CS Diagnostics 10Q 2009 Q0 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from __________ to __________

Commission File Number: 000-29611

THE CHILDREN’S INTERNET, INC.

(Exact name of small business issuer as specified in its charter)

Nevada		20-1290331
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

9701 Fair Oaks Blvd., Suite 200, Fair Oaks, CA 95628

(Address of principal executive offices)

(916) 965-5300

(Issuer's telephone number)

110 Ryan Industrial Ct., Suite 9, San Ramon, CA 94583

(Former address)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock:

As of October 31, 2008, there were 33,373,738 shares of common stock issued and outstanding.

THE CHILDREN’S INTERNET, INC

INDEX


		Page
		Number

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Balance Sheets - September 30, 2008 (unaudited) December 31, 2007 (audited)	1

	Unaudited Statements of Operations - For the nine months and three months ended September 30, 2008 and 2007, and the period from inception through September 30, 2008	2

	Unaudited Statements of Cash Flows - For the nine months ended September 30, 2008 and 2007, and the period from inception to September 30, 2008	3

	Notes to Unaudited Financial Statements	4

Item 2.	Management's Discussion and Analysis of Financial Conditions and Plan of Operation	18

Item 3.	Qualitative and Quantitative Disclosures about Market Risk	24

Item 4.	Controls and Procedures	24


PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Default Upon Senior Securities	28

Item 4.	Submission of Matters to Vote of Security Holders	28

Item 5.	Other Information	28

Item 6.	Exhibits and Reports on Form 8-K	28

SIGNATURES		29

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE CHILDREN'S INTERNET, INC.

(A Development Stage Company)

BALANCE SHEETS

	September 30,			December 31,
	2008			2007
ASSETS	(Unaudited)			(Audited)
Current Assets:
Cash	$	3		$	104
Deposit held in escrow, offsets $37,378 account
payable to Oswald & Yap (Note 4)		37,378			37,378
Total Current Assets		37,381			37,482
Equipment:
Equipment at cost		13,034			13,034
Accumulated depreciation		(12,416	)		(9,421	)
Equipment, net		618			3,613
Other Assets:
Deposit - State Board of Equalization		2,000			2,000
Utility deposit		118			118
Deferred tax asset, net of valuation allowance of
$1,521,634 (2008) and $1,398,462 (2007)		-			-
TOTAL ASSETS	$	40,117		$	43,213

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses	$	762,915		$	791,622
Accrued salaries		749,319			729,319
Note payable to Randick, O'Dea & Tooliatos, LLP		250,000			-
Notes payable to TCI Holding Company, LLC		343,406			264,504
Loans payable to related parties		121,291			101,518
Accrued payroll taxes		44,472			42,942
Taxes payable		8,674			4,817
Total Current Liabilities		2,280,077			1,934,722
Long-Term Liabilities:
Due to related party		1,032,900			1,028,831
TOTAL LIABILITIES		3,312,977			2,963,553

COMMITMENTS AND CONTINGENCIES (NOTES 3 & 4)		-			-

STOCKHOLDERS' DEFICIT
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; zero shares issued and outstanding		-			-
Common stock, $0.001 par value; 75,000,000 shares
authorized; issued and outstanding 33,373,738 shares
shares (2008) and 31,373,738 shares (2007)		33,374			31,374
Additional paid-in capital		2,372,410			2,364,660
Deficit accumulated during the development stage		(5,678,644	)		(5,316,374	)
TOTAL STOCKHOLDERS' DEFICIT		(3,272,860	)		(2,920,340	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$	40,117		$	43,213

The accompanying notes are an integral part of the financial statements.

THE CHILDREN'S INTERNET, INC.

(A Development Stage Company)

STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months						For the Nine Months						From
	Ended September 30,						Ended September 30,						Inception
	2008			2007			2008			2007			to Date

NET REVENUES	$	-		$	189		$	30		$	631		$	1,671
COSTS OF REVENUES		-			22			3			85			260
Gross margin		-			167			27			546			1,411
OPERATING EXPENSES
Sales and marketing		-			-			-			35,700			70,225
General and administrative		39,860			248,031			316,331			613,555			3,903,378
Officers' compensation		-			100,291			-			264,277			1,583,513
Depreciation expense		822			1,086			2,995			3,282			12,416
Total operating expenses		40,682			349,408			319,326			916,814			5,569,532
Loss from operations		(40,682	)		(349,241	)		(319,299	)		(916,268	)		(5,568,121	)
Interest expense		15,464			7,744			42,171			24,632			104,923
Loss before income taxes		(56,146	)		(356,985	)		(361,470	)		(940,900	)		(5,673,044	)
Provision for income taxes		-			-			800			800			5,600
NET LOSS	$	(56,146	)	$	(356,985	)	$	(362,270	)	$	(941,700	)	$	(5,678,644	)



Net loss per common share
- basic and diluted	$	(0.00	)	$	(0.01	)	$	(0.01	)	$	(0.04	)	$	(0.48	)

Shares used in computing
basic and diluted net loss
per share		26,873,738			26,873,738			26,873,738			26,873,738			11,927,911

The accompanying notes are an integral part of the financial statements.

THE CHILDREN'S INTERNET, INC.

(A Development Stage Company)

STATEMENTS OF CASH FLOWS

(Unaudited)


	For the Nine Months Ended September 30,						For the period from Inception through September 30,
	2008			2007			2008
CASH FLOWS USED IN OPERATING ACTIVITIES
Net Loss	$	(362,270	)	$	(941,700	)	$	(5,678,644	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation on equipment		2,995			3,282			12,416
Amortization of prepaid marketing expenses		-			630			1,260
Stock compensation to directors		-			30,000			345,000
Stock compensation to officers and employees		6,000			53,860			127,261
Shares issued for services		-			-			709,756
Services performed as capital contribution		3,750			7,500			606,250
Expenses paid by former officer on behalf of company		-			-			5,000
Deposit - State Board of Equalization		-			-			(2,000	)
Utility deposit		-			(118	)		(118	)
Increase in current assets -
Deposit held in escrow		-			-			(37,378	)
Prepaid marketing expenses		-			-			(1,260	)
Increase in current liabilities -
Accounts payable and accrued expenses		(23,320	)		351,813			816,061
Accrued salaries		20,000			212,750			749,319
Note payable to Randick, O'Dea & Tooliatos		250,000			-			250,000
Notes payable to TCI Holding Company, LLC		78,902			161,000			343,406
Loans payable to related parties		19,773			120,009			121,291
Net cash used in operating activities		(4,170	)		(974	)		(1,632,380	)

CASH USED IN INVESTING ACTIVITIES
Acquisition of equipment		-			(838	)		(13,034	)
Net cash used in investing activities		-			(838	)		(13,034	)

CASH PROVIDED BY FINANCING ACTIVITIES
Issuance of common stock		-			-			612,517
Advances from majority shareholder		4,069			232			1,489,812
Majority shareholder advances converted to stock		-			-			(456,912	)
Net cash provided by financing activities		4,069			232			1,645,417

Net change in cash and cash equivalents		(101	)		(1,580	)		3

Cash and cash equivalents - Beginning of period		104			1,106			-

Cash and cash equivalents - End of period	$	3		$	(474	)	$	3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	144		$	180		$	3,446
Cash paid for taxes	$	-		$	800		$	4,800

The accompanying notes are an integral part of the financial statements.

THE CHILDREN'S INTERNET, INC.

(A Development Stage Company)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

September 30, 2008

NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Children's Internet, Inc. (the Company) was incorporated under the laws of the State of Nevada on September 25, 1996 under the name D.W.C. Installations. At that date, 2,242,000 shares were issued to a small group of shareholders. The Company was primarily inactive until July 3, 2002 when Shadrack Films, Inc. (Shadrack) purchased 2,333,510 newly-issued shares of the Company’s common stock for $150,000, thereby obtaining a majority ownership interest. The total issued and outstanding shares of the Company was increased to 4,575,510 shares as a result of this sale to Shadrack. On December 27, 2002, the Company’s name was changed from D.W.C. Installations to The Children’s Internet, Inc.

The Company is currently authorized to conduct business in California, and beginning October 29, 2008 the Company has been located in Fair Oaks, California. The Company’s primary operations consist of marketing, selling, and administering a secure Internet service and safe online community for children. The system, known as The Children’s Internet®, is not owned by the Company, but is owned by a related party, Two Dog Net, Inc. (“TDN”). The Company’s marketing, selling and administration rights derive from a Wholesale Sales & Marketing Agreement with TDN, through the year 2013 which includes the ability to obtain five-year extensions.

In a Stock Purchase Agreement dated October 11, 2002, twenty-five D.W.C. Installations shareholders sold 2,237,000 of the original 2,242,000 “freely-tradable” shares of common stock to six individuals, two of whom are related to the Company’s former Chief Executive Officer and Chief Financial Officer and Chairman of the Board, Sholeh Hamedani. Together, the two related individuals purchased 27% of the 2,237,000 shares sold. At the time the shares were issued, the Company believed the shares were "freely tradable" based on the representations made by its law firm, Oswald & Yap, who structured the agreement. Subsequently the Company determined that the shares were, in fact, not freely tradable and those shares would have to be registered. The said shares were then registered in a SB-2 Registration Statement which was declared effective on May 5, 2004.

