VelaTel Global Communications, Inc. - FORM 10-Q/A

Attached files

file	filename
EX-31.2 - CERTIFICATION - VelaTel Global Communications, Inc.	chtl_10qa-ex3102.htm
EX-32.1 - CERTIFICATION - VelaTel Global Communications, Inc.	chtl_10qa-ex3201.htm
EX-32.2 - CERTIFICATION - VelaTel Global Communications, Inc.	chtl_10qa-ex3202.htm
EX-31.1 - CERTIFICATION - VelaTel Global Communications, Inc.	chtl_10qa-ex3101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 1

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30, 2009

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from _______ to _______

Commission file number 333-134883

CHINA TEL GROUP, INC.

(Exact name of Registrant as specified in its charter)

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

12520 High Bluff Drive, Suite 145, San Diego, CA 92130

(Address of principal executive offices) (zip code)

858-259-6614

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that registrant was required to submit and post such files.) o Yes o No

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

	Large accelerated filer o	Accelerated filer o
	Non-accelerated filer x	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of stock, as of the latest practicable date: As of November 9, 2009 the registrant had 170,863,298 shares of its Series A common stock outstanding with a par value of $0.001 and 66,909,088 shares of its Series B common stock outstanding with a par value of $0.001.

EXPLANATORY NOTE

This Amendment No. 1 to Form 10-Q (“Amendment No. 1”) amends the Quarterly Report of China Tel Group, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009, as filed with the Securities and Exchange Commission on November 12, 2009 (the “Original Filing”). This Amendment No. 1 is being filed for the purpose of correcting errors in accounting for and disclosing the acquired investment in ChinaComm Cayman and the recording of the option to purchase additional interest thereof.

We have not updated the information contained herein for events occurring subsequent to November 12, 2009, the filing date of the Original Filing.

CHINA TEL GROUP, INC.

(A DEVELOPMENT STAGE COMPANY)

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2009

		PAGE
PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	3

	Condensed Consolidated Statements of Loss for the three and nine months ended September 30, 2009, three months ended September 30, 2008, April 4, 2008 (date of inception) through September 30, 2008 and from April 4, 2008 (date of inception) through September 30, 2009 (unaudited)	4

	Condensed Consolidated Statement of Stockholders’ Deficit for the period from April 4, 2008 (date of inception) through September 30, 2009 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009, April 4, 2008 (date of inception) through September 30, 2008 and from April 4, 2008 (date of inception) through September 30, 2009 (unaudited)	7

	Notes to Condensed Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	42

Item 4.	Controls and Procedures	42

Item 4(T).	Controls and Procedures	43

PART II.	OTHER INFORMATION	43

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Submission of Matters to a Vote of Security Holders	44

Item 5.	Other Information	44

Item 6.	Exhibits	45

PART I - FINANCIAL STATEMENTS

CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS

	(RESTATED)
	September 30,			December 31,
	2009			2008
	(unaudited)
ASSETS
Current assets:
Cash	$	18,121		$	6,578
Accounts receivable, net of provision for bad debts of $4,695		89,179			-
Accounts receivable, other		8,742			-
Inventory		7,693			-
Note receivable		2,915,016			3,039,123
Prepaid expenses		163,946			-
Deferred financing costs, net of accumulated amortization of $3,000,883 and $386,188, respectively		870,919			3,203,608
Total current assets		4,073,616			6,249,309

Property, plant and equipment, net of accumulated depreciation of $1,278,598		591,112			-

Other assets:
Intangible assets, net of accumulated amortization of $142,536		119,214			-
Goodwill		797,156			-
Investments, at cost		5,000,000			5,000,000
Total other assets		5,916,370			5,000,000

Total assets	$	10,581,098		$	11,249,309

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses	$	52,494,760		$	42,632,534
Unearned revenue		23,040			-
Line of credit		141,593			-
Advances from shareholders		231,471			-
Notes payable, related party		1,050,000
Notes payable		245,463			-
Convertible debentures, net of unamortized discount of $1,570,128 and $12,568,303, respectively		22,549,557			21,535,101
Derivative liability		4,144,550			26,165,886
Total current liabilities		80,880,434			90,333,521

Long term debt
Mandatory redeemable Series B common stock		66,909			66,909
Total liabilities		80,947,343			90,400,430

Stockholders' deficit:
Preferred stock, no par value, 25,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock:
Series A common stock; $0.001 par value, 500,000,000 shares authorized, 163,497,600 and 89,458,947 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively		163,498			89,459
Additional paid in capital		65,099,150			30,079,383
Accumulated deficit		(135,658,937	)		(109,319,963	)
Accumulated other comprehensive income		30,044			-
Total China Tel Group, Inc.'s stockholders' deficit		(70,366,245	)		(79,151,121	)
Non controlling interest		-			-
Total stockholder's deficit		(70,366,245	)		(79,151,121	)

Total liabilities and stockholders' deficit	$	10,581,098		$	11,249,309

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

CHINA TEL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(a development stage company)
(Unaudited)
(RESTATED)

										From April 4, 2008			From April 4, 2008
	Three months			Three months			Nine months			(date of inception)			(date of inception)
	ended			ended			ended			Through			Through
	September 30, 2009			September 30, 2008			September 30, 2009			September 30, 2008			September 30, 2009

REVENUE	$	258,528		$	-		$	457,766		$	-		$	457,766
Cost of sales		235,816			-			364,247			-			364,247
Gross profit		22,712			-			93,519			-			93,519

OPERATING EXPENSES:
Selling, general and administrative expenses		18,801,147			1,943,302			25,205,098			5,027,872			33,023,427
Depreciation and amortization		41,476			-			58,880			-			58,880
Research and development costs		30,000			11,016,074			9,757,038			44,012,899			61,585,210
Total operating expenses		18,872,623			12,959,376			35,021,016			49,040,771			94,667,517

Net loss from operations		(18,849,911	)		(12,959,376	)		(34,927,497	)		(49,040,771	)		(94,573,998	)

OTHER INCOME (EXPENSES):
Other (expenses)		(36,120	)		-			(36,907	)		-			(36,907	)
Gain on foreign currency transactions		25,967						25,967						25,967
Loss on investments, related party		-			-			-			-			(6,636,410	)
Gain on change in fair value of debt derivative		11,997,895			-			22,021,336			-			9,938,836
Interest expense		(5,436,200	)		(2,213,106	)		(13,421,873	)		(28,279,301	)		(44,026,354	)

Net loss before provision for income taxes		(12,298,369	)		(15,172,482	)		(26,338,974	)		(77,320,072	)		(135,308,866	)

Income taxes		-			-			-			-			-

Net (Loss)		(12,298,369	)		(15,172,482	)		(26,338,974	)		(77,320,072	)		(135,308,866	)

Non controlling interest		-			-			-			-			-

NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.	$	(12,298,369	)	$	(15,172,482	)	$	(26,338,974	)	$	(77,320,072	)	$	(135,308,866	)

Net loss per common share (basic and fully diluted)	$	(0.10	)	$	(0.17	)	$	(0.25	)	$	(1.04	)	$	(1.46	)
Weighted average number of shares outstanding, basic and fully diluted		125,166,675			87,439,040			105,894,140			74,428,713			92,565,014

