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

PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These include statements about the Company’s expectations, beliefs, intentions or strategies for the future, which are indicated by words or phrases such as “anticipate,” “expect,” “intend,” “plan,” “will,” “the Company believes,” “management believes” and similar words or phrases.  The forward-looking statements are based on the Company’s current expectations and are subject to certain risks, uncertainties and assumptions. The Company’s actual results could differ materially from results anticipated in these forward-looking statements.  All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements.

THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000

Revenues.  Revenues for the three months ended June 30, 2001 were $1,840,000, an increase of $737,000 from $1,103,000 for the three months ended June 30, 2000.  For the three months ended June 30, 2001, revenues consisted of $115,000 derived from services rendered and $1,725,000 from the sales of products and systems through its Laptizen subsidiary.

During the three months ended June 30, 2001, all of PacificNet’s revenue was generated from customers in Asia.

Cost of Revenues.  Cost of revenues for the three months ended June 30, 2001 was $1,800,000 an increase of $1,599,000 from $201,000 for the three months ended June 30, 2000.  This increase was due to a corresponding increase in revenues.  Cost of revenues, as a percentage of revenues, was 152% for services rendered and 94% for the sales of products and systems through the Laptizen subsidiary for the three months ended June 30, 2001.

Gross margin for the three months ended June 30, 2001 was $40,000 a decrease of $862,000 from $902,000 for the three months ended June 30, 2000.  Gross margins for the three months ended June 30, 2001, were comprised of (52)% for services rendered and 6% for products and systems sold.  The decrease in margin for services rendered resulted from two primary factors:  1) premium pricing received on consulting projects during fiscal 2000 compared to fiscal 2001; and 2) additional costs incurred to complete fixed price services contracts during fiscal 2001.

Selling, General and Administrative Expenses. Selling, general and administrative expenses totaled $963,000 for the three months ended June 30, 2001, an increase of $380,000 from $583,000 for the three months ended June 30, 2000.   The increase is primarily related to higher business activity levels in 2001 over 2000.

As of June 30, 2001, the Company’s estimated monthly cash requirement for selling, general and administrative expenses during the subsequent three-month period was approximately $250,000; a decrease of approximately $40,000 from the actual monthly cash requirement rate for the three-months ended June 30, 2001.

Equity in Losses of Affiliated Companies.  The Company’s equity in losses of affiliated companies totaled $13,000 for the three months ended June 30, 2001, as compared to losses of $11,000 for the three months ended June 30, 2000. The loss reflects the Company’s 40% equity in losses in PacificNet-NTSC.com Sdn.Bhd, a Malaysian based consulting company and reseller of the Company’s products that was acquired in May 2000.

Interest Income.  Interest income was $39,000 for the three months ended June 30, 2001, as compared to $60,000 for the three months ended June 30, 2000. The decrease is due to the lower net cash balances.

Income Taxes.  No tax provision has been recorded for the three months ended June 30, 2001, as the result of the cumulative operating loss generated by the Company.

Minority Interests.   Minority interests for the three months ended June 30, 2001 totaled $50,000, compared with $0 for the same period in the prior year and consisted of minority interest in the losses of Laptizen that commenced operations in July 2000.

SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

Revenues.  Revenues for the six months ended June 30, 2001 were $3,801,000, an increase of $2,521,000 from $1,280,000 for the six months ended June 30, 2000.  For the six months ended June 30, 2001, revenues consisted of $309,000 derived from services rendered and $3,492,000 from the sales of products and systems through Laptizen.

During the six months ended June 30, 2001, all of PacificNet’s revenue was generated from customers in Asia.

Cost of Revenues.  Cost of revenues for the six months ended June 30, 2001 was $3,652,000 an increase of $3,419,000 from $233,000 for the six months ended June 30, 2000.  This increase was due to a corresponding increase in revenues.  Cost of revenues, as a percentage of revenues, was 129% for services rendered and 93% for the sales of products and systems through Laptizen for the six months ended June 30, 2001.

Gross margin for the six months ended June 30, 2001 was $149,000 a decrease of $898,000 from $1,047,000 for the six months ended June 30, 2000.  Gross margins for the six months ended June 30, 2001, were comprised of (29)% for services rendered and 7% for products and systems sold.  The decrease in margin for services rendered resulted from two primary factors:  1) premium pricing received on consulting projects during fiscal 2000 compared to fiscal 2001; and 2) additional costs incurred to complete fixed price services contracts during fiscal 2001.

