Each of Holdings and Castlerigg International may be deemed to share beneficial ownership of the shares beneficially owned by Castlerigg Master Investments Ltd. The business address of each of these entities is as follows: c/o Sandell Asset Management Corp. 40 W. 57<SUP>th</SUP> Street, 26<SUP>th</SUP> Floor, New York, New York 10019. SAMC, Mr. Sandell, Holdings and Castlerigg International each disclaims beneficial ownership of the securities with respect to which indirect beneficial ownership is described.</P>
</TD></TR>
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<P style="margin:0px; text-indent:39.6px">Under the terms of the Registration Rights Agreement entered into as part of the Senior Secured Convertible Note, we were obligated to file this registration statement within 45 days of the closing of the placement.&nbsp;&nbsp;In the event this registration statement is not filed timely, we are obligated to make pro rata cash payments to each of the investors in the Placement, as liquidated damages, in an amount equal to 2% per month which shall apply retrospectively from 90 days following closing.</P>
<P style="margin:0px" align=justify><BR></P>
<P style="margin:0px; text-indent:39.6px" align=justify>The Registration Rights Agreement also provides that we pay all fees and expenses incident to the registration statement, other than brokerage commissions and underwriting discounts of the selling stockholders on the sale of their shares.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We do not have any arrangement with any broker-dealer for it to act as an underwriter for the sale of the shares included herein for any of the selling stockholders.&nbsp;&nbsp;Each of the selling stockholders purchased or received the shares offered by it in this prospectus in the ordinary course of business, and at the time of purchase of such shares, it had no agreements or understandings, directly or indirectly, with any person for the distribution of such shares.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="plan_distribution"></A></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:14pt; margin-top:0px; margin-bottom:13.333px; text-indent:48px" align=center><B>PLAN OF DISTRIBUTION</B></P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">We are registering the shares of common stock issuable upon conversion of the convertible notes and upon exercise of the warrants to permit the resale of these shares of common stock by the holders of the common stock, convertible notes and warrants from time to time after the date of this prospectus. &nbsp;We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock. &nbsp;We will bear all fees and expenses incident to our obligation to register the shares of common stock.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents. &nbsp;If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions. &nbsp;The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. &nbsp;These sales may be effected in transactions, which may involve crosses or block transactions, </P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">in the over-the-counter market;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">in transactions otherwise than on these exchanges or systems or in the over-the-counter market;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">through the writing of options, whether such options are listed on an options exchange or otherwise;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">purchases by a broker-dealer as principal and resale by the broker-dealer for its account;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">an exchange distribution in accordance with the rules of the applicable exchange;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">privately negotiated transactions;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">short sales;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">sales pursuant to Rule 144;</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; text-indent:-24px; page-break-before:always">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">a combination of any such methods of sale; and</P>
<P style="margin:0px; text-indent:-24px">&#183;</P>
<P style="margin-top:0px; margin-bottom:13.333px">any other method permitted pursuant to applicable law.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved). &nbsp;In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. &nbsp;The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. &nbsp;The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The selling stockholders may pledge or grant a security interest in some or all of the convertible notes or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. &nbsp;The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be &quot;underwriters&quot; within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. &nbsp;At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. &nbsp;In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person. &nbsp;Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. &nbsp;All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $453.03 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or &quot;blue sky&quot; laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any. &nbsp;We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will be entitled to contribution. &nbsp;We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.</P>
<P style="margin-top:0px; margin-bottom:13.333px; text-indent:48px">Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_13"></A><A NAME="legal_matters"></A></P>
<P style="margin:0px" align=justify><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center><B>LEGAL MATTERS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Anslow + Jaclin, LLP, Manalapan, New Jersey passed upon the validity of the common stock being offered hereby.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_14"></A><A NAME="experts"></A></P>
<P style="margin:0px" align=center><B>EXPERTS</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Included in the Prospectus constituting part of this Registration Statement are consolidated financial statements for fiscal 2006 and 2005, which have been audited by Kabani &amp; Co., an independent registered public accounting firm, to the extent and for the periods set forth in their respective report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firms as experts in accounting and auditing.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="available_info"></A></P>
<P style="margin:0px" align=center><B>AVAILABLE INFORMATION</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedule thereto, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information regarding our common stock and our company, please review the registration statement, including exhibits, schedules and reports filed as a part thereof. Statements in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement, set forth the material terms of such contract or other document but are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px">We are also subject to the informational requirements of the Exchange Act which requires us to file reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information along with the registration statement, including the exhibits and schedules thereto, may be inspected at public reference facilities of the SEC at 100 F Street N.E , Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC&#146;s Internet website at<FONT COLOR=#0000FF> &nbsp;http://www.sec.gov</FONT> .</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>38</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=15.133></TD><TD width=25.133></TD><TD width=424.667></TD><TD width=24.133></TD><TD width=148.933></TD></TR>
<TR><TD width=638 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC. AND SUBSIDIARY</B></P>
</TD></TR>
<TR><TD width=638 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>CONSOLIDATED BALANCE SHEET</B></P>
</TD></TR>
<TR><TD width=638 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>(UNAUDITED)</B></P>
</TD></TR>
<TR><TD width=464.933 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt"><B>&nbsp;</B></P>
</TD><TD width=24.133><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>September 30, 2007</B></P>
</TD></TR>
<TR><TD width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=638 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>Assets</B></P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=449.8 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Current Assets</B></P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Cash and cash equivalents</P>
</TD><TD width=24.133><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>$</B></P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>828,258</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Accounts receivable</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>322,210</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Inventories, net</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>195,574</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Advance to suppliers</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>686,862</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Loan receivables</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>143,663</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Other current assets</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>112,280</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Total Current Assets</B></P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>2,288,847</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=449.8 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Property &amp; Equipment &#150; net</B></P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>1,465,641</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=449.8 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Intangible Assets &#150; net</B></P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>10,879</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Total Assets</B></P>
</TD><TD width=24.133><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>$</B></P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right><B>3,765,367</B></P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=638 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>Liabilities &amp; Stockholders' Equity</B></P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=449.8 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Current Liabilities</B></P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Short-term loan</P>
</TD><TD width=24.133><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>$</B></P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>266,042</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Accrued expenses and other current liabilities</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>346,851</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Due to related party</P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>10,000</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Total Current Liabilities</B></P>
</TD><TD width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>622,893</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR>
<BR></P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=15.133></TD><TD width=25.133></TD><TD width=424.667></TD><TD width=24.133></TD><TD width=148.933></TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=449.8 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Stockholders' Equity</B></P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Common Stock, part value $.001 per share, 75,000,000 shares authorized;
    52,958,000 shares issued and 51,758,000 shares outstanding</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>52,958</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Additional paid-in-capital</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>3,357,565</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Shares to be cancelled</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(1,212,000)</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Other comprehensive income</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>144,662</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Statutory reserves</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>192,808</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt">Retained earnings</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>606,482</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Total Stockholders' Equity</B></P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>3,142,475</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=424.667><P style="line-height:13pt; margin:0px; text-indent:14px; font-size:11pt"><B>Total Liabilities and Stockholders' equity</B></P>
</TD><TD valign=bottom width=24.133><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>$</B></P>
</TD><TD style="border-bottom:3px double #000000" width=148.933><P style="line-height:13pt; margin:0px; font-size:11pt" align=right><B>3,765,367</B></P>
</TD></TR>
<TR><TD valign=bottom width=15.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=424.667><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=24.133><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=148.933><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=638 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>&nbsp;The accompanying notes are an integral part of these unaudited consolidated financial statements </P>
</TD></TR>
</TABLE>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px" align=center><BR>
1</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=18></TD><TD width=22></TD><TD width=271></TD><TD width=21></TD><TD width=74></TD><TD width=21></TD><TD width=75></TD><TD width=21></TD><TD width=74></TD><TD width=21></TD><TD width=78></TD></TR>
<TR><TD width=18><P>&nbsp;</P></TD><TD width=22><P>&nbsp;</P></TD><TD width=271><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=74><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=75><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=74><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=78><P>&nbsp;</P></TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=678 colspan=10><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=678 colspan=10><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>CONSOLIDATED STATEMENT OF INCOME</B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=678 colspan=10><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006</B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=678 colspan=10><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>(UNAUDITED)</B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=170 colspan=3><P style="line-height:11pt; margin:0px; font-size:9pt" align=center><B>Three month periods ended</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=173 colspan=3><P style="line-height:11pt; margin:0px; font-size:9pt" align=center><B>Nine month periods ended</B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=170 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>September 30, </B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=173 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>September 30, </B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>2007</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>2006</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>2007</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>2006</B></P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=311 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Net sales</B></P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>1,899,854 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>152,329 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>4,155,855 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>889,602 </P>
</TD></TR>
<TR><TD width=311 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Cost of sales</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>1,175,312 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>94,633 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>2,964,774 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>579,628 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=293 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Gross profit</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>724,542 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>57,696 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>1,191,081 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>309,974 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=311 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Operating expenses</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt">Selling, general and administrative</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>116,266 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>68,922 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>290,587 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>133,840 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt">Depreciation and amortization</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>42,308 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>5,848 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>87,029 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>16,859 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="line-height:13pt; margin:0px; font-size:11pt"><B>&nbsp;</B></P>
</TD><TD valign=bottom width=271><P style="line-height:13pt; margin:0px; font-size:11pt"><B>&nbsp;&nbsp;Total operating expenses</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>158,574 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>74,770 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>377,616 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>150,699 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=293 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Income (Loss) from operations</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>565,968 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(17,074)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>813,465 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>159,275 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=311 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Other income (expenses)</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt">Interest income</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>10,569 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>103 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>13,755 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>374 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt">Interest expenses</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>- </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(1,535)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>- </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(2,538)</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt">Subsidy income</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>16,236 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>33 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>27,743 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>18,156 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt">Other expenses</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(1)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(53)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(85)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(162)</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Total other income (loss)</B></P>
</TD><TD width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>26,804 </P>
</TD><TD width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(1,452)</P>
</TD><TD width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>41,413 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>15,830 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=293 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Net income (loss)</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>592,772 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(18,526)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>854,878 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>175,105 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=293 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=311 colspan=3><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Other comprehensive gain</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=293 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt">Foreign currency translation gain</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>76,486 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>11,725 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>90,359 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>21,081 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=293 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>&nbsp;</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=271><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Net comprehensive income (loss)</B></P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>669,258 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=75><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(6,801)</P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=74><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>945,237 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>196,186 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=311 colspan=3><P style="margin:0px"><B>Net earnings per common shares outstanding &#150;</B></P>
<P style="margin:0px"><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;basic and diluted</B></P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=74><P style="margin:0px" align=right>0.01 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=75><P style="margin:0px" align=right>0.00 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=74><P style="margin:0px" align=right>0.02 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="margin:0px" align=right>0.00 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=311 colspan=3><P style="margin:0px"><B>Weighted average common shares outstanding &#150; </B></P>
<P style="margin:0px"><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;basic and diluted</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=74><P style="margin:0px" align=right>52,088,882 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=75><P style="margin:0px" align=right>45,310,978 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=74><P style="margin:0px" align=right>52,088,882 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="margin:0px" align=right>41,789,780 </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=293 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=696 colspan=11><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>&nbsp;The accompanying notes are an integral part of these unaudited consolidated financial statements </P>
</TD></TR>
<TR><TD valign=bottom width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=22><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=271><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=75><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=74><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px" align=center><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR>
2</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR></P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=56></TD><TD width=448></TD><TD width=25></TD><TD width=78></TD><TD width=21></TD><TD width=79></TD></TR>
<TR><TD width=56><P>&nbsp;</P></TD><TD width=448><P>&nbsp;</P></TD><TD width=25><P>&nbsp;</P></TD><TD width=78><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=79><P>&nbsp;</P></TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=651 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC AND SUBSIDIARY</B></P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=651 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>CONSOLIDATED CASH FLOW STATEMENTS</B></P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=651 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006</B></P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=651 colspan=5><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>(UNAUDITED)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>2007</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=center><B>2006</B></P>
</TD></TR>
<TR><TD valign=bottom width=504 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Cash flows from operating activities: &nbsp;</B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Net income &nbsp;</P>
</TD><TD valign=bottom width=25><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>&nbsp;&nbsp;$ &nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>8454,878 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>175,105 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Adjustments to reconcile net income to net cash</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">provided by operating activities: &nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;Depreciation and amortization</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>87,029 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>16,859 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;Changes in operating assets and liabilities: &nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable &nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(318,854)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(21,935)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Inventories &nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(107,352)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(33,542)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Advances to suppliers &nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(659,300)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>56,725 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Loan receivables and other current assets</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(13,930)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(205,941)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable &nbsp;&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>98,809 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>323 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">&nbsp;&nbsp;&nbsp;&nbsp;Accrued expenses and other current liabilities &nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>185,378 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(20,801)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Total Adjustments</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(827,029)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(109,503)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Net cash provided by operating activities</B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>27,849 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>65,602 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=504 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Cash flows from investing activities:</B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Purchase of property and equipment</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(985,580)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(360,132)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=504 colspan=2><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Cash flows from financing activities:</B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Proceeds on short-term loan</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>260,561 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>126,443 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Foreign currency translation</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>37,612 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>21,082 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-family:Arial Unicode MS; font-size:11pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-family:Arial Unicode MS; font-size:11pt" align=right>&#12288;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Net increase in cash and cash equivalents</B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(659,558)</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>(147,005)</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Cash and cash equivalents, beginning balance</B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>1,487,816 </P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>492,089 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-family:Arial Unicode MS; font-size:11pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-family:Arial Unicode MS; font-size:11pt" align=right>&#12288;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt"><B>Cash and cash equivalents, ending balance</B></P>
</TD><TD valign=bottom width=25><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>828,258 </P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>345,084 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt"><B><U>SUPPLEMENTARY DISCLOSURE:</U></B></P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Interest paid</P>
</TD><TD valign=bottom width=25><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt">-</P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>1,003 </P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="line-height:13pt; margin:0px; font-size:11pt">Income tax paid</P>
</TD><TD valign=bottom width=25><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="line-height:13pt; margin:0px; font-size:11pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=56><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=448><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=25><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=707 colspan=6><P style="line-height:13pt; margin:0px; font-size:11pt" align=center>The accompanying notes are an integral part of these unaudited consolidated financial statements</P>
</TD></TR>
<TR><TD width=707 colspan=6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin-top:0px; margin-bottom:13.333px" align=center><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR>
3</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR></P>
<P style="margin:0px"><B>NOTE 1</B>&nbsp;<B>GENERAL</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">China VOIP &amp; Digital Telecom Inc. (&#147;the Company&#148; or &#147;We&#148;), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan YinQuan became our wholly-owned subsidiary. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Jinan YinQuan was established in JiNan in the People&#146;s Republic of China (&#147;the PRC&#148;) in 2001. &nbsp;The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company&#146;s principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license). &nbsp;Currently, the Company is focused on the Voice Over Internet Phone (&#147;VOIP&#148;) technology related business.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 2&nbsp; SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</B></P>
<P style="margin:0px"><U>Unaudited Interim Financial Information</U> </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2006. Operating results for the three month and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Basis of Presentation</U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. &nbsp;Our functional currency is the Chinese Renminbi; however the accompanying financial statements have been translated and presented in United States Dollars ($).</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Use of Estimates </U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. &nbsp;</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Risks and Uncertainties</U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.</P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR>
4</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px"><U>Inventories </U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower. &nbsp;As of September 30, 2007, the reserve for obsolenscence was $20,429. &nbsp;</P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px"><U>Revenue Recognition</U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company recognizes revenue from telecommunications as services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Earnings Per Share (EPS)</U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), &#147;Earnings per share&#148;. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted EPS is not presented as the Company has no potential dilutive shares outstanding.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Income Taxes </U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company utilizes SFAS No. 109, &quot;Accounting for Income Taxes,&quot; which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company is approved as hi-tech software company, the company is completely exempt of income tax for the first 2 years up to December 2007 and is 50% exempt of income tax for the next 3 years pursuant to State Tax notice no. [2003] 82.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Segment Reporting</U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Statement of Financial Accounting Standards No. 131 (&quot;SFAS 131&quot;), &quot;Disclosure about Segments of an Enterprise and Related Information&quot; requires use of the &quot;management approach&quot; model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. As per SFAS 131, the company operates in two segments based on nature of products and services: Telecommunocations, Sale of equipments and Technical services.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; text-indent:2px"><U>Recently Issued Accounting Standards </U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In September 2006, FASB issued SFAS 157 &#145;Fair Value Measurements&#146;. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always">In September 2006, FASB issued SFAS 158 &#145;Employers&#146; Accounting for Defined Benefit Pension and Other Postretirement Plans&#151;an amendment of FASB Statements No. 87, 88, 106, and 132(R)&#146; This Statement improves financial reporting by </P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR>
5</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:</P>
<P style="margin:0px">A brief description of the provisions of this Statement </P>
<P style="margin:0px; text-indent:-28px; font-family:Wingdings">l</P>
<P style="margin:0px">The date that adoption is required </P>
<P style="margin:0px; text-indent:-28px; font-family:Wingdings">l</P>
<P style="margin:0px">The date the employer plans to adopt the recognition provisions of this Statement, if earlier.</P>
<P style="margin:0px; text-indent:-28px; font-family:Wingdings">l</P>
<P style="margin:0px">The requirement to measure plan assets and benefit obligations as of the date of the employer&#8217;s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In February of 2007 the FASB issued SFAS 159, &#147;The Fair Value Option for Financial Assets and Financial Liabilities&#151;Including an amendment of FASB Statement No. 115.&#148; &nbsp;The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. &nbsp;The statement is effective as of the beginning of an entity&#146;s first fiscal year that begins after November 15, 2007. &nbsp;The company is analyzing the potential accounting treatment.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Foreign Currency Translation </U></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company uses the United States dollar (&quot;U.S. dollars&quot;) for financial reporting purposes. The Company maintains books and records in their functional currency, being the primary currency of the economic environment in which the operations are conducted. In general, the Company translates the assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income in accordance with SFAS No. 130, &#147;Reporting Comprehensive Income&#148; as a component of shareholders&#146; equity </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As of September 30, 2007, the accounts of Jinan YinQuan were maintained and expressed in the Chinese Yuan Renminbi (CNY). The consolidated financial statements of the Company were translated into United States Dollars (USD) in accordance with Statement of Financial Accounts Standards (&quot;SFAS&quot;) No. 52, &quot;Foreign Currency Translation,&quot; with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. For the nine month periods ended September 30, 2007 and 2006, the foreign currency translation gain is $90,359 and $21,081 respectively. The accumulated comprehensive foreign currency translation gain amounted to $144,662 as on September 30, 2007.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 3 &nbsp;&nbsp;PRINCIPLES OF CONSOLIDATION</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The accompanying consolidated financial statements include the accounts of China VOIP &amp; Digital Telecom (the &#147;Company&#148;) and its 100% wholly-owned subsidiary Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;). All significant inter-company accounts and transactions have been eliminated in consolidation.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center><BR>
6</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 4 &nbsp;&nbsp;CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS </B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">For the nine months ended September 30, 2007, one customer provided 6% of the net revenues and one supplier provided 79% of the cost of sales. &nbsp;The balance receivable as of September 30, 2007 from this customer was $128,225. The balance advanced to the supplier as of September 30, 2007 was $265,669. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents as&nbsp;the same is&nbsp;not covered by insurance. </P>
<P style="line-height:14pt; margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 5 &nbsp;&nbsp;ADVANCES TO SUPPLIERS</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The Company made prepayments to suppliers to purchase inventory, equipment or services. This amount represents the advances paid by the Company to suppliers of $686,862 at September 30, 2007.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 6 &nbsp;&nbsp;LOAN RECEIVABLES</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As of September 30, 2007, the Company had a loan receivable amounted to $133, 021 with unsecured, 8% annual interest rate bearing and due on November 30, 2007. &nbsp;Interest income of the said loan for the nine month periods ended September 30, 2007 and 2006 was $10,451 and $0, respectively.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As of September 30, 2007, the Company had a loan receivable amounted to $10,642, which was unsecured, non-interest bearing and payable on demand.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 7 &nbsp;&nbsp;OTHER CURRENT ASSETS</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As of September 30, 2007, the other current assets comprise of the following:</P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=332></TD><TD width=15></TD><TD width=80></TD><TD width=15></TD></TR>
<TR><TD width=332><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD><TD width=80><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD></TR>
<TR><TD style="background-color:#EAF9E8" width=332><P style="margin:0px">Advances to Staff</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="margin:0px" align=right>37,688</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="margin:0px">Prepaid expense</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="margin:0px" align=right>40,171</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="margin:0px">Others</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=80><P style="margin:0px" align=right>34,421</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=332><P style="margin:0px">Total</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:3px double #000000" valign=bottom width=80><P style="margin:0px" align=right>112,280</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 8&nbsp; &nbsp;PROPERTIES AND EOUIPMENT</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The balances of Company property and equipment as of September 30, 2007 are summarized as follows:</P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=327></TD><TD width=21></TD><TD width=80></TD><TD width=15></TD></TR>
<TR><TD width=327><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=80><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD></TR>
<TR><TD valign=bottom width=327><P style="margin:0px">Electronic Equipment</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="margin:0px" align=right>1,041,353 </P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" width=327><P style="margin:0px">Vehicles</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="margin:0px" align=right>&nbsp;&nbsp;&nbsp;87,237 </P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327><P style="margin:0px">Office Equipment</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="margin:0px" align=right>&nbsp;&nbsp;9,699 </P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=327><P style="margin:0px">Construction in progress</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:1px solid #000000" valign=bottom width=80><P style="margin:0px" align=right>425,726</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="margin:0px" align=right>1,564,015</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=327><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327><P style="margin:0px">Less: Accumulated depreciation</P>
</TD><TD valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="margin:0px" align=right>(98,374)</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=327><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:1px solid #000000" valign=bottom width=80><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327><P style="margin:0px">Property and equipment, net</P>
</TD><TD valign=bottom width=21><P style="margin:0px">$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=80><P style="margin:0px" align=right>1,465,641</P>
</TD><TD valign=bottom width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The depreciation expense for the nine month periods ended September 30, 2007 and 2006 was $73,330 and $4,391 respectively. The depreciation expense for the three month periods ended September 30, 2007 and 2006 was $37,742 and $1,692 respectively.</P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<P style="margin:0px" align=center><BR>
7</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 9 &nbsp;&nbsp;INTANGIBLE ASSET </B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Intangible asset comprised of a set of software acquired from third parties. This set of software is used for the core technology of the Company&#146;s VOIP business. &nbsp;It is amortized over 5 years. </P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=421></TD><TD width=13></TD><TD width=108></TD></TR>
<TR><TD width=421><P>&nbsp;</P></TD><TD width=13><P>&nbsp;</P></TD><TD width=108><P>&nbsp;</P></TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=421><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" width=13><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=108><P style="margin:0px" align=center>2007</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=421><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" width=13><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=108><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=421><P style="margin:0px">Software</P>
</TD><TD style="background-color:#EAF9E8" width=13><P style="margin:0px">&nbsp;$</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=108><P style="margin:0px" align=right>93,248 </P>
</TD></TR>
<TR><TD width=421><P style="margin:0px">Less: amortization</P>
</TD><TD width=13><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=108><P style="margin:0px" align=right>(82,369)</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" width=421><P style="margin:0px">Intangible asset, net</P>
</TD><TD style="background-color:#EAF9E8" width=13><P style="margin:0px">$</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:3px double #000000" valign=bottom width=108><P style="margin:0px" align=right>10,879</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=413></TD><TD width=12></TD><TD width=10></TD><TD width=107></TD></TR>
<TR><TD width=413><P>&nbsp;</P></TD><TD width=12><P>&nbsp;</P></TD><TD width=10><P>&nbsp;</P></TD><TD width=107><P>&nbsp;</P></TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=413><P style="margin:0px">Amortization for the next 5 years is as follows :-</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=117 colspan=2><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=413><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" width=12><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=117 colspan=2><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=413><P style="margin:0px">2007</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=10><P style="margin:0px">$</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=107><P style="margin:0px" align=right>4,566</P>
</TD></TR>
<TR><TD valign=bottom width=413><P style="margin:0px">2008</P>