Also on October 11, 2002, the Company entered into a subsequent agreement with the six new shareholders holding the 2,237,000 “freely-tradable” shares, to issue four shares of restricted common stock to these shareholders or their designees, for every one “freely-tradable” share held. Pursuant to this agreement, 8,948,000 newly-issued restricted shares of common stock were issued in exchange for an agreement to loan to TDN, the proceeds of the sales of a portion of their shares. TDN in turn agreed to loan a portion of these proceeds to Shadrack to finance the on-going operations of the Company. TDN retained the remainder of the proceeds to help fund the on-going development, maintenance and technology upgrade costs of The Children’s Internet system and to make payments on TDN’s existing debts.

The 8,948,000 newly-issued shares were recorded at a value of $575,356 based on the $0.0643 per share paid by Shadrack in a previous transaction where Shadrack acquired the 2,333,510 newly-issued shares it purchased on July 3, 2002. The $575,356 value was recorded by the Company as a debt financing fee. The loan agreement is such that Shadrack will not charge the Company any interest on the amounts loaned. Shares sold under this agreement included 1,218,990 of the “freely-tradable” shares and 2,650,108 of the newly-issued restricted shares, for a total of 3,869,098 shares, which were sold for a total of $2,722,341. After deducting the $494,049 in commissions paid by TDN, the resulting net proceeds were $2,228,292. As of September 30, 2008 and 2007, the total amount loaned to the Company by Shadrack was $1,489,812 and $1,471,490, respectively (including $456,912 converted to 13,054,628 shares of the Company’s common stock in 2005).

During the year ended December 31, 2005, an additional 13,334,628 restricted shares of common stock were issued. Of these shares, 13,054,628 were issued to Shadrack, a related party which as of September 30, 2008, held approximately 52.2% of the voting power of the Company’s outstanding common stock, for conversion of existing debt, and 280,000 shares were issued to Crosslink Financial Communications, a non-related party in payment for providing investor relation services. Although Crosslink was not a related party at the time of issuance, its principal shareholder, William L. Arnold served as President of the Company from December 30, 2005 through August 31, 2006, under an Executive Employment Agreement dated December 30, 2005.

On June 9, 2006, 15,600 shares were issued to two principals of Brazer Communications under a public relations consulting agreement.

On June 29, 2007, 4,500,000 shares (the “Escrowed Shares”) were issued in the name of The Children’s Internet Holding Company, LLC, a Delaware limited liability company (“TCI Holding” or “TCI Holding Company, LLC”), and deposited in escrow on July 3, 2007 in accordance with the Interim Stock Purchase Agreement (“ISPA”) signed on June 15, 2007 between the Company and TCI Holding, thereby increasing the Company’s total issued and outstanding shares of common stock to 31,373,738. The 4,500,000 shares held in escrow have not been deemed to carry voting rights under Nevada law as they are held for the benefit of the Company until released.

On October 19, 2007, TCI Holding Company, LLC entered into a Definitive Stock Purchase Agreement (the “DSPA”) with the Company to purchase a controlling interest in the Company. The DSPA expired on March 31, 2008 and was subsequently terminated by action of the Board of Directors on May 9, 2008, as explained in Note 4.

On August 18, 2008, 2,000,000 shares were issued in the name of Randick, O’Dea & Tooliatos, LLP, a law firm representing TCI in various matters, as a pledge to cover up to $250,000 in services provided in the litigation with the Securities & Exchange Commission explained in Note 4, in accordance with the Pledge Agreement and Promissory Note for $250,000 dated August 6, 2008 and due on August 6, 2009, also explained in Note 4. The 2,000,000 shares are being held by Randick, O’Dea & Tooliatos as security for repayment of the loan, and are not deemed to carry voting rights under Nevada law as they are held for the benefit of the Company until released in payment at the maturity of the loan. The issuance of the 2,000,000 shares, increased the Company’s total issued and outstanding shares of common stock to 33,373,738 as of September 30, 2008 for the purposes of financial reporting.

Development Stage Enterprise

The Company is a development stage enterprise as defined by Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises.” All losses accumulated since the inception of the Company have been considered as part of the Company’s development stage activities. The Company has devoted the majority of its efforts to activities focused on marketing The Children’s Internet® service and on financial planning, raising capital, developing sales strategies and new marketing materials and implementing its business plan. The Company is considered to be a development stage company even though its planned principal operations have commenced, because there have been no significant revenues earned by the Company to date.

Additionally, the Company is not a shell company as defined in Rule 12b-2 of the Exchange Act.

Revenue Recognition

In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104 “Revenue Recognition, corrected copy” to revise and clarify SAB No. 101, “Revenue Recognition in Financial Statements”, issued in 1999 and 2000. Pursuant to these bulletins and the relevant generally accepted accounting principles, the Company recognizes revenue when services are rendered to subscribers under contractual obligation to pay monthly subscription amounts for such services.

NOTE 2 - INTERIM FINANCIAL INFORMATION

Basis of Presentation

The accompanying unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America pursuant to Regulation S-B of the Securities and Exchange Commission, which contemplates continuation of the Company as a going concern. At present, the Company has not generated any significant revenues from its established sources of revenue and has had net losses and negative cash flow since its inception. These factors raise substantial doubt about the Company's ability to continue as a going concern. Without the realization of additional capital or established revenue sources, it would be unlikely for the Company to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

These interim financial statements should be read in conjunction with the Company's audited financial statements and related notes as contained in the Company's Form 10-KSB for the year ended December 31, 2007. In the opinion of management, the interim financial statements reflect all adjustments, including normal recurring adjustments, necessary for fair presentation of the interim periods presented. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of results of operations to be expected for the full year.

Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company had net losses and negative cash flow from operations for the nine-month periods ended September, 30, 2008 and 2007, and accumulated net losses and negative cash flow from operations of $5,678,644 and $1,632,380, respectively, from inception through September 30, 2008.

The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The ability of the Company to continue as a going concern is dependent on its ability to generate profitable operations in the future by implementing its business plan and/or to obtain the necessary financing to meet its obligations, and to repay its liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. Management plans to provide for the Company’s capital needs during the year ended December 31, 2008 through equity financing, with the net proceeds to be used to fund continuing operations.

NOTE 3 - RELATED PARTY TRANSACTIONS

Services Provided

On January 26, 2005, the Company’s Board of Directors resolved that starting January 1, 2005, all salary due and payable to the Company's former Chief Executive Officer and Chief Financial Officer and Chairman of the Board, Sholeh Hamedani, would be accrued when earned. The decision was to be made at the end of each year whether to make the payment in cash, shares of the Company’s restricted common stock, or a combination of both. Accordingly, for the period from January 1, 2005 through the date of her resignation as Chief Executive Officer and Chief Financial Officer, October 19, 2007, $504,193 has been accrued and charged to Officers’ Compensation. For the period ended September 30, 2007, $135,000 was accrued and charged to Officers’ Compensation. For the period from August 2002 through the end of 2004, Sholeh Hamedani provided services to the Company at a total cumulative fair market value of $435,000, which was contributed to Additional Paid-in Capital.

The salary of the Company’s former President, William L. Arnold, was not fully paid, but was accrued from May 1, 2006 through August 31, 2006. Beginning on September 1, 2006, Mr. Arnold took an unpaid leave of absence. The Company believes that Mr. Arnold’s leave of absence was voluntary while Mr. Arnold claims that his leave of absence was related to a breach of his employment agreement with the Company.

In a letter from Mr. Arnold’s counsel dated November 7, 2007, Mr. Arnold seeks to negotiate an amicable settlement for alleged breach of contract, intentional and negligent misrepresentation arising out of his recruitment, hiring, and employment beginning in December 2005. On or about December 6, 2007, Mr. Arnold filed a lawsuit in the Superior Court of California, County of Alameda Case No. 07-359949 alleging breach of contract, fraud and violation of California Labor Code Section 200 in connection with the dispute surrounding his employment. The Company filed an answer to the Complaint and intends to vigorously defend the claim.

From April 1, 2007 through December 31, 2007, Roaya Hamedani-Wooler and Soraiya Hamedani, sisters of the former Chief Executive Officer of the Company, Sholeh Hamedani, and both of whom have twelve years experience with TDN developing and marketing the Children’s Internet®, performed consulting services for the Company. Mrs. Wooler earned $30,181, of which only $19,181 has been paid to date. Soraiya Hamedani earned $27,159, of which only $16,159 has been paid to date. In addition, Lewis Wooler, husband of Roaya Hamedani-Wooler, performed customer service and technical support services during the same period, and earned $24,803, of which only $13,803 has been paid to date. Their consulting services for the Company ended on December 31, 2007.