Comprehensive Loss:
Net Loss	$	(12,298,369	)	$	(15,172,482	)	$	(26,338,974	)	$	(77,320,072	)	$	(135,308,866	)
Foreign currency translation gain		30,044			-			30,044			-			30,044

Comprehensive Loss:		(12,268,325	)		(15,172,482	)		(26,308,930	)		(77,320,072	)		(135,278,822	)
Comprehensive loss attributable to the non controlling interest		-			-			-			-			-
Comprehensive loss attributable to China Tel Group, Inc.	$	(12,268,325	)	$	(15,172,482	)	$	(26,308,930	)	$	(77,320,072	)	$	(135,278,822	)

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

CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2009
(Unaudited)
(RESTATED)

	CHINA TEL GROUP, INC.
	Preferred stock				Common stock				Additional			Other					Non		Total
					Series A				Paid in			Comprehensive		Accumulated			controlling		Stockholders'
	Shares		Amount		Shares		Amount		Capital			Income (Loss)		Deficit			Interest		Deficit
Balance, April 4, 2008 (date of inception)		-	$	-		-	$	-	$	-		$	-	$	-		$	-	$	-
Effect of merger with China Tel Group, Inc. (formerly Morlock Ventures, Inc.) and assumption of liabilities as of April 4, 2008		-		-		86,117,088		86,117		(153,026	)		-		(350,071	)		-		(416,980	)
Beneficial conversion feature relating to issuance of convertible debentures		-		-		-		-		27,060,987			-		-			-		27,060,987
Issuance of Series A common stock in exchange for convertible debentures		-		-		1,471,663		1,472		1,396,608			-		-			-		1,398,080

Issuance of Series A common stock in settlement of debt		-		-		1,870,196		1,870		1,774,814			-		-			-		1,776,684

Net loss		-		-		-		-		-			-		(108,969,892	)		-		(108,969,892	)

Balance, December 31, 2008		-		-		89,458,947		89,459		30,079,383			-		(109,319,963	)		-		(79,151,121	)
Issuance of Series A common stock in January 2009 in exchange for services rendered		-		-		1,000,000		1,000		479,000			-		-			-		480,000
Issuance of Series A common stock in January 2009 in exchange for previously incurred debt		-		-		1,573,158		1,573		1,492,927			-		-			-		1,494,500
Issuance of Series A common stock in February 2009 in exchange for services rendered		-		-		986,526		987		393,624			-		-			-		394,611
Issuance of Series A common stock in February 2009 in exchange for previously incurred debt		-		-		204,861		205		194,413			-		-			-		194,618
Issuance of Series A common stock in March 2009 in exchange for services rendered		-		-		4,040,000		4,040		2,067,560			-		-			-		2,071,600
Issuance of Series A common stock in March 2009 in exchange for previously incurred debt		-		-		406,113		406		385,401			-		-			-		385,807

Subtotal		-		-		97,669,605	$	97,670	$	35,092,308		$	-	$	(109,319,963	)	$	-	$	(74,129,985	)

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

CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM APRIL 4, 2008 (DATE OF INCEPTION) THROUGH SEPTEMBER 30, 2009
(Unaudited)
(RESTATED)

	CHINA TEL GROUP, INC.
	Preferred stock				Common stock				Additional			Other					Non		Total
					Series A				Paid in			Comprehensive		Accumulated			controlling		Stockholders'
	Shares		Amount		Shares		Amount		Capital			Income (Loss)		Deficit			Interest		Deficit
Balance forward		-		-		97,669,605	$	97,670	$	35,092,308		$	-	$	(109,319,963	)	$	-	$	(74,129,985	)
Issuance of Series A common stock in March 2009 as deposit toward purchase of an investment		-		-		1,000,000		1,000		429,000			-		-			-		430,000
Issuance of Series A common stock in May 2009 in exchange for previously incurred debt		-		-		211,500		211		200,713			-		-			-		200,924
Issuance of Series A common stock in June 2009 in exchange for previously incurred debt		-		-		263,158		263		249,737			-		-			-		250,000
Issuance of Series A common stock in June 2009 in exchange for services rendered		-		-		2,900,000		2,900		1,075,100			-		-			-		1,078,000
Issuance of Series A common stock in July 2009 in exchange for services rendered		-		-		7,403,149		7,403		5,945,116			-		-			-		5,952,519
Issuance of Series A common stock in August 2009 in exchange for services rendered		-		-		8,153,115		8,153		6,094,339			-		-			-		6,102,492
Issuance of Series A common stock in August 2009 in exchange for convertible debentures and related interest		-		-		23,991,144		23,991		7,247,020			-		-			-		7,271,011
Issuance of Series A common stock in September 2009 in exchange for services rendered		-		-		4,364,134		4,365		4,059,520			-		-			-		4,063,885
Issuance of Series A common stock in September 2009 in exchange for convertible debentures and related interest		-		-		14,541,795		14,542		4,198,720			-		-			-		4,213,262

Issuance of common stock for services to be rendered		-		-		3,000,000		3,000		(3,000	)		-		-			-		-

Equity based compensation		-		-		-		-		510,577			-		-			-		510,577
Foreign currency translation gain		-		-		-		-		-			30,044		-			-		30,044

Net loss		-		-		-		-		-			-		(26,338,974	)		-		(26,338,974	)

Balance, September 30, 2009		-	$	-		163,497,600	$	163,498	$	65,099,150		$	30,044	$	(135,658,937	)	$	-	$	(70,366,245	)

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

CHINA TEL GROUP, INC.
(a development stage company)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(RESTATED)

				From April 4, 2008			From April 4, 2008
	Nine months			(date of inception)			(date of inception)
	Ended			Through			Through
	September 30, 2009			September 30, 2008			September 30, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(26,338,974	)	$	(77,320,072	)	$	(135,308,866	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		58,880			-			58,880
Non controlling interest		-			-			-
Amortization of financing costs		2,614,695			-			3,000,883
Accretion of convertible debt		10,998,175			-			12,513,258
Gain on change in fair value of debt derivative		(22,021,336	)		-			(9,938,836	)
Common stock issued in exchange for services		20,653,684			-			20,653,684
Beneficial conversion feature in conjunction with the issuance of convertible debentures		-			27,060,987			27,060,987
(Increase) decrease in:
Accounts receivable		60,549			-			60,549
Inventory		(3,881	)		-			(3,881	)
Note receivable		124,107						124,107
Prepaid expenses		(27,110	)					(27,072	)
Increase (decrease) in:
Accounts payable and accrued liabilities		12,921,505			27,358,464			57,204,804
Unearned revenue		(11,810	)		-			(11,810	)
Net cash used in operating activities		(971,516	)		(22,900,621	)		(24,613,313	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from acquisition of Perusat S.A.		19,419			-			19,419
Proceeds received in connection with reverse merger		-			-			55,404
Investment in Chinacomm		-			(5,000,000	)		(5,000,000	)
Net cash provided by (used in) investing activities		19,419			(5,000,000	)		(4,925,177	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from shareholders		231,471			-			231,471
Payments made to notes payable		(41,902	)		-			(41,902	)
Proceeds from notes payable, related party		775,000			-			775,000
Net proceeds from issuance of convertible debentures		-			28,198,938			28,592,971
Net cash provided by financing activities		964,569			28,198,938			29,557,540

Effect of currency rate change on cash		(929	)		-			(929	)

Net increase in cash and cash equivalents		11,543			298,317			18,121


Cash and cash equivalents, beginning of the period		6,578			-			-
Cash and cash equivalents, end of the period	$	18,121		$	298,317		$	18,121

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	-		$	-		$	-
Cash paid during the period for taxes	$	-		$	-		$	-

NON CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued in settlement of debt	$	14,010,122		$	4,322,844		$	18,332,966
Common stock issued for services rendered	$	20,653,684		$	-		$	20,653,684

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

General

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three and nine month periods ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated December 31, 2008 financial statements and footnotes thereto included in the Company's Form 10-K filed with the United States Securities and Exchange Commission (“SEC”) on May 15, 2009.