</TD><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=107><P style="margin:0px" align=right>6,313</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=413><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=10><P style="margin:0px">$</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:3px double #000000" valign=bottom width=107><P style="margin:0px" align=right>10,879</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The amortization expense for the nine month periods ended September 30, 2007 and 2006 was $13,699 and $12,468 respectively. The amortization expense for the three month periods ended September 30, 2007 and 2006 was $4,566 and $4,156 respectively. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 10 &nbsp;&nbsp;SHORT TERM LOAN</B></P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=98></TD><TD width=16></TD><TD width=112></TD><TD width=16></TD><TD width=96></TD><TD width=24></TD><TD width=104></TD><TD width=24></TD><TD width=144></TD></TR>
<TR><TD width=98><P>&nbsp;</P></TD><TD width=16><P>&nbsp;</P></TD><TD width=112><P>&nbsp;</P></TD><TD width=16><P>&nbsp;</P></TD><TD width=96><P>&nbsp;</P></TD><TD width=24><P>&nbsp;</P></TD><TD width=104><P>&nbsp;</P></TD><TD width=24><P>&nbsp;</P></TD><TD width=144><P>&nbsp;</P></TD></TR>
<TR><TD width=98><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=16><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=112><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=16><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=96><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=top width=24><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=top width=104><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=24><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=144><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=98><P style="margin:0px">Principal</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=16><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=112><P style="margin:0px">Interest rate</P>
<P style="margin:0px">(Per annum)</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=16><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=96><P style="margin:0px">Due Date</P>
</TD><TD style="background-color:#EAF9E8" valign=top width=24><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=104><P style="margin:0px" align=center>Time period</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=24><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=144><P style="margin:0px">Secured by</P>
</TD></TR>
<TR><TD valign=bottom width=98><P style="margin:0px">$ 266,042</P>
</TD><TD valign=bottom width=16><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=112><P style="margin:0px">8.694%</P>
</TD><TD valign=bottom width=16><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=96><P style="margin:0px">Nov 2007</P>
</TD><TD valign=top width=24><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=104><P style="margin:0px" align=center>Six months</P>
</TD><TD valign=bottom width=24><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=144><P style="margin:0px">Jinan Development Zone Security Co., Ltd.</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px">The loan was borrowed from JiNan City Commercial Bank. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 11 &nbsp;ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES </B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Accrued expenses and other current liabilities as of September 30, 2007 are summarized as follows:</P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=421></TD><TD width=12></TD><TD width=87></TD></TR>
<TR><TD width=421><P>&nbsp;</P></TD><TD width=12><P>&nbsp;</P></TD><TD width=87><P>&nbsp;</P></TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=421><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=87><P style="margin:0px" align=center><U>2007</U></P>
</TD></TR>
<TR><TD valign=bottom width=421><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=87><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=421><P style="margin:0px">Accrued expenses</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin:0px">$&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=87><P style="margin:0px" align=right>37,500</P>
</TD></TR>
<TR><TD valign=bottom width=421><P style="margin:0px">Accrued staff welfare</P>
</TD><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=87><P style="margin:0px" align=right>9,211</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=421><P style="margin:0px">Tax payables</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=87><P style="margin:0px" align=right>200,868</P>
</TD></TR>
<TR><TD valign=bottom width=421><P style="margin:0px">Security deposits</P>
</TD><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD valign=bottom width=87><P style="margin:0px" align=right>40,146</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=421><P style="margin:0px">Advances from customers</P>
</TD><TD style="background-color:#EAF9E8" width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=87><P style="margin:0px" align=right>40,220</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=421><P style="margin:0px">Others</P>
</TD><TD style="background-color:#FFFFFF" width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=87><P style="margin:0px" align=right>18,906</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=421><P style="margin:0px">Total</P>
</TD><TD style="background-color:#FFFFFF" width=12><P style="margin:0px">&nbsp;$</P>
</TD><TD style="background-color:#FFFFFF; border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=87><P style="margin:0px" align=right>346,851</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 12 &nbsp;&nbsp;DUE TO RELATED PARTY</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Due to related party of $10,000 as of September 30, 2007 represents payable to former beneficial owner of Crawford Lake Mining Inc. &nbsp;This payable is unsecured, non interest bearing and payable on demand.</P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center><BR>
8</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px"><B>NOTE 13 &nbsp;&nbsp;SEGMENT REPORTING</B></P>
<P style="margin:0px"><BR></P>
<P style="margin-top:4.2px; margin-bottom:4.2px">Statement of Financial Accounting Standards No. 131 (&quot;SFAS 131&quot;), &quot;Disclosure About Segments of an Enterprise and Related Information&quot; requires use of the &quot;management approach&quot; model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.</P>
<P style="margin-top:4.2px; margin-bottom:4.2px">During the nine months ended September 30, 2007 and 2006, the Company is organized into three main business segments: (1) Telecommunications minutes, (2) Equipment Sales and (3) Technical services. The following table presents a summary of operating information and certain year-end balance sheet information for the nine months ended September 30, 2007 and 2006: &nbsp;</P>
<P style="margin:0px"><BR></P>
<A NAME="_1256131694"></A><A NAME="_1256131783"></A><A NAME="_1256270412"></A><A NAME="_1256270612"></A><TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=327.467></TD><TD width=131.4></TD><TD width=9.733></TD><TD width=131.4></TD></TR>
<TR><TD width=327.467><P>&nbsp;</P></TD><TD width=131.4><P>&nbsp;</P></TD><TD width=9.733><P>&nbsp;</P></TD><TD width=131.4><P>&nbsp;</P></TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=272.533 colspan=3><P style="margin:0px; font-family:Arial" align=center><B>Nine month periods ended</B></P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=center>9/30/2007</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=center>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=center>2006</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">Revenues from unafiliated customers:</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=center>(Unaudited)</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=center>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=center>(Unaudited)</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Telecommunication</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 3,074,260&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 481,333&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Equipment sales</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;387,912&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;408,269&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Technical services</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;479,580&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;- &nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 3,941,752&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 889,602&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">Operating income (loss):</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Telecommunication</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 414,085&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 152,215&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Equipment sales</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;20,026&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;11,230&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Technical services</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;443,394&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;- &nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Corporation (1)</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;(64,040)</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;(4,170)</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 813,465&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 159,275&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">Net income (loss) before taxes:</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Telecommunication</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 446,854&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 160,780&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Equipment sales</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;23,892&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;18,495&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Technical services</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;448,173&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;- &nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Corporation (1)</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;(64,040)</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;(4,170)</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 854,878&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 175,105&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">Identifiable assets:</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Telecommunication</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 3,632,032&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 1,572,848&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Equipment sales</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;159,199&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;50,577&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;Technical services</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;- &nbsp;&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;&nbsp;- &nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 3,791,231&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;$ 1,623,425&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=327.467><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.733><P style="margin:0px" align=right>&nbsp;</P>
</TD><TD valign=bottom width=131.4><P style="margin:0px" align=right>&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px">(1). Unallocated loss from Operating income(loss) and Net income(loss) before taxes are primarily related to general corporate expenses.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><B>NOTE 14 STATUTORY RESERVES</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As stipulated by the Company Law of the People's Republic of China (PRC) executed on 2006, net income after taxation can only be distributed as dividends after appropriation has been made for the following: </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">1.</P>
<P style="margin:0px">Making up cumulative prior years' losses, if any; </P>
<P style="margin:0px; text-indent:-28px">2.</P>
<P style="margin:0px">Allocations to the &quot;Statutory surplus reserve&quot; of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital; </P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; text-indent:-28px; page-break-before:always">3.</P>
<P style="margin:0px">Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's &quot;Statutory common welfare fund&quot;, which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and </P>
<P style="margin:0px; text-indent:-28px">4.</P>
<P style="margin:0px">Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting. </P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><BR>
9</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=center>CHINA VOIP &amp; DIGITAL TELECOM INC. AND SUBSIDIARY</P>
<P style="margin:0px" align=center>NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</P>
<P style="margin:0px" align=center>(UNAUDITED)</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In accordance with the Chinese Company Law, the company has allocated 10% of its net income after tax to surplus as of September 30, 2007. The amount included in the statutory reserves as of September 30, 2007 amounted to $127,322. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">According to the new Company Law of the People's Republic of China (PRC) executed in 2006, the Company is not required to reserve the &#147;Statutory common welfare fund&#148;. Accordingly, the Company did not reserve the common welfare fund subsequent to June 30, 2007. The amount included in the Statutory common welfare fund as of September 30, 2007 amounted to $65,487.. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">NOTE 15 &nbsp;&nbsp;STOCKHOLDER&#146;S EQUITY</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">Pursuant to the term sheet, on July 18, 2007, the Company issued 1.2 million shares to Downshire Capital Inc. and its assigned parties as first installment for financing assistance. While according to the term sheet, $3 million USD should be received by the company before August 15, 2007, otherwise, Downshire Capital and its designed investors need to return the 1.2 million shares and the Registrant will cancel it accordingly.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">As of August 21, 2007, Downshire Capital Inc.was not able to complete the financing before closing deadline according to the termsheet signed with the Registrant on July 17,2007. After further negotiation, both parties could not reach further agreement to extend the termsheet and the termsheet was terminated accordingly. &nbsp;The stock transfer agent of the Company has put restriction on the stock to trade. The Company requested its stock transfer agent to cancel the shares. However, Downshire Capital Inc. did not return the certificates to stock transfer agent as of September 30, 2007. The shares have been classified as &#147;Shares to be cancelled&#148; in the accompanying financial statements.</P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="index"></A></P>
<P style="line-height:15.75pt; margin:0px; font-size:13.5pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
<P style="line-height:15.75pt; margin:0px; font-size:13.5pt" align=center><B>FINANCIAL STATEMENTS</B></P>
<P style="margin:0px" align=center><BR></P>
<P style="line-height:15.75pt; margin:0px; font-size:13.5pt" align=center><B>DECEMBER 31, 2006 AND 2005</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>TABLE OF CONTENTS</B></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin:0px; font-size:12pt">Report of Independent Registered Public Accounting Firm</P>
<P style="line-height:14pt; margin:0px; text-indent:384px; font-size:12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:528px; font-size:12pt">1</P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin:0px; font-size:12pt">Balance Sheets</P>
<P style="line-height:14pt; margin:0px; text-indent:528px; font-size:12pt">2 </P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin:0px; font-size:12pt">Statements of Income</P>
<P style="line-height:14pt; margin:0px; text-indent:240px; font-size:12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:336px; font-size:12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:528px; font-size:12pt">3 </P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin:0px; font-size:12pt">Statements of Cash Flows</P>
<P style="line-height:14pt; margin:0px; text-indent:384px; font-size:12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:528px; font-size:12pt">4</P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin:0px; font-size:12pt">Statements of Stockholders&#146; Equity &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:336px; font-size:12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:528px; font-size:12pt">5</P>
<P style="line-height:14pt; margin:0px"><BR></P>
<P style="line-height:14pt; margin:0px; font-size:12pt">Notes to Financial Statements&nbsp;</P>
<P style="line-height:14pt; margin:0px; text-indent:528px; font-size:12pt">6</P>
<P style="line-height:14pt; margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
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<P style="margin:0px; text-indent:78px; font-size:12pt; page-break-before:always"><B>Report of Independent Registered Public Accounting Firm</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px"><B>The Board of Directors and Stockholders</B></P>
<P style="line-height:12.75pt; margin:0px"><B>China VOIP &amp; Digital Telecom, Inc.</B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">We have audited the accompanying consolidated balance sheet of China VOIP &amp; Digital Telecom, Inc. (the &quot;Company&quot;) as of December 31, 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2006 and 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). &nbsp;Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. &nbsp;An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. &nbsp;We believe that our audits provide a reasonable basis for our opinion.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, in conformity with US generally accepted accounting principles.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;</P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B><U>/s/ Kabani &amp; Company</U></B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Los Angeles, California</P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt">March 23, 2007</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:10.867px"><BR></P>
<P style="margin:5.867px"><BR></P>
<P style="margin:0px" align=center><BR>
<BR>
1</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
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<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
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<P style="margin:0px; page-break-before:always"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=14></TD><TD width=30></TD><TD width=332></TD><TD width=21></TD><TD width=181></TD></TR>
<TR><TD width=14><P>&nbsp;</P></TD><TD width=30><P>&nbsp;</P></TD><TD width=332><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=181><P>&nbsp;</P></TD></TR>
<TR><TD width=14><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=30><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=332><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=181><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=578 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
</TD></TR>
<TR><TD width=578 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CONSOLIDATED BALANCE SHEET</B></P>
</TD></TR>
<TR><TD width=578 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>AS OF DECEMBER 31 2006</B></P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=376 colspan=3><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>&nbsp;</B></P>
</TD><TD width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>2006</B></P>
</TD></TR>
<TR><TD valign=bottom width=578 colspan=5><P style="line-height:12.75pt; margin:0px; text-indent:271px; font-size:10.5pt"><B>Assets</B></P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=362 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Current assets</B></P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Cash and cash equivalents</P>
</TD><TD width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>$</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,487,816 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Inventories, net</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>82,759 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Advance to suppliers</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>13,181 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Loans Receivable</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>147,290 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Due from related parties</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>85,825 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Total Current Assets</B></P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,816,871 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=362 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Property &amp; Equipment-Net</B></P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>514,284 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=362 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Intangible assets</B></P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,939 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Total Assets</B></P>
</TD><TD width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>$</B></P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2,355,094 </B></P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=578 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>Liabilities &amp; Stockholders' Equity</B></P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=362 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Current liabilities</B></P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Accounts payable</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>3,283 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Accrued expenses and other current liabilities</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>144,573 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Due to related parties</P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>10,000 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Total Current Liabilities</B></P>
</TD><TD width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>157,856 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;&nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=362 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Stockholders' Equity</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;&nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Common Stock, part value $.001 per share, 75,000,000 shares authorized; 51,758,000 shares issued and outstanding</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>51,758 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Additional paid-in-capital</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2,146,765 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Other comprehensive income</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>54,303 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Statutory Reserves</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>70,859 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Accumulated Deficit</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(126,447)</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Total Stockholders' Equity</B></P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>2,197,238 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=181><P style="line-height:12.75pt; margin:0px; font-family:Arial Unicode MS; font-size:10.5pt" align=right>&#12288;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=332><P style="line-height:12.75pt; margin:0px; text-indent:14px; font-size:10.5pt"><B>Total Liabilities and Stockholders' equity</B></P>
</TD><TD valign=bottom width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>$</B></P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=181><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right><B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2,355,094 </B></P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=30><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=332><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=181><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=578 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>&nbsp;The accompanying notes are an integral part of these consolidated financial statements </P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:10.867px"><BR></P>
<P style="margin:5.867px"><BR></P>
<P style="margin:0px" align=center><BR>
<BR>
2</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=12></TD><TD width=12></TD><TD width=231></TD><TD width=18></TD><TD width=136></TD><TD width=18></TD><TD width=151></TD></TR>
<TR><TD width=12><P>&nbsp;</P></TD><TD width=12><P>&nbsp;</P></TD><TD width=231><P>&nbsp;</P></TD><TD width=18><P>&nbsp;</P></TD><TD width=136><P>&nbsp;</P></TD><TD width=18><P>&nbsp;</P></TD><TD width=151><P>&nbsp;</P></TD></TR>
<TR><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=231><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=136><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=151><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=566 colspan=6><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM INC.</B></P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=566 colspan=6><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CONSOLIDATED STATEMENTS OF OPERATIONS</B></P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=566 colspan=6><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005</B></P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>&nbsp;2006 </B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>&nbsp;2005 </B></P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=255 colspan=3><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">NET SALES</P>
</TD><TD valign=bottom width=18><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,449,969 </P>
</TD><TD valign=bottom width=18><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>990,495 </P>
</TD></TR>
<TR><TD width=255 colspan=3><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">COST OF SALES</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>954,212 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>273,374 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=243 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Gross profit</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>495,757 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>717,121 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=255 colspan=3><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Operating Expenses :-</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Selling, general and administrative</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,029,167 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>485,459 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Depreciation and amortization</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,439 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,485 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>&nbsp;</B></P>
</TD><TD valign=bottom width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>&nbsp;&nbsp;Total operating expenses</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,052,606 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>508,944 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=243 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Income (Loss) from operations</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(556,849)</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>208,177 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=255 colspan=3><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Other income (expenses)</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Interest income</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>936 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>263 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Interest expenses</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;(4,119) </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>- &nbsp;&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Subsidy income</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>29,856 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>63,526 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Other expenses</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;(162) </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;(37) </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Total other income</B></P>
</TD><TD width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>26,511 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>63,752 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=243 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Net income (loss)</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(530,338)</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>271,929 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=243 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=255 colspan=3><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Other comprehensive gain (loss)</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=243 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Foreign currency translation gain</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>37,252 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>17,042 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=243 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>&nbsp;</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=231><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Net comprehensive income (loss)</B></P>
</TD><TD valign=bottom width=18><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=136><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(493,086)</P>
</TD><TD valign=bottom width=18><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" width=151><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>288,971 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=255 colspan=3><P style="margin:0px"><B>NET PROFIT (LOSS) PER COMMON SHARE - BASIC AND DILUTED</B></P>
</TD><TD valign=bottom width=18><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=136><P style="margin:0px" align=right>-0.01</P>
</TD><TD valign=bottom width=18><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=151><P style="margin:0px" align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;0.01 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=255 colspan=3><P style="margin:0px"><B>WEIGHTED AVERAGE COMMON SHARES</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=136><P style="margin:0px" align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;50,931,973 </P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=151><P style="margin:0px" align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;40,000,000 </P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=243 colspan=2><P style="margin:0px"><B>OUTSTANDING - BASIC AND DILUTED</B></P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=12><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=231><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=136><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=18><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=151><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=578 colspan=7><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>&nbsp;The accompanying notes are an integral part of these consolidated financial statements </P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:10.867px"><BR></P>
<P style="margin:5.867px"><BR></P>
<P style="margin:0px" align=center><BR>
<BR>
3</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=9.6></TD><TD width=105></TD><TD width=55></TD><TD width=9.6></TD><TD width=48></TD><TD width=10></TD><TD width=53></TD><TD width=11></TD><TD width=49></TD><TD width=9.6></TD><TD width=68></TD><TD width=10></TD><TD width=68></TD><TD width=9.6></TD><TD width=51></TD><TD width=11.6></TD></TR>
<TR><TD width=9.6><P>&nbsp;</P></TD><TD width=105><P>&nbsp;</P></TD><TD width=55><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD><TD width=48><P>&nbsp;</P></TD><TD width=10><P>&nbsp;</P></TD><TD width=53><P>&nbsp;</P></TD><TD width=11><P>&nbsp;</P></TD><TD width=49><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD><TD width=68><P>&nbsp;</P></TD><TD width=10><P>&nbsp;</P></TD><TD width=68><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD><TD width=51><P>&nbsp;</P></TD><TD width=11.6><P>&nbsp;</P></TD></TR>
<TR><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=105><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=55><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=48><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=10><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=53><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=11><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=49><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=68><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=10><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=68><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=51><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=11.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD width=578 colspan=16><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
</TD></TR>
<TR><TD width=578 colspan=16><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY</B></P>
</TD></TR>
<TR><TD width=578 colspan=16><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005</B></P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=48><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=53><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=11><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=49><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=48><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=53><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=11><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=49><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Shares</B></P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Common Stock</B></P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Additional Paid in Capital</B></P>
</TD><TD valign=bottom width=11><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Statutory Reserves</B></P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Other comprehensive income</B></P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Accumulated Deficit</B></P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=center><B>Total</B></P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt"><B>Balance December 31, 2004</B></P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>23,338,372 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>241,642 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>-</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>-</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>9 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>202,821 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>444,472 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Contributed Capital</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>16,661,628 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>172,512 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>172,512 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Foreign Currency Translation </P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>17,042 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>17,042 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Net income </P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>271,929 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>271,929 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-family:Arial Unicode MS; font-size:7.5pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-family:Arial Unicode MS; font-size:7.5pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-family:Arial Unicode MS; font-size:7.5pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-family:Arial Unicode MS; font-size:7.5pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-family:Arial Unicode MS; font-size:7.5pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-family:Arial Unicode MS; font-size:7.5pt" align=right>&#12288;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt"><B>Balance December 31, 2005</B></P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>40,000,000 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>414,154 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>-</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>-</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>17,051 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>474,750 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>905,955 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Recapitalization of Jinan on reverse acquisition</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>10,858,000 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>(363,296)</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>335,665 </P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>(27,631)</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Issuance of shares for cash</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>500,000 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>500 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>999,500 </P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>1,000,000 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Issuance of shares for services</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>400,000 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>400 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>811,600 </P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>812,000 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Foreign Currency Translation </P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>37,252 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>37,252 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Net Loss</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>(530,338)</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>(530,338)</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt">Transfer to Statutory Reserve</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>70,859 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>(70,859)</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="line-height:9.75pt; margin:0px; font-size:7.5pt"><B>Balance December 31, 2006</B></P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=55><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>51,758,000 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=48><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>51,758 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=53><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>2,146,765 </P>
</TD><TD valign=bottom width=11><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=49><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>70,859 </P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>54,303 </P>
</TD><TD valign=bottom width=10><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=68><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>(126,447)</P>
</TD><TD valign=bottom width=9.6><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>$</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=62.6 colspan=2><P style="line-height:9.75pt; margin:0px; font-size:7.5pt" align=right>2,197,238 </P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=48><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=53><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=11><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=49><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=105><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=55><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=48><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=53><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=11><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=49><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=68><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=9.6><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=62.6 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=578 colspan=16><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>&nbsp;The accompanying notes are an integral part of these consolidated financial statements </P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:10.867px"><BR></P>
<P style="margin:5.867px"><BR></P>
<P style="margin:0px" align=center><BR>
<BR>
4</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=33></TD><TD width=327></TD><TD width=29></TD><TD width=78></TD><TD width=21></TD><TD width=79></TD></TR>
<TR><TD width=33><P>&nbsp;</P></TD><TD width=327><P>&nbsp;</P></TD><TD width=29><P>&nbsp;</P></TD><TD width=78><P>&nbsp;</P></TD><TD width=21><P>&nbsp;</P></TD><TD width=79><P>&nbsp;</P></TD></TR>
<TR><TD width=33><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=327><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=29><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=78><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=21><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=534 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC</B></P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=534 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>CONSOLIDATED CASH FLOW STATEMENTS</B></P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=534 colspan=5><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005</B></P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>2006 </B></P>
</TD><TD valign=bottom width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>&nbsp;</B></P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>2005 </B></P>
</TD></TR>
<TR><TD valign=bottom width=360 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Cash flows from operating activities: &nbsp;</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Net income &nbsp;(loss)</P>
</TD><TD valign=bottom width=29><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$ &nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(530,338)</P>
</TD><TD valign=bottom width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>271,929 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Adjustments to reconcile net income to net cash</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">provided by operating activities: &nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;Depreciation and amortization</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,439 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,485 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;Reserve for inventory obsolesce</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>19,668 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;Provision on accounts receivable</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>3,671 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;Issuance of shares for services</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>812,000 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;Changes in operating assets and liabilities: &nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Accounts receivable &nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>289,463 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(199,819)</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Inventories &nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(2,541)</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(16,308)</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Advances to suppliers &nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>94,836 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(63,117)</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Prepaid expenses and other assets</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(122,143)</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(73,871)</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Accounts payable &nbsp;&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(115,518)</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>74,888 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Deferred revenue</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(12,765)</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>12,765 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;Accrued expenses and other current liabilities &nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(58,002)</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>79,075 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Total Adjustments</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>928,437 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(159,231)</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Net cash provided by operating activities</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>398,099 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>112,698 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=360 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Cash flows from investing activities:</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Purchase of property and equipment</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(439,624)</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(39,864)</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=360 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Cash flows from financing activities:</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Contributed Capital</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>172,512 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Proceeds on subscription of common stocks</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,000,000 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Net cash provided by financing activities</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,000,000 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD style="border-top:1px solid #000000; border-bottom:1px solid #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>172,512 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Foreign currency translation</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>37,252 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>17,042 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Net increase in cash and cash equivalents</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>995,727 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>262,388 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Cash and cash equivalents, beginning balance</B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>492,089 </P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>229,701 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>Cash and cash equivalents, ending balance</B></P>