On December 6, 2007, the Company entered into a Services Agreement with TDN, which was made effective as of October 19, 2007. Under the Services Agreement, TDN provided TCI with office space, computer and office equipment, and certain supplies and services until the earlier of January 31, 2008 or the closing of the Definitive Stock Purchase Agreement, explained in Note 4, for which TCI was obligated to pay TDN a monthly charge of $9,961 pro rated based on the actual number of days for any partial months. Although the Services Agreement expired on January 31, 2008, because the DSPA did not close on that date, TDN continued to provide the Company with its San Ramon office space, computers and office equipment, and certain supplies and services. As the Guarantors of the TDN Services Agreement, TCI Holding signed an agreement with TDN on February 5, 2008 providing that it would guarantee payment of up to $25,000 of unpaid invoices for the monthly service fees. It was in TCI Holding’s best interest to ensure a smooth transition and transfer of information so TDN continued to provide uninterrupted services, facilities and equipment which were essential to TCI’s operations as well as to closing the DSPA. Neither TCI Holding nor the Company has paid TDN the outstanding fees.

Advances

Substantially all of the Company’s funding has been provided by Shadrack, which as of September 30, 2008 held approximately 52.2% of the voting power of the Company’s outstanding common stock. Additional short-term funding consists of advances totaling $90,702 made since January 1, 2007 by Nasser Hamedani, a related party as explained below, short-term advances totaling $19,469 made by Larry Wheeler, father of Tyler Wheeler, the Company’s CEO and CFO and a member of Company’s board of directors, short-term advances totaling $11,120 made by John Heinke, the Company’s Controller, and advances totaling $343,406 made by TCI Holding. The total amount advanced by Shadrack through September 30, 2008 and 2007 was $1,489,812 and $1,471,490, respectively (including the amount converted to the Company’s common stock, as described in the following paragraph).

In February 2005, the Company owed Shadrack approximately $457,000 for loans made by Shadrack to the Company for funding all of the Company’s operations since entering the development stage on July 3, 2002. On February 15, 2005, the Company's Board of Directors authorized and approved the conversion of debt totaling $456,912 owed by the Company to Shadrack, into 13,054,628 shares of the Company’s restricted common stock at a conversion price of $.035 per share, thereby reducing the amount due to Shadrack.

Shadrack Films, Inc. is an entity owned and controlled by the Company's former Chief Executive Officer, Chief Financial Officer and Chairman of the Board, Sholeh Hamedani, who is its sole officer, director and shareholder. Shadrack also owned 2,333,510 shares of the Company's common stock, of which it sold 1,277,150 of its restricted shares in reliance on an exemption from registration pursuant to Section 4(1)(1/2) of the Securities Act of 1933, to approximately 130 investors between July 2004 and June 2005. In addition, Shadrack paid for services, on behalf of the Company, valued at $35,000 with 70,000 restricted shares of the Company’s common stock. Together with the 13,054,628 shares issued upon conversion of the debt, Shadrack owned an aggregate of 14,040,988 shares of the Company's common stock or 52.2% as of September 30, 2008 (excluding the 4,500,000 shares held in escrow, and the 2,000,000 shares pledged as collateral for a note payable, and without giving effect to any presently exercisable options).

Beneficial Ownership

The Company, Shadrack and TDN are related parties. The Company's former Chief Executive Officer, Chief Financial Officer and Chairman of the Board, Sholeh Hamedani, is the sole shareholder of Shadrack which as of September 30, 2008 owned 52.2% of the Company's common stock outstanding. Ms. Hamedani was President of TDN until she resigned on August 1, 2002 and is a 10% shareholder of TDN. In addition, TDN’s current President, Chairman and Founder, Nasser Hamedani, is the father of Sholeh Hamedani. TDN also owns an option to purchase up to 18,000,000 shares of the Company’s common stock and is therefore beneficial owner of approximately 40.1% of the Company’s common stock.

Licensing Agreement

The Wholesale Sales and Marketing Agreement between the Company and TDN, dated March 3, 2003, is an exclusive and renewable five-year agreement for the Company to be the exclusive marketers of TDN’s proprietary secure internet service for children at the pre-school to junior high levels called The Children's Internet®. Under the terms of the Wholesale Sales and Marketing Agreement, the agreement is automatically renewed for additional five-year periods on the same terms unless either party terminates by written notice to the other party no less than one year before the end of the term. Accordingly, the earliest date on which the agreement can be terminated is March 3, 2013.

On February 15, 2005, the Company's Board of Directors authorized and approved an amendment to the Wholesale Sales and Marketing Agreement. The amendment reduces the license fee for The Children's Internet® technology payable to TDN from $3.00 to $1.00 per subscriber per month. In consideration for the reduction of the fee, the Company granted TDN or its designees, an option to purchase the Company's currently restricted common stock as described below in the section called “Stock Options Granted”.

Office Space

The Company’s previous office space in Pleasanton, California was leased by Shadrack for three years. The original lease expired on April 30, 2007. From May 1 through July 15, 2007, the same office space was rented by Shadrack on a month-to-month basis. Shadrack and the landlord could not reach an agreement on terms for a new lease. Therefore, the Company vacated the premises on July 13, 2007. Upon vacating the Pleasanton office, the Company moved into office space in San Ramon, California. Costs of the relocation were approximately $5,000. This office space was leased from RAM Properties by Nasser Hamedani, a related party, pursuant to a one-year lease through July 14, 2008, and is currently rented on a month-to-month basis. On October 19, 2007, the Company entered into a Services Agreement with TDN whereby monthly rental payments of $1,762 are payable to TDN by the Company. Prior to the Services Agreement, the Company reimbursed Mr. Hamedani for the monthly lease payment of $1,762. Although the Services Agreement expired on January 31, 2008, because the DSPA did not close, TDN continued to provide the Company with its San Ramon office space.

Stock Options Granted

As noted above, on February 15, 2005, because TDN agreed to reduce their licensing fee, the Company issued an option to TDN to purchase up to 18,000,000 shares of the Company’s restricted common stock at an exercise price of $0.07 per share, and a fair value of $0 (the “TDN Option”). The TDN Option is exercisable, in whole or in part at any time and from time to time, for a period of five years from the date of grant. The TDN Option also provides TDN with “piggyback” registration rights for all shares underlying the TDN Option on any registration statement filed by the Company for a period of one year following any exercise of the TDN Option. This issuance was valued at $0 because as of the date of issuance, the Company was under no obligation for payment to TDN since no sales of the product had occurred and no liability, therefore, had been generated. The TDN Option was granted primarily to induce TDN to reduce its future right to a royalty from sales of the product.

NOTE 4 - COMMITMENTS AND CONTINGENCIES

On November 24, 2004, Oswald & Yap, a Professional Corporation (“O&Y”), formerly legal counsel to the Company, filed a complaint in the Superior Court of California, County of Orange, Case No. 04CC11623, against the Company, seeking recovery of allegedly unpaid legal fees in the amount of $50,984.86 in connection with the legal representation of the Company. Subsequently the amount claimed of unpaid legal fees was reduced to $37,378.43 because it was discovered that O&Y did not properly credit all of the payments that were made by the Company to O&Y. The amount of $37,378.43 was deposited in an escrow account by the Company on July 5, 2005. The complaint includes causes of action for breach of contract. The Company disputes the amounts claimed alleging that O&Y’s services were otherwise unsatisfactory. On May 9, 2005, O&Y submitted an Offer to Compromise for a $0 payment by the Company to O&Y in exchange for mutual releases which the Company rejected.

On February 14, 2005, a cross-claim was filed in the Superior Court of California, County of Orange, Case No. 04CC11623 by the Company against O&Y alleging breach of contract, professional negligence, negligent representation, and breach of good faith and fiduciary duty. The basis of the allegations is that O&Y was retained to assist the Company’s predecessor company in the purchase and acquisition of D.W.C. Installations (“D.W.C.”) with the expectation that D.W.C. had available free-trading shares such that the Company could immediately raise capital on the relevant markets and that in advising the Company through the purchase, O&Y failed to properly advise the Company as to the status of D.W.C. and its shares, which in fact were not free-trading. As a result of this conduct, the Company alleges damages in an unspecified amount but including purchase costs, extended operation costs, refiling costs, audit costs, legal fees, loan fees, lost market share, and costs for registration. O&Y has vigorously disputed the claims set forth in the cross-complaint and has indicated its intention, should it prevail in its defense, to institute a malicious prosecution action against the Company, Nasser Hamedani, Sholeh Hamedani and Company counsel. Litigation of this matter is currently stayed pending outcome of the SEC Complaint discussed below. The case was scheduled for a status conference on April 7, 2008 before the Superior Court in Irvine, California, which has been continued to December 15, 2008.

There is a contingent liability in connection with a Stock Purchase Agreement executed on October 11, 2002 between identified shareholders and identified purchasers. Under the terms of the Stock Purchase Agreement, a payment of $150,000 is due to be paid into escrow in part consideration for purchase of the stock of D.W.C. The payment date is designated as 90 days from the date that the Company’s (formerly, D.W.C.) shares of common stock become quoted on the over-the-counter bulletin board system. The shares were approved by NASDAQ OTC:BB to be quoted on the over-the-counter bulletin board system on December 23, 2004. If this payment is not made, there could be exposure in connection with the identified shareholders’ efforts to collect the amounts allegedly due.