Selling, General and Administrative Expenses.  Selling, general and administrative expenses totaled $2,230,000 for the six months ended June 30, 2001, an increase of $1,252,000 from $978,000 for the six months ended June 30, 2000.   The increase is primarily related to higher business activity levels in 2001 over 2000.

Equity in Affiliated Companies.  The Company’s equity in losses of affiliated companies totaled $25,000 for the six months ended June 30, 2001, as compared to $11,000 for the six months ended June 30, 2000. The increase reflects the Company’s 40% equity in losses in PacificNet-NTSC.com Sdn.Bhd, a Malaysian based consulting company and reseller of the Company’s products that was acquired in May 2000.

Interest Income.  Interest income was $116,000 for the six months ended June 30, 2001, as compared to $124,000 for the six months ended June 30, 2000. The decrease is due to the lower net cash balances in 2001 as compared to 2000.

Income Taxes.  No tax provision has been recorded for the six months ended June 30, 2001, as the result of the cumulative operating loss generated by the Company.

Minority Interests.   Minority interests for the six months ended June 30, 2001 totaled $62,000, compared with $0 for the same period in the prior year and consisted of minority interest in the losses of Laptizen that commenced operations in July 2000.

LIQUIDITY AND CAPITAL RESOURCES

Cash. The Company’s cash balance decreased by $1.6 million to $2.6 million at June 30, 2001, as compared to $4.2 million at December 31, 2000.  Operating activities used $1.6 million of cash comprised of  $1.4 million for continuing operations and $271,000 for discontinued operations.

Working Capital. The Company’s working capital decreased $1.8 million to $2.6 million at June 30, 2001, as compared to $4.4 million at December 31, 2000.  When compared to balances at December 31, 2000, the decrease in working capital at June 30, 2001 reflects a decrease in cash of $1,615,000 and a decrease in net accounts receivable of $270,000, offset by an increase in other current assets  of  $27,000 and a decrease in current liabilities of $86,000.    The Company anticipates that as revenue and operating activity levels increase, working capital financing requirements will also increase.

Property and Equipment Additions. For the six months ended June 30, 2001, additions to property and equipment aggregated $32,000.  The Company does not anticipate material expenditures for additions to property and equipment over the next year.

Investments in Affiliated Companies and Goodwill.   As of June 30, 2001, investments in affiliated companies and goodwill aggregated $567,000 as compared to $1,330,000 as of December 31, 2000.  The decrease of $763,000 reflects the Company's share of losses of affiliated companies of $25,000, amortization of goodwill of $3,000 and the provision for impairment loss of $735,000 related to the Company’s investments in APP China Group Limited and Cypress Rise.

Commitments for Additional Funding of Affiliated Companies.  The Company believes that affiliated companies in which it participates will generate incremental service revenues and product sales in 2001.  The Company does not anticipate that it will enter into additional joint venture arrangements and other investment structures over the next twelve months.

Cash Needs for the Foreseeable Future.  As of June 30, 2001, the Company had approximately $2.6 million of cash.  The Company expects that its cash needs for the foreseeable future will arise primarily from working capital requirements, technology development and capital expenditures.  The Company expects that the principal sources of cash will be cash on hand.  In the event that additional credit facilities are required, the Company believes that these additional credit facilities can be negotiated at market rates currently in effect.  The Company believes that these sources will be adequate to meet anticipated cash requirements for the remainder of fiscal 2001.

Inflation.  Inflation has not had a material impact on PacificNet’s business in recent years.

Currency Exchange Fluctuations.  All of PacificNet’s revenues are denominated either in U.S. dollars or Hong Kong dollars, while its expenses are denominated primarily in Hong Kong dollars and Renminbi, the currency of the PRC (“RMB”).  There can be no assurance that the RMB-to-U.S. dollar rate will remain stable.  Although a devaluation of the Hong Kong dollar or RMB relative to the U.S. dollar would likely reduce PacificNet’s expenses (as expressed in U.S. dollars), any material increase in the value of the Hong Kong dollar or RMB relative to the U.S. dollar would increase PacificNet’s expenses, and could have a material adverse effect on PacificNet’s business, financial condition and results of operations.  PacificNet has never engaged in currency hedging operations and has no present intention to do so.

Seasonality and Quarterly Fluctuations.  PacificNet has not experienced fluctuations in quarterly revenues from its e-commerce solutions business since inception.  The Company believes that its business is not subject to seasonal and quarterly fluctuations; however, since the Company, in its current form of business operations as an Asian IT solutions and consulting company, has only been in existence since July 1999, the Company does not have sufficient operating history to determine whether seasonal and quarterly fluctuations exist within its business lines.