</TD><TD valign=bottom width=29><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,487,816 </P>
</TD><TD valign=bottom width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>492,089 </P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B><U>SUPPLEMENTARY DISCLOSURE:</U></B></P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt" align=right>&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Interest paid</P>
</TD><TD valign=bottom width=29><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Income tax paid</P>
</TD><TD valign=bottom width=29><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=78><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD><TD valign=bottom width=21><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>$</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>-</P>
</TD></TR>
<TR><TD valign=bottom width=33><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=327><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=29><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=78><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=21><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD width=567 colspan=6><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>The accompanying notes are an integral part of these consolidated financial statements</P>
</TD></TR>
</TABLE>
<P style="margin-top:0px; margin-bottom:10.867px"><BR></P>
<P style="margin:5.867px"><BR></P>
<P style="margin-top:5.867px; margin-bottom:5.867px; padding-left:7px; padding-right:7px" align=center><BR>
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5</P>
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<P style="margin:7.533px"><BR>
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<P style="line-height:12.75pt; margin-top:16.6px; margin-bottom:0px; font-size:10.5pt; page-break-before:always" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</B></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center><B>FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px"><B>NOTE 1 &#150;GENERAL</B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">China VOIP &amp; Digital Telecom Inc. (&#147;the Company&#148; or &#147;We&#148;), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;) in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan became our wholly-owned subsidiary. </P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">Jinan YinQuan was established in JiNan in the People&#146;s Republic of China (&#147;the PRC&#148;) in 2001. &nbsp;The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted. </P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">The Company&#146;s principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license). &nbsp;Currently, the Company is focused on the Voice Over Internet Phone (&#147;VOIP&#148;) technology related business.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px"><B>NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES</B></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Basis of Presentation</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. &nbsp;Our functional currency is the Chinese Renminbi; however the accompanying financial statements have been translated and presented in United States Dollars ($).</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Use of Estimates </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. &nbsp;</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Risks and Uncertainties</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px" align=center><BR>
6</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
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<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px; page-break-before:always"><U>Cash and Cash Equivalents</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><U>Accounts Receivable</U></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Advances to suppliers</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company advances to certain vendors for purchase of its material. The advances to suppliers are interest free and unsecured.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Inventories </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower. As of December 31, 2006, the management made impairment on inventories of $19,668, while as of December 31, 2005, the management determined that there was no need of reserves for inventories. &nbsp;</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Property and Equipment</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over useful lives of 5 to 10 years. &nbsp;The cost of assets sold or retired and the related amounts of accumulated depreciation are removed from the accounts in the year of disposal. &nbsp;Any resulting gain or loss is reflected in current operations. &nbsp;Assets held under capital leases are recorded at the lesser of the present value of the future minimum lease payments or the fair value of the leased property. Expenditures for maintenance and repairs are charged to operations as incurred.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Intangible Assets</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company evaluates intangible assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Impairment of Long-Lived Assets </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company adopted Statement of Financial Accounting Standards No. 144, &quot;Accounting for the Impairment or Disposal of Long-Lived Assets&quot; (&quot;SFAS 144&quot;), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, &quot;Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,&quot; and the accounting and reporting provisions of APB Opinion No. 30, &quot;Reporting the Results of Operations for a Disposal of a Segment of a Business.&quot; The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px" align=center><BR>
7</P>
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<P style="margin:7.533px"><BR>
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<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px; page-break-before:always">fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2006 and 2005, there were no significant impairments of its long-lived assets used in operations. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Fair Value of Financial Instruments </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Statement of Financial Accounting Standard No. 107, &quot;Disclosures about Fair Value of Financial Instruments&quot;, requires that the Company disclose estimated fair values of financial instruments. </P>
<P style="margin:0px">The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, advances to suppliers, accounts payable, other payable, tax payable, and related party advances and borrowings. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet date.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Revenue Recognition</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company recognizes revenue from telecommunications as services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Advertising Costs </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the years ended December 31, 2006 and 2005 were insignificant. </P>
<A NAME="FIS_FINANCIAL_STATEMENTS"></A><P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Stock-Based Compensation</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">In October 1995, the FASB issued SFAS No. 123, &#147;Accounting for Stock-Based Compensation&#148;. SFAS No. 123 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using the existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, &#147;Accounting for stock issued to employees&#148; (APB 25) and related interpretations with proforma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. The Company uses the intrinsic value method prescribed by APB 25 and has opted for the disclosure provisions of SFAS No.123. &nbsp;There were no stock options or warrants issued during the years ended December 31, 2006 and 2005 respectively.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Earnings Per Share (EPS)</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), &#147;Earnings per share&#148;. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted EPS is not presented as the Company has no potential dilutive shares outstanding.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Income Taxes </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company utilizes SFAS No. 109, &quot;Accounting for Income Taxes,&quot; which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px" align=center><BR>
8</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
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<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px; page-break-before:always">included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. </P>
<P style="margin:0px">The Company is approved as hi-tech software company, the company is completely exempt of income tax for the first 2 years up to December 2007 and is 50% exempt of income tax for the next 3 years pursuant to State Tax notice no. [2003] 82.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Statement of Cash Flows</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">In accordance with Statement of Financial Accounting Standards No. 95, &quot;Statement of Cash Flows,&quot; cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Segment Reporting</U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Statement of Financial Accounting Standards No. 131 (&quot;SFAS 131&quot;), &quot;Disclosure about Segments of an Enterprise and Related Information&quot; requires use of the &quot;management approach&quot; model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. As per SFAS 131, the company operates in two segments based on nature of products and services : Telecommunocations &amp; Sale of equipments</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Recently Issued Accounting Standards </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">In February 2006, FASB issued SFAS No. 155, &#147;Accounting for Certain Hybrid Financial Instruments&#148;. SFAS No. 155 amends SFAS No 133, &#147;Accounting for Derivative Instruments and Hedging Activities&#148;, and SFAF No. 140, &#147;Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities&#148;. &nbsp;SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. &nbsp;This statement is effective for all financial instruments acquired or issued after the beginning of the Company&#146;s first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.</P>
<P style="margin-top:5px; margin-bottom:0px">In March 2006 FASB issued SFAS 156 &#145;Accounting for Servicing of Financial Assets&#146; this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:</P>
<P style="margin-top:5px; margin-bottom:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">1.</P>
<P style="margin:0px">Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. </P>
<P style="margin:0px; text-indent:-28px">2.</P>
<P style="margin:0px">Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. </P>
<P style="margin:0px" align=center><BR>
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9</P>
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<P style="margin:7.533px"><BR>
<BR></P>
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<P style="margin:0px; text-indent:-28px; page-break-before:always">3.</P>
<P style="margin:0px">Permits an entity to choose &#145;Amortization method&#146; or &nbsp;Fair value measurement method&#146; for each class of separately recognized servicing assets and servicing liabilities: </P>
<P style="margin:0px; text-indent:-28px">4.</P>
<P style="margin:0px">At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity&#146;s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. </P>
<P style="margin:0px; text-indent:-28px">5.</P>
<P style="margin:0px">Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In September 2006, FASB issued SFAS 157 &#145;Fair Value Measurements&#146;. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px">In September 2006, FASB issued SFAS 158 &#145;Employers&#146; Accounting for Defined Benefit Pension and Other Postretirement Plans&#151;an amendment of FASB Statements No. 87, 88, 106, and 132(R)&#146; This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:</P>
<P style="line-height:12.75pt; margin-top:4.2px; margin-bottom:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">1.</P>
<P style="margin:0px">A brief description of the provisions of this Statement </P>
<P style="margin:0px; text-indent:-28px">2.</P>
<P style="margin:0px">The date that adoption is required </P>
<P style="margin:0px; text-indent:-28px">3.</P>
<P style="margin:0px">The date the employer plans to adopt the recognition provisions of this Statement, if earlier.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The requirement to measure plan assets and benefit obligations as of the date of the employer&#146;s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px" align=center><BR>
10</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
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<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px; page-break-before:always">In February of 2007 the FASB issued SFAS 159, &#147;The Fair Value Option for Financial Assets and Financial Liabilities&#151;Including an amendment of FASB Statement No. 115.&#148; &nbsp;The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. &nbsp;The statement is effective as of the beginning of an entity&#146;s first fiscal year that begins after November 15, 2007. &nbsp;The company is analyzing the potential accounting treatment.</P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><U>Foreign Currency Translation </U></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company uses the United States dollar (&quot;U.S. dollars&quot;) for financial reporting purposes. The Company maintains books and records in their functional currency, being the primary currency of the economic environment in which the operations are conducted. In general, the Company translates the assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. </P>
<P style="margin:0px">Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income in accordance with SFAS No. 130, &#147;Reporting Comprehensive Income&#148; as a component of shareholders&#146; equity .</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">As of December 31, 2006, the accounts of Jinan Yinquan were maintained and expressed in the Chinese Yuan Renminbi (RMB). The consolidated financial statements of the Company were translated into United States Dollars (USD) in accordance with Statement of Financial Accounts Standards (&quot;SFAS&quot;) No. 52, &quot;Foreign Currency Translation,&quot; with the RMB as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. As of December 31, 2006 and 2005, the foreign currency transaction gain is $37,252 and $17,042, respectively.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 3 </B>&nbsp;<B>&nbsp;PRINCIPLES OF CONSOLIDATION</B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The accompanying consolidated financial statements include the accounts of China VOIP &amp; Digital Telecom (the &#147;Company&#148;) and its 100% wholly-owned subsidiary Jinan Yinquan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;). All significant inter-company accounts and transactions have been eliminated in consolidation.</P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 4 </B>&nbsp;<B>&nbsp;CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS </B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5px">For the year ended December 31, 2006, one customer provided 28% of the net revenues and one supplier provided 45% of the cost of sales. For the year ended December 31, 2005, one customer provided 9% of the net revenues and one supplier provided 47% of the cost of sales. There were no balance due from the customers as of December 31, 2006 and 2005, respectively. The accounts payable balances due to the suppliers were $118,482 and $0 at December 31, 2006 and 2005, respectively.</P>
<P style="line-height:13.5pt; margin:0px"><BR></P>
<P style="line-height:13.5pt; margin:0px" align=center><BR>
11</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
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<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt; page-break-before:always"><B>NOTE 5 - ADVANCES TO SUPPLIERS</B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company made prepayments to suppliers to purchase inventory. This amount represents the advances paid by the Company to suppliers of $13,181 at December 31, 2006. </P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 6 &#150; LOANS RECEIVABLE</B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">As of December 31, 2006, $147,290 was the loan receivable from two unrelated parties. The loans were unsecured, non-interest bearing and payable on demand. &nbsp;</P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>NOTE 7 - DUE FROM RELATED PARTIES</B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">The due from related party as of December 31, 2006 consists of $85,825 receivable from executive officers of the company. This amount was withdrawn by the officers for Company operations. The amount is due on demand, unsecured and interest free.</P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>NOTE 8&nbsp;- PROPERTIES AND EQUIPMENT</B></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The property and equipment as of December 31, 2006 is summarized as follows:</P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<A NAME="RANGE!A1"></A><TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=332></TD><TD width=15></TD><TD width=80></TD><TD width=15></TD></TR>
<TR><TD width=332><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD><TD width=80><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD></TR>
<TR><TD width=332><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=80><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="line-height:12.75pt; margin:0px">Electronic Equipment</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>171,609</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" width=332><P style="line-height:12.75pt; margin:0px">Vehicles</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>51,318</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="line-height:12.75pt; margin:0px">Office Equipment</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>6,591</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=332><P style="line-height:12.75pt; margin:0px">Construction in progress</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:1px solid #000000" valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>307,391</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>536,909</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=332><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="line-height:12.75pt; margin:0px">Less: Accumulated depreciation</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>(22,625)</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=332><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:1px solid #000000" valign=bottom width=80><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=332><P style="line-height:12.75pt; margin:0px">Property and equipment, net</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="border-bottom:3px double #000000" valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>$514,284 </P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The depreciation expense for the years ended December 31, 2006 and 2005 was $5,856 and $6,112 respectively. </P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 9</B>&nbsp;&nbsp;<B>INTANGIBLE ASSET </B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Intangible asset is the two sets of software acquired from third parties. &nbsp;These sets of software are used for the core technology of the Company&#146;s VOIP business. &nbsp;It is amortized over 5 years. The intangible assets as of December 31, 2006 are as summarized below:-</P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=372></TD><TD width=14></TD><TD width=111></TD><TD width=13></TD></TR>
<TR><TD width=372><P>&nbsp;</P></TD><TD width=14><P>&nbsp;</P></TD><TD width=111><P>&nbsp;</P></TD><TD width=13><P>&nbsp;</P></TD></TR>
<TR><TD width=372><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=14><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=111><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=13><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=372><P style="line-height:12.75pt; margin:0px">Original cost</P>
</TD><TD style="background-color:#EAF9E8" width=14><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=111><P style="line-height:12.75pt; margin:0px" align=right>$88,637 </P>
</TD><TD style="background-color:#EAF9E8" valign=top width=13><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD width=372><P style="line-height:12.75pt; margin:0px">Less: amortization</P>
</TD><TD width=14><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="border-bottom:1px solid #000000" valign=bottom width=111><P style="line-height:12.75pt; margin:0px" align=right>(64,698)</P>
</TD><TD style="border-bottom:1px solid #000000" valign=top width=13><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" width=372><P style="line-height:12.75pt; margin:0px">Intangible asset, net</P>
</TD><TD style="background-color:#EAF9E8" width=14><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-bottom:3px double #000000" valign=bottom width=111><P style="line-height:12.75pt; margin:0px" align=right>$23,939</P>
</TD><TD style="background-color:#EAF9E8" valign=top width=13><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">Following is future amortization schedule of the intangible asset:</P>
<P style="line-height:12.75pt; margin:0px" align=center><BR>
12</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
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<P style="line-height:12.75pt; margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
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<P style="line-height:12.75pt; margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
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<P style="line-height:12.75pt; margin:0px; page-break-before:always"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=372></TD><TD width=11></TD><TD width=10></TD><TD width=103></TD></TR>
<TR><TD width=372><P>&nbsp;</P></TD><TD width=11><P>&nbsp;</P></TD><TD width=10><P>&nbsp;</P></TD><TD width=103><P>&nbsp;</P></TD></TR>
<TR><TD width=372><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=11><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=10><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=103><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=372><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" width=11><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=113 colspan=2><P style="line-height:12.75pt; margin:0px" align=center>Amortization</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=372><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" width=11><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=113 colspan=2><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=372><P style="line-height:12.75pt; margin:0px">2007</P>
</TD><TD style="background-color:#EAF9E8" width=11><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=10><P style="line-height:12.75pt; margin:0px">$</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=103><P style="line-height:12.75pt; margin:0px" align=right>17,727</P>
</TD></TR>
<TR><TD valign=bottom width=372><P style="line-height:12.75pt; margin:0px">2008</P>
</TD><TD width=11><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=10><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=103><P style="line-height:12.75pt; margin:0px" align=right>6,212</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=372><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" width=11><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=10><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=103><P style="line-height:12.75pt; margin:0px" align=right>23,939</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 10 </B>&nbsp;<B>&nbsp;ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES </B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">Accrued expenses and other current liabilities as of December 31, 2006 are summarized as follows:</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=315></TD><TD width=20></TD><TD width=15></TD><TD width=80></TD><TD width=15></TD></TR>
<TR><TD width=315><P>&nbsp;</P></TD><TD width=20><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD><TD width=80><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD></TR>
<TR><TD width=315><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=20><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=80><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=315><P style="line-height:12.75pt; margin:0px">Accrued expenses</P>
</TD><TD width=20><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>$57,708 </P>
</TD><TD valign=top width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=315><P style="line-height:12.75pt; margin:0px">Accrued staff welfare</P>
</TD><TD style="background-color:#EAF9E8" width=20><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>10,904</P>
</TD><TD style="background-color:#EAF9E8" valign=top width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=315><P style="line-height:12.75pt; margin:0px">Security deposits</P>
</TD><TD width=20><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>6,123</P>
</TD><TD valign=top width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=315><P style="line-height:12.75pt; margin:0px">Tax payables</P>
</TD><TD style="background-color:#EAF9E8" width=20><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>69,838</P>
</TD><TD style="background-color:#EAF9E8" valign=top width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=315><P style="line-height:12.75pt; margin:0px">Total</P>
</TD><TD width=20><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="line-height:12.75pt; margin:0px" align=right>$144,573 </P>
</TD><TD valign=top width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=315><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD width=20><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=bottom width=80><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD valign=top width=15><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="margin:0px; font-size:10.5pt"><B>NOTE 11 DUE TO RELATED PARTY</B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5px">Due to related party of $10,000 as of December 31, 2006 represents payable to former beneficial owner of Crawford Lake Mining Inc. &nbsp;This payable is unsecured, non interest bearing and payable on demand.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>NOTE 12 &nbsp;&nbsp;EQUITY TRANSACTIONS DURING YEAR ENDED 31 DECEMBER 2006 </B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">In August 2006, the Company decided to forward split its common stock at a ratio of 3.6 shares of the Company&#146;s common stock for every 1 share of common stock issued and outstanding as at August 7, 2006. &nbsp;Immediately after the forward stock split, the total outstanding shares of the Company are 22,608,000.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">In August 2006, the Company issued 40,000,000 shares to the original shareholders of Jinan Yuan Technology Co., Ltd. (&#147;Jinan&#148;) to exchange 100% equity interest of Jinan. &nbsp;In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px">In December 2006, the Company issued 500,000 shares to Leasing Standard Limited for the gross private placement of US$1,000,000, and 400,000 shares to Leasing Standard Limited for consulting service for the SB-2 filing, legal cost, audit cost, and advisory cost of the private placement and reverse-take over procedures.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>NOTE 13 STATUTORY RESERVES</B></P>
<P style="line-height:12.75pt; margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:4.2px; margin-bottom:4.2px">As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following: </P>
<P style="line-height:12.75pt; margin-top:4.2px; margin-bottom:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">1.</P>
<P style="margin:0px">Making up cumulative prior years' losses, if any; </P>
<P style="margin:0px" align=center><BR>
<BR>
13</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<P style="margin:0px; text-indent:-28px">2.</P>
<P style="margin:0px">Allocations to the &quot;Statutory surplus reserve&quot; of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital; </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">3.</P>
<P style="margin:0px">Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's &quot;Statutory common welfare fund&quot;, which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">4.</P>
<P style="margin:0px">Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; text-indent:-28px">5.</P>
<P style="margin:0px">In accordance with the Chinese Company Law, the company has allocated 10% of its net income to surplus in 2006. The amount included in the statutory reserves as of December 31, 2006 amounted to $35,430. </P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:4.2px; margin-bottom:4.2px">The Company established a reserve for the annual contribution of 10% of net income to the common welfare fund in 2006. The amount included in the statutory reserves as of December 31, 2006 amounted to $35,430.</P>
<P style="margin:5.867px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 14 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS</B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">On August 17, 2006, the Company acquired 100% of the equity in Jinan YinQuan Technology Co. Ltd. (&#147;Jinan YinQuan&#148;) pursuant to an Agreement by and between Jinan YinQuan and the Company. The former shareholders of Jinan YinQuan received 40,000,000 shares of the Company's commons stock in exchange for all the issued and outstanding shares of Jinan YinQuan. In conjunction with the acquisition, with the following liabilities of the company were assumed by Jinan YinQuan:</P>
<P style="margin:0px">&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=26></TD><TD width=157></TD><TD width=9.6></TD><TD width=9.6></TD><TD width=49></TD><TD width=9.6></TD></TR>
<TR><TD width=26><P>&nbsp;</P></TD><TD width=157><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD><TD width=49><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD></TR>
<TR><TD width=26><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=157><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=49><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#CBDBD1" valign=bottom width=183 colspan=2><P style="margin:0px">Accounts payable</P>
</TD><TD style="background-color:#CBDBD1" width=9.6><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#CBDBD1" valign=bottom width=9.6><P style="margin:0px">$</P>
</TD><TD style="background-color:#CBDBD1" valign=bottom width=49><P style="margin:0px" align=right>100</P>
</TD><TD style="background-color:#CBDBD1" valign=bottom width=9.6><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=183 colspan=2><P style="margin:0px">Accrued expenses</P>
</TD><TD style="background-color:#FFFFFF" width=9.6><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=49><P style="margin:0px" align=right>17,531</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#CBDBD1; border-bottom:4px solid #DFDFDF" valign=bottom width=183 colspan=2><P style="margin:0px">Note payable (Related Party)</P>
</TD><TD style="background-color:#CBDBD1; border-bottom:1px solid #DFDFDF" width=9.6><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#CBDBD1; border-bottom:1px solid #000000" valign=bottom width=9.6><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#CBDBD1; border-bottom:1px solid #000000" valign=bottom width=49><P style="margin:0px" align=right>10,000</P>
</TD><TD style="background-color:#CBDBD1; border-bottom:1px solid #DFDFDF" valign=bottom width=9.6><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF; border-bottom:1px solid #DFDFDF" valign=bottom width=26><P style="margin-top:4.2px; margin-bottom:4.2px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:4px solid #FFFFFF" valign=bottom width=157><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:1px solid #FFFFFF" width=9.6><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:3px double #000000" valign=bottom width=9.6><P style="margin:0px">$</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:3px double #000000" valign=bottom width=49><P style="margin:0px" align=right>27,631</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:4px solid #FFFFFF" valign=bottom width=9.6><P style="margin:0px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px">&nbsp;</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5px">These liabilities have been excluded from the statement of cash flows for the year ended December 31, 2006.</P>
<P style="margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5.267px; font-size:10.5pt"><B>NOTE 15 COMMITMENTS </B></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">a) Operating Leases </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company leases its offices and facilities under long-term, non-cancelable lease agreements expiring at various dates through December 31, 2006. The non-cancelable operating lease agreements provide that the Company pays certain operating expenses applicable to the leased premises according to the Chinese Law. </P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The future minimum annual lease payments required under the operating leases are as follows:</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:5px"><BR></P>
<P style="margin:0px; font-size:10.5pt">&nbsp;</P>
<P style="margin:0px" align=center><BR>
<BR>
14</P>
<P style="margin:7.533px"><BR></P>
<P style="margin:7.533px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR>
<BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=472></TD><TD width=18></TD><TD width=9.6></TD><TD width=67.4></TD><TD width=9.6></TD></TR>
<TR><TD width=472><P>&nbsp;</P></TD><TD width=18><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD><TD width=67.4><P>&nbsp;</P></TD><TD width=9.6><P>&nbsp;</P></TD></TR>
<TR><TD width=472><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=18><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=67.4><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=9.6><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=472><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Year Ending December</P>
</TD><TD style="background-color:#EAF9E8" width=18><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=77 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=center>Payments</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=472><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" width=18><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=77 colspan=2><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=472><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">2007</P>
</TD><TD style="background-color:#EAF9E8" width=18><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=9.6><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">$</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=67.4><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>16,116</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=472><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" width=18><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=67.4><P style="margin:0px; font-size:10.5pt; color:#FF0000" align=right>&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#EAF9E8" valign=bottom width=472><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Total future lease payments</P>
</TD><TD style="background-color:#EAF9E8" width=18><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9E8; border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=9.6><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">$</P>
</TD><TD style="background-color:#EAF9E8; border-top:1px solid #000000; border-bottom:3px double #000000" valign=bottom width=67.4><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>16,116</P>
</TD><TD style="background-color:#EAF9E8" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=472><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" width=18><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=67.4><P style="margin:0px; font-size:10.5pt" align=right>&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=9.6><P style="margin:0px; font-size:10.5pt">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B>NOTE 16 SEGMENT REPORTING</B></P>
<P style="margin:0px"><BR></P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The Company has two reportable segments consisting of (1) Equipment Sales and (2) Telecommunications minutes. The Company evaluates performance based on sales, gross profit margins and operating profit before income taxes. &nbsp;Unallocated assets and loss from continuing operations are primarily related to general corporate expenses.</P>
<P style="line-height:12.75pt; margin-top:0px; margin-bottom:4.2px">The following is information for the Company&#146;s reportable segments for the years ended December 31, 2006 and 2005:</P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=13></TD><TD width=160></TD><TD width=137></TD><TD width=101></TD><TD width=79></TD><TD width=85></TD></TR>
<TR><TD width=13><P>&nbsp;</P></TD><TD width=160><P>&nbsp;</P></TD><TD width=137><P>&nbsp;</P></TD><TD width=101><P>&nbsp;</P></TD><TD width=79><P>&nbsp;</P></TD><TD width=85><P>&nbsp;</P></TD></TR>
<TR><TD width=13><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=160><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=137><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=101><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=79><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=85><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B><U>2006</U></B></P>
</TD><TD valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>Telecommunication </P>
</TD><TD valign=bottom width=101><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>Equipment </P>
</TD><TD valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>Corporate</P>
</TD><TD valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>Total </P>
</TD></TR>
<TR><TD style="background-color:#EAF9EA" valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Revenue</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>966,815 </P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=101><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;&nbsp;&nbsp;483,154 </P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,449,969 </P>
</TD></TR>
<TR><TD valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Gross margin</P>
</TD><TD valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>462,942 </P>
</TD><TD valign=bottom width=101><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;32,815 </P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>495,757 </P>
</TD></TR>
<TR><TD style="background-color:#EAF9EA" valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Net Income before taxes</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>310,968</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=101><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>22,043</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=79><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(863,349)</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>(530,338)</P>
</TD></TR>
<TR><TD valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Identifiable Assets</P>
</TD><TD valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,570,337</P>
</TD><TD valign=bottom width=101><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>784,757</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>2,355,794</P>
</TD></TR>
<TR><TD style="background-color:#EAF9EA" valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Depreciation and amortization</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,249 </P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=101><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,249 </P>
</TD></TR>
<TR><TD valign=bottom width=13><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=160><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">capital expenditure</P>
</TD><TD valign=bottom width=137><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>538,223 </P>
</TD><TD valign=bottom width=101><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=79><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=85><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>538,223 </P>
</TD></TR>
</TABLE>
<P style="margin:5.867px"><BR></P>
<P style="margin:0px"><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=14></TD><TD width=161></TD><TD width=12></TD><TD width=177></TD><TD width=110></TD><TD width=15></TD><TD width=86></TD></TR>
<TR><TD width=14><P>&nbsp;</P></TD><TD width=161><P>&nbsp;</P></TD><TD width=12><P>&nbsp;</P></TD><TD width=177><P>&nbsp;</P></TD><TD width=110><P>&nbsp;</P></TD><TD width=15><P>&nbsp;</P></TD><TD width=86><P>&nbsp;</P></TD></TR>
<TR><TD width=14><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=161><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=12><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=177><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=110><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=15><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD><TD width=86><P style="margin-top:5.533px; margin-bottom:5.533px">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=175 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=189 colspan=2><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=110><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=86><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt"><B><U>2005</U></B></P>
</TD><TD valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;Telecommunication </P>
</TD><TD valign=bottom width=125 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;Equipment </P>
</TD><TD valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>Total</P>
</TD></TR>
<TR><TD style="background-color:#EAF9EA" valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Revenue</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>965,346 </P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=110><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;25,149 </P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>990,495 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Gross margin</P>
</TD><TD valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>716,503 </P>
</TD><TD valign=bottom width=110><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>618 </P>
</TD><TD valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>717,121 </P>
</TD></TR>
<TR><TD style="background-color:#EAF9EA" valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Net Income before taxes</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>271,695</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=110><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>234</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>271,929</P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Identifiable Assets</P>
</TD><TD valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,191,427</P>
</TD><TD valign=bottom width=110><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>31,038</P>
</TD><TD valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>1,222,465</P>
</TD></TR>