On June 13, 2006, the Company became subject to an arbitration demand from Stonefield Josephson, Inc., its former accountant, seeking reimbursement costs for legal fees spent in connection with the SEC inquiry of the Company. Stonefield Josephson, Inc.’s claim seeks recovery of $29,412.74. The Company disputes any amounts owed because of a settlement agreement entered into between the respective parties in December 2004 effectively terminating their relationship. This matter was submitted to binding arbitration through AAA in January 2007. The Arbitrator’s decision was issued on February 2, 2007, awarding Stonefield Josephson, Inc. the sum of $19,000 plus costs and fees in the amount of $1,425 due and payable March 15, 2007. The decision also awarded Stonefield Josephson, Inc. interest at the rate of 10% per annum on $19,000 from March 15, 2007. On August 30, 2007, an additional $2,500 in post-arbitration attorney’s fees and costs was awarded by the Los Angeles Superior Court. No amounts have been paid to Stonefield Josephson since the date of the Arbitrator’s decision.

On August 25, 2006, the Company filed a complaint against its former accountants, Stonefield Josephson, Inc., and its principal Dean Skupen, in the Superior Court of California, County of Alameda, Case No. VG06286054 alleging breach of contract, promissory estoppel, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, fraud, and unfair business practices arising out of defendants’ alleged failure to properly perform contractual obligations. The Company seeks damages resulting from defendants’ actions, including recovering costs expended for a subsequent audit and the resultant loss in stock price following the Company’s inability to file necessary reports with the NASD. The matter was subsequently transferred to Los Angeles Superior Court. Mediation on this matter took place on February 29, 2008 in Los Angeles, California but was unsuccessful. A court hearing is pending.

On September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a complaint (the “SEC Complaint”) in the United States District Court, Northern District of California, Case No. C066003CW, against, among others, the Company, and its former Chief Executive Officer, Sholeh Hamedani, alleging violations of Section 10(b) of the Exchange Act and Rule 10b-5 by one or more defendants; violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13 by one or more defendants; violations of Section 13(b)(2)(A) of the Exchange Act by the Company; violations of Section 13(b)(2)(B) of the Exchange Act by the Company; and violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1, 13b2-2, 13a-14, 16(a) by one or more defendants. The complaint generally alleged that the Company and the individual defendants made false or misleading public statements regarding the Company’s business and operations, made false statements in various filings with the SEC, and in particular, in the June 2005 Annual Report and Restatement and 2005 Current and Quarterly Reports, and that the defendants, or some of them, induced investment in the Company through misrepresentation and omissions. The complaint sought disgorgement, unspecified monetary damages, injunctive relief and other relief against the defendants.

On October 23, 2008, the court issued its final judgment with respect to the SEC Complaint (the “Final Judgment”). Pursuant to the Final Judgment, Sholeh Hamedani was required to disgorge all Company shares owned or controlled by her through Shadrack and the Company was ordered to open an escrow account to accept all such disgorged shares. The Company’s Board of Directors and remaining shareholders may determine how to dispose of such shares, but must seek the court’s approval of any disposition (including the selling, transferring, borrowing against or diluting of such shares). For purposes of establishing a quorum at a shareholder meeting, the disgorged shares shall be deemed present but not voting.

With respect to Sholeh Hamedani and Nasser Hamedani, the Final Judgment provided that they are prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act and imposed certain monetary penalties on them.

On December 30, 2005, William L. Arnold, the principal shareholder of Crosslink Financial Communications, Inc., the Company’s former investor relations consulting firm, was appointed by the Chairman to act as President of the Company under an Executive Employment Agreement. Compensation included a monthly salary of $10,000, of which $2,500 per month was deferred with 9% accrued interest until January 2007. The Executive Employment Agreement also included a combination of nonqualified and qualified stock options (the “Arnold Option”). The Arnold Option was for the purchase of up to 1,000,000 shares at an option price of $0.55 per share, and expired on December 31, 2010. The closing market price of the Company’s common stock was $0.48 per share on the date of the agreement. One half of the Arnold Option vested immediately and the remaining 500,000 option shares were to vest at the rate of 1/36^th each month until fully vested. Commencing on September 1, 2006, Mr. Arnold took a voluntary unpaid leave of absence. During Mr. Arnold’s leave of absence the vesting of his options was suspended. Of the 500,000 option shares which vested immediately, 360,000 are Incentive Stock Options (ISO’s). The remaining 640,000 option shares are non-qualified. Additionally, the Executive Employment Agreement includes a performance bonus of up to 50% of the annual salary to be paid on or before the sixtieth day following the close of the Company’s fiscal year, provided that Mr. Arnold meets the performance standards as established by the Board of Directors. Pursuant to this provision, $40,000 was accrued as an expense for the period of January 1 through August 31, 2006. If the stock-based compensation provisions of SFAS No. 123R had been adopted prior to January 1, 2006, the fair value of the 500,000 shares which vested on December 30, 2005 under the Arnold Option would have been recorded at $235,000.

In May 2007, Mr. Arnold advised the Company that he disagreed with the Company’s position that his unpaid leave of absence was voluntary. Mr. Arnold informed the Company that he believed his resignation resulted from the Company’s breach of his Executive Employment Agreement. The Company and Mr. Arnold have had discussions in an effort to resolve the dispute between them but, to date, have not reached agreement. The Company believes that Mr. Arnold violated the terms of the Executive Employment Agreement when he voluntarily left his position as President in September of 2006. The Company believes it is only obligated to pay Mr. Arnold for back pay and bonus, plus interest, for the period prior to September 2006. The total compensation that the Company believes it owes Mr. Arnold as of September 30, 2008 is $89,274. This amount is reflected in the Company’s financial statements.

In a letter from Mr. Arnold’s counsel dated November 7, 2007, Mr. Arnold indicated that he sought to negotiate an amicable settlement for alleged breach of contract, intentional and negligent misrepresentation arising out of his recruitment, hiring, and employment beginning in December 2005. On or about December 6, 2007, Mr. Arnold filed a lawsuit in the Superior Court of California, County of Alameda Case No. 07-359949 alleging breach of contract, fraud and violation of California Labor Code Section 200 in connection with the dispute surrounding his employment. The Company filed an answer to the Complaint and intends to vigorously defend the claim.

Adverse outcomes in some or all of the claims pending against the Company may result in significant monetary damages or injunctive relief against the Company that could adversely affect the Company’s ability to conduct its business. Although management currently believes that resolving all of these matters, individually, or in the aggregate, will not have a material adverse impact on the Company’s financial position or results of operations, the litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. There exists the possibility of a material adverse impact on the Company’s financial position and the results of operations for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

The Company is not aware of any other pending or threatened litigation that could have a material adverse effect on its business.

The Company entered into two equipment leases with Dell Financial Services L.P. of Round Rock, Texas. The cash value of the equipment leased, including sales tax, is $11,775. The Company entered into these leases in November 2006, however, lease payments commenced in January 2007. The total value of the 48 monthly lease payments is $17,424. At the end of the four-year period in December 2010, each lease has a purchase option at $1. These leases are considered to be operating leases as the period over which payments are to be made exceeds the period over which the assets would be depreciated, if purchased.

On January 9, 2007, the Company signed a 12-month co-location agreement with Evocative, Inc. to house the Company’s search engine, servers and related equipment at Evocative’s data center in Emeryville, California. This agreement replaced a similar 13-month agreement which began in October 2003 and was continued on a month-to-month basis. The new agreement added a managed firewall service. The basic annual cost under this agreement was $35,988. The co-location agreement with Evocative was cancelled as of January 31, 2008.

On March 1, 2007, the Company entered into an oral agreement to pay Tim T. Turner, the amount of $13,125 per month as a consultant until such time as Mr. Turner and the Company entered into an employment agreement. On April 2, 2007, the Company entered into an Executive Employment Agreement with Tim T. Turner, whereby Mr. Turner became the Director of Finance and Operations for the Company. This position was not deemed an executive officer position. Upon the Company obtaining Directors and Officers insurance, Mr. Turner would have been appointed an officer of the Company and made a member of the Company’s Board of Directors. Mr. Turner resigned his position with the Company effective on December 15, 2007. The agreement provided that Mr. Turner would receive a yearly salary of $157,500, part of which was to be deferred for a year, and if the Company was not able to pay such deferred compensation, it was to be evidenced by a promissory note and have an attached warrant.

On March 17, 2008, Mr. Turner informed the Company that amounts owed to Mr. Turner included a bonus of $78,750 and severance of $360,937.50, in addition to amounts accrued by the Company for Mr. Turner’s unpaid salary of $110,562 and consulting fees of $13,125. The Company disputes the bonus and severance amounts claimed by Mr. Turner and intends to legally contest such disputed amounts in the event Mr. Turner further attempts collection.

On April 30, 2007, the Company and the Board of Directors adopted “The Children’s Internet, Inc. 2007 Equity Incentive Plan” (the “Plan”). The purpose of the Plan is to provide incentives to attract retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company’s future performance through awards of Options, Restricted Stock and Stock Bonuses. Under the terms of the Plan, the Company has made available six million (6,000,000) shares of the Company’s stock to be issued to officers, directors, employees, consultants and advisors of the Company with certain restrictions as set forth in the Plan. The Plan will be administered by a Committee of the Board of Directors. The Plan will terminate ten years from the effective date of the Plan unless terminated earlier under terms of the Plan.