Basis and Business Presentation

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

The Company is in the development stage, as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities, and its efforts have been principally devoted to developing a broadband wireless telecommunications network in several cities in the Peoples Republic of China (“PRC”). To date, the Company has generated minimal sales revenues, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. Since the Company’s inception through September 30, 2009, the Company has accumulated losses of $ 135,658,937. (Reference in this report to “Since the Company’s inception” refers to April 4, 2008, the date Trussnet Nevada was formed and the date used for financial activities for accounting purposes in this report.)

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

Reverse Merger and Corporate Restructure

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

As a result of the Merger, there was a change in control of the Company. In accordance with Accounting Standards Codification subtopic 815-10 (“ASC 815-10”), Business Combinations, the Company was the acquiring entity. In substance, the Merger is a recapitalization of the Company’s capital structure, rather than a business combination.

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

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

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

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

Mortlock Ventures, Inc.

Summary Statement of Financial Position

At May 21, 2008

Current Assets:
Cash	$	55,404
Other assets:
Prepaid expenses		38
Advances receivable		2,616,105

Current Liabilities:
Accounts payable		(125,919	)
Convertible debentures		(2,395,699	)
Subscriptions received		(500,000	)
Net liabilities assumed	$	(350,071	)

Acquisition of Perusat S.A

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

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

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

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

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

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

Estimates

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

Revenue Recognition

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

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

Cash and Cash Equivalents

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

Fair Values

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

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

Accounting For Bad Debt and Allowances

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

Inventories

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

Property, Plant and Equipment

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

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

Buildings		33 years
Machinery and equipment		10 years
Vehicles		4 years
Fur Furniture and fixtures		10 years
Computers		4 years

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

Long-Lived Assets

The Company has adopted Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

Income Taxes

The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) ASC 740-10 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.

Comprehensive Income

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

Functional Currency

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

Net Loss Per Share

The Company has adopted Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”) This requires the computation, presentation and disclosure requirements of earnings per share information. Basic earnings per share have been calculated based upon the weighted average number of common shares outstanding. Stock options and warrants have been excluded as common stock equivalents in the diluted earnings per share, because they are either anti-dilutive or their effect is not material.

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

Concentrations of Credit Risk

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

Stock Based Compensation

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

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

Research and Development

The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products, and services are expensed in the period incurred. The Company incurred research and development expenses of $30,000 and $9,757,038 for the three and nine month periods ended September 30, 2009, respectively; $11,016,074 for the three months and from April 4, 2008 (since the Company’s inception) through September 30, 2008, respectively and $61,585,210 from April 4, 2008 (since the Company’s inception) through September 30, 2009.

Investments

The Company entered into a Framework Agreement whereby the Company, through its subsidiary, Gulfstream Capital Partners, Ltd., agreed to acquire 49% interest in ChinaComm Cayman for a total purchase price of $196 million. At December 31, 2008, pursuant to the agreement, the Company has paid $5,000,000 toward the purchase with an option to acquire up to 49% pursuant to a non-recouse promissory note for $191,000,000 issued on March 9, 2009 . See Note 6 for complete discussion.

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

Liquidity

As shown in the accompanying financial statements, the Company incurred loss from operations of $ 26,338,974 for the nine month period ended September 30, 2009 and $ 135,308,866 since the Company’s date of inception through September 30, 2009.

New Accounting Pronouncements

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

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

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

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

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

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

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

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

NOTE 2 - GOING CONCERN MATTERS

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying condensed consolidated financial statements, the Company incurred a net loss of $ 26,338,974 for the nine month period ended September 30, 2009. Additionally, the Company has negative working capital of $ 76,806,818 as of September 30, 2009. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 3 - NOTE RECEIVABLE

In conjunction with the sale of convertible debentures, the Company’s broker/dealer issued a promissory note for $3,039,123 representing non forwarded proceeds received from convertible note subscribers. The Company has entered into an agreement pursuant to which the Company’s broker/dealer will provide to the Company Series A common stock of the Company held by the broker/dealer. During the nine months ended September 30, 2009, the Company collected $124,107 towards the note leaving $2,915,016 unpaid at September 30, 2009.

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

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

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

NOTE 4 - PREPAID EXPENSES

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

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

NOTE 5 - DEFERRED FINANCING COSTS

Deferred financing costs are amortized ratably over a 13.5 month period in conjunction with the related convertible notes. The Company charged $1,026,057 and $2,614,685 to operations for the three and nine month periods ended September 30, 2009, respectively; $-0- from April 4, 2008 (date of inception) through September 30, 2008 and 3,000,883 from April 4, 2008 (date of inception) through September 30, 2009.

NOTE 6 - DEPOSITS AND INVESTMENTS

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

As of September 30, 2009, ChinaComm Cayman was an inactive entity with no assets, liabilities or operating activities except for contractual rights in the operation of the Chinacomm Network.

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

NOTE 7 - INTANGIBLE ASSETS

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

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

NOTE 8 - CONVERTIBLE NOTES

Convertible notes as of September 30, 2009 are comprised of the following:

	Gross Principal Amount			Less: Unamortized Discount			Net
10% convertible notes payable, unsecured are due December 31, 2008; accrued and unpaid interest due at maturity; convertible note holder has the option to convert note principal together with accrued and unpaid interest to the Company’s common stock at a rate of $0.95 per share. The Company is currently in default.	$	13,721,442		$	-		$	13,721,442
10% amended and restated convertible notes payable are due December 31, 2009, with interest payable at maturity. The amended and restated convertible notes are convertible into the Company’s common stock at the lower of (a) $0.95 per share or (b) 80% of the volume weighted average of the closing bid price for the shares on the Over The Counter Bulletin Board Exchange for the ten (10) day period prior to the convertible note holder’s election to convert.	$	10,398,243			1,570,128		$	8,828,115
Total		24,119,685			1,570,128			22,549,557
Less current maturities		(24,119,685	)		(1,570,128	)		22,549,557	)
Long term portion	$	-		$	-		$	-

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

In accordance with Accounting Standards Codification subtopic 470-20, Debt; Debt With Conversion And Other Options (“ASC 470-20”), the Company recognized an imbedded beneficial conversion feature present in the convertible notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $27,060,987 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid-in capital and a discount against the convertible notes. The debt discount attributed to the beneficial conversion feature is amortized ratably to operations as interest expense over the term of the convertible notes.