<TR><TD style="background-color:#EAF9EA" valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">Depreciation and amortization</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,485 </P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=110><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD style="background-color:#EAF9EA" valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>23,485 </P>
</TD></TR>
<TR><TD valign=bottom width=14><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=173 colspan=2><P style="line-height:12.75pt; margin:0px; font-size:10.5pt">capital expenditure</P>
</TD><TD valign=bottom width=177><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>122,038 </P>
</TD><TD valign=bottom width=110><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=15><P style="margin-top:0.2px; margin-bottom:0.2px; font-size:2pt">&nbsp;</P>
</TD><TD valign=bottom width=86><P style="line-height:12.75pt; margin:0px; font-size:10.5pt" align=right>122,038 </P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin-top:0px; margin-bottom:13.333px"><BR></P>
<P style="margin:0px" align=center>15</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px"><BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=313.2></TD><TD width=406.733></TD></TR>
<TR><TD valign=top width=313.2><P style="margin:0px" align=justify><B>No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offering made by this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the selling stockholders.&nbsp;&nbsp;This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than those specifically offered hereby or an offer to sell or a solicitation of an offer to buy any of these securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation.&nbsp;&nbsp;Except where otherwise indicated, this Prospectus speaks as of the effective date of the Registration Statement.&nbsp;&nbsp;Neither the delivery of this Prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof.</B></P>
</TD><TD valign=top width=406.733><P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="line-height:15pt; margin:0px; font-size:13pt" align=center><B>21,992,000</B></P>
<P style="line-height:15pt; margin:0px; font-size:13pt" align=center><B>Shares of</B></P>
<P style="line-height:15pt; margin:0px; font-size:13pt" align=center><B>Common Stock</B></P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="line-height:20pt; margin:0px; font-size:18pt" align=center><B>CHINA VOIP &amp; DIGITAL TELECOM, INC.</B></P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<A NAME="toc"></A><TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=294.6></TD><TD width=28.667></TD><TD width=396.6></TD></TR>
<TR><TD valign=top width=294.6><P style="margin:0px" align=center>TABLE OF CONTENTS</P>
</TD><TD valign=top width=28.667><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=396.6 rowspan=20><P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="line-height:17pt; margin:0px; font-size:15pt" align=center>PROSPECTUS</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="margin:0px" align=center>&nbsp;</P>
<P style="line-height:17pt; margin:0px; font-size:15pt" align=center>February __, 2008</P>
</TD></TR>
<TR><TD valign=top width=294.6><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=28.667><P style="margin:0px" align=right>Page</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>PROSPECTUS SUMMARY<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>1</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>RISK FACTORS<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>5</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>FORWARD LOOKING STATEMENTS<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>10</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>USE OF PROCEEDS<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>11</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>DIVIDEND POLICY<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>11</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>MARKET FOR OUR COMMON STOCK<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>11</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>12</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>BUSINESS<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>16</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>MANAGEMENT<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>25</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>SECURITY OWNERSHIP<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>30</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>30</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>DESCRIPTION OF SECURITIES<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>30</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>SELLING STOCKHOLDERS<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>34</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>PLAN OF DISTRIBUTION<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>36</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>LEGAL MATTERS<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>38</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>EXPERTS<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>38</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#E2EEF6">&nbsp;</TR>
<TR>AVAILABLE INFORMATION<TD style="background-color:#E2EEF6" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#E2EEF6" valign=top width=28.667><P style="margin:0px" align=right>38</P>
</TD><P style="margin:0px; padding-left:19.067px; padding-top:0px; padding-right:0px; padding-bottom:0px; text-indent:-19.067px; background-color:#FFFFFF">&nbsp;</TR>
<TR>INDEX TO CONSOLIDATED FINANCIAL STATEMENTS<TD style="background-color:#FFFFFF" valign=top width=294.6>
<P>&nbsp;</P></TD><TD style="background-color:#FFFFFF" valign=top width=28.667><P style="margin:0px" align=right>F-1</P>
</TD>&nbsp;</TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="part_1_2_2"></A></P>
<P style="margin:0px" align=center><B>PART II</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=center><B>INFORMATION NOT REQUIRED IN PROSPECTUS</B></P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_15"></A></P>
<P style="margin:0px"><B>Item 13.&nbsp;&nbsp;Other Expenses of Issuance and Distribution.</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The estimated expenses of this offering in connection with the issuance and distribution of the securities being registered, all of which are to be paid by the Registrant, are as follows:</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0 align=center><TR style="font-size:0"><TD width=580.6></TD><TD width=6.733></TD><TD width=8.2></TD><TD width=40.4></TD><TD width=11.933></TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=580.6><P style="margin:0px; padding-left:8.8px">Registration Fee&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.733><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.2><P style="margin:0px">$</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=40.4><P style="line-height:10pt; margin:0px; font-size:8pt" align=right>281</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=11.933><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=580.6><P style="margin:0px; padding-left:8.8px">Legal Fees and Expenses&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.733><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=8.2><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=40.4><P style="margin:0px" align=right>56,800</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=11.933><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=580.6><P style="margin:0px; padding-left:8.8px">Accounting Fees and Expenses&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.733><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=8.2><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=40.4><P style="margin:0px" align=right>7,500</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=11.933><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=580.6><P style="margin:0px; padding-left:8.8px">Printing&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.733><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=8.2><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=40.4><P style="margin:0px" align=right>0</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=11.933><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#E2EEF6" valign=bottom width=580.6><P style="margin:0px; padding-left:8.8px">Miscellaneous Expenses&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=6.733><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6; border-bottom:1px solid #000000" valign=bottom width=8.2><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#E2EEF6; border-bottom:1px solid #000000" valign=bottom width=40.4><P style="margin:0px" align=right>0</P>
</TD><TD style="background-color:#E2EEF6" valign=bottom width=11.933><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD style="background-color:#FFFFFF" valign=bottom width=580.6><P style="margin:0px; padding-left:8.8px">Total&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=6.733><P style="margin:0px">&nbsp;</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:3px double #000000" valign=bottom width=8.2><P style="margin:0px">$</P>
</TD><TD style="background-color:#FFFFFF; border-bottom:3px double #000000" valign=bottom width=40.4><P style="margin:0px" align=right>64,581</P>
</TD><TD style="background-color:#FFFFFF" valign=bottom width=11.933><P style="margin:0px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<A NAME="item_1_3_16"></A><P style="margin:0px"><B>Item 14.&nbsp;&nbsp;Indemnification of Directors and Officers</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The only statue, charter provision, by-law, contract, or other arrangement under which any controlling person, director or officers of the Registrant is insured or indemnified in any manner against any liability which he may incur in his capacity as such, is as follows:</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Our certificate of incorporation limits the liability of our directors and officers to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: (i) breach of the directors&#146; duty of loyalty; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) the unlawful payment of a dividend or unlawful stock purchase or redemption, and (iv) any transaction from which the director derives an improper personal benefit.&nbsp;&nbsp;Delaware law does not permit a corporation to eliminate a director&#146;s duty of care, and this provision of our certificate of incorporation has no effect on the availability of equitable remedies, such as injunction or rescission, based upon a director&#146;s breach of the duty of care.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The effect of the foregoing is to require us to indemnify our officers and directors for any claim arising against such persons in their official capacities if such person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. We also maintain officers&#146; and directors&#146; liability insurance coverage.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Insofar as indemnification for liabilities may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable.</P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="item_1_3_17"></A></P>
<P style="margin:0px"><B>Item 15.&nbsp;&nbsp;Recent Sales of Unregistered Securities</B></P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify>(1)&nbsp;&nbsp;On December 21, 2007, we issued (i) 8,885,730 shares of common stock underlying the Senior Secured Convertible Note and (ii) warrants to purchase 11,479,855 shares of common stock to one investor for aggregate gross proceeds of approximately $6.46 million.&nbsp;&nbsp;&nbsp;As part of the fee to the placement agent, we granted them warrants to purchase 355,429 shares of common stock at an exercise price of $0.5627 per share.&nbsp;&nbsp;We relied on the exemption from the registration requirements of the Securities Act of 1933 (the &#147;Securities Act&#148;) provided in Section 4(2) thereof and Rule 506 thereunder.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify>(2)&nbsp;&nbsp;On December 21, 2007, we issued (i) 50,000 shares of common stock to two partners and one associate at the firm of our legal counsel, Anslow + Jaclin, LLP, for legal services performed. for aggregate gross proceeds of $2.5 million.&nbsp;&nbsp; We relied on the exemption from the registration requirements of the Securities Act of 1933 (the &#147;Securities Act&#148;) provided in Section 4(2) thereof and Rule 506 thereunder.</P>
<P style="margin:0px" align=justify><BR></P>
<P style="margin:0px" align=justify>(3) On July 21, 2007, we issued (i) 1,200,000 shares of common stock to Downshire Capital, Inc. pursuant to a term sheet executed by us and Downshire Capital, Inc. &nbsp;We relied on the exemption from the registration requirements of the Securities Act of 1933 (the &#147;Securities Act&#148;) provided in Section 4(2) thereof and Rule 506 thereunder.</P>
<P style="margin:0px" align=justify><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">(4) In August 2006, the Company issued 40,000,000 shares to the equity holders of Jinan Yinquan technology Co. Ltd as part of the acquisition of Jinan. &nbsp;Consequently, Jinan is now the wholly owned subsidiary of the Company. The common stock was issued in a private transaction in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933 as amended.</P>
<P style="margin:3.333px"><BR></P>
<P style="margin:3.333px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin-top:3.333px; margin-bottom:3.333px; page-break-before:always">(5) September 4, 2006, the Company declared a 3.6:1 forward stock split and issued 16,328,000 new shares of common stock to shareholders. &nbsp;We relied on the exemption from the registration requirements of the Securities Act of 1933 (the &#147;Securities Act&#148;) provided in Section 4(2) thereof and Rule 506 thereunder.</P>
<P style="margin:3.333px"><BR></P>
<P style="margin-top:3.333px; margin-bottom:3.333px">(6) In December 2006, the Company issued 500,000 shares of its common stock pursuant to an exemption from registration contained in Section 4 (2) of the Securities Act of 1933 as amended in exchange of gross proceeds of $1,000,000. &nbsp;</P>
<P style="margin:3.333px"><BR></P>
<P style="margin:0px">(7) In December 2006, the Company entered into a consulting agreement with Leasing Standard Limited. &nbsp;Pursuant to this agreement, the Company issued 400,000 shares of its common stock in reliance upon the registration contained in Section 4 (2) of the Securities Act of 1933 as amended.</P>
<P style="margin:3.333px"><BR></P>
<P style="margin:3.333px"><BR></P>
<P style="margin:0px" align=justify><BR></P>
<P style="margin:0px"><BR></P>
<A NAME="item_1_3_18"></A><P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify><B>Item 16. Exhibits and Financial Statement Schedules</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify><B>Exhibit</B></P>
<P style="margin:0px" align=justify><B>Number&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Description&nbsp;of Exhibit</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px" align=justify>All references to Registrant&#146;s Forms 8-K, 10-K, 10-QSB and 10-KSB include reference to File No. 07125548.</P>
<P style="margin:0px" align=justify><BR></P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=91.2></TD><TD width=499.2></TD></TR>
<TR><TD style="border:1px solid #000000" valign=top width=91.2><P style="margin:0px"><B>Exhibit No.</B></P>
</TD><TD style="border-top:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px"><B>Description</B></P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">3.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Articles of Incorporation (1)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">3.2</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Bylaws (1)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Securities Purchase Agreement by and between the Company and the Investors dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.2</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Registration Rights Agreement by and between the Company and the Investors dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.3</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Perfection Certificate dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.4</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Security Agreement by and between the Company and the Collateral Agent dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.5</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Senior Secured Convertible Note by and between the Company and the Investors dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.6</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Common Stock Purchase Warrant by and between the Company and the Investor dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.7</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Officer&#146;s Certificate dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.8</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Director&#146;s Certificate dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.9</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Pledge Agreement by and between the Company and the Collateral Agent, dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">10.10</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Guaranty dated December 21, 2007 (5)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">14.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Code of Ethics (4)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">16.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Change in Certifying Accountants (3)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">21.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Subsidiaries of the registrant (4)</P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">23.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px"><a href="consent.htm">Consent of Kabani &amp; Co. (4)</a></P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">23.2</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px"><a href="opinion.htm">Consent of Anslow &amp; Jaclin, LLP (filed as part of Exhibit 5)</a></P>
</TD></TR>
<TR><TD style="border-left:1px solid #000000; border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=91.2><P style="margin:0px">24.1</P>
</TD><TD style="border-right:1px solid #000000; border-bottom:1px solid #000000" valign=top width=499.2><P style="margin:0px">Powers of Attorney (included on the signature page).</P>
</TD><A NAME="_DV_M56"></A><A NAME="_DV_M57"></A><A NAME="_DV_M59"></A><A NAME="_DV_M60"></A><A NAME="_DV_M61"></A><A NAME="_DV_M62"></A><A NAME="_DV_M63"></A><A NAME="_DV_M64"></A></TR>
</TABLE>
<P style="margin:0px" align=justify>&nbsp;</P>
<A NAME="item_1_3_19"></A><P style="line-height:14pt; margin-top:0px; margin-bottom:-18.667px; padding-left:48px; text-indent:-48px">&nbsp;(1)</P>
<P style="margin:0px; padding-left:48px">Incorporated herein by reference to the registrant&#146;s initial Registration Statement on Form SB-2 (file number 06529334) filed on January 13, 2006.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin-top:0px; margin-bottom:-18.667px; padding-left:48px; text-indent:-48px">(2)</P>
<P style="margin:0px; padding-left:48px">Incorporated herein by reference to the registrant&#146;s Current Report on Form 8-K (file number 061203975) filed on October 13, 2006.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin-top:0px; margin-bottom:-18.667px; padding-left:48px; text-indent:-48px">(3)</P>
<P style="margin:0px; padding-left:48px">Incorporated herein by reference to the registrant&#146;s Current Report on Form 8-K (file number 061203975) filed on December 12, 2006.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin-top:0px; margin-bottom:-18.667px">(4)</P>
<P style="margin:0px; text-indent:48px">Filed herewith.</P>
<P style="margin:0px"><BR></P>
<P style="line-height:14pt; margin-top:0px; margin-bottom:-18.667px; padding-left:48px; text-indent:-48px">(5)</P>
<P style="margin:0px; padding-left:48px">Incorporated herein by reference to the registrant&#146;s Current Report on Form 8-K (file number 333-131017) filed on December 26, 2007.</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px"><BR>
<BR></P>
<HR style="margin-top:9.6px; margin-bottom:9.6px" noshade size=1.333>
<P style="margin:0px; page-break-before:always" align=justify><B>Item 17.&nbsp;&nbsp;Undertakings</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>The undersigned Registrant hereby undertakes:</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>(1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the &#147;Securities Act&#148;).</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>(ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the change in volume and price represents no more than a 20 percent change in the maximum aggregate offering price set forth in the &#147;Calculation of Registration Fee&#148; table in the effective registration statement.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>(iii) to include any additional or changed material information with respect to the plan of distribution.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>(2) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>II-5</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px"><BR></P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>(3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions of its Certificate of Incorporation, By-Laws, the General Corporation Law of the State of Delaware or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer of controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>II-6</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px"><BR></P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG></BIG></U></FONT></P>
<P style="margin:0px" align=justify>&nbsp;<A NAME="part_1_2_3"></A></P>
<P style="margin:0px" align=center><B>SIGNATURES</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Jinan, China, on the&nbsp;1<SUP>st</SUP> day of February 2008.</P>
<P style="margin:0px">&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=373.533></TD><TD width=23.067></TD><TD width=179.667></TD><TD width=143.667></TD></TR>
<TR><TD valign=top width=373.533><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=202.733 colspan=2><P style="margin:0px">China VoIP &amp; Digital Telecom, Inc.</P>
<P style="margin:0px">&nbsp;</P>
<P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=143.667><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD valign=top width=373.533><P style="margin:0px">&nbsp;</P>
</TD><TD valign=bottom width=23.067><P style="margin:0px">By:</P>
</TD><TD style="border-bottom:1px solid #000000" valign=top width=179.667><P style="margin:0px">/s/ Li Kunwu</P>
</TD><TD valign=top width=143.667><P style="margin:0px">&nbsp;</P>
</TD></TR>
<TR><TD valign=top width=373.533><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=23.067><P style="margin:0px">&nbsp;</P>
</TD><TD valign=top width=179.667><P style="margin:0px">Li Kunwu</P>
<P style="margin:0px">Chief Executive Officer and Chief Financial Officer</P>
</TD><TD valign=top width=143.667><P style="margin:0px">&nbsp;</P>
</TD></TR>
</TABLE>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=center><B>POWER OF ATTORNEY</B></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Each director and/or officer of the registrant whose signature appears below hereby appoints Li Kunwu as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission, any and all amendments, including post-effective amendments, to this Registration Statement (and to any registration statement filed pursuant to Rule 462 under the Securities Act of 1933).</P>
<P style="margin:0px" align=justify>&nbsp;</P>
<P style="margin:0px; text-indent:39.6px" align=justify>Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated:</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px" align=justify>&nbsp;</P>
<TABLE style="font-size:10pt" cellspacing=0><TR style="font-size:0"><TD width=263.467></TD><TD width=243.4></TD><TD width=213.067></TD></TR>
<TR><TD valign=top width=263.467><P style="margin:0px" align=center><B>Signature</B></P>
</TD><TD valign=top width=243.4><P style="margin:0px" align=center><B>Title</B></P>
</TD><TD valign=top width=213.067><P style="margin:0px" align=center><B>Date</B></P>
</TD></TR>
<TR><TD valign=top width=263.467><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD valign=top width=243.4><P style="margin:0px"><B>&nbsp;</B></P>
</TD><TD valign=top width=213.067><P style="margin:0px"><B>&nbsp;</B></P>
</TD></TR>
<TR><TD valign=top width=263.467><P style="margin:0px">/s/ Wang Qinghua</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px">Wang Qinghua</P>
</TD><TD valign=top width=243.4><P style="margin:0px; padding-left:29.333px">Director</P>
</TD><TD valign=top width=213.067><P style="margin:0px" align=center>February 1, 2008</P>
</TD></TR>
<TR><TD valign=top width=263.467><P style="margin:0px">/s/ Xu Yinyi</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px">Xu Yinyi</P>
</TD><TD valign=top width=243.4><P style="margin:0px; padding-left:29.333px">Director</P>
</TD><TD valign=top width=213.067><P style="margin:0px" align=center>February 1, 2008</P>
</TD></TR>
<TR><TD valign=top width=263.467><P style="margin:0px">/s/ Jiang Yanli</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px">Jiang Yanli</P>
</TD><TD valign=top width=243.4><P style="margin:0px; padding-left:29.333px">Director</P>
</TD><TD valign=top width=213.067><P style="margin:0px" align=center>February 1, 2008</P>
</TD></TR>
<TR><TD valign=top width=263.467><P style="margin:0px">/s/ Kan Kaili</P>
<P style="margin:0px"><BR></P>
<P style="margin:0px; padding-top:4px; border-top:1px solid #7F0000"><BR></P>
<P style="margin:0px">Kan Kaili</P>
</TD><TD valign=top width=243.4><P style="margin:0px; padding-left:29.333px">Director</P>
</TD><TD valign=top width=213.067><P style="margin:0px" align=center>February 1, 2008</P>
</TD></TR>
</TABLE>
<P style="margin:0px">&nbsp;</P>
<P style="line-height:10pt; margin:0px; font-size:8pt" align=center>II-7</P>
<P style="margin:0px"><BR></P>
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<P style="line-height:10pt; margin:0px; font-size:8pt; color:#0000FF; page-break-before:always"><A HREF="#toc"><U>Table of Contents</U></A><FONT COLOR=#000000><U><BIG><A NAME="doc_1_2"></A></BIG></U></FONT></P>
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</BODY>
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CC Filed by Filing Services Canada Inc. 403-717-3898
As filed with the Securities and Exchange Commission on February 1, 2008
Registration No. 333-131017
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
––––––––––––––––
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
––––––––––––––––
CHINA VOIP & DIGITAL TELECOM, INC.
(Exact name of registrant as specified in its charter)
––––––––––––––––
Nevada
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
98-0509797
(I.R.S. Employer
Identification Number)
––––––––––––––––
No.786 Xinluo Street, High-tech Industrial Development Zone,
Jinan, China 250101
86-531-87027114
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
––––––––––––––––
Li Kunwu
President and Chief Executive Officer
No.786 Xinluo Street, High-tech Industrial Development Zone,
Jinan, China 250101
86-531-87027114
(Name, address, including zip code, and telephone number, including area code, of agent for service)
––––––––––––––––
Copies to:
Richard I. Anslow, Esq.
Anslow + Jaclin,  LLP
195 Route 9 South, Suite 204
Manalapan, New Jersey 07726
(732) 409-1212
––––––––––––––––
Approximate Date of Commencement of Proposed Sale to the Public:
from time to time after the effective date of this Registration Statement as determined by market conditions and other factors.
If any of the securities being registered on this Form are to be offered o3 a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:
x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x
(Do not check if a smaller reporting company)
o
CALCULATION OF REGISTRATION FEE
Title Of Each
Class of Securities
to be Registered
Amount To
Be Registered
Proposed Maximum Offering Price Per Share
Proposed Maximum Aggregate Offering Price
Amount of Registration Fee
Common Stock, $.001 par value(1)
11,551,449
$0.5627
$6,500,000.35
$255.45
Common Stock, $.001 par value(3)
5,897,243
0.5627
3,318,378.64
130.41
Common Stock, $.001 par value(7)
4,543,308
0.3762
1,709,192.47
67.17
Total
21,992,000(3)
$11,527,571.146
$453.03
(1)
In accordance with the Registration Rights Agreement, 11,551,449 shares of common stock represents 130% of the 8,885,730 shares of common stock issuable in connection with the conversion of the Senior Secured Convertible Notes in accordance with the Securities Purchase Agreement dated December 21, 2007 between us and Castlerigg Master Investments Ltd., at a conversion price equal to $0.5627, or the average of the lowest weighted average price of our common stock for the 25 trading days prior to the date of the Senior Secured Convertible Notes.
(2)
None of the 21,992,000 being registered are shares that have been, or will be, received as liquidated damages or conversion default payments.
(3)
Represents warrants to purchase 5,897,243 shares of the Company's common stock at a price per share of $0.5627, issuable in connection with the Series B Warrant between us and Castlerigg Master Investments, Ltd. Dated December 21, 2007.
(4)
In accordance with the Registration Rights Agreement, 4,543,308 shares of common represent 130% of the 3,495,852stock issuable to make interest payments towards the total $1,314,897 that will accrue on the Senior Secured Convertible Notes during the life of the Senior Secured Convertible Notes.   This represents 85% of the maximum interest payment the Company would pay in shares of common stock for the life of the Senior Secured Convertible Notes as $0.3762 is the lesser of 85% of the average volume weighted average bid price for the Company's common stock for the 25 consecutive trading days prior to February 1, 2008 and 85% of the average of the lowest three trading days during the 25 consecutive trading day period prior to February 1, 2008,assuming such date was an interest payment date, as defined within the Notes.
Table of Contents
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Table of Contents
SUBJECT TO COMPLETION FEBRUARY 1, 2008
The information in this prospectus is not complete and may be changed.  The selling stockholders may not sell these securities until the registration filed with the Securities and Exchange Commission is effective.  This preliminary prospectus is not an offer to sell these securities and neither we nor the selling stockholders are soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PROSPECTUS
21,992,000 shares of Common Stock
CHINA VOIP & DIGITAL TELECOM, INC.
This prospectus relates to the sale or other disposition by the selling stockholders identified on pages 34 to 36 of this prospectus, or their transferees, of up to 21,992,000 shares of our common stock, which includes (i) 11,551,449 shares issuable upon conversion shares of our Senior Secured Convertible Note, (ii) 4,543,308 shares of our common stock issuable in connection with interest payments on our Senior Secured Convertible Note (ii) 5,897,243 shares issuable upon the exercise of the Series B Warrant that was granted in connection with the Senior Secured Convertible Note pursuant to that certain Securities Purchase Agreement.  These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.
We will receive no proceeds from the sale or other disposition of the shares, or interests therein, by the selling stockholders. However, we will receive proceeds in the amount of $3,318,378.64 assuming the cash exercise of all of the warrants held by the selling stockholders, subject to certain of the warrants being exercised under a "cashless exercise" right.
Our common stock is traded on the over-the-counter electronic bulletin board. Our trading symbol is
CVDT.  On January 28,
2008, the last bid price as reported was $0.55 per share.
The selling stockholders, and any participating broker-dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, and any commissions or discounts given to any such broker-dealer may be regarded as underwriting commissions or discounts under the Securities Act.  The selling stockholders have informed us that they do not have any agreement or understanding, directly or indirectly, with any person to distribute their common stock.
Brokers or dealers effecting transaction in the shares should confirm the registration of these securities under the securities laws of the states in which transactions occur or the existence of our exemption from registration.
An investment in shares of our common stock involves a high degree of risk.  We urge you to carefully consider the Risk Factors beginning on page 5
.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
February __, 2008
Table of Contents
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this prospectus.  This summary does not contain all the information that you should consider before investing in the common stock.  You should carefully read the entire prospectus, including "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations"and the Consolidated Financial Statements, before making an investment decision
.
THE COMPANY
Background
China VoIP & Digital Telecom, Inc. is principally engaged in the development and sales of computer software and hardware, digital video pictures system; development and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license), as well as Voice over Internet Phone ("VoIP") technology related businesses, and relies on China Tietong, a Chinese telecom provider, to provide VoIP services.  China VoIP Digital Telecom Inc., formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan") in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000.  Accordingly, Jinan YinQuan became a wholly-owned subsidiary of China VoIP & Digital Telecom, Inc.
Our principal business office is located in Jinan City, Shandong Province, China.  The address is RM 508, No.786 Xinluo Street, High-Tech Industrial Development Zone, Jinan, China, and our telephone number at that address is 86-(531) 8702-7114.  Our internet website is www.chinavoip-telecom.com.  The information contained on our website is not incorporated by reference in this prospectus and should not be considered a part of this prospectus.
In this prospectus, "China VoIP," the "Company," "we," "us" and "our" refer to China VoIP & Digital Telecom, Inc. and, unless the context otherwise indicates, our subsidiary MCM.
History
We were originally incorporated in Nevada on October 18, 2004 as a development stage company named "Crawford Lake Mining, Inc." in the business of mineral exploration.  On August 17, 2006, we entered in an agreement with Jinan YinQuan Technology Co., Ltd., a Chinese registered company.  Upon the effectiveness of the share exchange agreement, the Company transferred opertation to the business of Jinan YinQuan, which has continued as the operating entity of the Company. Accordingly, the Company changed its name to China VoIP & Digital Telecom Inc.
Share Exchange with Jinan YinQuan Technology Co., Ltd.
On August 17, 2006, we acquired all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan") in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000.  Accordingly, Jinan YinQuan became a wholly-owned subsidiary of China VoIP & Digital Telecom, Inc.
NP Soft Switch
Our NP soft switch IP phone system and its ancillary IP phone billing and management systems were are all proprietarily developed by Jinan Yinquan, and are protected by a software copyright certificate issued by the State Copyright Bureau. The technology has been registered as a software product at Shandong Information Industry Office.
The NP soft switch IP phone system is based on real-time Internet communication technology and related applications, and uses software to simulate circuit switching. It provides next-generation networks (IPv6 and NGN) call control and connection control functions designed for real time services, and serves as the core of call and control of a next-generation network. The NP system supports many IP phone access protocols, and can organize effectively individual and corporate communications. It boasts excellent capacity and scalability, and can be applied on many kinds of end equipments and accessing modes (including IP mobile phone, PSTN phone, IP fixed phone, soft terminal, WIFI IP phone, and etc.)
The NP system consists of an access certification module (AC), soft switch call control module (SCC), billing system (BS), system management configuration (WEB), network management system (NMS) and database system (DBS), and adopts the distributed structure. Based on the number of users, distribution and network environment, soft switch system platforms or relay gateway can be installed anywhere in the world to balance the load. In a region with many network users, it is recommended to install a voice server, so that most data exchange of voice communication can be done locally to avoid cross-regional transmission of voice data. When a network users in different regions wish to communicate, a node server will be used to connect them in order to interconnect the different servers and the sharing of network resources. Different soft switch systems serve as the redundancy for each other. When one soft switch system is down, another one will be appointed to take its position according to the load condition and network status. The
node server will send the parameters of the new soft switch server to the terminals, and terminals will register automatically themselves onto the new server. When a relay gateway is down or the network is down, the soft switch system will direct the call to other relay gateway to ensure the normal service.
The AC Module checks for equipment registration and calls. It covers the differences between different types of equipment and the deficiency of specific equipment, so that they can be connected easily with one another. The access certification is based on an account number, password and MAC address, and unauthorized users are prohibited from accessing the system. It supports standard signals, and makes sure the network phone set, residential gateway, soft switch and any other network terminal products that are manufactured by most equipment companies can register with and be used in the system, so as to achieve compatibility and communication between different protocols and products. The differences between different products and protocols will be handled by the system. Furthermore, it supports private signals. Private signals adopts TLS transmission layer encryption technology to avoid being intercepted and captured. Only the authorized terminal equipment with built-in private signals can log into the system. The AC module also supports both login and call signals to pass through NAT, and provides accessing and inter-communication functions with different protocol-type equipments under different network environment, so as to realize equipment login and call certifications.
The SCC Module is responsible for handling call signals, and providing different kinds of call services and the media flow routing function. Its open design supports standard SIP protocol issued by IETF, and 32 byte encryption key for voice transmission, which means even all RTP packets are captured in the midway, the voice cannot be recovered. Additionally, it supports both server transfer and P2P direct communication. The communication mode can be selected very flexibly according to the network condition of the user, application mode, terminal device, and call mode. This module is enhanced by private encryption key to protect against any unauthorized copying inside the system even from the administrator.
The Billing Module provides certification, billing and management functions to audio and other related value-added service, and by using it, user can choose different payment methods such as pre-payment, afterward payment, and the purchase of call card. The billing module enables multiple levels of management for distributors. Distributors at different levels will be awarded operator hall management functions, operation management model compatible with that of telecom carriers, and alert functions for pre paid call expenses to remind distributors or end users to recharge.
This module records the details of every user's call, rate, call expense, and expense for value-added service, and account balance. User can check for such details at any time.
This module allows the administrators to set up the call expense rate and value-added service expense rate. Therefore, different charge rates can be applied to different kind of users, such as large distributors, key accounts and special accounts.
It has different kinds of statistics and analysis functions, and therefore can generate statistic reports and analysis tables according to the actual needs.
It can provide powerful management platform to internet bars, including functions such as order processing, call expense adjustment, and statistics functions to meet the billing requirements of the bar owners.
The Network Administration Module system's web server will provide real time monitoring functions to cover server status, equipment status and call status inside the soft switch system, provide related statistics information, and meanwhile identify any abnormity in the system.
RECENT DEVELOPMENTS
On December 21, 2007, China VoIP & Digital Telecom Inc., a Nevada corporation, (the "Company"), entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") wit
h an accredited institutional investor (
the "Investor").  The
aggregate purchase price was $5,000,000 and the investment was as follows:
* $5,000,000 of 8.75% Senior Secured Convertible Notes (the "Notes") convertible into Company common stock at the Average Market Price (the "AMP") as of the day immediately preceding the closing date (the "Conversion Price"), defined as $.5627.  The Notes will have a maturity date of 3 years from closing which can be extended by the Investor in its sole discretion for up to 2 additional years.  The Company can make interest payments in cash or registered stock at the Company's option.  If paid in stock, the price used will be 85% of the AMP (the "Payment-in-Stock Price").  The stock component of interest payment will be limited to 20% of the dollar value traded over the previous month.
The Notes will be senior secured obligations of the Company and will be secured by a first priority perfected security interest in all of Company and its subsidiaries, assets, and capital stock.  The Company will not be permitted to incur additional indebtedness without the Investors prior written consent.
The Investor may request that the Company repurchase up to 1/3
rd
of the Initial Investment amount on each of 12
th
and 24
th
month anniversaries of the closing (together  the "First Redemption Option", "Second Redemption Option", "First Redemption Date" and "Second Redemption Date", respectively). If however, the arithmetic average of the closing price of the common stock in each 30 day period following the effectiveness of the registration statement until the First Redemption Date has been greater than 125% of the initial Conversion Price and the dollar trading volume during the same 30 day period has been greater than $3.0 million, then the Investor will waive its first Redemption option.  If the same conditions outlined above are met in any six months between the First Redemption Date and the Second Redemption Date, the Investor will waive its Second Redemption Option.
After one year following the effectiveness of the Registration Statement (as defined in the Registration Rights Agreement), the Company will have the option to prepay the Notes at the greater of (i) 125% of the equity value and (ii) 125% of the issue price plus accrued and unpaid interest.  Upon being irrevocably notified by the Company of the Company's desire to exercise the Company Optional Redemption (as defined in the Notes), the Investor will determine the date of the actual prepayment not to exceed 75 business days following the receipt of the notice.  If the Company exercises the Company Optional Redemption it will issue the Investor 55% 5-year warrant coverage with a strike price equal to the strike price of the existing warrants (the "Prepayment Warrants").
Other than their relationship as a result of the Securities Purchase Agreement, there is no material relationship between the Company and any of the Investors.
The Investor received three series of warrants, titled Series A Warrant, Series B Warrant, Series C Warrant (collectively the "Warrants")
.
The Warrants are exercisable at price per share of $.5627 and are subject to economic anti-dilution protection.  The Series A Warrant is exercisable for 8,885,730 shares of the Company's common stock and expires the date eighty four (84) months after the earlier of (A) such time as all of the Registrable Securities (as defined in the Registration Rights Agreement) are available for resale pursuant to an effective Registration Statement and (B) two (2) years after December 21, 2007 .  The Series B Warrant is exercisable for 6,220,011 shares of the Company's common stock and expires on the date on which the Notes issued pursuant to the Securities Purchase Agreement are no longer issued and outstanding.  The Series C Warrant is exercisable for 6,353,297 shares of the Company's common stock and expires on the date sixty (60) months after the first time the Company elects a Company Optional Redemption.