On June 29, 2007, 4,500,000 shares (the “Escrowed Shares”) were issued in the name of The Children’s Internet Holding Company, LLC, a Delaware limited liability company (“TCI Holding” or “TCI Holding Company, LLC”), and deposited in escrow on July 3, 2007 in accordance with the Interim Stock Purchase Agreement (“ISPA”) signed on June 15, 2007 between the Company and TCI Holding, thereby increasing the Company’s total issued and outstanding shares of common stock to 31,373,738 at June 30, 2008 for the purposes of financial reporting. The 4,500,000 shares held in escrow have not been deemed to carry voting rights under Nevada law as they are held for the benefit of the Company until released.

On October 19, 2007, the Company and TCI Holding entered into the Definitive Stock Purchase Agreement. The DSPA supersedes the ISPA and constitutes the DSPA that was contemplated by the ISPA. Under the terms of the DSPA, on October 19, 2007 Sholeh Hamedani resigned as Chief Executive Officer and Chief Financial Officer of the Company, but remained Chairman of the Board of Directors. The Board of Directors appointed Richard J. Lewis, III to be the Company’s Acting CEO and CFO.

On March 18, 2008, The Children’s Internet, Inc. (“TCI”) entered into Amendment No. 4 (the “Amendment”) to the DSPA. Under the Amendment, the date upon which the parties are permitted to terminate the DSPA if the closing of the DSPA did not occur was extended from March 15, 2008 to March 31, 2008.

On May 9, 2008, because TCI Holding was unable to secure the necessary funding in order to close the deal under the terms of the DSPA and the parties were unable to reach a new agreement and, therefore, the Company’s Board of Directors, voted unanimously to terminate the DSPA.

Also, on May 9, 2008, the Board of Directors unanimously voted to remove Richard J. Lewis III as the Company’s Chief Executive Officer and Chief Financial Officer, and subsequently replaced Mr. Lewis with Mr. Tyler Wheeler as acting Chief Executive Officer and Chief Financial Officer.

On October 24, 2008, TCI Holding caused to be filed against the Company and its board members the Petition and Application for Order Compelling Shareholders’ Meeting and Order to Show Cause and/or Petition for Writ of Mandamus to Compel Shareholders’ Meeting, and the Order to Show Cause (Case No.: 08 OC 00367 1B) (the “Petition”). As described in greater detail in Footnote 7 below, the Company and TCI Holding have agreed that upon the occurrence of certain events as set forth in the Control Agreement (as such term is defined in Footnote 7) that TCI Holding would cause the Petition to be dismissed with prejudice

NOTE 5 - COMMON STOCK

On February 15, 2005, the Company’s Board of Directors authorized a 2 for 1 forward split of the Company's issued and outstanding common stock to shareholders of record on March 7, 2005, in the form of a 100% stock dividend. The effective date of the forward split on the NASDAQ OTC: BB was March 11, 2005.

On June 29, 2007, 4,500,000 common shares were issued and deposited in escrow on July 3, 2007 in accordance with the Interim Stock Purchase Agreement between the Company and TCI Holding Company, LLC, which was terminated by action of the Board of Directors on May 9, 2008, as explained in Note 4. However, the 4,500,000 shares held in escrow have not been deemed to carry voting rights under Nevada law as they are held for the benefit of the Company until released.

No other new shares were issued by the Company during the period from January 1, 2007 through the date of this report.

NOTE 6 - NON-MONETARY TRANSACTIONS

Deferred Charge

As explained in Note 3, on February 15, 2005, the Company’s Board of Directors granted an option to TDN, a related party, to purchase up to 18,000,000 shares of the Company’s restricted common stock. This option was valued at $0.

Conversion of Debt to Common Stock

As explained in Note 3, on February 15, 2005, the Company's Board of Directors authorized and approved the conversion of debt totaling $456,912 owed to Shadrack, which holds approximately 52.2% of the voting power of the Company’s outstanding common stock, into 13,054,628 shares of the Company’s restricted common stock at a conversion price of $.035 per share.

Stock-based Compensation

On February 15, 2005, the Company’s Board of Directors granted Tyler Wheeler, who as of September 30, 2008, was the Company’s Chief Software Architect Consultant and a director, an option to purchase up to 1,000,000 shares of the Company’s restricted common stock at an exercise price of $0.035, and a fair value of $315,000. The option is exercisable, in whole or in part at any time and from time to time, for a period of five years from the date of grant. This option to purchase Company shares was based on a fair market value of $0.315 per share. The option was valued using the Black-Scholes option pricing model, which was developed for estimating the fair value of traded options, and taking into account that the exercisable option shares are restricted. The value of $315,000 was recorded as an expense for services when the option was granted.

From December 30, 2005 through August 31, 2006, options to purchase 611,112 shares at $0.55 per share, granted to William L. Arnold, became vested under his executive employment agreement based on his service as President of the Company. The options to purchase 111,112 shares which vested during the nine months ended September 30, 2006 were valued at $52,223 using the Black-Scholes option pricing model based on the grant-date fair value in accordance with SFAS No. 123R.

On June 9, 2006, 15,600 restricted shares were awarded to two principals of Brazer Communications under a six-month contract to perform public relations consulting services for the Company. The fair market value of these shares was $7,800.

On April 30,2007, subject to the terms of the 2007 Equity Incentive Plan, the Company granted qualified stock options to two employees, Tim Turner, pursuant to the terms of Mr. Turner’s Executive Employee Agreement, and John Heinke, the Company’s Controller. Mr. Turner was granted options to purchase 2,687,374 shares of the Company’s common stock at the purchase price of $0.081 per share. Of the total options, 300,000 shares vested immediately and the balance of 2,387,374 shares were to vest at the rate of one thirty-sixth per month of employment. Mr. Turner resigned effective on December 15, 2007 and a total of 796,300 shares subject to his option had vested. Mr. Heinke was granted options to purchase 300,000 shares of the Company’s common stock at the purchase price of $0.081 per share. Mr. Heinke’s options vest at the rate of one thirty-sixth per month of employment. The purchase price of $0.081 per share for Mr. Turner and Mr. Heinke’s options was the fair market value of the shares at the date of the grant.

On April, 30, 2007, subject to the terms of the 2007 Equity Incentive Plan, the Company granted unqualified stock options to three of the Company’s four Directors, Roger Campos, Jamshid Ghosseiri and Tyler Wheeler. Each Director was granted options to purchase 125,000 shares of the Company’s common stock at the purchase price of $0.081 per share which was the fair market value of the shares at the date of the grant. The options for the three Directors vested immediately upon grant.

The value of the options granted on April 30, 2007 and discussed in the preceding two paragraphs, was based on a fair market value of $0.08 per share at the grant date, which was computed using the Black-Scholes option pricing model. The total value of option shares vested during the three months ended September 30, 2008 was $2,000, which was recorded as an expense of the period.

Contributed Capital

For the period from January 1 through March 31, 2007, Shadrack Films, Inc., the majority shareholder as of September 30, 2008, provided to the Company the half-time services of John Heinke, CPA, as Controller, at a fair market value of $7,500, which was contributed to Additional Paid-in Capital. For the period from July 1 through September 30, 2008, the Controller’s services averaging ten hours per week at a fair market value of $3,750, were again contributed to Additional Paid-in Capital. Accordingly, he will not seek payment for his services provided during those periods.

NOTE 7 - SUBSEQUENT EVENTS

Entry into a Material Definitive Agreement

On October 29, 2008 (the “Agreement Date”), the Company entered into a Control Agreement (the “Control Agreement”) with TCI Holding and the following directors of the Company (the “Directors”): Jamshid Ghosseiri, Roger Campos, and Tyler Wheeler. Under the Control Agreement, the Company and the Directors agreed to take a number of actions related to the composition of the board of directors of the Company (the “Board”) and the appointment of officers of the Company.

Pursuant to the Control Agreement, Tyler Wheeler resigned as Chief Executive Officer of the Company and Richard J. Lewis III (“Lewis”) was appointed as the Chief Executive Officer of the Company. Lewis was also appointed a director and acting Chairman of the Company to fill the vacancy that existed on the Board as of the Agreement Date. Furthermore, the Directors agreed to submit their irrevocable resignations from the Board, which resignations are to be effective upon the expiration of the 10-day period (the “Rule 14f-1 Period”) set forth in Rule 14f-1 (“Rule 14f-1”) promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). TCI Holding named two directors, Ronald Bender and Richard Kwiecinski, to fill the vacancies created by the resignation of the Directors, whose appointment as directors became effective on the expiration of the Rule 14f-1 Period or November 17, 2008.

The Company agreed not to take any actions to cause its indemnification obligations with respect to the Directors to be eliminated, reduced, or otherwise compromised. Currently outstanding options granted to the members of the Board as of the Agreement Date will remain exercisable to the extent exercisable on the Agreement Date and will not be earlier terminated because of the resignation of any of such optionees. The Company agreed not to grant any options or equity interests or incur any other obligations of any kind to any of the Directors, or to any other person until the expiration of the Rule 14f-1 Period.