Since the Company’s date of inception through September 30, 2009, the Company amortized $27,060,987 as interest expense.

On November 17, 2008, the Company also entered into an amended and restated convertible note purchase agreement with certain convertible note holders for the modification of certain terms and conditions contained in the previously issued convertible note purchase agreements. The Company issued an aggregate of $20,979,572 in amended and restated convertible notes in exchange for $17,389,776 of previously issued convertible notes, a 20% inducement premium and accrued interest. The amended and restated convertible note purchase agreements accrue interest at 10% per annum, payable at maturity and are due on December 31, 2009. The amended and restated convertible note holders have an option to convert any unpaid note principal to the Company’s common stock at the lower of (a) $0.95 per share or (b) 80% of the volume weighted average of the closing bid price for the shres on The Over The Counter Bulletin Board Exchange for the ten (10) day period prior to the convertible note holder’s election to convert. The effective interest rate at the date of inception was 304.22%.

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

NOTE 9 - NOTES PAYABLE

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

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 10 - DERIVATIVE FINANCIAL INSTRUMENTS

The Company's derivative financial instruments consisted of embedded derivatives related to the 10% amended and restated convertible notes issued November 17, 2008. The embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments required that the Company record the derivatives at their fair values as of the inception date of the amended and restated convertible notes (estimated at $14,083,386) and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income. At September 30, 2009, the conversion-related derivatives were valued using the Black Scholes Option Pricing Model, with the following assumptions: dividend yield of 0%; annual volatility of 161.35%; and risk free interest rate of 0.14% and recorded non-operating income of $22,021,336 representing the change in fair value from December 31, 2008. The derivatives were classified as short-term liabilities. The derivative liability at September 30, 2009 is $4,144,550.

NOTE 11 - NON CONTROLLING INTEREST

Acquisition of Perusat S.A

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

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

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

NOTE 12 - MANDATORY REDEEMABLE SERIES B COMMON STOCK

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

Voting Rights

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

Non Participatory

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

Liquidation Preference

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

Transferability

The Series B common stock is non transferable.

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

Mandatory Redemption

The Series B common stock will be redeemed in 2023 at par value ($0.001) per share, therefore classified outside of equity for reporting purposes

NOTE 13 - STOCKHOLDERS EQUITY

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

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

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

During the nine month period ended September 30, 2009, the Company issued an aggregate of 31,846,924 shares of common stock amounting to $20,021,336 for services rendered. The value of common stock issued for services was based upon the value of the services rendered, which did not differ materially from the fair value of the Company's common stock during the period the services were rendered.

During the nine month period ended September 30, 2009, the Company issued an aggregate of 2,658,790 shares of common stock in exchange of outstanding accounts payable.

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

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

NOTE 14 - RELATED PARTY TRANSACTIONS

The Company has the following material related party transactions:

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

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

The Company has not paid Trussnet Delaware for a significant portion of the services provided. As of September 30, 2009, that amount is approximately $41.5 million. Trussnet Delaware has also advanced funds for the Company’s operations in anticipation of the Company’s funding. Except for that implied extension of credit, the Company believes that all such services were provided at prices and on terms and conditions that are the same as those that would result from arm’s-length negotiations with unrelated parties. As the Company has no employees, the Company believes there is only a de minimis value to the Company’s shared use of the Trussnet Delaware office space.

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 15 - FAIR VALUE MEASUREMENT

The Company adopted the provisions of ASC 825-10 on January 1, 2008 (“ASC 825-10”). ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

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

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

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

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

Upon adoption of ASC 825-10, there was no cumulative effect adjustment to beginning retained earnings and no impact on the consolidated financial statements.

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

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

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

	Quoted Prices in Active Markets for Identical Instruments Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3			Total
Assets:
Cash	$	18,121	$	-	$	-		$	18,121

Equity Based Investments		-		-		5,000,000			5,000,000

Total assets	$	18,121	$	-	$	5,000,000		$	5,018,121

Liabilities:
Debt Derivative	$	-	$	-	$	(4,144,550	)	$	(4,144,550	)

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

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

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

NOTE 16 - RESTATEMENT

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

Condensed Consolidated Statement of Losses

Three months ended September 30, 2008

Operating Expenses:	As Previously Reported			Adjustment			Reference	As Restated
Selling, General and Administrative	$	1,943,302					$	$	1,943,302
Research and Development		-			11,016,074				11,016,074
Total Operating Expenses		1,943,302			11,016,074		(a)		12,959,576
Net Loss from Operations		(1,943,302	)		(11,016,074	)			(12,959,576
Interest Expense		(9,561,638	)		7,348,532		(b)		(2,213,106	)

Net Loss Before Income Taxes		(11,504,940	)		(3,667,542	)			(15,172,482	)

Provision for Income Taxes		-			-				-

Net Loss	$	(11,504,940	)	$	(3,667,542	)	(a),(b)	$	(15,172,482	)

Condensed Consolidated Statement of Losses

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

Operating Expenses:	As Previously Reported			Adjustment			Reference	As Restated
Selling, General and Administrative	$	5,027,872					$	$	5,027,872
Research and Development		-			44,012,899				44,012,899
Total operating expenses		5,027,872			44,012,899		(a)		44,012,899
Net Loss from Operations		(5,027,872	)		(44,012,899	)			(49,040,771
Interest Expense		(56,051,988	)		27,772,687		(b)		(28,279,301	)

Net Loss Before Income Taxes		(61,079,860	)		(16,240,212	)			(77,320,072	)

Provision for Income Taxes		-			-				-

Net Loss	$	(61,079,860	)	$	(16,240,212	)	(a),(b)	$	(77,320,072	)

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

Condensed Consolidated Statement of Cash Flows

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

	As Previously
	Reported			Adjustment			Reference		As Restated
Cash Flows from Operating Activities:
Net Loss for the Period	$	(61,079,860	)	$	(16,240,212	)		(a),(b)	$	(77,320,072	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Beneficial Conversion Feature in Conjunction with the Issuance of Convertible Debentures		46,406,344			(19,345,357	)		(b)		27,060,987
Amortization of Debt Discount		8,427,330			(8,427,330	)		(b)
(Increase) Decrease in:
Construction in Process		(44,012,899	)		44,012,899			(a)		-
Increase (Decrease) in:
Accounts Payable and Other Current Liabilities		27,358,464			-					27,358,464
Net Cash used in Operating Activities		(22,900,621	)		-					(22,900,621	)

Cash Flows from Investing Activities:
Investment in Chinacomm		(5,000,000	)		-					(5,000,000	)
Net Cash used in Investing Activities		(5,000,000	)		-					(5,000,000	)

Cash Flows from Financing Activities:
Net Proceeds from Issuance of Convertible Debentures		28,198,938			-					28,198,938
Net Cash Provided by Financing Activities		28,198,938			-					28,198,938

Net Increase in Cash		298,317			-					298,317
Cash at Beginning of Period		-			-					-

Cash at End of Period	$	298,317		$	-				$	298,317

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

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

In this Amendment No. 1, the Company restated its financial statements for the three months and six months ended June 30, 2009 and from April 4, 2008 (date of inception) through June 30, 2009 for the purpose of correcting errors in accounting and disclosing the acquired investment in ChinaComm Cayman and the recording of the option to purchase additional equity interest in Chinacomm Cayman.