Also on December 21, 2007, the Company executed a Registration Rights Agreement, which requires the Company to file a Registration Statement registering:
* all of the shares of Company common stock issuable upon conversion in full of the Notes;
* the Common Stock issuable upon exercise of the Warrants;
The registration statement of which this prospectus is a part has been filed pursuant to such Agreements, see "Selling Stockholders."
THE OFFERING
Securities Covered Hereby
21,992,000 shares, which includes (i) 11,551,449 shares underlying Senior Secured Convertible Note, (ii) 4,543,308 shares of common stock issuable to make interest payments towards the total $1,314,897 that will accrue on the Senior Secured Convertible Notes (iii) 5,897,243 shares subject to the Series B Warrant.
Common Stock Outstanding Prior to the Offering
53,008,000 shares
Common Stock to be Outstanding after the Offering
75,000,000 shares, assuming the selling stockholders convert the portion of their Senior Secured Convertible Note included herein and exercise all their warrants, and no conversion of other series of outstanding preferred stock nor exercise of the other outstanding warrants and options.
3
Table of Contents
Use of Proceeds
We will receive no proceeds from the sale or other disposition of the shares of common stock covered hereby by the selling stockholders.  However, we will receive $3,318,378.64 if all of the warrants for underlying shares included in this prospectus are exercised for cash.  We will use these proceeds for general corporate purposes.
OTC Electronic Bulletin Board Symbol
"CVDT"
RISK FACTORS
See "RISK FACTORS" for a discussion of the above factors and certain additional factors that should be considered in evaluating an investment in the common stock.
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following selected financial information is derived from the Consolidated Financial Statements appearing elsewhere in this prospectus and should be read in conjunction with the Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this prospectus.
Year Ended December 31 30,
Summary of Operations
2006
2005
Total revenues
$
1,449,969
$
990,495
Net income (loss)
(530,338
)
271,929
Net profit (loss) per common share (basic and diluted)
$
(0.01
)
$
0.01
Weighted average common shares outstanding, basic and diluted
50,931,973
40,000,000
Statement of Financial Position
As of
September 30, 2007
As of
September 30, 2006
Cash and cash equivalents
$
828,258
$
345,084
Total assets
3,765,367
1,623,425
Working capital
1,665,954
609,194
Long-term debt
-
-
Stockholders' equity
3,142,475
1,074,505
4
Table of Contents
RISK FACTORS
The shares of our common stock being offered for resale by the selling stockholders are highly speculative in nature, involve a high degree of risk and should be purchased only by persons who can afford to lose the entire amount invested in the common stock. Before purchasing any of the shares of common stock, you should carefully consider the following factors relating to our business and prospects. If any of the following risks actually occurs, our business, financial condition or operating results could be materially adversely affected. In such case, the trading price of our common stock could decline and you may lose all or part of your investment. The risks and uncertainties described below are not the only risks facing us.
Risks Related to Our Business
We depend on our key management personnel and the loss of their services could adversely affect our business.
We place substantial reliance upon the efforts and abilities of our executive officers, Li Kinwu, our Chairman, Chief Executive Officer and Chief Financial Officer and Wang Qinghua, our Chief of Technology. The loss of the services of any of our executive officers could have a material adverse effect on our business, operations, revenues or prospects. We do not maintain key man life insurance on the lives of these individuals.
We need to manage growth in operations to maximize our potential growth and achieve our expected revenues and our failure to manage growth will cause a disruption of our operations resulting in the failure to generate revenue.
In order to maximize potential growth in our current and potential markets, we believe that we must expand our manufacturing and marketing operations. This expansion will place a significant strain on our management and our operational, accounting, and information systems. We expect that we will need to continue to improve our financial controls, operating procedures, and management information systems. We will also need to effectively train, motivate, and manage our employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating the revenues we expect.
We may have difficulty raising necessary capital to fund operations as a result of market price volatility for our shares of common stock.
In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of common stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.
We may incur significant costs to ensure compliance with U.S. corporate governance and accounting requirements.
We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these newly applicable rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
We may never issue dividends.
We did not declare any dividends for the year ended December 31, 2006 and have not declared any dividends to date in 2007. Our board of directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
Future acquisitions may have an adverse effect on our ability to manage our business.
If we are presented with appropriate opportunities, we may acquire complementary technologies or companies. Future acquisitions would expose us to potential risks, including risks associated with the assimilation of new technologies and personnel, unforeseen or hidden liabilities, the diversion of management attention and resources from our existing business and the inability to generate sufficient revenues to offset the costs and expenses of acquisitions. Any difficulties encountered in the acquisition and integration process may have an adverse effect on our ability to manage our business.
We may have difficulty defending our intellectual property rights from infringement resulting in lawsuits requiring us to devote financial and management resources that would have a negative impact on our operating results.
We regard our service marks, trademarks, trade secrets, patents and similar intellectual property as critical to our success. We rely on trademark, patent and trade secret law, as well as confidentiality and license agreements with certain of our employees, customers and others to protect our proprietary rights. We have received trademark and patent protection for certain of our products in the People's Republic of China. No assurance can be given that our patents and licenses will not be challenged, invalidated, infringed or circumvented, or that our intellectual property rights will provide competitive advantages to us. There can be no assurance that we will be able to obtain a license from a third-party technology that we may need to conduct our business or that such technology can be licensed at a reasonable cost.
We have limited business insurance coverage in China.
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. As a result, we do not have any business liability or disruption insurance for our operations in China. Any business disruption, litigation or natural disaster may result in substantial costs and diversion of our resources.
Risks Related to Our Industry
If VoIP technology fails to gain acceptance among mainstream consumers, our ability to grow our business will be limited.
The market for VoIP service is continuing to rapidly evolve. We currently generate most of our revenue from the sale of VoIP services and related products to residential customers. Revenue generated from sales to residential customers will continue to account for most of our revenue for the foreseeable future. We believe that a significant portion of our initial residential customers are early adopters of VoIP technology. However, in order for our business to continue to grow and to become profitable, VoIP technology must gain acceptance among mainstream consumers, who tend to be less technically knowledgeable and more resistant to new technology services. Because potential VoIP customers need to connect additional hardware not required for the use of traditional telephone service, mainstream consumers may be reluctant to use our service. We have shifted our focus of advertising to reach out to the mainstream consumer and increase brand awareness, primarily with new television commercials. However, if mainstream consumers choose not to adopt our technology, our ability to grow our business will be limited.
Regulation of VoIP services is developing and therefore uncertain, and current or future legislative, regulatory or judicial actions could adversely affect our business and expose us to liability.
Our business has developed in an environment largely free from government regulation. However, the United States and other countries have begun to assert regulatory authority over VoIP and are continuing to evaluate how VoIP will be regulated in the future. Both the application of existing rules to us and our competitors and the effects of future regulatory developments are uncertain.
Current or future legislative, judicial or other regulatory actions could have a negative effect on our business. If we become subject to the rules and regulations applicable to telecommunications providers in individual states, we may incur significant litigation and compliance costs, and we may have to restructure our service offerings, exit certain markets or raise the price of our services, any of which could cause our services to be less attractive to customers. In addition, future regulatory developments could increase our cost of doing business and limit our growth.
Our international operations are also subject to regulatory risks, including the risk that regulations in some jurisdictions will prohibit us from providing our services cost-effectively or at all, which could limit our growth. Currently, there are several countries where regulations prohibit us from offering service. In addition, because customers can use our services almost anywhere that a broadband Internet connection is available, including countries where providing VoIP services is illegal, the governments of those countries may attempt to assert jurisdiction over us, which could expose us to significant liability and regulation.
Risks Related to Our Private Placement of Senior Convertible Note and Warrants and this Offering
In order to raise sufficient funds to continue operations, we may have to issue additional securities at prices which may result in substantial dilution to our shareholders.
If we raise additional funds through the sale of equity or convertible debt, current stockholders' percentage ownership will be reduced. In addition, these transactions may dilute the value of Common Stock outstanding. We may have to issue securities that may have rights, preferences and privileges senior to our Common Stock. We cannot assure that we will be able to raise additional funds on terms acceptable to us, if at all. If future financing is not available or is not available on acceptable terms, we may not be able to fund our future needs, which would have a material adverse effect on our business plans, prospects, results of operations and financial condition.
The shares issuable upon exercise of the Warrants issued to the Castlerigg Master Investments Ltd. are required to be registered with the Commission. We are subject to adverse consequences if the shares are not registered with the Commission within defined time periods.
The Registration Rights Agreement with the Original Note Holder requires us to file a registration statement for the resale of the 317,394 shares issuable upon exercise of the Class A Warrant. The registration statement must be filed within 45 days of December 31, 2007, must be declared effective by the Commission within 120 days, and must remain effective and available for use until earlier of the date the Castlerigg Master Investments Ltd. can sell all of the securities covered by the registration statement without restriction pursuant to Commission Rule 144 and the date all of such securities have been sold pursuant to the registration statement. If we fail to meet the deadlines for the filing or the effectiveness of the registration statement we will be subject to cash delay payments equal to 2% per month which shall apply retroactively from 90 days before closing.
The shares issued to Castlerigg Master Investments Ltd.  upon conversion of the Note are required to be registered with the Commission. We are subject to adverse consequences if the shares are not registered with the Commission within defined time periods.
The Registration Rights Agreement with the Buyer requires us to file a registration statement for the resale of the shares issuable upon conversion of the Note. The registration statement must be filed within 5 days after we receive stockholder approval for the issuance of such shares or exemption from NASDAQ from such requirement, must be declared effective by the Commission within 120 days (or 90 days if there is no review of the registration statement by the Commission), and must remain effective and available for use until earlier of the date all of such securities have been sold pursuant to the registration statement or the second anniversary of the date of the conversion of the Note. If we fail to meet the deadlines for the filing or the effectiveness of the registration statement, we are required to pay monthly liquidated damages of 1% of the outstanding principal amount of the Note plus accrued interest thereon until such failure is cured. The total penalties payable for failure to have a registration statement declared effective are capped at 12%.
Our Common Stock could be subject to extreme volatility.
Our Common Stock is currently traded on OTCBB.  The trading volume of our Common Stock each day is relatively low. Because of this limited liquidity, stockholders may be unable to sell their shares. Moreover, this means that sales or purchases of relatively small blocks of stock can have a significant impact on the price at which our stock is traded. The trading price of our Common Stock has, from time to time, fluctuated widely and may be subject to similar fluctuations in the future. The trading price of our Common Stock may be affected by a number of factors, including events described in the Risk Factors set forth in this prospectus, as well as our operating results, financial condition, public announcements by us, general conditions in the solar cell industry, and other events or factors. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our Common Stock. These fluctuations may have a negative effect on the market price of our Common Stock.
The influx of additional shares of our Common Stock into the market may create downward pressure on the trading price of our Common Stock.
The initial sale or secondary resale of significant amounts of our Common Stock in the public markets could have an adverse effect on the market price of our Common Stock. As a result, you may lose all or a portion of your investment and we may experience difficulty in selling our equity securities in the future at prices that we deem to be appropriate. This prospectus covers the resale of up to 21,992,000 shares of our Common Stock. Due to the significance of the number of shares being registered, as compared to our presently outstanding shares, the entry of those shares into the public market or the mere expectation of the entry of those shares into the public market, could adversely affect the market price of our Common Stock and could impair our ability to obtain capital through securities offerings.
The significant downward pressure on the market price of our Common Stock that would result from the sale of a significant amount of such shares of Common Stock could also encourage "short sales." These "short sales" occur when an investor commits to sell a security that he or she does not own at the time such commitment is made, but that the investor hopes to buy in earnest at a lower price in the future before he or she must deliver the security to the counterparty on the original sale. Investors typically engage in short selling when they believe that the price of the underlying security will decline before the time of settlement. In the event of a significant increase in short selling of our Common Stock, other investors may interpret such increase as a sign that the market price of our Common Stock will decline, causing further downward pressure on the market price.
Substantial Voting Power May be Concentrated in the Hands of Certain Stockholders.
Upon conversion of the Note, Castlerigg Master Investments Ltd. would acquire 8,885,730 shares of our Common Stock. This amount equates to approximately 11.84% of our outstanding Common Stock, after giving effect to such issuance and the other transactions contemplated hereby.
As long as the Series A Warrants, Series B Warrants and the Series C Warrants are outstanding, it may limit our ability to raise additional funds.
During the term that the Series A Warrants, Series B Warrants and the Series C Warrants (the "Warrants") are outstanding, the holders of the Warrants are given the opportunity to profit from a rise in the market price of our Common Stock. In addition, the Warrants are not redeemable by us. We may find it more difficult to raise additional equity capital while the Warrants are outstanding. At any time during which the Warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms from other sources.
Risks Related To Doing Business in China
Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our services and materially and adversely affect our competitive position.
Our business operations are primarily conducted in China. We also believe that a significant portion of the terminal devices we design are sold to end users in China. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to the economic, political and legal developments of China. Since the late 1970s, the PRC government has been reforming the economic system in China. These reforms have resulted in significant economic growth. However, we cannot predict the future direction of economic reforms or the effects such measures may have on our business, financial position or results of operations. Any adverse change in the economic conditions in China, in policies of the PRC government or in laws and regulations in China, could have a material adverse effect on the overall economic growth of China and investment in the VoIP industry. Such developments could materially and adversely affect our business, lead to reduction in demand for our services and materially and adversely affect our competitive position.
Our business benefits from certain tax incentives, and changes to these tax incentives could adversely affect our operating results.
The PRC government has provided various tax incentives to domestic high technology companies, including our PRC subsidiaries, in order to encourage the development of technology companies. Our subsidiaries in China are also entitled to a turnover tax exemption relating to their income derived from any technology development agreement and technical transfer agreement which has been registered with the relevant government authority.
On March 16, 2007, the National People's Congress, the Chinese legislature, passed a new tax law, which is scheduled to take effect on January 1, 2008. The new law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. There are enterprises that have already been established prior to the promulgation of the new law and enjoyed low tax rates according to the provisions of the tax laws and administrative regulations that were in force before the promulgation of the new law. Such enterprises may continue to enjoy the preferential tax treatments within five years after the new law is promulgated, and then gradually transition to the tax rate provided in the new law. Enterprises that enjoy the preferential treatment of tax exemption for a fixed term may continue to enjoy such treatment after the promulgation of the new law until such fixed term expires. However, for enterprises that have not yet started to enjoy the preferential tax treatments due to the fact that they have not been profitable, the term of the preferential tax treatments would start running from the year the new law is promulgated, regardless of whether or not they are profitable on such year. Preferential tax treatments will continue to be granted to entities that conduct businesses in certain encouraged sectors and to entities otherwise classified as "new and high technology enterprise," whether foreign-invested enterprises or domestic companies. Our subsidiaries' qualifications are subject to an annual assessment by the relevant government authority in China. Thus, there is no assurance that our subsidiaries in China will continue to receive such or any other preferential tax treatment. If any of these incentives are reduced or eliminated by government authorities in the future, the effective tax rates of our subsidiaries in China and our effective tax rates on a consolidated basis could increase significantly. Any such change could adversely affect our operating results.
Our subsidiaries in China are subject to restrictions on dividend payments, making other payments to us or any other affiliated company and borrowing or allocating tax losses among our subsidiaries.
We are a holding company incorporated in Nevada. We conduct substantially all of our operations through our subsidiaries in China. Current PRC regulations permit our subsidiaries in China to pay dividends only out of their respective accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our subsidiaries in China are each required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends. In addition, current PRC regulations prohibit inter-company borrowings or allocation of tax losses among our subsidiaries in China. Further, if any of our subsidiaries in China incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments to us.
Fluctuations in exchange rates could result in foreign currency exchange losses.
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People's Bank of China. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a greater fluctuation range between Renminbi and the U.S. dollar. For example, the daily fluctuation range between the Renminbi and the U.S. dollar reached 160 basis points, or 0.16%, on September 15, 2006. From July 21, 2005 to June 25, 2007, the Renminbi cumulatively appreciated approximately 8.0% over the U.S. dollar. While the international reaction to the RMB revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in a further and more significant appreciation of the RMB against the U.S. dollar.
Substantially all of our revenues are denominated in RMB, while a small portion of our cost of revenues is denominated in U.S. dollars. Fluctuations in exchange rates, primarily those involving the U.S. dollar, may affect our cost of revenues and profit margins as well as our net income. In addition, these fluctuations could result in exchange losses and increased costs in RMB terms. Furthermore, as we rely entirely on dividends paid to us by our subsidiaries in China, any significant revaluation of the RMB may have a material adverse effect on the value of, and any dividends payable on our ADSs in foreign currency terms. If we decide to convert RMB we
receive from our subsidiaries into U.S. dollars for the purpose of distributing dividends on our ordinary shares or for other purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions to reduce our exposure to foreign currency exchange risk. In addition, our currency exchange losses may be magnified by China's exchange control regulations that restrict our ability to convert RMB into U.S. dollars.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
Because substantially all of our revenues are denominated in RMB, any restrictions on currency exchange may limit our ability to use revenues generated in RMB to fund any business activities we may have outside China or to make dividend payments in U.S. dollars. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, RMB are freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of the State Administration of Foreign Exchange, or SAFE, is obtained. Although the PRC government regulations now allow greater convertibility of RMB for current account transactions, significant restrictions still remain. For example, foreign exchange transactions under our subsidiaries' capital account, including principal payments in respect of foreign currency-denominated obligations, remain subject to significant foreign exchange controls and the approval of the State Administration of Foreign Exchange. These limitations could affect our ability to obtain foreign exchange for capital expenditures. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of RMB, especially with respect to foreign exchange transactions.
Uncertainties with respect to the PRC legal system could adversely affect us.
We conduct substantially all of our business through our subsidiaries established in China. Our subsidiaries are generally subject to laws and regulations applicable to foreign investment in China and, in particular, laws applicable to wholly foreign-owned enterprises and Sino-foreign joint ventures. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system is still evolving, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
FORWARD LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may contain forward-looking statements.  This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.  Forward-looking statements, which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words "may," "should," "expect," "anticipate," "estimate," "believe," "intend"or "project"or the negative of these words or other variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements regarding, among other things, (a) our projected sales and profitability, (b) our technology, (c) our manufacturing, (d) the regulation to which we are subject, (e) anticipated trends in our industry and (f) our needs for working capital. These statements may be found under "Management's Discussion and Analysis or Plan of Operations" and "Business," as well as in this prospectus generally.  Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under "Risk Factors" and matters described in this prospectus generally.  In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will in fact occur.
Except as otherwise required by applicable laws, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in the prospectus, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus.
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USE OF PROCEEDS
We will not receive any portion of the proceeds from the sale or other disposition of the shares of common stock covered hereby, or interests therein, by the selling stockholders. We may receive proceeds of up to $3,318,378.64 if all the warrants held by the selling stockholders are exercised for cash. Management currently anticipates that any such proceeds will be utilized for working capital and other general corporate purposes. We cannot estimate how many, if any, warrants may be exercised as a result of this offering or that they will be exercised for cash.
We are obligated to bear the expenses of the registration of the shares. We anticipate that these expenses will be approximately $40,000.
DIVIDEND POLICY
We have never declared dividends or paid cash dividends on our common stock and our board of directors does not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividend.
MARKET FOR OUR COMMON STOCK
Principal Market and Market Prices
Our common stock is traded on the over-the-counter market on the OTC Electronic Bulletin Board (OTCBB) under the symbol CVDT.
The following table sets forth, for the calendar quarters indicated, the reported high and low bid quotations per share of the common stock as reported on the OTCBB.  These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.
Fiscal Period
Fiscal Year Ending
12/31/08
Fiscal Year Ended
12/31/07
Fiscal Year Ended
12/31/06
High
Low
High
Low
High
Low
First Quarter
$0.69(1)
$0.40(1)
$4.94
$2.01
$---- (2)
$---- (2)
Second Quarter
2.34
1.11
---- (2)
---- (2)
Third Quarter
1.19
0.46
2.28
2.02
Fourth Quarter
1.65
0.41
3.70
2.50
(1)
Reflects prices through January 28, 2008
(2) At this time, our common stock was not traded publicly.
We have not paid any dividends on our shares of common stock since inception and do not expect to declare any dividends on our common stock in the foreseeable future.  Any declared dividend in the future would be subject to the terms of the outstanding preferred stock at that time.
Approximate Number of Holders of Our Common Stock
On February 1, 2008, there were approximately 86 holders of record of the common stock.  Since of shares of common stock are held in street or nominee name, it is believed that there are a substantial number of additional beneficial owners of our common stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the other financial information appearing elsewhere in this prospectus.  In addition to historical information contained herein, the following discussion and other parts of this prospectus contain certain forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those discussed in the forward-looking statements due to factors discussed under "Risk Factors", as well as factors discussed elsewhere in this prospectus.  The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus.
Results of Operations
Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006
During the nine months ended September 30, 2007, we earned $4,155,855 in revenues as compared to $889,602 during the same period ended in 2006, an increase of $3,266,253 or approximately 467%.
The increase of revenue is mainly contributed to our efforts on promotion and more interest in our services.
The gross profit increased from $309,974 during the nine months ended September 30, 2006 to $1,191,081 in the same period of 2007.
Meanwhile, selling, general and administrative expenses were
$290,587 during the nine month period ended September 30, 2007 as compared to $133,840 for the same period ended in 2006, an increase of $47,344 or approximately 145%.
Net income of $854,878 recorded during the nine months ended September 30, 2007, as compared to a net loss of $175,105 during the same period of 2006.
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Liquidity and Capital Resources
Cash provided in operating activities during the nine months ended September 30, 2007 mainly consisted of a loss in cash received from customers of $318,854.
Cash flows provided by investing activities led to a loss of $985,580 or the nine month period ended September 30, 2007 as compared to a loss of $360,132 provided for the same period of 2006.
Cash flows provided by financing activities were a loss of $659,558 during the nine months period ended September 30, 2007 as compared to a loss of $147,005 for the same period of 2006.
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Management's Plan
We were originally incorporated in Nevada on October 18, 2004 as a development stage company named "Crawford Lake Mining, Inc." in the business of mineral exploration.  On August 17, 2006, we entered in an agreement with Jinan YinQuan Technology Co., Ltd., a Chinese registered company.  Upon the effectiveness of the Acquisition, the Company succeeded to the business of Jinan YinQuan, which will be continued as its sole line of business. Accordingly, the Company has changed its name to China VoIP & Digital Telecom Inc. and has also changed its symbol to CVDT.
During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:
l
We intend to continue with our marketing strategies to market our NPSoft Switch System in the People's Republic of China. We currently offer our products to 17 cities within the Shandong Province, 3 cities within Zhejiang Province and 1 city in Anhui Province.  Furthermore, our NP Soft Switch system is being tested in 2 other markets.
l
Along with the continued marketing activities of our current products and services, we are also developing other telecommunication technologies in order to complement our VOIP product offering.
l
During the next twelve months, the Company expects to roll out new technologies and also expand into new markets within the People's Republic of China.
l
The capital recently acquired from the sale of Senior Secured Convertible Notes will be used to finance some or all of the following activities: 1) acquisition of other companies running business in other provinces of China; 2) purchase of new equipment to satisfy increasing region and customer requirements; 3) marketing and general administrative expenses for new launched regions of China.
Critical Accounting Policies
The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.  On an on-going basis, management evaluates our estimates and assumptions, including but not limited to those related to revenue recognition and the impairment of long-lived assets, goodwill and other intangible assets.  Management bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
In September 2006, FASB issued SFAS 157 'Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 'Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
A brief description of the provisions of this Statement
l
The date that adoption is required
l
The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
l
The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In February of 2007 the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115."  The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.  The company is analyzing the potential accounting treatment.
Inflation
To date, inflation has not had a material effect on our business. We believe that the effects of future inflation may be minimized by controlling costs and increasing our manufacturing efficiency through the increase of our product sales.
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BUSINESS
Business of Issuer
China VoIP Digital Telecom Inc. ("the Company"), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan") in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan became our wholly-owned subsidiary.
Jinan YinQuan is an equity joint venture established in JiNan in 2001, in the People's Republic of China ("the PRC").  The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted.
The Company's principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license).  Currently, the Company is focused on the Voice over Internet Phone ("VoIP") technology related business, and relies on China Tietong, a Chinese telecom provider, to provide VoIP services.
Industry Background
VoIP is a technology that enables communications over the Internet through the compression of voice, video and/or other media into data packets that can be efficiently transmitted over data networks and then converted back into the original media at the other end. Data networks, such as the Internet or local area networks, or LANs, have always utilized packet-switched technology to transmit information between two communicating terminals. The most common protocol used for communicating on these packet switched networks is IP. VoIP allows for the transmission of voice along with other data over these same packet
switched networks, and provides an alternative to traditional telephone networks, which use a fixed electrical path to carry voice signals through a series of switches to a destination.
As a result of the potential cost savings and added features of VoIP, consumers, enterprises, traditional telecommunication service providers and cable television providers are viewing VoIP as the future of telecommunications. VoIP has experienced significant growth in recent years due to:
l
Demand for lower cost telephone service;
l
Increasing demand for long distance communication services driven by the increased mobility of the global workforce;
l
Improved quality and reliability of VoIP calls due to technological advances, increased network development and greater bandwidth capacity; and
l
New product innovations that allow VoIP providers to offer services not currently offered by traditional telephone companies.
The traditional telephone networks maintained by many local and long distance telephone companies were designed solely to carry low-fidelity audio signals with a high level of reliability. Although these traditional telephone networks are very reliable for voice communications, these networks are not well suited to service the explosive growth of digital communication applications for the following reasons:
l
They are expensive to build because each subscriber's telephone must be individually connected to the central office switch, which is usually several miles away from a typical subscriber's location;
l
They transmit data at very low rates and resolutions, making them poorly suited for delivering high-fidelity audio, entertainment-quality video or other rich multimedia content;
l
They use dedicated circuits for each telephone call, which allot fixed bandwidth throughout the duration of each call, whether or not voice is actually being transmitted; and
·
They may experience difficulty in providing new or differentiated services or functions, such as video communications, that the network was not originally designed to accommodate.
Until recently, traditional telephone companies have avoided the use of packet switched networks for transmitting voice calls due to the potential for poor sound quality attributable to latency issues (delays) and lost packets which can prevent real-time transmission. Recent improvements in packet switch technology, compression and broadband access technologies, as well as improved hardware and provisioning techniques, have significantly improved the quality and usability of packet-switched voice calls.
Historically, packet-switched networks were built mainly for carrying non real-time data, although they are now fully capable of transmitting real time data. The advantages of such networks are their efficiency, flexibility and scalability. Bandwidth is only consumed when needed. Networks can be built in a variety of configurations to suit the number of users, client/server application requirements and desired availability of bandwidth, and many terminals can share the same connection to the network. As a result, significantly more traffic can be transmitted over a packet switched network, such as a home network or the Internet, than a circuit-switched telephony network. Packet switching technology allows service providers to converge their traditionally separate voice and data networks and more efficiently utilize their networks by carrying voice, video, facsimile and data traffic over the same network. The improved efficiency of packet switching technology creates network cost savings that can be passed on to the consumer in the form of lower telephony rates.