The Company also agreed to call an annual or special meeting of its shareholders as soon as practically possible after the expiration of the Rule 14f-1 Period for the purposes of electing directors, voting on a proposed merger between the Company and TCI Holding, and such other matters as the new Board will deem appropriate.

In connection with executing the Control Agreement, TCI Holding agreed to cause the hearing in the Petition and Application for Order Compelling Shareholders’ Meeting and Order to Show Cause and/or Petition for Writ of Mandamus to Compel Shareholders’ Meeting, and the Order to Show Cause filed on behalf of TCI Holding against the Company and its board members (Case No.: 08 OC 00367 1B) (the “Petition”) to be postponed indefinitely. Upon expiration of the Rule 14f-1 Period, TCI Holding shall cause the Petition to be dismissed with prejudice. The parties to the Control Agreement agreed that all prior agreements between or among them, whether written or oral, are terminated void, expired, or of no further effect.

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

As of the Agreement Date and pursuant to the Control Agreement, Tyler Wheeler resigned as the Chief Executive Officer and a director of the Company and Roger Campos and Jamshid Ghosseiri resigned as directors of the Company. The resignations of such directors are effective upon the expiration of the 10-day period set forth in Rule 14f-1 applicable to each resigning director.

On October 24, 2008, Sholeh Hamedani resigned as a director and officer of the Company pursuant to the Final Judgment.

As described above in Footnote 7, pursuant to the Control Agreement, Lewis was appointed the Chief Executive Officer of the Company, a director and the Acting Chairman of the Company on the Agreement Date. Lewis is 54 years of age. The Board also named Mr. Lewis as the Company’s Chief Financial Officer and Secretary. Lewis served as the Company’s Acting Chief Executive Officer and Acting Chief Financial Officer from October 2007 to May 9, 2008. Since May 2007, Lewis has been the Managing Member of TCI Holding. From 1996 to 2006, Lewis was Chief Executive Officer of EcoTechnology, Inc., a waste-to-energy emerging growth company, where he oversaw the funding, construction and installation of the world’s first municipal gasification plant in the wastewater treatment industry, located at Philadelphia, Pennsylvania. From 1985 to 1996, Lewis practiced public finance law in California, including service with the law firms Mudge Rose Guthrie Alexander & Ferdon and Whitman Breed Abbott & Morgan. Lewis received his BA from the University of Wisconsin in 1979, and his JD from the University of the Pacific, McGeorge School of Law in 1985.

Ronald Bender agreed to be a director of the Company on October 29, 2008 pursuant to the Control Agreement. Mr. Bender is 52 years of age. For the past 15 years, Mr. Bender has owned and operated a mid-sized construction company in California that specializes in erosion control. In 2005, Mr. Bender became affiliated with and is one of the main benefactors of the largest privately owned children’s paleontological museum in the world. Mr. Bender is also involved in several other philanthropic endeavors including providing educational opportunities to orphaned children in Brazil.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this Report.

Forward-Looking Statements

The following information contains certain forward-looking statements of management of the Company. 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," "could," "expect," "estimate," "anticipate," “plan,” "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 our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

Critical Accounting Policies and Estimates

The Company's financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

RESULTS OF OPERATIONS

Selected Financial Data

The following selected statement of operations and balance sheet data for the period from September 25, 1996, the date of our inception, through September 30, 2008 and for the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 were derived from our financial statements and notes thereto included in this report which are unaudited. Historical results are not necessarily indicative of results that may be expected for any future period. The following data should be read in conjunction with "Plan of Operation" below, and our unaudited financial statements, including the related notes to the financial statements.

	For the nine months ended September 30, 2008	For the nine months ended September 30, 2007	For the period from September 25, 1996 (inception) through September 30, 2008
Statement of Operations Data:
Net revenues	$30	$631	$1,671
Operating expenses	$319,326	$916,814	$5,569,532
Operating loss	($319,299)	($916,268)	($5,568,121)
Net loss	($362,270)	($941,700)	($5,678,644)

	As of September 30, 2008
Balance Sheet Data:
Total assets	$40,117
Total liabilities	$3,312,977
Total stockholders' deficit	($3,272,860)

Our total operating expenses decreased by $597,488 (65%) for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. The major changes were decreases of $264,277 in officer compensation, $35,700 in selling expenses, $255,059 in professional fees, and $30,000 in stock options granted directors which occurred only in 2007. The decrease in officer compensation is due to the resignation on October 19, 2007 of Sholeh Hamedani, former CEO and CFO, and the resignation on December 15, 2007 of Tim Turner, former Director of Finance & Operations. The decrease in selling expenses corresponds with the Company’s discontinuance of marketing activities until obtaining additional investment capital. The decrease in professional fees for the nine months ended September 30, 2008 is attributable mainly to the following: Consulting fees decreased by $142,510 due to the suspension of operating The Children’s Internet system and development activities in January 2008, accounting fees decreased by $69,524 due to having conducted an audit of 2006 and a re-audit of 2005 during the nine months ended September 30, 2007, and legal fees decreased by $43,200 due principally to the termination of the SEC litigation.

Plan of Operation

This plan of operation contains forward-looking statements that involve risks, uncertainties, and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those described elsewhere in this report.

On September 10, 2002, we entered into a License Agreement with Two Dog Net (‘TDN”) for an exclusive worldwide license to market and sell The Children’s Internet® service. We subsequently replaced the royalty and license agreement with a new Wholesale Sales & Marketing Agreement dated March 3, 2003. The new agreement provides for us to be the exclusive marketers of TDN’s proprietary secure Internet service for children at the pre-school to junior high levels called The Children’s Internet®. We further amended this agreement in February 2005 to decrease the per user fee to TDN from $3.00 to $1.00. In consideration for this decrease of the royalty fee, TDN was granted an option to acquire 18,000,000 shares of the Company’s restricted common stock at an exercise price of $.07 per share for five years from the date of grant. The shares underlying the option have “piggy back” registration rights for a period of one year following any exercise of the option.

TDN did not give written notice to terminate the contract one year prior to the expiration of the initial five-year term. Therefore, the licensing agreement was automatically renewed for an additional five years expiring in 2013.

The Company released The Children’s Internet®, version 9.0, to the market on March 2, 2006. The Company is the exclusive marketer and distributor of The Children's Internet® membership-based service created just for kids. In the August 2004 issue of PC Magazine, The Children's Internet® was ranked as Editors' Choice in the category of "Kids' Browsers and Services," and was voted number one over AOL, EarthLink and MSN Premium 9. Additionally in August 2006, The Children's Internet® was declared winner of Outstanding Products of 2006 by iParenting Media Awards in the software category. Shortly thereafter in September 2006, The Children's Internet® received the coveted National Parenting Center's Seal of Approval.

We believe The Children's Internet® is the most comprehensive, smart solution to the problems inherent to a child’s unrestricted and unsupervised Internet access. We offer a protected online service and "educational super portal" specifically designed for children, pre-school to junior high, providing them with SAFE, real-time access to the World Wide Web; access to hundreds of thousands of the best pre-selected, pre-approved educational and entertaining web pages accessed through a secure propriety browser and search engine.

During 2007, the technology on which the product is based and the functionality of the service was improved. The Company, through TDN, also substantially upgraded the underlying system infrastructure by increasing redundant servers and improving control procedures which in turn increased the reliability of the service. Additionally, during the first quarter of 2007, where appropriate, the Company contracted with third party companies to outsource administrative support services and effectively put in place the infrastructure to support the marketing initiatives. These outsource providers handled telemarketing and the order taking process and media placement.

The Business Model

The product was being sold for $9.95 per month to the subscriber. The user must already have internet access, either through dial-up, DSL or cable broadband. We utilize both retail and wholesale channels of distribution.

The Company will focus on establishing long-term, value-driven relationships with:

Parents and Kids

The School Market: School Administrators and Teachers

Major ISP’s such as Comcast, Yahoo, AOL, etc.

Non-profit organizations such as religious groups, Boy Scouts and Girl Scouts, etc.

ISP customers with an interest in protecting their families

The product is launched and generated minimal revenues through our grass roots marketing efforts as well as some online marketing initiatives. At the end of the first quarter of 2007, we aired our updated Infomercial on various television stations from New York to California for an initial three week media test which was the first part of an overall three month media campaign. The Company intended to continue to run the media test to identify the markets that met or exceeded our response criteria in order to build the permanent television schedule to ”roll-out” the Infomercial on a national basis. However, due to unforeseen expenses we have not had the anticipated budget in place to continue to run the media test after the first quarter of 2007.

Beginning with the third quarter of 2007, we focused the majority of our resources on negotiating and finalizing the Definitive Stock Purchase Agreement and negotiating a proposed settlement with the SEC of the outstanding claims filed by the SEC against the Company.

We believe that implementation of a broad based sales and marketing plan is essential. With adequate funding, we would execute our sales and marketing programs using a number of traditional and some less traditional marketing techniques to generate product awareness and build brand awareness. Among these are;

Direct Response Marketing. The TV Infomercial will be the cornerstone of our consumer-marketing program. This direct response-marketing vehicle provides a number of advantages including; a direct sale opportunity, brand awareness development, cost effectiveness, and rapid market response and feedback.