As of September 30, 2009, Condensed Consolidated Balance Sheet restatement is to:

Correct the recorded investment in ChinaComm Cayman

Eliminate the recording of the option to acquire additional interest in ChinaComm Cayman as a note payable

Reverse the accrual on interest previously booked towards note payable

The changes in reported amounts are summarized in the following reconciliations of the Company’s restatement of the Condensed Consolidated Balance sheet as of September 30, 2009:

	As previously
	Reported			Adjustment			Ref		As restated
Cash	$	18,121		$					$	18,121
Accounts receivable, net		89,179								89,179
Accounts receivable, other		8,742								8,742
Inventory		7,693								7,693
Note receivable		2,915,016								2,915,016
Prepaid expenses		163,946								163,946
Deferred financing costs		870,919								870,919
Property, plant and equipment		591,112								591,112
Intangible assets		119,214								119,214
Goodwill		797,156								797,156
Investment, at cost		196,000,000			(191,000,000	)		a		5,000,000
Total assets	$	201,581,098		$	(191,000,000	)			$	10,581,098

Accounts payable and accrued liabilities	$	61,026,093		$	(8,531,333	)		b	$	52,494,760
Note payable		191,245,463			(191,000,000	)		a		245,463
Unearned revenue		23,040								23,040
Line of credit		141,593								141,593
Advances from shareholders		231,471								231,471
Notes payable, related party		1,050,000								1,050,000
Convertible debentures		22,549,557								22,549,557
Derivative liability		4,144,550								4,144,550
Mandatory redeemable common stock		66,909								66,909
Total liabilities		280,478,676			(199,531,333	)				80,947,343

Preferred stock		-
Common stock		163,498								163,498
Additional paid in capital		65,099,150								65,099,150
Deficit		(144,190,270	)		8,531,333			b		(135,658,937	)
Accumulated other comprehensive income		30,044								30,044
Total stockholders' deficit		(78,897,578	)		8,531,333					(70,366,245	)
Total liabilities and stockholders' deficit	$	201,581,098		$	(191,000,000	)			$	10,581,098

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

For the three month period ended September 30, 2009, the Condensed Consolidated Statement of Loss restatement is to:

·	Reverse the accrual on interest previously booked towards note payable

The changes in reported amounts are summarized in the following reconciliations of the Company’s restatement of the Condensed Consolidated Statement of Loss for the three months ended September 30, 2009:

	As previously
	Reported			Adjustment		Ref		As restated
REVENUE	$	258,528		$				$	258,528
Cost of sales		235,816							235,816
Gross profit		22,712			-				22,712

OPERATING EXPENSES:
Selling, general and administrative		18,801,147							18,801,147
Depreciation and amortization		41,476							41,476
Research and development		30,000							-
Total operating expenses		18,872,623			-				18,842,623

Net loss from operations		(18,849,911	)		-				(18,819,911	)

OTHER INCOME (EXPENSES):
Other income (expense)		(36,120	)						(36,120	)
Gain on foreign currency transactions		25,967							25,967
Gain on change in fair value of debt derivative		11,997,895							11,997,895
Interest expense		(9,256,200	)		3,820,000		b		(5,436,200	)
Net loss before provision for income taxes		(16,118,369	)		3,820,000				(12,268,369	)
Income taxes		-			-				-

Net (loss)		(16,118,369	)		3,820,000				(12,268,369	)

Non controlling interest		-			-				-

NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.	$	(16,118,369	)	$	3,820,000			$	(12,268,369	)

Net loss per common share (basic and fully diluted	$	(0.13	)	$	0.03			$	(0.10	)

Weighted average number of shares outstanding, basic and fully diluted		125,166,675			125,166,675				125,166,675

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

For the nine month period ended September 30, 2009, the Condensed Consolidated Statement of Loss restatement is to:

·	Reverse the accrual on interest previously booked towards note payable

The changes in reported amounts are summarized in the following reconciliations of the Company’s restatement of the Condensed Consolidated Statement of Loss for the nine months ended September 30, 2009:

	As previously
	Reported			Adjustment		Ref		As restated
REVENUE	$	457,766		$				$	457,766
Cost of sales		364,247							364,247
Gross profit		93,519			-				93,519

OPERATING EXPENSES:
Selling, general and administrative		25,205,098							25,205,098
Depreciation and amortization		58,880							58,880
Research and development		9,757,038							9,757,038
Total operating expenses		35,021,016			-				35,021,016

Net loss from operations		(34,927,497	)		-				(34,927,497	)

OTHER INCOME (EXPENSES):
Other income (expense)		(36,907	)						(36,907	)
Gain on foreign currency transactions		25,967							25,967
Gain on change in fair value of debt derivative		22,021,336							22,021,336
Interest expense		(21,953,206	)		8,531,333		b		(13,421,873	)
Net loss before provision for income taxes		(34,870,307	)		8,531,333				(26,338,974	)
Income taxes		-			-				-

Net (loss)		(34,870,307	)		8,531,333				(26,338,974	)

Non controlling interest		-			-				-

NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.	$	(34,870,307	)	$	8,531,333			$	(26,338,974	)

Net loss per common share (basic and fully diluted	$	(0.33	)	$	0.08			$	(0.25	)

Weighted average number of shares outstanding, basic and fully diluted		105,894,140			105,894,140				105,894,140

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

For the three months ended September 30, 2008, the Condensed Consolidated Statement of Loss restatement is to:

·	Properly record research and development expenditures as a current period expense

·	Correct calculation of the beneficial conversion feature related to convertible debt

	As previously
	Reported			Adjustment			Ref		As restated
REVENUE	$	-		$					$	-
Cost of sales		-								-
Gross profit		-			-					-

OPERATING EXPENSES:
Selling, general and administrative		1,943,302								1,943,302
Depreciation and amortization		-								-
Research and development		-			11,016,074			c		11,016,074
Total operating expenses		1,943,302			11,016,074					12,959,376

Net loss from operations		(1,943,302	)		(11,016,074	)				(12,959,376	)

OTHER INCOME (EXPENSES):
Other income (expense)		-								-
(Loss) gain on change in fair value of debt derivative		-								-
Interest expense		(9,561,638	)		7,348,532			d		(2,213,106	)
Net loss before provision for income taxes		(11,504,940	)		(3,667,542	)				(15,172,482	)
Income taxes		-			-					-

Net (loss)		(11,504,940	)		(3,667,542	)				(15,172,482	)

Non controlling interest		-			-					-

NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.	$	(11,504,940	)	$	(3,667,542	)			$	(15,172,482	)

Net loss per common share (basic and fully diluted	$	(0.13	)	$	(0.04	)			$	(0.17	)

Weighted average number of shares outstanding, basic and fully diluted		87,439,040			87,439,040					87,439,040