The growth of the Internet in recent years has proven the scalability of these underlying packet switched networks. As broadband connectivity, including cable modem and digital subscriber line, or DSL, has become more available and less expensive, it is now possible for service providers like us to offer voice and video services that run over these IP networks to businesses and residential consumers. Providing such services has the potential to both substantially lower the cost of telephone service and equipment costs to these customers and to increase the breadth of features available to our subscribers. Services like full-
motion, two-way video are now supported by the bandwidth spectrum commonly available to broadband customers, whether business or residential.
As a result of these growth trends, various service providers, enterprises and consumers are continuing to procure offerings from VoIP providers, including Jinan Yinquan.  Specifically, consumers in emerging markets are increasingly using VoIP-enabled services, such as Internet Protocol, or IP, telephones, to realize significant cost savings on long distance and international calls, while in markets where a significant number of consumers have access to broadband internet services, these consumers are increasingly looking at VoIP as a viable and more affordable substitute for their traditional telecommunications provider.
Accordingly, many of the traditional telecommunications providers are looking to deploy VoIP as a defensive strategy, while cable companies, ISPs and other broadband providers are looking at VoIP service offerings as a way to capture new revenue streams from existing and new customers. These providers have two primary alternative means to develop and deploy VoIP offerings: they can build them in-house; or they can partner with a company like Jinan Yinquan and outsource all or a portion of the effort. Those seeking to offer VoIP service offerings by developing an in-house service must learn a vastly different set of platforms, and integrate several additional components with their existing systems, which requires the development of significant technical expertise and the deployment and management of substantial capital expenditures.
Alternatively, a full service VoIP company, like Jinan Yinquan, can provide these service providers with the ability to outsource their VoIP services, and thereby effectively reduce the upfront and ongoing cost of providing the service, and efficiently reduce the time to market and risks associated with developing and maintaining an in-house VoIP service.
Our Strategy
Different from other VoIP services companies, we enable customers using our VoIP products and services without a PC connection. Our objective is to provide reliable, scalable, and profitable worldwide Internet communication services with unmatched quality.  Our goal is to achieve this objective by delivering innovative technologies and services and balancing the needs of our customers with the needs of our business.  We intend to bring the best possible voice and video products and services, at an affordable price, to either residential or businesses customers and enhance the ways in which these customers communicate with each other, and within the world.
Specific strategies to accomplish this objective include:
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Focus on our retail VoIP business.
From 2005, we began to shift the focus of our sales and marketing efforts to growing the VoIP services for retail customers from the efforts to providing one-off solution services to enterprise customers.  The retail users can enable the Company to generate continuing revenue stream although it will involve more after sales services.  In addition, these customers are more likely to subscribe to our additional services and are less likely to leave the service.
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Expand our business into whole China region.
As of end of 2006, we have successfully expanded our business into all major cities in Shandong Province of China.  Apart from the efforts to expand intensively our services in the Shandong Province, we are aggressively planning to develop our business in other provinces of China.  We believed that our successful experience and model in Shandong Province can be copied in other cities.  To achieve our final goals, we will adopt following approaches to develop our business: 1) setup branches in other provinces; 2) acquire or merge with other companies already operated in other provinces; 3) co-operate or find agents to expand our business in other provinces.
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Capitalize on our technological expertise to introduce new products and features.
Over the past years, we have developed several core technologies that form the backbone of our voice and video over IP service and which we intend to use to develop product enhancements and future products.
We developed our unique technologies used to provide video and voice service through special devices or software.  As a result, we are able to update the software functionality of our customers' requirements without any third party assistance.
l
Extend our strategic partnership with Major Chinese Telecom Operators.
Currently, we set up partnership with China Tietong, one of the six major telecom operators in China.  Thanking for the strong marketing support from China Tietong, we can expand our business quickly and legally in China.  In future, we will enhance our partnership with China Tietong and seek cooperation opportunities with other major telecom players in China.
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Develop additional distribution channels.
We have established relationships with telephone café, retailers and other distributors of telecommunications products and services. To further accelerate growth of our products and services, we intend to build upon our existing relationships and establish new relationships with distributors, value added resellers and system integrators, other service providers, equipment manufacturers and retailers to make our products more readily available and accessible to potential customers of our services.
Technology
Our NP soft switch IP phone system and its ancillary IP phone billing and management systems were are all proprietarily developed by Jinan Yinquan, and are protected by a software copyright certificate issued by the State Copyright Bureau. The technology has been registered as a software product at Shandong Information Industry Office.
TECHNICAL FEATURES OF THE NP SYSTEM
The NP soft switch IP phone system is based on real-time Internet communication technology and related applications, and uses software to simulate circuit switching. It provides next-generation networks (IPv6 and NGN) call control and connection control functions designed for real time services, and serves as the core of call and control of a next-generation network. The NP system supports many IP phone access protocols, and can organize effectively individual and corporate communications. It boasts excellent capacity and scalability, and can be applied on many kinds of end equipments and accessing modes (including IP mobile phone, PSTN phone, IP fixed phone, soft terminal, WIFI IP phone, and etc.)
TECHNICAL SPECIFICATIONS OF THE NP SYSTEM:
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Developed based on standard and proprietary protocol suites with sound switching capacity and compatibility;
l
Supports speech, fax, video phone and chat;
l
Is a fully distributed network structure that supports load balance, overload protection, and redundant backup to ensure the high stability and reliability of the system;
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Function of passing through NAT/Firewall; it can pass through multiple level of NAT to reduce operation cost;
l
Web based configuration and maintenance system and remote web administration system, which realize centralized control and administration to reduce maintenance cost;
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Supports many kinds of value-added services, and provide scalable ports for new businesses; support unconditional transfer, busy transfer, offline transfer, no-response transfer, call holding/recovering, call park/pickup, call transfer, caller ID display, number change, call restriction, and caller ID blocking;
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Supports different kinds of internet accessing modes, and can be connected with Cable Modem, xDsl, Fttb+LAN, PPPoE and intranet; prove sound compatibility with different network environment, and support fully Ipv6;
l
Fully opened system structure and interoperability with networks based on different protocols, which ensures a stable platform to support the across-region and across-industry information sharing;
l
Seamless integration with IP PBX, ensuring the provision of various solutions for internal but across-region communication inside companies;
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IVR function, that supports centralized or distributed call center for corporate users;
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Remote conference call function, which allows the participant to use any kind of voice communication device, such as fixed phone set, mobile phone, Linktone, and soft switch IP phone;
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Supports Presence technology; end user can set up his/her own configuration and have others see his/her presence status;
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Supports interconnections with other kinds of IP phone systems, and even different soft switch system.
SYSTEM STRUCTURE
The NP system consists of an access certification module (AC), soft switch call control module (SCC), billing system (BS), system management configuration (WEB), network management system (NMS) and database system (DBS), and adopts the distributed structure. Based on the number of users, distribution and network environment, soft switch system platforms or relay gateway can be installed anywhere in the world to balance the load. In a region with many network users, it is recommended to install a voice server, so that most data exchange of voice communication can be done locally to avoid cross-regional transmission of voice data. When a network users in different regions wish to communicate, a node server will be used to connect them in order to interconnect the different servers and the sharing of network resources. Different soft switch systems serve as the redundancy for each other. When one soft switch system is down, another one will be appointed to take its position according to the load condition and network status. The node server will send the parameters of the new soft switch server to the terminals, and terminals will register automatically themselves onto the new server. When a relay gateway is down or the network is down, the soft switch system will direct the call to other relay gateway to ensure the normal service.
AC Module
This module checks for equipment registration and calls. It covers the differences between different types of equipment and the deficiency of specific equipment, so that they can be connected easily with one another. The access certification is based on an account number, password and MAC address, and unauthorized users are prohibited from accessing the system. It supports standard signals, and makes sure the network phone set, residential gateway, soft switch and any other network terminal products that are manufactured by most equipment companies can register with and be used in the system, so as to achieve compatibility and communication between different protocols and products. The differences between different products and protocols will be handled by the system. Furthermore, it supports private signals. Private signals adopts TLS transmission layer encryption technology to avoid being intercepted and captured. Only the authorized terminal equipment with built-in private signals can log into the system. The AC module also supports both login and call signals to pass through NAT, and provides accessing and inter-communication functions with different protocol-type equipments under different network environment, so as to realize equipment login and call certifications.
SCC Module
This module is responsible for handling call signals, and providing different kinds of call services and the media flow routing function. Its open design supports standard SIP protocol issued by IETF, and 32 byte encryption key for voice transmission, which means even all RTP packets are captured in the midway, the voice cannot be recovered. Additionally, it supports both server transfer and P2P direct communication. The communication mode can be selected very flexibly according to the network condition of the user, application mode, terminal device, and call mode. This module is enhanced by private encryption key to protect against any unauthorized copying inside the system even from the administrator.
Billing Module
This module provides certification, billing and management functions to audio and other related value-added service, and by using it, user can choose different payment methods such as pre-payment, afterward payment, and the purchase of call card. The billing module enables multiple levels of management for distributors. Distributors at different levels will be awarded operator hall management functions, operation management model compatible with that of telecom carriers, and alert functions for pre paid call expenses to remind distributors or end users to recharge.
This module records the details of every user's call, rate, call expense, and expense for value-added service, and account balance. User can check for such details at any time.
This module allows the administrators to set up the call expense rate and value-added service expense rate. Therefore, different charge rates can be applied to different kind of users, such as large distributors, key accounts and special accounts.
It has different kinds of statistics and analysis functions, and therefore can generate statistic reports and analysis tables according to the actual needs.
It can provide powerful management platform to internet bars, including functions such as order processing, call expense adjustment, and statistics functions to meet the billing requirements of the bar owners.
Network Administration Module
The system's web server will provide real time monitoring functions to cover server status, equipment status and call status inside the soft switch system, provide related statistics information, and meanwhile identify any abnormity in the system
.
SYSTEM INNOVATION — PROPRIETARY PROTOCOL SUITE
Large Number of Concurrent Lines
By using proprietary built-in hardware, protocol suite, terminal device, relay gateway, and soft switch system, Jinan Yinquan can use P2P mode to transfer the audio for all kinds of calls (PC2PC, PC2Phone, Phone2PC, Phone2Phone).  During the call, the signals for call holding and call status information will be sent to the soft switch system, which will monitor the calls to all users and send control signals to those users with established calls to ensure call quality. Because the signal is of very limited data volume and thus occupies very limited bandwidth, the network congestion will be effectively avoided. The server is responsible only for processing signals instead of sending audio, which can increase greatly the number of concurrent lines of soft switch system. If Jinan Yinquan's terminals adopt the equipments based on our proprietary protocol suite, a single system will be able to support 10,000 concurrent lines.
Management Control
Multiple control server domain names have been reserved in terminal devices. When the terminal devices fail in communicating with registration server, such reserved server address will be retrieved automatically. If the connection route fails in meeting the requirements due to poor network quality, you can require to change registration server and connection route to ensure the call quality.
VALUE-ADDED FUNCTIONS
The system supports IM, presence and technologies, No matter whether the terminals of users are busy or idle, the performance of the terminals will not be affected. All operations of the terminals will be transferred as signals to registration server, which will be responsible for processing such data.
Recording
When the user needs to record a call, the system will switch automatically into server transfer mode to save the audio stream. This kind of service will be awarded to the public security department or the police office when needed. The system will automatically cancel the P2P mode.
Encryption
Signal based encryption can prevent others from acquiring user information. Based on the encryption on audio packets, the captured audio packets by an authorized person will not be recovered into audio
Product and services
We have different lines of products or services designed for individual users and enterprise users.  Following products are designed for individual users or small enterprise users:
IP telephone
IP telephone is the hardware that supports the protocol of SIP or H.323. It has all of the same functions of a traditional telephone. It has two Ethernet Interfaces, taking one IP address, with one router. Using the IP telephone does not interfere with internet usage. To satisfy different terminal devices connected with soft switch platform, this kind of equipment can be further classified into the following three series:
l
Only one Ethernet port (10/100M) and one IP address. After having been connected with information socket and configured through web, it can become an end user of soft switch system.
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Built-in route with more than two Ethernet ports (10/100M). One of them is connected with information socket to occupy one IP address, and the other is connected with hub and used for the accessing of other networking equipments, such as a computer or any other IP phone set.
l
After having been configured through web, it can become an end user of soft switch system.
Analog Gateway: IAD
An Analog gateway connects the soft switch system with the common telephone and converts the traditional telephone into a complete VoIP telephone having access to all of the functions and benefits that are found with using this state of the art technology. It includes following models:
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One FXS line: It can support one telephone.
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One line with router: It can connect with one telephone, including a router, we connect its LAN with computer, and so calling will not affect our going to the Internet.
l
Many FXS: 2,4,8,16,32,48, and 64 lines, ect. They can respectively connect with telephones in the same number as them. They are suitable to be used inside buildings and by enterprises.
l
With fleeing interface: It has the interface same as common telephone line's. We connect the common line with the interface to realize one telephone with two numbers. We can get the calls from soft switch telephones and common telephones. When we call somebody, we can choose to use the low-cost soft switch telephone and common telephone.
Video Telephone
A Video telephone device supports the protocol of SIP or H.323. Along with receiving and making calls, you can see the caller on video as long as the other caller also has this capability.
Softphone
Softphone is the software that supports the protocol of SIP or H.323. Users make calls by using the computer keyboard or soft keyboard to dial, with the same functions as IP telephone. The Softphone user communicates using a computer headset.  Using this function, a user can communicate with any hardware terminal device.
Wife Phone
WiFi Phone is new product to be introduced by the Company. It is a type of IP phone set that supports both SIP protocol and 802.11 connection, and also an end user device for soft switch platform. Within the coverage scope of 802.11 wireless networks, it has the same functions as IP phone sets, and the differences are network accessing mode and the supports to route functions.  Currently, we have identified several OEM manufactures alternatives in China, who are able to manufacture the wifi phone set.  We are also seeking co-operation opportunity with other wifi router companies.  We are planning to put this kind of product into use in the first half year of 2007.
Following services or products are designed for these median or big size enterprises:
NGN Soft Switch System
The communications technology has been driven by the development of Internet technology all the time. And the prologue of a new round communications technology competition has been kicked off by the new communications technology and instruments which are represented by VoIP. This also expands the competition among telecom operators from areas and users to the communications technologies . VoIP has been the preferred technology for the newcomers in telecom market. The great prospect of VoIP has been embodied in three aspects:
·
The new telecom operators organize the low-cost communication networks of their own with VoIP.
·
The international Internet operators provide the net users with the voice communication services through VoIP.  In a sense, they have partaken the market share from traditional telecom enterprises gradually.
·
A number of large or medium size enterprises start organizing VoIP communication networks of their own, which could lower communication cost as well as expedite information exchange, in order to confront globalize competition among enterprises. According to the analysis from Gartner , due to capital and technology , the application of VoIP is at the very outset, it will reach the peak of its application in 3 to 5 years.
NP PBX
The NPPBX is a small voice-switch platform with powerful functions.  It combined PBX and VoIP advanced technology perfectly, had proposed many kinds of VoIP solutions for the enterprises. These solutions can reduce the communication cost of all large and medium-sized enterprises and government significantly, increase working efficiency at the same time. NPPBX will become an indispensable part
for enterprise with popularization. NPPBX has many kinds of function, include: voice mail, computer-telephones, conference call, calling control, CDR, and API etc. It is both IAD and PBX. So, NPPBX is not only the supplement to the traditional PBX, but also the substitute of that.  NP-PBX influences neither the use nor the functions of the original network. Moreover, it creates new network applications, as well as increases the rate of utilization of the inner equipments and resources in the whole enterprise, which reduces its communication cost.  VoIP can realize voice transmission among different areas through IP network.  It is feasible to save a large number of the toll fees, and realize zero calling charge inside the organization.  NPPBX adopts SIP, performs as the voice gatekeeper, voice gateway as well as the traditional voice exchange in one, offering the low-cost voice communication to users as the enterprise, government, financial institution, education department, intelligent building, and hotels, etc.
NPPBX, as the substitute of the traditional PBX, has very obvious comparative advantages to the traditional one. It integrates PSTN and Internet in to one, and saves a large number of management and maintenance cost. It would be more convenient and easier to provide the value-added services through NPPBX.  The single system has a lot of functions, which the traditional one could realize only with many other supplementary equipment. NP PBX is more universal and practice, for it's easier to use、configure and maintain.  Due to the application of the computer, it's easier for capacity-expansion of the system and decreasing the fund input. NPPBX is a flexible voice platform with following functions and may lowers the calling charges for the enterprises:
·
Distributing the extensions at your willing: Via the easy understanding configuration interface, anybody that can operate the computer may configure his user's information easily.  Thus you never need to retain a professional for the maintenance.
·
Auto-telephones and calling group:  After recording the voice prompt according to user's demands, it's possible for the caller dialing a certain number to reach the corresponding department. The telephones in this department will ring in turn according to the set order , until someone answers it.  It's also possible to set an extension to answer the incoming call directly.
·
Voice message (64/256/1024 hours): The caller may leave a voice message in the phone when you are unavailable to reply in time . You may listen the message either by the appointed phone or by other extensions. Besides, the system will send the message to your E-mail, so you may listen it by computer when you outside.
·
Conference call (available for 8/32 lines): It's easy for you to hold a conference call either through the WEB interface or the extensions.  Not only the registered NP PBX extensions but also the traditional phones can be invited into the conference call. You may invite your staff to enter a conference call of the company through the telephone in hotel room or cell-phone when he is on the business trip.  Whenever, wherever, you may hold your conference call.
·
Register to SIP soft-switch: You may register NPPBX through a VoIP ID to the soft switch platform which supports SIP, in order to make domestic or international toll through the platform.
·
Other functions: NPPBX also has other functions like Call hold、Call transfer、Caller ID、Non-interruption, ect. Users may configure all the functions by dialing the corresponding keys on the phone set.
Call Center
The term "call center" often conjures up images of hundreds of agents working for huge telemarketing conglomerates.  However, that's simply not the case any more.  Call center systems have progressed to the point that even small companies with as few as 10 agents can get the same powerful call management features as the big players.  Call centers now are increasingly called "contact centers" as they incorporate inquires from web and email sources in addition to phone calls depending on technology.  Call center systems address many facets of your business with features such as instant routing of important customers to the best agents, reduced hold times, more efficient scheduling of employees, and detailed reporting.  Call center is typically applicable for:
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Government hot line
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Company customer service center, follow-up service center
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Integrated information service
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Materials circulation/EC
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Media interaction
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Fax memory transmit
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Data inquire center (inquire marks/ electric charge)
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Multi-party communication, such as conference call
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Enterprise or individual secretary service, voicemail
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Telephone direct selling, telephone shopping
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Telephone interview survey
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Enterprise yellow page service
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Against-counterfeit inquire service
Competition
The market for our products and services is increasingly competitive, evolving rapidly and is subject to shifting customer needs and introductions of new products and services. Our current and potential competitors approach the market from different areas of expertise and vary in size and scope with respect to the products and services that they offer or may offer in the future.
We face competition from traditional telephone service providers in China, such as the China Telecom, China Netcom and cable access providers.  These competitors are increasingly integrating enhanced functionalities with their basic services.  Their already existed network and subscribers are their strong competitive advantage.  In addition, their IP card service which offer customer considerable discounts on the long distant calls is our direct competitive service.  These traditional telephone service providers are much bigger than us, but we compete with them by lower price and better services.
We face competition from other VoIP service providers which are competing with telephone service providers. These competitors include Skype, which is offering enhanced services with their basic telephone services.  There are also some Chinese VoIP services providers competing in the whole China market, but they are in small scales.
We face competition from providers of enhanced services and products, such as answering machines, voicemail, Internet call waiting, and virtual telephone numbers for fax or voice communications.
Furthermore, we face competition from Internet service providers such as AOL, MSN, and YAHOO, which are increasingly integrating enhanced functionalities with their basic services.
We compete with all of the above companies for a share of the telecommunications spending of our target market. We differentiate ourselves in the market as follows: 1) we offering lower price and better services to compete with traditional telephone providers; 2) we offering convenient devices and lower prices to compete with IP phone card service; 3) we offering convenient devices and multifunction to compete with Skype and other international VoIP service providers; 4) we offering high quality and multifunction to compete to local VoIP services providers.
We believe that we compete favorably based on these factors. Many of our current and potential competitors, however, have greater name recognition, longer operating histories, larger subscriber bases and significantly greater financial resources than we have. In particular, many of our competitors are large, established network service providers such as China Telecom and China Netcom that are able to market and distribute enhanced communications services within their already large base of subscribers. They may be able to devote greater resources to product development and marketing and sales than we can. As a
result, they may be able to respond more quickly to new technologies and changes in customer requirements than we can. Furthermore, other international competitors such as Vonage, Skype may be able to adopt more aggressive pricing policies and offer customers more attractive terms, including potentially providing a competing solution at little or no cost as part of a bundled product offering. We cannot assure you that our current and future competitors will not offer or develop products or services that are superior to ours or achieve greater market acceptance than ours or that we will be able to compete effectively against them.
Suppliers
We outsource the manufacturing of the videophones, broadband phone adapters, business telephones and cordless handsets to third-party manufacturers. We do not have long-term purchase agreements with these contract manufacturers.  We currently rely on China Tietong, a Chinese telecom provider, to switch our VoIP phone calls with traditional phone calls; In addition, we also use the traditional phone numbers allocated by China Tietong, and paying China Tietong the charges for each phone switching by their traditional telephone system.  While we believe that relations with our suppliers are good, there can be no assurance that our suppliers will be able or willing to supply products and services to us in the future. While we believe that we could replace our suppliers if necessary, our ability to provide service to our subscribers would be impacted during this timeframe, and this could have an adverse effect on our business, financial condition and results of operations.
Research and Development
The VoIP market is characterized by rapid technological changes and advances. Accordingly, we make substantial investments in the design and development of new products and services and enhancements and features to existing products and services. Our current and future research and development efforts relate to our service offerings and the development of new endpoints for subscribers of our service. Future development will also focus on emerging audio and video telephony standards and protocols, and 802.11 standard and other wireless applications applicable to future wireless telecom. The development of new products and the enhancement of existing products are essential to our success.
We estimate our research and development cost in 2008 will be approximately $200,000 per year.
Regulatory
The use of the Internet and private IP networks to provide voice, video and other forms of real-time, two-way communications services is a relatively recent development. Although the provisioning of such services is currently permitted or unregulated within some countries, several other governments have adopted laws and/or regulations that could restrict or prohibit the provisioning of voice communications services over the Internet or private IP networks.  More aggressive domestic or international regulation of the Internet, in general, and Internet telephony providers and services, specifically, may materially and adversely affect our business, financial condition, operating results and future prospects, particularly if increased numbers of governments impose regulations restricting the use and sale of IP telephony services.
However, our business is mainly focused on Chinese market.  The Chinese government's regulations on the VoIP market have following characters:
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At present, the Chinese government has not given a clear definition to VoIP service, which leads to the regulation absence in VoIP business and the non-presence of clear relevant management policies.
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As a result, sometimes VoIP services can be considered as telecom services, while sometimes value-added services.  Moreover, it is planed that the VoIP service will be divided into two categories, "Multiparty Communication" and "IP-VPN service", so that it can be regulated by respective regulations.
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In future, It is most likely that the regulation and policies in connection with VoIP service will manage the market according to the value-added service attributes, while impose strict criteria on market entering license like telecom business.
Intellectual Property and Proprietary Rights
Our ability to compete depends, in part, on our ability to obtain and enforce intellectual property protection for our technology in China and internationally. We currently rely primarily on a combination of trade secrets, patents, copyrights, trademarks and licenses to protect our intellectually property. As of February 1, 2008, we have four (4) software copyrights.  In particular, we have a software copyright certificate for NP Network Telephone, a software copyright certificate for billing and managing system of IP phone systems, a software copyright certificate for a long-distance video monitoring system that have issued and a number of software copyrights pending. Our patents expire on dates ranging from 2028 to 2030. We cannot predict whether our pending patent applications will result in issued patents.
To protect our trade secrets and other proprietary information, we require our employees to sign agreements providing for the maintenance of confidentiality and also the assignment of rights to inventions made by them while in our employ. There can be no assurance that our means of protecting our proprietary rights will be adequate or that competition will not independently develop
technologies that are similar or superior to our technology, duplicate our technology or design around any of our patents.  Our failure to protect our proprietary information could cause our business and operating results to suffer.
We license intellectual property from third parties and incorporate such intellectual property into our services. These relationships are generally non-exclusive and have a limited duration. Moreover, we have certain obligations with respect to non-use and non-disclosure of such intellectual property. We cannot assure you that the steps we have taken to prevent infringement or misappropriation of our intellectual property or the intellectual property of third parties will be successful.
Employees
As of January 29, 2008, we had 51 full-time employees: 15 are in research and development, 10 are in operations and customer care, 21 are in sales and marketing and 5 are in general and administrative functions.  Although our employees are covered by employment agreements titled, "Labor Contracts" none of our employees are covered by collective bargaining agreements. We believe that our relations with our employees are good.
Properties
The Company's executive office is located in Jinan City, Shandong Province, China.  The address is RM 508, No.786 Xinluo Street, High-Tech Industrial Development Zone, Jinan, China, occupying 900 square meters, under a lease expiring on March 31, 2008, and renewable at the Company's option.  Lease payments are approximately $16,000 annually.  The Company is expected to move into the newly purchased office building before March 31 of 2008. The new building is located in Yi ke Industrial Base at Jinan High-Tech Industrial Development Zone, on the eleventh floor, occupying 2,000 square meters.
Litigation
None.
MANAGEMENT
Executive Officers and Directors
As of February 1, 2008, the directors and executive officers of the Company were:
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Name
Age
Principal Position
Appointment/
Resignation
date
Li Kunwu
42
Chairman, CEO
January 1, 2002
Kan Kaili
62
Independent Director
August 15, 2007
Wang Qinghua
46
VP, CTO
August 14, 2001
Xu Yinyi
47
Director
November 26, 2004
Jiang Yanli
40
Director
August 16, 2006
Mr. Li
is currently serving as the Chairman of the Company.  Prior to that, Mr. Li was the Financial Director of Shandong Luneng Taishan Football Club Co. Ltd., one of the top 15 Football Club of China, more than 3 years.  He also served as Finance manager or Financial Controller in Shandong Luneng Group and its subsidiaries.  Mr. Li is a CPA in the PRC, with an experience serving as a Financial Controller in large-scale state-owned enterprises for more than fifteen years. He holds degrees in economics, management/finance, and accounting from Shandong University.
Mr. Wang
is serving as the Managing Director and Chief Technology Officer of the Company.  He is also the key founder of the Jinan Yinquan.  Mr. Wang is an expert in the areas of software, system integration, net - work communication, and project management.  Prior to foundation of the Company, Mr. Wang severed as a CEO of Shandong Meigao Electronics Project Co., Ltd.  Mr. Wang also served as Vice President, Senior Engineer and other positions in other IT companies.
Mr. Xu
is serving as the Director of the Company.  He is currently the Chairman and CEO of Shanghai Nanzheng Industry Co. Ltd.  He was the CEO of China Southern Security Corporation Qingdao Branch. Prior to that, he served as CEO of Shandong Luye Group Ltd.  He also served as the Chief Representative of Foreign Trade Section of Jinan Government in Shanghai.