Spot Media. In markets where consumer reaction to our Direct Response Marketing program is high, we will run spot television and radio commercials in support of our Direct Response campaign to further enhance brand awareness and reinforce the consumer purchase decision. We will also be opportunistic marketers, purchasing airtime around relevant programming, such as MSNBC’s “To Catch a Predator” program.

Public Relations. Public relations activities will combine events, special promotions, and traditional media relations with the objective of maintaining top-of-mind awareness of the product with consumers and media. We will work with our strategic partners, where possible and appropriate, to maximize resources and obtain optimum media coverage.

Internet Advertising. The Company will employ Internet advertising on targeted sites frequented by parents of school-aged children. Advertising will also be placed on sites that specifically address Internet security for children.

School Sales Initiative. Schools are a natural vehicle for reaching our target audience, parents of school-aged children. The Company will initiate a major sales effort aimed at forming partnerships with schools and teachers to bring awareness of our product to children and their parents. The Company has tested this concept with local school districts and the response has been excellent.

Fundraising Initiative. The Company will establish a fundraising program for use by schools as well as other children’s organizations, as a fund raising vehicle. This program will enable such organizations to raise funds by selling subscriptions to The Children’s Internet service. A portion of the sales price will be refunded to the selling organization. The advantage of TCI’s fund raising program over other fund raising vehicles is that our program functions like an annuity, providing continued funding to the participating organization for as long as their members continue to subscribe to The Children's Internet service.

Strategic Partnerships. Strategic partnerships will be an important component of our overall marketing strategy. Strategic partners can provide “legitimacy” for the brand. These partners can also expose the Company’s product to a large base of potential new customers. Joint public relations and marketing efforts can be a very cost effective mechanism. ISP’s, web portals, telecommunications companies, child-oriented companies and public interest groups will be target strategic partners.

We believe the combined effect of this coordinated marketing program will be to build awareness of our product amongst our target consumer, to establish The Children’s Internet as the premiere product in the minds of consumers and to drive this motivated consumer base to make the purchase decision to subscribe to The Children’s Internet service.

Channels of Distribution:

The Children's Internet, Inc. will employ both direct and indirect sales channels.

Also, subject to secure financing, we will hire a direct sales force. The primary targets will be the largest Internet Service Providers as well as other national organizations that market to the most appropriate demographic groups for our service. We believe one or more of the largest ISPs in the United States will recognize the first mover advantage opportunity and will use The Children’s Internet to not only offer this much needed product to their existing customers, but also to take a significant market share from their competition. We also believe that almost any company that markets to our demographics will want to seize the public relations goodwill that will accrue to any company offering our service.

The indirect channel, composed of non-salaried independent agents and wholesale distributors, will target a wide range of opportunities, from local charities to national organizations where they may have an influential contact. These sales agents will have the opportunity to employ secondary resellers to work for them, but we will not market using a multi-level marketing plan.

Future Products and Services

In the future, we anticipate generating revenues via advertising sold to the purveyors of children goods and services. As well, we intend to engage in the merchandising of The Children’s Internet® themed products, from clothing to toys to books, but for the foreseeable future we will focus strictly on the successful distribution of our core service.

Market Share, Cash Flow and Profitability

Although market data is not exact, and varies depending on the source, our plan is based on the belief that in the United States alone there are an approximately 35 million homes with internet access with children in kindergarten through grade 12 as of June 2007. Our model, with a mix of business generated from the respective channels of distribution, indicates we can be cash flow positive and profitable with less than 0.5% of the market.

LIQUIDITY AND RESOURCES

As of September 30, 2008, we had net loss from inception of approximately $5,679,000. Approximately $1,776,000 of the Company’s cumulative net losses are non-cash compensation charges. The cumulative net losses consist of approximately $606,000 which represents the estimated fair market value for the cost of wages, if paid, for services rendered by the Company’s former Chief Executive Officer, Controller and James Lambert, an outside financial consultant (we have recorded these amounts for the cost of wages and, since they did not charge the Company, as additional paid-in capital), $2,331,000 which represents professional fees such as legal and accounting expenses, $575,000 which represents a debt financing fee, $420,000 which represents officers, employees and directors compensation for which options to purchase common stock were issued, $593,000 which represents accrued officers compensation, and the balance of $1,154,000 consists primarily of payroll, occupancy and telecommunications costs including internet costs, net of approximately $2,000 in revenues. To date, Shadrack, the majority shareholder as of September 30, 2008, has funded all of our expended costs, with the exception of short-term advances totaling approximately $465,000 made by other related parties since January 2007.

Since inception, the Company has been dependent on funding from Shadrack and other related parties for our current operations and for providing office space and utilities that for the nine months ended September 30, 2008, averaged $13,700 per month in operating costs, exclusive of professional fees and officer compensation. Through September 30, 2008, the amount funded by Shadrack totaled approximately $1,490,000. On September 30, 2008, the balance due to Shadrack was approximately $1,033,000. The difference of approximately $457,000 was converted to common stock on February 15, 2005, when the Company’s Board of Directors authorized the conversion of all debt owed to Shadrack into 13,054,628 shares of restricted common stock at a conversion price of $0.035 per share. The Company has received advances from TCI Holdings, to fund operations totaling approximately $343,000 since August 2007.

Where practicable, we plan to contract with third party companies to outsource administrative support services that effectively support the growth of the business. These outsource providers handle technical support, telemarketing and the order taking process and media placement. We believe this strategy will minimize the number of employees required to manage our intended growth in the future.

As a part of streamlining business operations, in January 2008 the Company closed down its co-location facility and Internet hosting services for the Children’s Internet® provided by Evocative Data Center. Since the product was taken offline, sales efforts have been suspended until additional funds are invested to establish another data center and co-location facility to host the servers that run The Children’s Internet service. Additionally, the Company has terminated the Children’s Internet® support and content staff during this time. Prior to taking the Children’s Internet® service offline, the product was not being aggressively marketed due to the Company’s lack of resources to promote the product.

On April 30, 2007, the Company and the Board of Directors adopted “The Children’s Internet, Inc. 2007 Equity Incentive Plan” (the “Plan”). The purpose of the Plan is to provide incentives to attract retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Under the terms of the Plan, the Company has made available six million (6,000,000) Shares of the Company’s stock to be issued to Officers, Directors, Employees, Consultants and Advisors to the Company with certain restrictions as set forth in the Plan. The Plan will be administered by a Committee of the Board of Directors. The Plan will terminate ten years from the effective date of the Plan unless terminated earlier under terms of the Plan.

The Company’s office space in Pleasanton, California had been leased by our majority shareholder, Shadrack Films, Inc., which expired on April 30, 2007. From May 1 through July 15, 2007, we rented our office space on a month-to-month basis. The Company and the landlord could not reach an agreement on terms for a new lease and we vacated the premises on July 13, 2007, and moved into office space in San Ramon, California. This office space is leased by Nasser Hamedani, a related party, who we were obligated to reimburse for the monthly lease payment of $1,762.

Going Concern Uncertainty

Through the date of this report, we have relied primarily on loans from Shadrack to fund all of our expenses. Shadrack has advised the Company that it is no longer able to provide funds to the Company. The Company entered into a Definitive Stock Purchase Agreement with TCI Holdings that, if executed would have provided the Company with an infusion of approximately $5.3 million to pay Company debts and fund future operations. As discussed in Note 4 of the Company’s Financial Statements, this transaction was not consummated. Since the transaction was not consummated, the Company will be required to obtain additional funds through private placements of debt or equity securities or by other borrowing. There is no assurance that such additional financing will be available when required in order to proceed with our business plan. Further, our ability to respond to competition or changes in the market place or to exploit opportunities will be significantly limited by lack of available capital financing. If we are unsuccessful in securing the additional capital needed to continue operations within the time required, we will not be in a position to continue operations. In this event, we would attempt to sell the Company or file for bankruptcy.

Off-Balance Sheet Arrangements

None.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the year 2007, we carried out an evaluation, under the supervision and with participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. Based upon that evaluation, we concluded that our disclosure controls and procedures were ineffective to provide reasonable assurance that material information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

In making this evaluation, our Chief Executive Officer and Chief Financial Officer considered the material weaknesses discussed in Management’s Report on Internal Control Over Financial Reporting. Based on this evaluation, we concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2007 because of the identification of material weaknesses in our internal control over financial reporting. There have been no significant changes made in our internal controls or in other factors that could significantly affect our internal controls during the period covered by this report or subsequent to the end of the period covered by this report. Our size and limited financial resources prevent us from employing sufficient personnel currently to enable us to have an adequate segregation of duties within our internal control system.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Oswald & Yap v. The Children’s Internet, Inc.

On November 24, 2004, Oswald & Yap, A Professional Corporation (“O&Y”), formerly counsel to the Company, filed a complaint in the Superior Court of California, County of Orange, Case No. 04CC11623, against the Company, seeking recovery of allegedly unpaid legal fees in the amount of $50,984.86 in connection with the legal representation of the Company. Subsequently the amount claimed of unpaid legal fees was reduced to $37,378.43 because it was discovered that O&Y did not properly credit all of the payments that were made by the Company to O&Y. The amount of $37,378.43 was deposited in an escrow account by the Company on July 5, 2005. The complaint includes causes of action for breach of contract. The Company disputes the amounts claimed alleging that O&Y’s services were otherwise unsatisfactory. On May 9, 2005, O&Y submitted an Offer to Compromise for a $0 payment by the Company to O&Y in exchange for mutual releases which the Company rejected.