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

From April 4, 2008 (date of inception) through September 30, 2008, the Condensed Consolidated Statement of Loss restatement is to:

·	Properly record research and development expenditures as a current period expense

·	Correct calculation of the beneficial conversion feature related to convertible debt

The changes in reported amounts are summarized in the following reconciliations of the Company’s restatement of the Condensed Consolidated Statement of Loss for the period from April 4, 2008 (date of inception) through September 30, 2008:

	As previously
	Reported			Adjustment			Ref		As restated
REVENUE	$	-		$					$	-
Cost of sales		-								-
Gross profit		-			-					-

OPERATING EXPENSES:
Selling, general and administrative		5,027,872								5,027,872
Depreciation and amortization		-								-
Research and development		-			44,012,899			c		44,012,899
Total operating expenses		5,027,872			44,012,899					49,040,771

Net loss from operations		(5,027,872	)		(44,012,899	)				(49,040,771	)

OTHER INCOME (EXPENSES):
Other income (expense)										-
Gain on foreign currency transactions										-
Gain on change in fair value of debt derivative										-
Interest expense		(56,051,988	)		27,772,687			d		(28,279,301	)
Net loss before provision for income taxes		(61,079,860	)		(16,240,212	)				(77,320,072	)
Income taxes		-			-					-

Net (loss)		(61,079,860	)		(16,240,212	)				(77,320,072	)

Non controlling interest		-			-					-

NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.	$	(61,079,860	)	$	(16,240,212	)			$	(77,320,072	)

Net loss per common share (basic and fully diluted	$	(0.82	)	$	(0.22	)			$	(1.04	)

Weighted average number of shares outstanding, basic and fully diluted		74,428,713			74,428,713					74,428,713

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

From April 4, 2008 (date of inception) through September 30, 2009, the Condensed Consolidated Statement of Loss restatement is to:

·	Reverse the accrual on interest previously booked towards note payable

·	Properly record research and development expenditures previously recorded as construction in process

·	Correct calculation of the beneficial conversion feature related to convertible debt

	As previously
	Reported			Adjustment			Ref		As restated
REVENUE	$	457,766		$					$	457,766
Cost of sales		364,247								364,247
Gross profit		93,519			-					93,519

OPERATING EXPENSES:
Selling, general and administrative		33,023,427								33,023,427
Depreciation and amortization		58,880								58,880
Research and development		17,572,311			44,012,899			c		61,585,210
Total operating expenses		50,654,618			44,012,899					94,667,517

Net loss from operations		(50,561,099	)		(44,012,899	)				(94,573,998	)

OTHER INCOME (EXPENSES):
Other income (expense)		(36,907	)							(36,907	)
Gain on foreign currency transaction		25,967								25,967
Loss on investments, related party		(6,636,410	)							(6,636,410	)
Gain on change in fair value of debt derivative		9,938,836								9,938,836
Interest expense		(80,330,374	)		36,304,020			b,d		(44,026,354	)
Net loss before provision for income taxes		(127,599,987	)		(7,708,879	)				(135,308,866	)
Income taxes		-			-					-

Net (loss)		(127,599,987	)		(7,708,879	)				(135,308,866	)

Non controlling interest		-			-					-

NET LOSS ATTRIBUTABLE TO CHINA TEL GROUP, INC.	$	(127,599,987	)	$	(7,708,879	)			$	(135,308,866	)

Net loss per common share (basic and fully diluted	$	(1.38	)	$	(0.08	)			$	(1.46	)

Weighted average number of shares outstanding, basic and fully diluted		92,565,014			92,565,014					92,565,014

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

For the nine month period ended September 30, 2009, the Condensed Consolidated Statement of Cash Flow restatement is to:

·	Reverse the accrual on interest previously booked towards note payable

The changes in reported amounts are summarized in the following reconciliations of the Company’s restatement of the Condensed Consolidated Statement of Cash Flow for the nine months ended September 30, 2009:

	As previously
	Reported			Adjustment			Ref		As restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(34,870,307	)		8,531,333			b		(26,338,974	)
Adjustments to reconcile net loss to net cash provided by operating activities:										-
Depreciation and amortization		58,880								58,880
Non controlling interest		-								-
Amortization of financing costs		2,614,695								2,614,695
Accretion of convertible debt		10,998,175								10,998,175
Gain on change in fair value of debt derivative		(22,021,336	)							(22,021,336	)
Common stock issued in exchange for services		20,653,684								20,653,684
(Increase) decrease in:										-
Accounts receivable		60,549								60,549
Inventory		(3,881	)							(3,881	)
Note receivable		124,107								124,107
Prepaid expenses		(27,110	)							(27,110	)
Increase (decrease) in:										-
Accounts payable and accrued liabilities		21,452,838			(8,531,333	)		b		12,921,505
Unearned revenue		(11,810	)		-					(11,810	)
Net cash used in operating activities		(971,516	)		-					(971,516	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from acquisition of Perusat S.A.		19,419								19,419
Proceeds received in connection with reverse merger		-								-
Investment in Chinacomm		-								-
Net cash provided by (used in) investing activities		19,419			-					19,419

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from shareholders		231,471								231,471
Payments made to notes payable		(41,902	)							(41,902	)
Proceeds from notes payable, related party		775,000								775,000
Net cash provided by financing activities		964,569			-					964,569

Effect of currency rate change on cash		(929	)		-					(929	)

Net increase in cash and cash equivalents		11,543			-					11,543

Cash and cash equivalents, beginning of the period		6,578			-					6,578
Cash and cash equivalents, end of the period	$	18,121		$	-				$	18,121

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

For the period from April 4, 2008 (date of inception) through September 30, 2008, the Condensed Consolidated Statement of Cash Flow restatement is to:

·	Properly record research and development expenditures as a current period expense

·	Correct calculation of the beneficial conversion feature related to convertible debt

The changes in reported amounts are summarized in the following reconciliations of the Company’s restatement of the Condensed Consolidated Statement of Cash Flows for the period from April 4, 2008 (date of inception) through September 30, 2008:

	As previously
	Reported			Adjustment			Ref		As restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(61,079,860	)		(16,240,212	)		c,d		(77,320,072	)
Adjustments to reconcile net loss to net cash provided by operating activities:										-
Accretion of convertible debt		8,427,330			(8,427,330	)		d		-
Construction in progress		(44,012,899	)		44,012,899			c		-
Beneficial conversion feature in conjunction with the issuance of convertible debentures		46,406,344			(19,345,357	)		d		27,060,987
Accounts payable and accrued liabilities		27,358,464								27,358,464
Net cash used in operating activities		(22,900,621	)		-					(22,900,621	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from acquisition of Perusat S.A.										-
Investment in Chinacomm		(5,000,000	)		-					(5,000,000	)
Net cash provided by (used in) investing activities		(5,000,000	)		-					(5,000,000	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible debentures		28,198,938								28,198,938
Net cash provided by financing activities		28,198,938			-					28,198,938

Effect of currency rate change on cash		-			-					-

Net increase in cash and cash equivalents		298,317			-					298,317

Cash and cash equivalents, beginning of the period		-			-					-
Cash and cash equivalents, end of the period	$	298,317		$	-				$	298,317

CHINA TEL GROUP, INC.