Mr. Jiang
serves as Director of the Company.  He is also the only member of the audit committee of the Company. Mr Jiang has a master's degree in finance management and consultation with more than twenty years of experience. He is currently serving for numerous state and private owned organizations including the commissioner of CPPCC Shandong Province, the vice-chairman of China International Commercial Chamber Qingdao Chamber, executive commissioner of Qingdao Industry & Commerce League, vice-president of Qingdao Professional Manager Association and vice-chairman of Qingdao Internal Audit Association . In 2005, Mr Jiang was honored with the "100 Faithful Stars of China Economy" award for his service to China and its economy.  Mr Jiang has published more than 40 economic and financial thesis and has written articles for newspapers and magazines, including the state, provincial and civic.
Professor Kan
, who earned a Doctorate degree from Stanford University, currently serves as the Professor of Beijing University of Posts and Telecommunications. He is a director of China's Information Industry Policy and Development Institute and Commissioner of the Advisory Commission for China's Telecommunications Act.He formally served as a strategy consultant on telecommunications policies and development of the World Bank.His primary areas of concentration are policies of telecommunications and the information industry as well as business management strategy.
Family relationships
None.
Involvement in certain legal proceedings
No bankruptcy petition has been filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
No director has been convicted in a criminal proceeding and is not subject to a pending criminal proceeding (excluding traffic violations and other minor offenses).
No director has been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
No director has been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, that has not been reversed, suspended, or vacated.
Audit committee financial expert
The Company's board of directors has determined it has at least one audit committee financial expert serving on its audit committee, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
The name of such financial expert is Mr. Jiang Yanli and he is an independent Director.
Safe Harbor
(i) A person who is determined to be an audit committee financial expert will not be deemed an expert for any purpose, including without limitation for purposes of section 11 of the Securities Act of 1933 (15 U.S.C. 77k), as a result of being designated or identified as an audit committee financial expert pursuant to this Item 401 of Regulation S-B.
(ii) The designation or identification of a person as an audit committee financial expert pursuant to this Item 401 of Regulation S-B does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification.
(iii) The designation or identification of a person as an audit committee financial expert pursuant to this Item 401 of Regulation S-B does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) Beneficial Ownership Reporting Compliance, each person who was at any time during the fiscal year, a director, officer, beneficial owner of more than ten percent of any class of equity securities of the Company registered pursuant to section 12 ("reporting person") is required to file Forms 3, 4, and 5 on a timely basis, during the most recent fiscal year or prior fiscal years.  Due to lack of knowledge, the relevant beneficial owners did not file on time.  They will file Form 3 and Form 5 shortly.
Code of Ethics
The Company has Standards of Ethical Conduct Policy ("Code of Ethics") that applies to all employees and directors, including the Chairman, Chief Executive Officer, and Chief Financial Officer. The Code of Ethics is filed as Exhibit 14.1 to this 10-KSB report.
The Board of Directors has a standing Audit Committee.
The Audit Committee reviews with our independent public accountants the scope and timing of the accountants' audit services and any other services they are asked to perform, their report on our financial statements following completion of their audit and our policies and procedures with respect to internal accounting and financial controls.  In addition, the Audit Committee reviews the independence of the independent public accountants and makes annual recommendations to the Board of Directors for the appointment of independent public accountants for the ensuing year.  The Audit Committee met 1 time during the fiscal year ended December 31, 2007.  The Audit Committee has not designated an Audit Committee Financial Expert.  We are in the process of revising the Committee Charters and the Code of Ethics, as well as reorganizing the Committees.
Director Compensation
Directors are not paid an annual fee of $3,000 for services as members of our Board of Directors or any committee thereof.
Executive Compensation
The following table sets forth the aggregate cash compensation paid by us to (i) our Chief Executive Officer and (ii) our most highly compensated officers:
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Table of Contents
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation
Awards
Payouts
Name and Principal Position
Year
Salary
Bonus
Other
Restricted Stock Awards
Securities Underlying Options/ SAR
LTIP Payouts
All other compensation
Li Kunwu
2007
$ 15,000
-
-
-
-
-
-
CEO
2006
$ 15,000
-
-
-
-
-
-
2005
$ 15,000
-
-
-
-
-
-
Wang Qinghua
2007
$ 14,000
-
-
-
-
-
-
CTO
2006
$ 14,000
-
-
-
-
-
-
2005
$ 14,000
-
-
-
-
-
-
Employment Agreements
The Company executed a labor contract with Mr. Li Kunwu for a term of 5 years.  Specifically, the contract was effective January 3, 2007 and expires on January 2, 2012.  The annual salary is $15,000.
The Company executed a labor contract with Mr. Wang Qinhua for a term of 5 years.  Specifically, the contract was effective June 1, 2006 and expires on May 31, 2011.  The annual salary is $14,000.
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SECURITY OWNERSHIP
The following table sets forth, as of February 1, 2008, certain information regarding the beneficial ownership of Common Stock by (i) each person who is known by the Company to own beneficially more than five percent of the outstanding Common Stock, (ii) each director and executive officer of the Company, and (iii) all directors and executive officers as a group:
Title of class
Name and Address of Beneficial Owner
Number of Shares
Percent of Class
Common stock
Li Kunwu (CEO and Director)
6,200,000
11.69%
Common stock
Wang Qinghua  (CTO and Director)
6,200,000
11.69%
Common stock
Xu Yinyi  (Director)
2,880,000
5.43%
Common stock
Jiang Yanli  (Director)
200,000
0.37%
All executive officers and Directors as a group (4 Persons)
15,480,000
29.20%
Notes:
(1)
All persons have their mailing address at the China office' address: RM 508, No.786 Xinluo Street, High-Tech Industrial Development Zone, Jinan, China.
(2)
Based on 53,008,000 shares of the Company's common stock issued and outstanding.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None, however any future transactions or loans between us and our officers, directors, principal stockholders or affiliates will be on terms no less favorable to us than could be obtained from an unaffiliated third party, and will be approved by a majority of disinterested directors.
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 75,000,000 shares of common stock, $0.001 par value, of which 53,008,000 shares were issued and outstanding as of February 1, 2008.
The holders of common stock are entitled to one vote for each share held of record on all matters to be voted by stockholders. There is no cumulative voting with respect to the election of directors with the result that the holders of more than 50% of the shares of common stock and other voting shares voted for the election of directors can elect all of the directors.
The holders of shares of common stock are entitled to dividends when and as declared by the Board of Directors from funds legally available therefore, and, upon liquidation are entitled to share pro rata in any distribution to holders of common stock, subject to the right of holders of outstanding preferred stock. No dividends have ever been declared by the Board of Directors on the common stock. See "Dividend Policy."  Holders of our common stock have no preemptive rights.  There are no conversion rights or redemption or sinking fund provisions with respect to our common stock.  All of the outstanding shares of common stock are, and all shares sold hereunder will be, when issued upon payment therefore, duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
We are not authorized to issue any shares of preferred stock as of February 1, 2008.
Preferred stock may be authorized and issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate.  In the event that we determine to authorize and issue any shares of preferred stock, a certificate of designation containing the rights, privileges and limitations of this series of preferred stock will be filed with the Secretary of State of the State of Nevada.  The effect of this preferred stock designation power is that our Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Nevada law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control without further action by our stockholders, and may adversely affect the voting and other rights of the holders of our common stock
.
Transfer Agent
Integrity Stock Transfer, Las Vegas, Nevada, is the transfer agent for our common stock.
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Table of Contents
SELLING STOCKHOLDERS
The shares of common stock being offered by the selling stockholders are those issuable to the selling stockholders upon conversion of the convertible notes and upon exercise of the warrants.  For additional information regarding the issuance of those convertible notes and warrants, see "Private Placement of Convertible Notes and Warrants" above.  We are registering the shares of common stock in order to permit the selling stockholders to offer the shares for resale from time to time.  Except for the ownership of the shares of common stock, the convertible notes and the warrants issued pursuant to the Securities Purchase Agreement, the selling stockholders have not had any material relationship with us within the past three years.
The table below lists the selling stockholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling stockholders.  The second column lists the number of shares of common stock beneficially owned by each selling stockholder, based on its ownership of the convertible notes and warrants, as of February 1, 2008, assuming conversion of all convertible notes and exercise of the warrants held by the selling stockholders on that date, without regard to any limitations on conversions or exercise.
The third column lists the shares of common stock being offered by this prospectus by the selling stockholders.
In accordance with the terms of a registration rights agreement with the selling stockholders, this prospectus generally covers the resale of at least 130% of the sum of (i) the number of shares of common stock issuable upon conversion of the convertible notes as of the Trading Day immediately preceding the date the registration statement is initially filed with the SEC, (ii) the number of shares of common stock issuable as Interest Shares pursuant to the terms of the Notes as of the Trading Day immediately preceding the date the registration statement is initially filed with the SEC and (iii) the number of shares of common stock issuable upon exercise of the related warrants as of the Trading Day immediately preceding the date the registration statement is initially filed with the SEC.  Because the conversion price of the convertible notes and the exercise price of the warrants may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus.  The fourth column assumes the sale of all of the shares offered by the selling stockholders pursuant to this prospectus.
Under the terms of the convertible notes and the warrants, a selling stockholder may not convert the convertible notes or exercise the warrants to the extent such conversion or exercise would cause such selling stockholder, together with its affiliates, to beneficially own a number of shares of common stock which would exceed 4.99% of our then outstanding shares of common stock following such conversion or exercise, excluding for purposes of such determination shares of common stock issuable upon conversion of the convertible notes which have not been converted and upon exercise of the warrants which have not been exercised.  The number of shares in the second column does not reflect this limitation.  The selling stockholders may sell all, some or none of their shares in this offering.  See "Plan of Distribution."
Name(1)
Shares
Beneficially
Owned Prior
To Offering(1)
Shares
to be
Offered
Amount
Beneficially
Owned
After
Offering(2)
Percent
Beneficially
Owned
After
Offering
Castlerigg Master Investments Ltd. (3) (4)
21,992,000
21,992,000
0
*
Totals
21,992,000
21,992,000
0
0
*
Less than one percent (1%).
1.
Unless otherwise indicated in the footnotes to this table, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable. Beneficial ownership includes shares of common stock underlying the Senior Secured Convertible Note, and Series B Warrant.  The Series A Warrant is exercisable for 8,885,730 shares of the Company's common stock and expires the date eighty four (84) months after the earlier of (A) such time as all of the Registrable Securities (as defined in the Registration Rights Agreement) are available for resale pursuant to an effective Registration Statement and (B) two (2) years after December 21, 2007.  The Series B Warrant is exercisable for 6,220,011 shares of the Company's common stock and expires on the date on which the Notes issued pursuant to the Securities Purchase Agreement are no longer issued and outstanding.  The Series C Warrant is exercisable for 6,353,297 shares of the Company's common stock and expires on the date sixty (60) months after the first time the Company elects a Company Optional Redemption.  Additionally, as the Company is obligated to register 43,991,507 shares of the Company's common stock in conjunction with the Securities Purchase Agreement, Senior Secured Convertible Note, and the Warrants dated December 21, 2007, Castlerigg Master Investments Ltd. would have beneficially owned an additional 21,999,507 shares.  In this regard, the Company will register 21,999,507 additional shares of the Company's common stock in a subsequent Registration Statement on Form S-1.  At this time, the Company is currently limited in the amount of shares it can issue as it has issued an amount of shares of the Company's common stock equal to the amount authorized.  The Company plans to issue a proxy requesting shareholders to approve an increase of the authorized shares.
2.
Assumes the sale of all shares covered hereby.  Additionally, as the Company is obligated to register 43,991,507 shares of the Company's common stock in conjunction with the Securities Purchase Agreement, Senior Secured Convertible Note, and the Warrants dated December 21, 2007, the Company will register 21,999,507 additional shares of the Company's common stock in a separate Registration Statement on Form S-1.  At this time, the Company is currently limited in the amount of shares it can issue as it has issued an amount of shares of the Company's common stock equal to the amount authorized.  After the Company increases the number of authorized shares as set forth in footnote (1) above, Castlerigg Master Investments Ltd. will beneficially own 21,999,507 shares of common stock.  The Company plans to issue a proxy requesting shareholders to approve an increase of the authorized shares.
3.
In accordance with the Registration Rights Agreement, consists of (i) 11,551,449 shares of common stock which represents 130% of the 8,885,730 shares of common stock underlying the Senior Secured Convertible Notes (ii) 4,543,308 shares of common stock which represents 130% of the 3,494,852 shares issuable for interest payments as $0.3762 is the lesser of 85% of the average volume weighted average bid price for the Company's common stock for the 25 consecutive trading days prior to February 1, 2008 and 85% of the average of the lowest three trading days during the 25 consecutive trading day period prior to February 1, 2008,assuming such date was an interest payment date, as defined within the Notes and (iii) 5,897,243shares upon exercise of Series Warrant B at an exercise price of $0.5627 per share.
4.
Sandell Asset Management Corp. ("SAMC") is the investment manager of Castlerigg Master Investments Ltd. ("Castlerigg") . Thomas Sandell is the controlling person of SAMC and may be deemed to share beneficial ownership of the shares beneficially owned by Castlerigg. Castlerigg International Ltd. ("Castlerigg International") is the controlling shareholder of Castlerigg International Holdings Limited ("Holdings").  Holdings is the controlling shareholder of Castlerigg.  Each of Holdings and Castlerigg International may be deemed to share beneficial ownership of the shares beneficially owned by Castlerigg Master Investments Ltd. The business address of each of these entities is as follows: c/o Sandell Asset Management Corp. 40 W. 57
th
Street, 26
th
Floor, New York, New York 10019. SAMC, Mr. Sandell, Holdings and Castlerigg International each disclaims beneficial ownership of the securities with respect to which indirect beneficial ownership is described.
34
Table of Contents
Under the terms of the Registration Rights Agreement entered into as part of the Senior Secured Convertible Note, we were obligated to file this registration statement within 45 days of the closing of the placement.  In the event this registration statement is not filed timely, we are obligated to make pro rata cash payments to each of the investors in the Placement, as liquidated damages, in an amount equal to 2% per month which shall apply retrospectively from 90 days following closing.
The Registration Rights Agreement also provides that we pay all fees and expenses incident to the registration statement, other than brokerage commissions and underwriting discounts of the selling stockholders on the sale of their shares.
We do not have any arrangement with any broker-dealer for it to act as an underwriter for the sale of the shares included herein for any of the selling stockholders.  Each of the selling stockholders purchased or received the shares offered by it in this prospectus in the ordinary course of business, and at the time of purchase of such shares, it had no agreements or understandings, directly or indirectly, with any person for the distribution of such shares.
PLAN OF DISTRIBUTION
We are registering the shares of common stock issuable upon conversion of the convertible notes and upon exercise of the warrants to permit the resale of these shares of common stock by the holders of the common stock, convertible notes and warrants from time to time after the date of this prospectus.  We will not receive any of the proceeds from the sale by the selling stockholders of the shares of common stock.  We will bear all fees and expenses incident to our obligation to register the shares of common stock.
The selling stockholders may sell all or a portion of the shares of common stock beneficially owned by them and offered hereby from time to time directly or through one or more underwriters, broker-dealers or agents.  If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholders will be responsible for underwriting discounts or commissions or agent's commissions.  The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices.  These sales may be effected in transactions, which may involve crosses or block transactions,
·
on any national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale;
·
in the over-the-counter market;
·
in transactions otherwise than on these exchanges or systems or in the over-the-counter market;
·
through the writing of options, whether such options are listed on an options exchange or otherwise;
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
·
an exchange distribution in accordance with the rules of the applicable exchange;
·
privately negotiated transactions;
·
short sales;
·
sales pursuant to Rule 144;
·
broker-dealers may agree with the selling securityholders to sell a specified number of such shares at a stipulated price per share;
·
a combination of any such methods of sale; and
·
any other method permitted pursuant to applicable law.
If the selling stockholders effect such transactions by selling shares of common stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of the shares of common stock for whom they may act as agent or to whom they may sell as principal (which discounts, concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess of those customary in the types of transactions involved).  In connection with sales of the shares of common stock or otherwise, the selling stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume.  The selling stockholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales.  The selling stockholders may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.
The selling stockholders may pledge or grant a security interest in some or all of the convertible notes or warrants owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933, as amended, amending, if necessary, the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus.  The selling stockholders also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholders and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be "underwriters" within the meaning of the Securities Act, and any commission paid, or any discounts or concessions allowed to, any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act.  At the time a particular offering of the shares of common stock is made, a prospectus supplement, if required, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-dealers or agents, any discounts, commissions and other terms constituting compensation from the selling stockholders and any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers.  In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
There can be no assurance that any selling stockholder will sell any or all of the shares of common stock registered pursuant to the registration statement, of which this prospectus forms a part.
The selling stockholders and any other person participating in such distribution will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholders and any other participating person.  Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock.  All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.
We will pay all expenses of the registration of the shares of common stock pursuant to the registration rights agreement, estimated to be $453.03 in total, including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with state securities or "blue sky" laws; provided, however, that a selling stockholder will pay all underwriting discounts and selling commissions, if any.  We will indemnify the selling stockholders against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreements, or the selling stockholders will be entitled to contribution.  We may be indemnified by the selling stockholders against civil liabilities, including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder specifically for use in this prospectus, in accordance with the related registration rights agreement, or we may be entitled to contribution.
Once sold under the registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.
LEGAL MATTERS
Anslow + Jaclin, LLP, Manalapan, New Jersey passed upon the validity of the common stock being offered hereby.
EXPERTS
Included in the Prospectus constituting part of this Registration Statement are consolidated financial statements for fiscal 2006 and 2005, which have been audited by Kabani & Co., an independent registered public accounting firm, to the extent and for the periods set forth in their respective report appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firms as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedule thereto, certain parts of which are omitted in accordance with the rules and regulations of the SEC. For further information regarding our common stock and our company, please review the registration statement, including exhibits, schedules and reports filed as a part thereof. Statements in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement, set forth the material terms of such contract or other document but are not necessarily complete, and in each instance reference is made to the copy of such document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference.
We are also subject to the informational requirements of the Exchange Act which requires us to file reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information along with the registration statement, including the exhibits and schedules thereto, may be inspected at public reference facilities of the SEC at 100 F Street N.E , Washington D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the SEC at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov
.
38
CHINA VOIP & DIGITAL TELECOM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, 2007
Assets
Current Assets
Cash and cash equivalents
$
828,258
Accounts receivable
322,210
Inventories, net
195,574
Advance to suppliers
686,862
Loan receivables
143,663
Other current assets
112,280
Total Current Assets
2,288,847
Property & Equipment – net
1,465,641
Intangible Assets – net
10,879
Total Assets
$
3,765,367
Liabilities & Stockholders' Equity
Current Liabilities
Short-term loan
$
266,042
Accrued expenses and other current liabilities
346,851
Due to related party
10,000
Total Current Liabilities
622,893
Stockholders' Equity
Common Stock, part value $.001 per share, 75,000,000 shares authorized;
    52,958,000 shares issued and 51,758,000 shares outstanding
52,958
Additional paid-in-capital
3,357,565
Shares to be cancelled
(1,212,000)
Other comprehensive income
144,662
Statutory reserves
192,808
Retained earnings
606,482
Total Stockholders' Equity
3,142,475
Total Liabilities and Stockholders' equity
$
3,765,367
The accompanying notes are an integral part of these unaudited consolidated financial statements
1
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
Three month periods ended
Nine month periods ended
September 30,
September 30,
2007
2006
2007
2006
Net sales
$
1,899,854
$
152,329
$
4,155,855
$
889,602
Cost of sales
1,175,312
94,633
2,964,774
579,628
Gross profit
724,542
57,696
1,191,081
309,974
Operating expenses
Selling, general and administrative
116,266
68,922
290,587
133,840
Depreciation and amortization
42,308
5,848
87,029
16,859
Total operating expenses
158,574
74,770
377,616
150,699
Income (Loss) from operations
565,968
(17,074)
813,465
159,275
Other income (expenses)
Interest income
10,569
103
13,755
374
Interest expenses
-
(1,535)
-
(2,538)
Subsidy income
16,236
33
27,743
18,156
Other expenses
(1)
(53)
(85)
(162)
Total other income (loss)
26,804
(1,452)
41,413
15,830
Net income (loss)
592,772
(18,526)
854,878
175,105
Other comprehensive gain
Foreign currency translation gain
76,486
11,725
90,359
21,081
Net comprehensive income (loss)
$
669,258
$
(6,801)
$
945,237
$
196,186
Net earnings per common shares outstanding –
basic and diluted
$
0.01
$
0.00
$
0.02
$
0.00
Weighted average common shares outstanding –
basic and diluted
52,088,882
45,310,978
52,088,882
41,789,780
The accompanying notes are an integral part of these unaudited consolidated financial statements
2
CHINA VOIP & DIGITAL TELECOM, INC AND SUBSIDIARY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006
(UNAUDITED)
2007
2006
Cash flows from operating activities:
Net income
$
8454,878
$
175,105
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
87,029
16,859
Changes in operating assets and liabilities:
-
Accounts receivable
(318,854)
(21,935)
Inventories
(107,352)
(33,542)
Advances to suppliers
(659,300)
56,725
Loan receivables and other current assets
(13,930)
(205,941)
Accounts payable
-
98,809
Deferred revenue
-
323
Accrued expenses and other current liabilities
185,378
(20,801)
Total Adjustments
(827,029)
(109,503)
Net cash provided by operating activities
27,849
65,602
Cash flows from investing activities:
Purchase of property and equipment
(985,580)
(360,132)
Cash flows from financing activities:
Proceeds on short-term loan
260,561
126,443
Foreign currency translation
37,612
21,082
Net increase in cash and cash equivalents
(659,558)
(147,005)
Cash and cash equivalents, beginning balance
1,487,816
492,089
Cash and cash equivalents, ending balance
$
828,258
$
345,084
SUPPLEMENTARY DISCLOSURE:
Interest paid
$
-
$
1,003
Income tax paid
$
-
$
-
The accompanying notes are an integral part of these unaudited consolidated financial statements
3
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
GENERAL
China VOIP & Digital Telecom Inc. ("the Company" or "We"), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan") in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan YinQuan became our wholly-owned subsidiary.
Jinan YinQuan was established in JiNan in the People's Republic of China ("the PRC") in 2001.  The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted.
The Company's principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license).  Currently, the Company is focused on the Voice Over Internet Phone ("VOIP") technology related business.
NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2006. Operating results for the three month and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ended December 31, 2007.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  Our functional currency is the Chinese Renminbi; however the accompanying financial statements have been translated and presented in United States Dollars ($).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
4
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower.  As of September 30, 2007, the reserve for obsolenscence was $20,429.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
The Company recognizes revenue from telecommunications as services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue.
Earnings Per Share (EPS)
Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted EPS is not presented as the Company has no potential dilutive shares outstanding.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company is approved as hi-tech software company, the company is completely exempt of income tax for the first 2 years up to December 2007 and is 50% exempt of income tax for the next 3 years pursuant to State Tax notice no. [2003] 82.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. As per SFAS 131, the company operates in two segments based on nature of products and services: Telecommunocations, Sale of equipments and Technical services.
Recently Issued Accounting Standards
In September 2006, FASB issued SFAS 157 'Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 'Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by
5
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
A brief description of the provisions of this Statement
l
The date that adoption is required
l
The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
l
The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In February of 2007 the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115."  The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.  The company is analyzing the potential accounting treatment.
Foreign Currency Translation
The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company maintains books and records in their functional currency, being the primary currency of the economic environment in which the operations are conducted. In general, the Company translates the assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income" as a component of shareholders' equity
As of September 30, 2007, the accounts of Jinan YinQuan were maintained and expressed in the Chinese Yuan Renminbi (CNY). The consolidated financial statements of the Company were translated into United States Dollars (USD) in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation," with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. For the nine month periods ended September 30, 2007 and 2006, the foreign currency translation gain is $90,359 and $21,081 respectively. The accumulated comprehensive foreign currency translation gain amounted to $144,662 as on September 30, 2007.
NOTE 3   PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of China VOIP & Digital Telecom (the "Company") and its 100% wholly-owned subsidiary Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan"). All significant inter-company accounts and transactions have been eliminated in consolidation.
6
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4   CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
For the nine months ended September 30, 2007, one customer provided 6% of the net revenues and one supplier provided 79% of the cost of sales.  The balance receivable as of September 30, 2007 from this customer was $128,225. The balance advanced to the supplier as of September 30, 2007 was $265,669.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist of cash and cash equivalents as the same is not covered by insurance.
NOTE 5   ADVANCES TO SUPPLIERS
The Company made prepayments to suppliers to purchase inventory, equipment or services. This amount represents the advances paid by the Company to suppliers of $686,862 at September 30, 2007.
NOTE 6   LOAN RECEIVABLES
As of September 30, 2007, the Company had a loan receivable amounted to $133, 021 with unsecured, 8% annual interest rate bearing and due on November 30, 2007.  Interest income of the said loan for the nine month periods ended September 30, 2007 and 2006 was $10,451 and $0, respectively.
As of September 30, 2007, the Company had a loan receivable amounted to $10,642, which was unsecured, non-interest bearing and payable on demand.
NOTE 7   OTHER CURRENT ASSETS
As of September 30, 2007, the other current assets comprise of the following:
Advances to Staff
37,688
Prepaid expense
40,171
Others
34,421
Total
112,280
NOTE 8   PROPERTIES AND EOUIPMENT
The balances of Company property and equipment as of September 30, 2007 are summarized as follows:
Electronic Equipment
1,041,353
Vehicles
87,237
Office Equipment
9,699
Construction in progress
425,726
1,564,015
Less: Accumulated depreciation
(98,374)
Property and equipment, net
$
1,465,641
The depreciation expense for the nine month periods ended September 30, 2007 and 2006 was $73,330 and $4,391 respectively. The depreciation expense for the three month periods ended September 30, 2007 and 2006 was $37,742 and $1,692 respectively.
7
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9   INTANGIBLE ASSET
Intangible asset comprised of a set of software acquired from third parties. This set of software is used for the core technology of the Company's VOIP business.  It is amortized over 5 years.
2007
Software
$
93,248
Less: amortization
(82,369)
Intangible asset, net
$
10,879
Amortization for the next 5 years is as follows :-
2007
$
4,566
2008
6,313
$
10,879
The amortization expense for the nine month periods ended September 30, 2007 and 2006 was $13,699 and $12,468 respectively. The amortization expense for the three month periods ended September 30, 2007 and 2006 was $4,566 and $4,156 respectively.
NOTE 10   SHORT TERM LOAN
Principal
Interest rate
(Per annum)
Due Date
Time period
Secured by
$ 266,042
8.694%
Nov 2007
Six months
Jinan Development Zone Security Co., Ltd.
The loan was borrowed from JiNan City Commercial Bank.
NOTE 11  ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of September 30, 2007 are summarized as follows:
2007
Accrued expenses
$
37,500
Accrued staff welfare
9,211
Tax payables
200,868
Security deposits
40,146
Advances from customers
40,220
Others
18,906
Total
$
346,851
NOTE 12   DUE TO RELATED PARTY
Due to related party of $10,000 as of September 30, 2007 represents payable to former beneficial owner of Crawford Lake Mining Inc.  This payable is unsecured, non interest bearing and payable on demand.