The Company filed a cross-complaint against O&Y alleging breach of contract, professional negligence, negligent representation, and breach of good faith and fiduciary duty. The Company is seeking damages in an unspecified amount for costs, legal fees and losses incurred.

O&Y has vigorously disputed the claims set forth in the cross-complaint and has indicated its intention, should it prevail in its defense, to institute a malicious prosecution action against the Company, Nasser Hamedani, Sholeh Hamedani and Company counsel.

A cross-claim was filed in the Superior Court of California, County of Orange, Case No. 04CC11623 by the Company against O&Y, and the principal allegation is that O&Y was retained to assist its predecessor company in the purchase and acquisition of D.W.C. Installations with the expectation that D.W.C. had available free-trading shares such that the Company could immediately raise capital on the relevant markets and that in advising the Company through the purchase, O&Y failed to properly advise the Company as to the status of D.W.C. Installations and its shares which in fact were not free-trading. As a result of this conduct, the Company alleges damages in an unspecified amount but including purchase costs, extended operation costs, refiling costs, audit costs, legal fees, loan fees, lost market share, and costs for registration.

Stock Purchase Agreement

There is a contingent liability in connection with a Stock Purchase Agreement executed on October 11, 2002 between identified Shareholders and identified Purchasers. Under the terms of Stock Purchase Agreement, a payment of $150,000 is due to be paid into escrow in part consideration for purchase of the stock of D.W.C. Installations, Inc. The payment date is designated as 90 days from the date that the Company’s [D.W.C. Installations, Inc., a Nevada Corporation] shares of common stock become quoted on the over-the-counter bulletin board system. The shares were approved by NASDAQ OTC:BB to be quoted on the over-the-counter bulletin board system and a symbol was assigned on December 23, 2004. If this payment is not made, there could be exposure in connection with the identified shareholders’ efforts to collect the amounts allegedly due.

Stonefield Josephson, Inc. Arbitration

The Company was subject to a claim by Stonefield Josephson, Inc., the former accountants for the Company, seeking reimbursement costs for legal fees spent in connection with the Securities and Exchange Commission inquiry of the Company. Stonefield Josephson, Inc.’s claim seeks recovery of $29,412.74. The Company disputes any amounts owed because of a settlement agreement entered into between the respective parties in December 2004 effectively terminating their relationship. This matter was submitted to binding arbitration through AAA in January 2007. The arbitrator’s decision was issued on February 2, 2007, awarding Stonefield Josephson, Inc. the sum of $19,000 plus costs and fees in the amount of $1,425 due and payable March 15, 2007. The decision also awarded Stonefield Josephson, Inc. interest at the rate of 10% per annum from March 15, 2007. On August 30, 2007, an additional $2,500 in post-arbitration attorney’s fees and costs was awarded by the Los Angeles Superior Court. No amounts have been paid to Stonefield Josephson since the date of the Arbitrator’s decision.

The Children’s Internet, Inc. v. Stonefield Josephson, Inc.

On August 25, 2006, the Company filed a complaint against its former accountants, Stonefield Josephson, Inc., and its principal Dean Skupen, in the Superior Court of California, County of Alameda, Case No. VG06286054 alleging breach of contract, promissory estoppel, breach of implied covenant of good faith and fair dealing, negligent misrepresentation, fraud, and unfair business practices arising out of defendants’ alleged failure to properly perform contractual obligations. The matter was subsequently transferred to Los Angeles Superior Court. All parties have agreed to mediation in this matter currently scheduled for December 3, 2008. Mediation on this matter took place on February 29, 2008 in Los Angeles, California but was unsuccessful. A court hearing is pending.

SEC Complaint

On September 27, 2006, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court Northern District of California Case No. C066003CW, against among others the Company, and its CEO, Sholeh Hamedani, alleging against one or more defendants violations of Section 10(b) of the Exchange Act and Rule 10b-5, violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, violations of Section 13(b)(2)(A) of the Exchange Act by the Company, Violations of Section 13(b)(2)(B) of the Exchange Act by the Company, Violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1, 13b2-2, 13a-14, 16(a) by one or more defendants. The complaint generally alleged that the Company and the individual defendants made false or misleading public statements regarding the Company’s business and operations, made false statements in various filings with the SEC, and in particular, in the June 2005 Annual Report and Restatement and 2005 Current and Quarterly Reports, and that the defendants, or some of them, induced investment in the Company through misrepresentation and omissions. The complaint sought disgorgement, unspecified monetary damages, injunctive relief and other relief against the defendants.

William L. Arnold

On February 25, 2005, we entered into a Consulting Agreement with Crosslink Financial Communications, Inc., of which William L. Arnold is the principal shareholder. Crosslink represented the Company in stockholder communications and public relations with existing shareholders, brokers, dealers and other investment professionals as to the Company's current and proposed activities, and in consulting with management. For undertaking this engagement the Company agreed to issue a “Commencement Bonus” payable in the form of 200,000 restricted shares of the Company's common stock. In addition, the Company agreed to a monthly stock compensation of 8,000 shares of common stock every month on the contract anniversary date, and a cash fee of $5,000 per month for the term of the Agreement. Out of this fee, Crosslink paid for complementary services (e.g., other mailing services, email services, database extensions) up to an average of $2,500 per month.

The agreement, which was originally for a term commencing February 25, 2005 and ending twelve months thereafter, was terminated at the end of December 2005 because there was a mutual desire for Mr. Arnold to be involved on a daily basis. Hence, on December 30, 2005, he was hired as the Company’s President. Beginning on September 1, 2006, Mr. Arnold took an unpaid leave of absence.

Subsequent to the filing of our Form 10-KSB on May 18, 2007, Mr. Arnold advised us that he disagreed with our position that his unpaid leave of absence was voluntary. Mr. Arnold informed us that he believed his leave of absence resulted from the Company’s breach of his Executive Employment Agreement. We have had discussions with Mr. Arnold in an effort to resolve the differences between the parties but, to date, have not reached agreement. On August 8, 2007, Mr. Arnold advised us that he intended to take legal action against the Company to enforce the terms of his Employment Agreement. Mr. Arnold claims $520,000 in damages from the Company. We believe that Mr. Arnold violated the terms of his Employment Agreement when he voluntarily left his position as President in September of 2006. We believe that we are only obligated to pay Mr. Arnold for back pay and bonus plus interest, for the period prior to September 2006. The total compensation that we believe is owed to Mr. Arnold as of September 30, 2008 is $89,274, which amount is reflected in our financial statements.

Adverse outcomes in some or all of the claims pending against us may result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business. Although management currently believes that resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our financial position or results of operations, the litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. There exists the possibility of a material adverse impact on our financial position and the results of operations for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

We are not aware of any other pending or threatened litigation that could have a material adverse effect on our business.

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

The Company had no “Unregistered Sales” of its securities during the period covered by this report.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

The Company has no Senior Securities.

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

None

ITEM 5. OTHER INFORMATION

On March 29, 2007, the Company entered into an agreement with the firm of Hunter & Renfro, LLP (formerly known as Hunter, Flemmer, Renfro & Whitaker, LLP) of Sacramento, California to replace Marc Lumer & Co. as the Company’s independent accountant. On May 14, 2006, the agreement was replaced with an agreement for Hunter & Renfro, LLP (formerly known as Hunter, Flemmer, Renfro & Whitaker, LLP) to audit the financial statements for the year ended December 31, 2006 and to re-audit the year ended December 31, 2005.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The following documents are filed as part of this Report:

(a) Exhibits:

	No.		Title
	31.1		Certification of Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2		Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K:

On February 12, 2008, the Company filed a Current Report on Form 8-K extending the closing date for the Definitive Stock Purchase Agreement (DSPA) with TCI Holding Company, LLC from January 31 to February 29, 2008.

On March 6, 2008, the Company filed a Current Report on Form 8-K extending the closing date for the DSPA from February 29 to March 15, 2008.

On March 21, 2008, the Company filed a Current Report on Form 8-K extending the closing date for the DSPA from March 15 to March 31, 2008.

On May 15, 2008, the Company filed a Current Report on Form 8-K to report the termination of the DSPA, the removal of Richard J. Lewis III as Chief Executive Officer and Chief Financial Officer, and the appointment of Tyler Wheeler as Acting Chief Executive Officer and Chief Financial Officer.

On November 4, 2008, the Company filed a Current Report on Form 8-K to report entering into the “Control Agreement” with The Children’s Internet Holding Company, LLC, under which the CEO and Board of Directors resigned and Richard J. Lewis III was appointed CEO and a director and acting Chairman of the Board, and two new directors were named.

SIGNATURES

Persuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


DATED: November 19, 2008	The Children’s Internet, Inc.

Date:		/s/ Richard J. Lewis III
		By: Richard J. Lewis III
		Its: Chief Executive Officer, and Acting Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

CS Diagnostics (CSDX) 10-Q2009 Q0 Quarterly report

Content analysis