(a development stage company)

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2009

From April 4, 2008 (date of inception) through September 30, 2009, the Condensed Consolidated Statement of Cash Flows restatement is to:

·	Reverse the accrual on interest previously booked towards note payable

·	Properly record research and development expenditures previously recorded as construction in process

·	Correct calculation of the beneficial conversion feature related to convertible debt

	As previously
	Reported			Adjustment			Ref		As restated
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(136,131,320	)		(7,708,879	)		b,c,d		(143,840,199	)
Adjustments to reconcile net loss to net cash provided by operating activities:										-
Depreciation and amortization		58,880								58,880
Amortization of financing costs		3,000,883								3,000,883
Accretion of convertible debt		20,940,588			(8,427,330	)		d		12,513,258
Gain on change in fair value of debt derivative		(9,938,836	)							(9,938,836	)
Common stock issued for services		20,653,684								20,653,684
Construction in progress		(44,012,899	)		44,012,899			c		-
Beneficial conversion feature in conjunction with the issuance of convertible debentures		46,406,344			(19,345,357	)		d		27,060,987
(Increase) decrease in:										-
Accounts receivable		60,549								60,549
Inventory		(3,881	)							(3,881	)
Note receivable		124,107								124,107
Prepaid expenses		(27,072	)							(27,072	)
Increase (decrease) in:										-
Accounts payable and accrued liabilities		74,267,470			(8,531,333	)		b		65,736,137
Unearned revenue		(11,810	)		-					(11,810	)
Net cash used in operating activities		(24,613,313	)		-					(24,613,313	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from acquisition of Perusat S.A.		19,419								19,419
Proceeds received in connection with reverse merger		55,404								55,404
Investment in Chinacomm		(5,000,000	)		-					(5,000,000	)
Net cash provided by (used in) investing activities		(4,925,177	)		-					(4,925,177	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from shareholders		231,471								231,471
Payments made to notes payable		(41,902	)							(41,902	)
Proceeds from notes payable, related party		775,000								775,000
Net proceeds from issuance of convertible debentures		28,592,971								28,592,971
Net cash provided by financing activities		29,557,540			-					29,557,540

Effect of currency rate change on cash		(929	)		-					(929	)

Net increase in cash and cash equivalents		18,121			-					18,121

Cash and cash equivalents, beginning of the period		-			-					-
Cash and cash equivalents, end of the period	$	18,121		$	-				$	18,121

(a)	Reverse recording of option to purchase additional interest in ChinaComm Cayman as note payable

(b)	Reverse recording of accrued interest on option to purchase additional interest in ChinaComm Cayman

(c)	Properly charge to current period operations research and development costs

(d)	Correct determination of beneficial conversion feature relating to convertible debt.

NOTE 17 – SUBSEQUENT EVENTS

In October 2009, the Company issued an aggregate of 7,172178 shares of Series A common stock. 6,242,622 shares were issued to consultants for services rendered having a value of approximately $2.5 million. An additional 929,556 shares were issued in exchange for convertible notes and related interest of $408,169.

In November 2009, the Company issued an aggregate of 193,520 shares of Series A common stock in exchange for convertible notes and related interest of $68,293.

On November 2, 2009 the Company exercised its right to terminate the Amended and Restated Stock Purchase Agreement previously entered into with Olotoa Investments, LLC. In terminating the agreement, the Company reserved its rights to seek damages from Olotoa for its breach of the Agreement.

Effective November 2, 2009, Mr. Robert P. Weygand, Jr. tendered his resignation as a member of the Board of Directors of the Company. The Company’s Board of Directors accepted the tendered resignation.

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

Forward-Looking Statements

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

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

●

Statements relating to the Company’s future business and financial performance;

●

The Company’s competitive position;

●

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

●

Other material future developments that you may take into consideration.

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

●

Competition in the industry in which we do business;

●

Legislation or regulatory environments;

●

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

●

General economic conditions.

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

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

Overview and Business Operations

Peoples Republic of China

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

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

Pursuant to an Exclusive Technical and Management Consulting Services Agreement dated May 23, 2008, Yunji Communications Technology (China) Co., Ltd. (“Yunji”), a PRC wholly-owned foreign enterprise of ChinaComm Cayman, will operate and service the Chinacomm Network in exchange for a approximately ninety percent (90%) of the revenue generated by Chinacomm from the Chinacomm Network. Trussnet Gulfstream (Dalian) Co. Ltd. (“Trussnet Dalian”), a PRC wholly owned foreign enterprise of Trussnet, has entered into agreements with Yunji pursuant to which Trussnet Dalian will lease to Yunji equipment required in the deployment of the Chinacomm Network (“Equipment”) and provide technical and management services to Yunji for the procurement, installation and optimization of the Equipment. These agreements will become material to the Company’s operations only when we provide a sufficient amount of cash towards our optional acquisition of 49% of ChinaComm Cayman. The funds provided by our acquisition will be used to acquire the Equipment and to capitalize Yunji and Trussnet Dalian. Until we provide this capital, Chinacomm will continue to operating the Chinacomm Network and retain any revenue it generates from therefrom.

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

The Company has contracted with Trussnet USA, Inc., a Delaware corporation (“Trussnet Delaware”) (under separate control from our subsidiary of the same name) engineering and deployment services for the Chinacomm Network. These services, generally performed by Trussnet Delaware itself or through subcontracts with vendors holding requisite local licenses, include radio frequency engineering, site acquisition, preparation and approval of architectural and engineering drawings, installations of the Equipment and network architecture and engineering.

Peru

The present operations of the Company conducted in Peru are all conducted through Perusat, S.A., a Peruvian company (“Perusat”). On April 15, 2009, the Company acquired 95% of the stock of Perusat through a wholly owned subsidiary of Trussnet in exchange for 1,000,000 shares of China Tel Group, Inc. Series A common stock, valued at $2.50 per share, and cash in the amount of $275,000. The Company has delivered the share consideration and has received the Perusat shares. The $275,000 is payable as follows: (i) $50,000 at the closing of the transaction (“Closing”); (ii) $50,000 at June 30, 2009; (iii) $50,000 at the end of each of the three following quarters; and (iv) the balance of the purchase price due at the end of the next quarter. The Company has not yet paid the initial $50,000 due at the Closing or any of the quarterly $50,000 installments due pursuant to the stock purchase agreement between the Company and Perusat which documented this acquisition.

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

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

Opportunities in Latin America and Elsewhere

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

Financial Overview

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

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

Agreement with Olotoa Investments, LLC

On July 13, 2009, the Company entered into an amended and restated agreement with Olotoa Investments, LLC (“Olotoa”), a private investment group, to sell 49% of our Series A common stock, on a fully diluted basis calculated on January 11, 2010, for an amended purchase price of $314 million (“Amended and Restated Agreement”). Pursuant to the terms of the Amended and Restated Agreement, Olotoa agreed to pay the purchase price between March 9, 2009 and September 9, 2010 in amounts and on dates as requested by our Board of Directors. On May 1, 2009 and July 1, 2009, the Company requested Olotoa to pay $50 million and $65 million, respectively, of the amended purchase price. Olotoa failed to make the requested payments.