8
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 13   SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
During the nine months ended September 30, 2007 and 2006, the Company is organized into three main business segments: (1) Telecommunications minutes, (2) Equipment Sales and (3) Technical services. The following table presents a summary of operating information and certain year-end balance sheet information for the nine months ended September 30, 2007 and 2006:
Nine month periods ended
9/30/2007
2006
Revenues from unafiliated customers:
(Unaudited)
(Unaudited)
Telecommunication
$ 3,074,260
$ 481,333
Equipment sales
387,912
408,269
Technical services
479,580
-
Consolidated
$ 3,941,752
$ 889,602
Operating income (loss):
Telecommunication
$ 414,085
$ 152,215
Equipment sales
20,026
11,230
Technical services
443,394
-
Corporation (1)
(64,040)
(4,170)
Consolidated
$ 813,465
$ 159,275
Net income (loss) before taxes:
Telecommunication
$ 446,854
$ 160,780
Equipment sales
23,892
18,495
Technical services
448,173
-
Corporation (1)
(64,040)
(4,170)
Consolidated
$ 854,878
$ 175,105
Identifiable assets:
Telecommunication
$ 3,632,032
$ 1,572,848
Equipment sales
159,199
50,577
Technical services
-
-
Consolidated
$ 3,791,231
$ 1,623,425
(1). Unallocated loss from Operating income(loss) and Net income(loss) before taxes are primarily related to general corporate expenses.
NOTE 14 STATUTORY RESERVES
As stipulated by the Company Law of the People's Republic of China (PRC) executed on 2006, net income after taxation can only be distributed as dividends after appropriation has been made for the following:
1.
Making up cumulative prior years' losses, if any;
2.
Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
3.
Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and
4.
Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
9
CHINA VOIP & DIGITAL TELECOM INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In accordance with the Chinese Company Law, the company has allocated 10% of its net income after tax to surplus as of September 30, 2007. The amount included in the statutory reserves as of September 30, 2007 amounted to $127,322.
According to the new Company Law of the People's Republic of China (PRC) executed in 2006, the Company is not required to reserve the "Statutory common welfare fund". Accordingly, the Company did not reserve the common welfare fund subsequent to June 30, 2007. The amount included in the Statutory common welfare fund as of September 30, 2007 amounted to $65,487..
NOTE 15   STOCKHOLDER'S EQUITY
Pursuant to the term sheet, on July 18, 2007, the Company issued 1.2 million shares to Downshire Capital Inc. and its assigned parties as first installment for financing assistance. While according to the term sheet, $3 million USD should be received by the company before August 15, 2007, otherwise, Downshire Capital and its designed investors need to return the 1.2 million shares and the Registrant will cancel it accordingly.
As of August 21, 2007, Downshire Capital Inc.was not able to complete the financing before closing deadline according to the termsheet signed with the Registrant on July 17,2007. After further negotiation, both parties could not reach further agreement to extend the termsheet and the termsheet was terminated accordingly.  The stock transfer agent of the Company has put restriction on the stock to trade. The Company requested its stock transfer agent to cancel the shares. However, Downshire Capital Inc. did not return the certificates to stock transfer agent as of September 30, 2007. The shares have been classified as "Shares to be cancelled" in the accompanying financial statements.
Table of Contents
CHINA VOIP & DIGITAL TELECOM, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm
1
Balance Sheets
2
Statements of Income
3
Statements of Cash Flows
4
Statements of Stockholders' Equity
5
Notes to Financial Statements
6
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
China VOIP & Digital Telecom, Inc.
We have audited the accompanying consolidated balance sheet of China VOIP & Digital Telecom, Inc. (the "Company") as of December 31, 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 2006 and 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2006, and the results of its operations and its cash flows for the years ended December 31, 2006 and 2005, in conformity with US generally accepted accounting principles.
/s/ Kabani & Company
Los Angeles, California
March 23, 2007
1
CHINA VOIP & DIGITAL TELECOM, INC.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31 2006
2006
Assets
Current assets
Cash and cash equivalents
$
1,487,816
Inventories, net
82,759
Advance to suppliers
13,181
Loans Receivable
147,290
Due from related parties
85,825
Total Current Assets
1,816,871
Property & Equipment-Net
514,284
Intangible assets
23,939
Total Assets
$
2,355,094
Liabilities & Stockholders' Equity
Current liabilities
Accounts payable
3,283
Accrued expenses and other current liabilities
144,573
Due to related parties
10,000
Total Current Liabilities
157,856
Stockholders' Equity
Common Stock, part value $.001 per share, 75,000,000 shares authorized; 51,758,000 shares issued and outstanding
51,758
Additional paid-in-capital
2,146,765
Other comprehensive income
54,303
Statutory Reserves
70,859
Accumulated Deficit
(126,447)
Total Stockholders' Equity
2,197,238
Total Liabilities and Stockholders' equity
$
2,355,094
The accompanying notes are an integral part of these consolidated financial statements
2
CHINA VOIP & DIGITAL TELECOM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006
2005
NET SALES
$
1,449,969
$
990,495
COST OF SALES
954,212
273,374
Gross profit
495,757
717,121
Operating Expenses :-
Selling, general and administrative
1,029,167
485,459
Depreciation and amortization
23,439
23,485
Total operating expenses
1,052,606
508,944
Income (Loss) from operations
(556,849)
208,177
Other income (expenses)
Interest income
936
263
Interest expenses
(4,119)
-
Subsidy income
29,856
63,526
Other expenses
(162)
(37)
Total other income
26,511
63,752
Net income (loss)
(530,338)
271,929
Other comprehensive gain (loss)
Foreign currency translation gain
37,252
17,042
Net comprehensive income (loss)
$
(493,086)
$
288,971
NET PROFIT (LOSS) PER COMMON SHARE - BASIC AND DILUTED
$
-0.01
$
0.01
WEIGHTED AVERAGE COMMON SHARES
50,931,973
40,000,000
OUTSTANDING - BASIC AND DILUTED
The accompanying notes are an integral part of these consolidated financial statements
3
CHINA VOIP & DIGITAL TELECOM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Shares
Common Stock
Additional Paid in Capital
Statutory Reserves
Other comprehensive income
Accumulated Deficit
Total
Balance December 31, 2004
23,338,372
$
241,642
$
-
$
-
$
9
$
202,821
$
444,472
Contributed Capital
16,661,628
172,512
172,512
Foreign Currency Translation
17,042
17,042
Net income
271,929
271,929
-
Balance December 31, 2005
40,000,000
414,154
-
-
17,051
474,750
905,955
Recapitalization of Jinan on reverse acquisition
10,858,000
(363,296)
335,665
(27,631)
Issuance of shares for cash
500,000
500
999,500
1,000,000
Issuance of shares for services
400,000
400
811,600
812,000
Foreign Currency Translation
37,252
37,252
Net Loss
(530,338)
(530,338)
Transfer to Statutory Reserve
70,859
(70,859)
-
Balance December 31, 2006
51,758,000
$
51,758
$
2,146,765
$
70,859
$
54,303
$
(126,447)
$
2,197,238
The accompanying notes are an integral part of these consolidated financial statements
4
CHINA VOIP & DIGITAL TELECOM, INC
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006
2005
Cash flows from operating activities:
Net income  (loss)
$
(530,338)
$
271,929
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
23,439
23,485
Reserve for inventory obsolesce
19,668
-
Provision on accounts receivable
-
3,671
Issuance of shares for services
812,000
-
Changes in operating assets and liabilities:
Accounts receivable
289,463
(199,819)
Inventories
(2,541)
(16,308)
Advances to suppliers
94,836
(63,117)
Prepaid expenses and other assets
(122,143)
(73,871)
Accounts payable
(115,518)
74,888
Deferred revenue
(12,765)
12,765
Accrued expenses and other current liabilities
(58,002)
79,075
Total Adjustments
928,437
(159,231)
Net cash provided by operating activities
398,099
112,698
Cash flows from investing activities:
Purchase of property and equipment
(439,624)
(39,864)
Cash flows from financing activities:
Contributed Capital
-
172,512
Proceeds on subscription of common stocks
1,000,000
-
Net cash provided by financing activities
1,000,000
172,512
Foreign currency translation
37,252
17,042
Net increase in cash and cash equivalents
995,727
262,388
Cash and cash equivalents, beginning balance
492,089
229,701
Cash and cash equivalents, ending balance
$
1,487,816
$
492,089
SUPPLEMENTARY DISCLOSURE:
Interest paid
$
-
$
-
Income tax paid
$
-
$
-
The accompanying notes are an integral part of these consolidated financial statements
5
CHINA VOIP & DIGITAL TELECOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
NOTE 1 –GENERAL
China VOIP & Digital Telecom Inc. ("the Company" or "We"), formerly, Crawford Lake Mining, Inc. acquired on August 17, 2006, all of the outstanding capital stock of Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan") in exchange for the issuance of 40,000,000 shares of our common stock to the Jinan Shareholders and $200,000. Such shares are restricted in accordance with Rule 144 of the 1933 Securities Act. In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock. Based upon same, Jinan became our wholly-owned subsidiary.
Jinan YinQuan was established in JiNan in the People's Republic of China ("the PRC") in 2001.  The exchange of shares with Jinan YinQuan has been accounted for as a reverse acquisition under the purchase method of accounting since the stockholders of the Jinan YinQuan obtained control of the consolidated entity. Accordingly, the merger of the two companies has been recorded as a recapitalization of Jinan YinQuan, with Jinan YinQuan being treated as the continuing entity. The historical financial statements presented are those of Jinan YinQuan. The continuing company has retained December 31 as its fiscal year end. The financial statements of the legal acquirer are not significant; therefore, no pro forma financial information is submitted.
The Company's principal activities are developing and sales of computer software and hardware, digital video pictures system; developing and sales of computer network and network audio devices, parts, low value consumables and etc (exclusive of the business not obtained the license).  Currently, the Company is focused on the Voice Over Internet Phone ("VOIP") technology related business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America.  Our functional currency is the Chinese Renminbi; however the accompanying financial statements have been translated and presented in United States Dollars ($).
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
6
Cash and Cash Equivalents
Cash and cash equivalents include cash in hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.
Accounts Receivable
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Advances to suppliers
The Company advances to certain vendors for purchase of its material. The advances to suppliers are interest free and unsecured.
Inventories
Inventories are valued at the lower of cost (determined on a weighted average basis) or market. The Management compares the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if lower. As of December 31, 2006, the management made impairment on inventories of $19,668, while as of December 31, 2005, the management determined that there was no need of reserves for inventories.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over useful lives of 5 to 10 years.  The cost of assets sold or retired and the related amounts of accumulated depreciation are removed from the accounts in the year of disposal.  Any resulting gain or loss is reflected in current operations.  Assets held under capital leases are recorded at the lesser of the present value of the future minimum lease payments or the fair value of the leased property. Expenditures for maintenance and repairs are charged to operations as incurred.
Intangible Assets
The Company evaluates intangible assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with SFAS 144. SFAS 144 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the
7
fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2006 and 2005, there were no significant impairments of its long-lived assets used in operations.
Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments.
The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, advances to suppliers, accounts payable, other payable, tax payable, and related party advances and borrowings.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet date.
Revenue Recognition
The Company's revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectibility is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.
The Company recognizes revenue from telecommunications as services are provided. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred revenue.
Advertising Costs
The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the years ended December 31, 2006 and 2005 were insignificant.
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 prescribes accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123 requires compensation expense to be recorded (i) using the new fair value method or (ii) using the existing accounting rules prescribed by Accounting Principles Board Opinion No. 25, "Accounting for stock issued to employees" (APB 25) and related interpretations with proforma disclosure of what net income and earnings per share would have been had the Company adopted the new fair value method. The Company uses the intrinsic value method prescribed by APB 25 and has opted for the disclosure provisions of SFAS No.123.  There were no stock options or warrants issued during the years ended December 31, 2006 and 2005 respectively.
Earnings Per Share (EPS)
Earnings per share is calculated in accordance with the Statement of financial accounting standards No. 128 (SFAS No. 128), "Earnings per share". SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted EPS is not presented as the Company has no potential dilutive shares outstanding.
Income Taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been
8
included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
The Company is approved as hi-tech software company, the company is completely exempt of income tax for the first 2 years up to December 2007 and is 50% exempt of income tax for the next 3 years pursuant to State Tax notice no. [2003] 82.
Statement of Cash Flows
In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.
Segment Reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company. As per SFAS 131, the company operates in two segments based on nature of products and services : Telecommunocations & Sale of equipments
Recently Issued Accounting Standards
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".  SFAS No. 155, permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  This statement is effective for all financial instruments acquired or issued after the beginning of the Company's first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.
In March 2006 FASB issued SFAS 156 'Accounting for Servicing of Financial Assets' this Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
1.
Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.
2.
Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
9
3.
Permits an entity to choose 'Amortization method' or  Fair value measurement method' for each class of separately recognized servicing assets and servicing liabilities:
4.
At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.
5.
Requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.
An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006. Management believes that this statement will not have a significant impact on the financial statement.
In September 2006, FASB issued SFAS 157 'Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 'Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)' This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
1.
A brief description of the provisions of this Statement
2.
The date that adoption is required
3.
The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
10
In February of 2007 the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115."  The statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  The statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.  The company is analyzing the potential accounting treatment.
Foreign Currency Translation
The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company maintains books and records in their functional currency, being the primary currency of the economic environment in which the operations are conducted. In general, the Company translates the assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period.
Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income" as a component of shareholders' equity .
As of December 31, 2006, the accounts of Jinan Yinquan were maintained and expressed in the Chinese Yuan Renminbi (RMB). The consolidated financial statements of the Company were translated into United States Dollars (USD) in accordance with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign Currency Translation," with the RMB as the functional currency. According to the Statement, all assets and liabilities were translated at the exchange rate on the balance sheet date, stockholder's equity are translated at the historical rates and statement of operations items are translated at the weighted average exchange rate for the year. As of December 31, 2006 and 2005, the foreign currency transaction gain is $37,252 and $17,042, respectively.
NOTE 3
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of China VOIP & Digital Telecom (the "Company") and its 100% wholly-owned subsidiary Jinan Yinquan Technology Co. Ltd. ("Jinan YinQuan"). All significant inter-company accounts and transactions have been eliminated in consolidation.
NOTE 4
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, by the general state of the PRC's economy. The Company's business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
For the year ended December 31, 2006, one customer provided 28% of the net revenues and one supplier provided 45% of the cost of sales. For the year ended December 31, 2005, one customer provided 9% of the net revenues and one supplier provided 47% of the cost of sales. There were no balance due from the customers as of December 31, 2006 and 2005, respectively. The accounts payable balances due to the suppliers were $118,482 and $0 at December 31, 2006 and 2005, respectively.
11
NOTE 5 - ADVANCES TO SUPPLIERS
The Company made prepayments to suppliers to purchase inventory. This amount represents the advances paid by the Company to suppliers of $13,181 at December 31, 2006.
NOTE 6 – LOANS RECEIVABLE
As of December 31, 2006, $147,290 was the loan receivable from two unrelated parties. The loans were unsecured, non-interest bearing and payable on demand.
NOTE 7 - DUE FROM RELATED PARTIES
The due from related party as of December 31, 2006 consists of $85,825 receivable from executive officers of the company. This amount was withdrawn by the officers for Company operations. The amount is due on demand, unsecured and interest free.
NOTE 8 - PROPERTIES AND EQUIPMENT
The property and equipment as of December 31, 2006 is summarized as follows:
Electronic Equipment
171,609
Vehicles
51,318
Office Equipment
6,591
Construction in progress
307,391
536,909
Less: Accumulated depreciation
(22,625)
Property and equipment, net
$514,284
The depreciation expense for the years ended December 31, 2006 and 2005 was $5,856 and $6,112 respectively.
NOTE 9
INTANGIBLE ASSET
Intangible asset is the two sets of software acquired from third parties.  These sets of software are used for the core technology of the Company's VOIP business.  It is amortized over 5 years. The intangible assets as of December 31, 2006 are as summarized below:-
Original cost
$88,637
Less: amortization
(64,698)
Intangible asset, net
$23,939
Following is future amortization schedule of the intangible asset:
12
Amortization
2007
$
17,727
2008
6,212
23,939
NOTE 10
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of December 31, 2006 are summarized as follows:
Accrued expenses
$57,708
Accrued staff welfare
10,904
Security deposits
6,123
Tax payables
69,838
Total
$144,573
NOTE 11 DUE TO RELATED PARTY
Due to related party of $10,000 as of December 31, 2006 represents payable to former beneficial owner of Crawford Lake Mining Inc.  This payable is unsecured, non interest bearing and payable on demand.
NOTE 12   EQUITY TRANSACTIONS DURING YEAR ENDED 31 DECEMBER 2006
In August 2006, the Company decided to forward split its common stock at a ratio of 3.6 shares of the Company's common stock for every 1 share of common stock issued and outstanding as at August 7, 2006.  Immediately after the forward stock split, the total outstanding shares of the Company are 22,608,000.
In August 2006, the Company issued 40,000,000 shares to the original shareholders of Jinan Yuan Technology Co., Ltd. ("Jinan") to exchange 100% equity interest of Jinan.  In addition, as further consideration for the acquisition, Apollo Corporation, the principal shareholder of the Company, agreed to cancel 11,750,000 post-split shares of its outstanding common stock.
In December 2006, the Company issued 500,000 shares to Leasing Standard Limited for the gross private placement of US$1,000,000, and 400,000 shares to Leasing Standard Limited for consulting service for the SB-2 filing, legal cost, audit cost, and advisory cost of the private placement and reverse-take over procedures.
NOTE 13 STATUTORY RESERVES
As stipulated by the Company Law of the People's Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:
1.
Making up cumulative prior years' losses, if any;
13
2.
Allocations to the "Statutory surplus reserve" of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital;
3.
Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's "Statutory common welfare fund", which is established for the purpose of providing employee facilities and other collective benefits to the Company's employees; and
4.
Allocations to the discretionary surplus reserve, if approved in the shareholders' general meeting.
5.
In accordance with the Chinese Company Law, the company has allocated 10% of its net income to surplus in 2006. The amount included in the statutory reserves as of December 31, 2006 amounted to $35,430.
The Company established a reserve for the annual contribution of 10% of net income to the common welfare fund in 2006. The amount included in the statutory reserves as of December 31, 2006 amounted to $35,430.
NOTE 14 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
On August 17, 2006, the Company acquired 100% of the equity in Jinan YinQuan Technology Co. Ltd. ("Jinan YinQuan") pursuant to an Agreement by and between Jinan YinQuan and the Company. The former shareholders of Jinan YinQuan received 40,000,000 shares of the Company's commons stock in exchange for all the issued and outstanding shares of Jinan YinQuan. In conjunction with the acquisition, with the following liabilities of the company were assumed by Jinan YinQuan:
Accounts payable
$
100
Accrued expenses
17,531
Note payable (Related Party)
10,000
$
27,631
These liabilities have been excluded from the statement of cash flows for the year ended December 31, 2006.
NOTE 15 COMMITMENTS
a) Operating Leases
The Company leases its offices and facilities under long-term, non-cancelable lease agreements expiring at various dates through December 31, 2006. The non-cancelable operating lease agreements provide that the Company pays certain operating expenses applicable to the leased premises according to the Chinese Law.
The future minimum annual lease payments required under the operating leases are as follows:
14
Year Ending December
Payments
2007
$
16,116
Total future lease payments
$
16,116
NOTE 16 SEGMENT REPORTING
The Company has two reportable segments consisting of (1) Equipment Sales and (2) Telecommunications minutes. The Company evaluates performance based on sales, gross profit margins and operating profit before income taxes.  Unallocated assets and loss from continuing operations are primarily related to general corporate expenses.
The following is information for the Company's reportable segments for the years ended December 31, 2006 and 2005:
2006
Telecommunication
Equipment
Corporate
Total
Revenue
966,815
483,154
1,449,969
Gross margin
462,942
32,815
495,757
Net Income before taxes
310,968
22,043
(863,349)
(530,338)
Identifiable Assets
1,570,337
784,757
2,355,794
Depreciation and amortization
23,249
23,249
capital expenditure
538,223
538,223
2005
Telecommunication
Equipment
Total
Revenue
965,346
25,149
990,495
Gross margin
716,503
618
717,121
Net Income before taxes
271,695
234
271,929
Identifiable Assets
1,191,427
31,038
1,222,465
Depreciation and amortization
23,485
23,485
capital expenditure
122,038
122,038
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No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offering made by this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the selling stockholders.  This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than those specifically offered hereby or an offer to sell or a solicitation of an offer to buy any of these securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation.  Except where otherwise indicated, this Prospectus speaks as of the effective date of the Registration Statement.  Neither the delivery of this Prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof.
21,992,000
Shares of
Common Stock
CHINA VOIP & DIGITAL TELECOM, INC.
PROSPECTUS SUMMARY
RISK FACTORS
FORWARD LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
MARKET FOR OUR COMMON STOCK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
SECURITY OWNERSHIP
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DESCRIPTION OF SECURITIES
SELLING STOCKHOLDERS
PLAN OF DISTRIBUTION
LEGAL MATTERS
EXPERTS
AVAILABLE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PROSPECTUS
February __, 2008
Page
1
5
10
11
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12
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25
30
30
30
34
36
38
38
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.  Other Expenses of Issuance and Distribution.
The estimated expenses of this offering in connection with the issuance and distribution of the securities being registered, all of which are to be paid by the Registrant, are as follows:
Registration Fee
$
281
Legal Fees and Expenses
56,800
Accounting Fees and Expenses
7,500
Printing
0
Miscellaneous Expenses
0
Total
$
64,581
Item 14.  Indemnification of Directors and Officers
The only statue, charter provision, by-law, contract, or other arrangement under which any controlling person, director or officers of the Registrant is insured or indemnified in any manner against any liability which he may incur in his capacity as such, is as follows:
Our certificate of incorporation limits the liability of our directors and officers to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: (i) breach of the directors' duty of loyalty; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) the unlawful payment of a dividend or unlawful stock purchase or redemption, and (iv) any transaction from which the director derives an improper personal benefit.  Delaware law does not permit a corporation to eliminate a director's duty of care, and this provision of our certificate of incorporation has no effect on the availability of equitable remedies, such as injunction or rescission, based upon a director's breach of the duty of care.
The effect of the foregoing is to require us to indemnify our officers and directors for any claim arising against such persons in their official capacities if such person acted in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. We also maintain officers' and directors' liability insurance coverage.
Insofar as indemnification for liabilities may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable.
Item 15.  Recent Sales of Unregistered Securities
(1)  On December 21, 2007, we issued (i) 8,885,730 shares of common stock underlying the Senior Secured Convertible Note and (ii) warrants to purchase 11,479,855 shares of common stock to one investor for aggregate gross proceeds of approximately $6.46 million.   As part of the fee to the placement agent, we granted them warrants to purchase 355,429 shares of common stock at an exercise price of $0.5627 per share.  We relied on the exemption from the registration requirements of the Securities Act of 1933 (the "Securities Act") provided in Section 4(2) thereof and Rule 506 thereunder.
(2)  On December 21, 2007, we issued (i) 50,000 shares of common stock to two partners and one associate at the firm of our legal counsel, Anslow + Jaclin, LLP, for legal services performed. for aggregate gross proceeds of $2.5 million.   We relied on the exemption from the registration requirements of the Securities Act of 1933 (the "Securities Act") provided in Section 4(2) thereof and Rule 506 thereunder.
(3) On July 21, 2007, we issued (i) 1,200,000 shares of common stock to Downshire Capital, Inc. pursuant to a term sheet executed by us and Downshire Capital, Inc.  We relied on the exemption from the registration requirements of the Securities Act of 1933 (the "Securities Act") provided in Section 4(2) thereof and Rule 506 thereunder.
(4) In August 2006, the Company issued 40,000,000 shares to the equity holders of Jinan Yinquan technology Co. Ltd as part of the acquisition of Jinan.  Consequently, Jinan is now the wholly owned subsidiary of the Company. The common stock was issued in a private transaction in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933 as amended.
(5) September 4, 2006, the Company declared a 3.6:1 forward stock split and issued 16,328,000 new shares of common stock to shareholders.  We relied on the exemption from the registration requirements of the Securities Act of 1933 (the "Securities Act") provided in Section 4(2) thereof and Rule 506 thereunder.
(6) In December 2006, the Company issued 500,000 shares of its common stock pursuant to an exemption from registration contained in Section 4 (2) of the Securities Act of 1933 as amended in exchange of gross proceeds of $1,000,000.
(7) In December 2006, the Company entered into a consulting agreement with Leasing Standard Limited.  Pursuant to this agreement, the Company issued 400,000 shares of its common stock in reliance upon the registration contained in Section 4 (2) of the Securities Act of 1933 as amended.
Item 16. Exhibits and Financial Statement Schedules
Exhibit
Number         Description of Exhibit
All references to Registrant's Forms 8-K, 10-K, 10-QSB and 10-KSB include reference to File No. 07125548.
Exhibit No.
Description
3.1
Articles of Incorporation (1)
3.2
Bylaws (1)
10.1
Securities Purchase Agreement by and between the Company and the Investors dated December 21, 2007 (5)
10.2
Registration Rights Agreement by and between the Company and the Investors dated December 21, 2007 (5)
10.3
Perfection Certificate dated December 21, 2007 (5)
10.4
Security Agreement by and between the Company and the Collateral Agent dated December 21, 2007 (5)
10.5
Senior Secured Convertible Note by and between the Company and the Investors dated December 21, 2007 (5)
10.6
Common Stock Purchase Warrant by and between the Company and the Investor dated December 21, 2007 (5)
10.7
Officer's Certificate dated December 21, 2007 (5)
10.8
Director's Certificate dated December 21, 2007 (5)
10.9
Pledge Agreement by and between the Company and the Collateral Agent, dated December 21, 2007 (5)
10.10
Guaranty dated December 21, 2007 (5)
14.1
Code of Ethics (4)
16.1
Change in Certifying Accountants (3)
21.1
Subsidiaries of the registrant (4)
23.1
Consent of Kabani & Co. (4)
23.2
Consent of Anslow & Jaclin, LLP (filed as part of Exhibit 5)
24.1
Powers of Attorney (included on the signature page).
(1)
Incorporated herein by reference to the registrant's initial Registration Statement on Form SB-2 (file number 06529334) filed on January 13, 2006.
(2)
Incorporated herein by reference to the registrant's Current Report on Form 8-K (file number 061203975) filed on October 13, 2006.
(3)
Incorporated herein by reference to the registrant's Current Report on Form 8-K (file number 061203975) filed on December 12, 2006.
(4)
Filed herewith.
(5)
Incorporated herein by reference to the registrant's Current Report on Form 8-K (file number 333-131017) filed on December 26, 2007.
Item 17.  Undertakings
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act").
(ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the change in volume and price represents no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement.
(iii) to include any additional or changed material information with respect to the plan of distribution.
(2) that, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.
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(3) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions of its Certificate of Incorporation, By-Laws, the General Corporation Law of the State of Delaware or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer of controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Jinan, China, on the 1
st
day of February 2008.
China VoIP & Digital Telecom, Inc.
By:
/s/ Li Kunwu
Li Kunwu
Chief Executive Officer and Chief Financial Officer
POWER OF ATTORNEY
Each director and/or officer of the registrant whose signature appears below hereby appoints Li Kunwu as his attorney-in-fact to sign in his name and behalf, in any and all capacities stated below, and to file with the Securities and Exchange Commission, any and all amendments, including post-effective amendments, to this Registration Statement (and to any registration statement filed pursuant to Rule 462 under the Securities Act of 1933).
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated:
Signature
Title
Date
/s/ Wang Qinghua
Wang Qinghua
Director
February 1, 2008
/s/ Xu Yinyi
Xu Yinyi
Director
February 1, 2008
/s/ Jiang Yanli
Jiang Yanli
Director
February 1, 2008
/s/ Kan Kaili
Kan Kaili
Director
February 1, 2008
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