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

Acquisition of Interest in ChinaComm Cayman

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

On March 9, 2009, we acquired from Trussnet Capital Partners (HK), Ltd. an option to acquire up to 49% of the authorized shares of ChinaComm Cayman for a purchase price of $196 million (including $5 million previously paid directly to Chinacomm). Trussnet Capital Partners (HK) Ltd., of which our President, Tay Yong Lee is the sole shareholder, provided bridge financing for this transaction due to our lack of funds. Upon our payment for ChinaComm Cayman , Trussnet Capital Partners (HK) Ltd. will deliver the funds to ChinaComm Cayman which will in turn capitalize Yunji and Trussnet Dalian.

Pending Strategic Transactions

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

Agreement with Runcom Technologies, Inc.

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

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

Critical Accounting Policies and Estimates

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

These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements included herein for the period ended September 30, 2009.

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

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

Loss Per Share. In accordance with Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”), basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed similar to basic loss per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of September 30, 2009, the Company had approximately 37.3 million shares of common stock related to the issuance of debt instruments that could be converted into shares of the Company’s Series A common stock if all debt instruments were converted. Diluted loss per share is not presented, because the issuance of these additional common shares would be anti-dilutive.

Convertible Instruments. The Company's derivative financial instruments consisted of embedded derivatives related to the 10% amended and restated convertible notes issued November 17, 2008. The embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments required that the Company record the derivatives at their fair values as of the inception date of the amended and restated convertible notes (estimated at $14,083,386) and at fair value as of each subsequent balance sheet date. Any change in fair value was recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge. If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income. At September 30, 2009, the conversion-related derivatives were valued using the Black Scholes Option Pricing Model, with the following assumptions: dividend yield of 0%; annual volatility of 161.35%; and risk free interest rate of 0.14% and recorded non-operating income of $22,021,336 representing the change in fair value from December 31, 2008. The derivatives were classified as short-term liabilities. The derivative liability at September 30, 2009 is $4,144,550.

Goodwill and Identifiable Intangible Assets. Goodwill consists of the excess of the purchase price over the fair value of net assets acquired in purchase business combinations. At September 30, 2009, all goodwill is related to the acquisition of Perusat. In accordance with Accounting Standards Codification subtopic 305-10, Intangibles, Goodwill and Other (“ASC 305-10”), goodwill and intangible assets with indefinite lives are not amortized, but instead are measured for impairment at least annually in the fourth quarter, or when events indicate that impairment exists. As required by ASC 305-10, in the impairment tests for indefinite-lived intangible assets, the Company compares the estimated fair value of the indefinite-lived intangible assets, using a combination of discounted cash flow analysis and market value comparisons. If the carrying value exceeds the estimate of fair value, the Company calculates the impairment as the excess of the carrying value over the estimate of fair value and, accordingly, records the loss.

Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for impairment, only when events or circumstances indicate the carrying value may be impaired in accordance with Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”).

Impairment of Long-Lived Assets. In accordance with ASC 360-10, the Company estimates the future undiscounted cash flows to be derived from the asset to assess whether or not a potential impairment exists when events or circumstances indicate the carrying value of a long-lived asset may be impaired. If the carrying value exceeds the Company’s estimate of future undiscounted cash flows, the Company then calculates the impairment as the excess of the carrying value of the asset over the Company’s estimate of its fair value.

Results of operations:

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

Revenue:

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

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

Cost of Sales

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

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

Operating Expenses:

Selling, General and Administrative Expenses:

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

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

Research and Development:

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

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

Other Income (expense):

Loss on Change in Fair Value of Debt Derivative:

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

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

Interest Expense:

September 30, 2009				September 30, 2008
$	5,436,200			$	2,213,106

For the three months ended September 30, 2009, the Company's interest expense increased $ 3,223 ,094, or 145.6 %, compared to the similar period last year. This increase is primarily attributable to amortization of debt discount attributable to the amended and restated convertible notes issued on November 17, 2008 totaling $4,765,675.

Net Loss:

September 30, 2009				September 30, 2008
$	12,298,369			$	15,172,482

For the three months ended September 30, 2009, our net loss decreased by $ 2,874,113 , or 18.9 %, as compared to the same period last year, primarily for the reasons described above.

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

Revenue:

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

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

Cost of Sales

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

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

Operating Expenses:

Selling, General and Administrative Expenses:

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

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

Research and Development:

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

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

Other Income (expense):

Gain on Change in Fair Value of Debt Derivative:

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

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

Interest Expense:

September 30, 2009				September 30, 2008
$	13,421,873			$	28,279,301

For the nine months ended September 30, 2009, our interest expense of $ $13,421,873 includes approximately $11 million in amortized debt discount relating to our convertible notes issued on November 17, 2008. During the period from April 4, 2008 (since the Company’s date of inception) through September 30, 2008 we incurred a beneficial conversion feature of $27,060,987 relating to our convertible debt.

Net Loss:

September 30, 2009				September 30, 2008
$	26,338,974			$	77,320,072

Our net loss of $ $26,338,974 for the nine months ended September 30, 2009 is the result of the factors described above.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

If the Company is successful at generating revenue relating to the Chinacomm Network, those revenues will be denominated in RMB. As more particularly set forth in the risk factors discussed in Part I,, Item 1A. “Risk Factors” in our Annual Report on Form 10-K of the United States Securities and Exchange Commission (“SEC”) for the year ended December 31, 2008, the Company will then have exposure to changes in dollar/RMB exchange rates which could be material to the Company’s business. The revenues realized from the Company’s investment in Perusat will be denominated in Peruvian Nuevo Sol. As a result, similar exposure to exchange rate fluctuations in the dollar/Nuevo Sol exchange rate could be also material to the Company’s business.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

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

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

In connection with the preparation of this report, to evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2009, the Company’s senior management did not complete the assessment of the effectiveness of its internal control over financial reporting, implementing the criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in "Internal Control-Integrated Framework". Senior management has concluded, as a result, that its disclosure controls and procedures may not be effective at the reasonable assurance level as of September 30, 2009. Specifically, its control environment possibly may not sufficiently promote effective internal control over financial reporting through the management structure to prevent a material misstatement.

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

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

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

ITEM 4(T). CONTROLS AND PROCEDURES.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

On March 19, 2009, the Company received a subpoena from the SEC related to Westmoore Securities, Inc. Westmoore Securities, Inc. acted as the placement agent for our convertible notes, and a principal of Westmoore Securities, Inc. was a member of our Board of Directors until March 7, 2009. The Company has provided documents to the SEC in response to the subpoena and continued to be available to provide any information or documents requested by the SEC.

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

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

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

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

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

ITEM 1A. RISK FACTORS.

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

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

In August 2009 the Company issued 23,991,144 Series A common shares for the conversion of convertible notes issued by the Company in 2008 including interest.

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

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

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

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

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

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

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

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

Dated: April 15, 2010	CHINA TEL GROUP, INC.

	By:	/s/ George Alvarez
		George Alvarez
		Chief Executive Officer

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